FRB Commentary 3: Big Picture

Summary of thoughts in last two videos. Discussion of why Fractional Reserve Banking is a subsidy to banks and allows them to arbitrage the yield curve.

Category:

Education

Tags:

• fractional
• reserve
• banking

[norwayte]

There was and is always a trade off between market and governance. Directly/indirectly-active/pas­sive.

If you are not willing to fight symptoms (video) and want an effective and efficient financial system? Draw a distinction:

The video (existing financial system) implies a constant shortage of money. That`s the lie.

Take the amount of money (M3) and accelerate the velocity of money in that way you devaluate money in certain periods of time.

No shortage of money. Inflation, interest down etc.

[khanacademy]

It does not imply a constant shortage of money. It says that, without Fed Reserve intervention, there is a shortage of reserves when fear enters the system. It is also saying that FDIC insurance allows the banks to have artificially low costs of capital (and decouples the cost of capital from the risks they are taking). Finally, it is arguing that the combination of liquidity from the Fed + FDIC insurance allows banks to make money off of the yield curve with no real value delivered.

[Penksimo]

khanacademy, thanks ,and serious thanks for all this . i have been learning so much from you!!

[etzel33]

@minusdotminus lol, i'm not defending the current debt system, just wondering about a fine point. this is a difficult subject, and I began with this video series and went on to the money as debt 2 and then to the secret of oz videos, plus other stuff. it dawned on me that fractional reserve lending is based on unsecured debt... I've watched this video several times. i agree with your observation

[etzel33]

a bookie might have zero reserves, balancing his payables with his receivables, and skimming a percentage. it all works out unless someone doesn't pay up, in which case his "insurance company" has to go out and "collect". Now if bookies required all their bets up front, then there's no issue of debt to consider (except the bookie's), and he's a "financial intermediary" which sounds good to me. So what's outlawed here? Unsecured debt?

[dadac123]

This video is actually worth watching many times!

There's so many things could made me think over and over again in this short video.

And the series really give me another sight to see the banking system. I gotta say it didn't like the thing I thought before at all!

[SirFinklebottom]

I am impressed with the quality of this man's understanding.

[ThaFacka]

you sal, are very informed. also thank you for using very precise terms, or using terms in a precise way.

[lpmcdo]

@xanas3712 System wide bank runs are always a consequence of a financial crisis which itself occurs when a bubble pops. FRB is vital for capitalism to exist, because there is never enough money in the system: when a loan is made, the money for the interest is always missing, so another loan needs to be made. That's why there must always be growth, zero growth is impossible. The soundness of a currency depends on the collateral, not the amount of reserves.

[lpmcdo]

@xanas3712 Money is always credit (Hartley Withers: "loans make deposits"). The increase of credit is inflationary, the decrease deflationary. Without the state, prices would be stable, because private enterprises pay back their debts, but the state does not, so the latter is the only cause for inflation. Deflation always follow inflation, so the state is also the only cause for deflation. Asset bubbles occur during disinflations (intermediary phase), when interest rates decrease.

[xanas3712]

@lpmcdo In any case, I don't think what you are saying is entirely wrong, but I think leaving out these steps obscures where the problem comes in.

Also I definitely disagree with you that FRB isn't the actual problem. FRB creates runs which creates the initial demand for central banking and deposit insurance. The cycle is started by FRB, even if FRB could theoretically exist without it this is very unlikely due to the desire for "quick fix" solutions arising from a belief in using the state.

[xanas3712]

@lpmcdo You've left steps out of your cycle. How do you suppose public debt results in inflation? If the debt were simply repudiated there would be no inflation, but massive deflation instead. It's the monetization of debt by adding new money to the system that is inflation and leads to a general rise in prices (and asset bubbles and other sorts of problems).

The general rise in prices is halted by the Fed not creating new money as fast by which they allow interest rates to rise.

[lpmcdo]

FRB is not the actual problem, exponential public debt is. Financial crises are not natural, fateful events of capitalism, they are part of the following cycle: exponential public debt leads first to inflation which lead to higher of interest rates which lead to disinflation which lead to lower of interest rates which lead to higher values of financial assets (bubble) which lead to an artificial wealth effect which leads to reflation which leads to higher interest rates which leads to a crash.