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Extrapolated example of credit.

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  • Strongly Liberal Democrat
    Democrat
    Pensacola, FL
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    Two people each with twenty dollard sit down at a card table to gamble. They play a game where one person guesses what a random card pulled from the deck will be and the other person is the dealer. To make the game appear fair and inviting it costs one dollar to play with a twenty dollar reward for winning. Odds are agsinst the bettor and eventually he is broke. Trying to win his money back the bettor borrows money from the dealer. The game continues until the bettor has borrowed five thousand dollars and losing hope quits the game. Twenty dollars has created five thousand dollars of wealth. That is how wealth or "money" is created. The banks due to the fractional reserve system have expanded it to the limit. Now it has been exagerated beyond comprehension and the system is approaching collapse. Credit used to be secured materially. Then security was relaxed to get more loans to collect fees. Approaching the limits of credit security college students are pledging their unguaranteed futures as guarantee for loans.
  • Liberal Democrat
    Democrat
    Colorado Springs, CO
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    Daily Reckoning: Why a Central Bank Can Never Run Out of Money

    "To understand how modern money works, it may be best to start with the banking system. Wray began with a simple model of a bank, a firm and a household. “So a firm approaches a bank and says it would like a loan,” Wray says. “Where does the bank get the money?”

    "It creates it out of thin air, out of nothing. It keystrokes it into existence. It creates a loan (an asset for the bank) and offsets it with a deposit (a liability for the bank). The firm gets a credit (an asset) and an offsetting debit (the loan). No prior deposits needed. As Wray says: “Loans create deposits. The bank lends its own IOUs. Can they run out?

    "“Of course not. They can’t run out of their own IOUs.”

    "This is important. If you don’t get this, banking will forever remain a mystery to you."

    That's an extract from the article, an interview with Randall Wray that I have taken out of context. You can read the rest of the article at the above link. I only included that extract to stimulate your interest. Don't read into it something more sinister than what it is...a simple explanation of banking and the fractional reserve system.

  • Strongly Liberal Democrat
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    Dallas, TX
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    Schmidt, excellent article and I'm glad you are posting MMT stuff. :)

    But just to point out, we have not had fractional reserve banking since we went off the domestic gold standard in the 30's.

    Modern bank lending is limited by regulations and bank capital, never by deposits on hand. Banks don't lend deposits. That's what so-called "shadow" banks or lenders do. If I lend you $10 of funds out of my checking account, that's shadow lending.

    Banks create deposits by making loans. Loans create deposits in the banking system.

  • Liberal Democrat
    Democrat
    Colorado Springs, CO
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    Carlitos -- Okay, I suppose it's the terminology. The required limits on deposit reserves in fractional reserve banking would seem to me to essentially fill the same function as the liquidity standards in Dodd Frank that ensure that a big bank holds enough highly liquid assets to pay liabilities. Highly liquid assets, of course, are not the same as cash deposits, but in this age of electronic banking where capital assets can be sold in seconds, doesn't the liquidity requirements of Dodd Franks kind of act the same way as the reserves in the fractional reserve banking system? Maybe I'm missing something? I was thinking more in terms of the reserve requirement rather than the way money was created out of thin air for loans
  • Strongly Liberal Democrat
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    Dallas, TX
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    The banks' "reserve" requirements at the Fed are just like a minimum deposit requirement in a checking account. If the banks go below their requirement, the Fed will automatically loan the needed amounts at a penalty rate; this is like over-drafting on your checking account. Bank "reserves" are a fancy word for the banks' checking accounts at the Fed. The reserve requirement is set by the government and could be zero, or even negative. It's not something that limits their ability to lend per se (but it has something to do with their costs of lending). So just as we bank, so do Banks. They all hold checking accounts at the Fed, which they use to clear transactions between each other.

    There is no comparison between Dodd Frank regulations and fractional reserve banking worth exploring.

    Regulations on the liability side of banking are very problematic. Banks need to be regulated (BY THEIR EMPLOYER, I.E THE GOVERNMENT) from the asset side, i.e. what loans they are allowed to make; and their liabilities should be fully funded by the government.

  • Strongly Liberal Democrat
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    Pensacola, FL
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    There is one fact that has not been discussed. Just like the banking system operates under the assumption that depositors will never want their deposits back the system operates on excesses. That nobody in the system will ever withdraw their assets. The hard system like the poor and crime operates on currency. Poor people pay their bills with currency, paper. Once the actions reach the wealthy either individuals, businesses or govsernments then that system operates on credit and the fact (assumption) that they never cash out. They have huge excesses of assets. But taxes are an important tool. Taxes can control wealth and start jobs producing businesses by incentivising. The creation of money is more a threat than a reality that is why there is 18 trillion dollars of national debt. If that magic keystroke started paying that debt down then their would be a collapse. The Theory only works in theory. It essentially identifies that nobody above a certain level cashes out. There are no huge private vaults full of dollars. There are only balance sheets with huge numbers.