WEB OF DEBT BLOG

HOW TO RESOLVE THE CREDIT CRISIS: GIVING CREDIT WHERE CREDIT IS DUE

163 Responses

1. 

   John Honey, on January 12, 2009 at 11:33 pm said:

   Ellen: This may be your best article.

   Of course all “too big to fail” banks need to be broken up into manageable pieces. They are all undercapitalized. They all need to sell stock now, but it is impossible because no one will buy. All present stockholders need to be wiped out. Their investment is worthless. Citibank may be the first to go based on what I hear. The parts are worth more than the whole.

   “Fair value” is the basic postulate of accounting. This applies to “off balance sheet” items too. I don’t think the SEC requires disclosures of off balance sheet items in quarterly reports. Thus no transparency.

   Reply
2. 

   Mister Moneymaker, on January 13, 2009 at 1:39 am said:

   This is a great idea!

   It addresses several issues, including adding some badly needed jobs in the new local bank system. May I request that no one who has ever worked in a private bank be allowed to apply to these new positions? Perhaps credit union experience can be allowed.

   With your permission, I will pass it on.

   Reply
3. 

   Ellen Brown, on January 13, 2009 at 2:46 am said:

   Thanks John Honey! (Great name.)

   Reply
4. 

   William Beyer, on January 13, 2009 at 3:31 am said:

   Being an economic neophyte, I need to ask a dumb question: Why do GAAPs allow so much economic activity to be (un)accounted for “off balance sheet”?

   Reply
   • 

     Ellen Brown, on January 13, 2009 at 2:11 pm said:

     The idea I think was that the off-balance-sheet activity was “risk-free” because it was supposedly protected from default with credit default swaps; but nobody checked to see if the counterparties had the funds to pay up in the event of default. Arguably, everybody was just getting around the BIS requirement, including our regulators. They all wanted to see our banks do well, and banks were floundering under the BIS strictures. But it’s a pretty opaque field and I don’t actually work in it, just read about it.

     Reply
5. 

   Dan, on January 13, 2009 at 5:51 am said:

   The first fallacy of this article is right n the title itself. It buys right into the propaganda perpetuated by the government itself, that there is “credit crunch”.

   For reference of an alternative interpretation of the credit status:
   The Great Credit-Crunch Hoax of 2008
   http://www.mises.org/story/3288

   The 2nd fallacy stems from what seems to be a misdiagnoses of the cause for the crisis, or rather a contradiction between the cause and the suggested cure. The author (Ellen) acknowledges that credit expansion or rather credit created out of thin air by banks is the cause of the problem. Yet she offers, as a solution, that more credit expansion take place only under a “public” system instead of a so called “private” system. In other words, continue to “create” money but in ways that, according to her words: “don’t encourage greed”, and “more fair”.

   1. The first problem is that she fails, or ignores (once again) to understand the cause of the economic crisis: The expansion of artificial credit by the banking system (which Ellen acknowledges) causes interest rates to be artificially lower (Ellen does not acknowledge) then the “natural” rate of the free market, where the “natural” rate is the rate that would have prevailed if only the real “savings” would have been used for credit (that is under a system where credit is not created out of thin air), as according to the law of supply and demand. The problem was further exacerbated by Fed policy of maintaining this low rate for quite long by injecting even more “easy” money into the system. What the author refuses to acknowledge is that only “real savings” can lead to economic growth. Therefore, by keeping interest rates artificially low due to an excess of “counterfeit” credit supply, demand for credit is artificially higher (Investors and speculators are drawn into projects that never would have been drawn into if it wasn’t for the lower interest rates). A bubble or bubbles of unsound business expansions start to take place diverting resources from the more productive sectors of the economy. The bubble will reveal itself as a series of malinvestments usually as soon as the credit starts to tighten. Most of the businesses turn out to be unsound because the economy cannot absorb them due to the lack of real savings. Real savings are determined by “time preference” of individuals, and since that “time preference” does not match the amount of credit that was expanded, the economic growth reveals itself as a phony bubble which MUST burst. More credit will not resolve the issue for it will further prop up unsound businesses, further delaying the “bust” and making the future “bust” much more severe. Expansion of credit indefinitely to prop up the malinvestments would eventually result a complete monetary collapse. The Fed knows this, which is why he eventually tightens the credit. This was a very crude explanation of the “business cycle”, or what is termed today the “Austrian business cycle”. The bottom line is that the author ignores the relationship between real savings and economic growth. She believes that new wealth can be created by a printing press, and that “monetized” debt can replace “real savings”. That is no more naive then trying to solve world poverty by printing money. REAL SAVINGS! When is the author going to address this critical little annoying thing?

   2. Some how, we are asked to believe that “greed” is a problem, and only government can relieve us of this evil human trait. But is it true that “political greed” is somehow more desirable then “economic greed”? I’m afraid that our current problem with the banking system is already a result of “political greed”, for if it wasn’t, the bankers wouldn’t get any privilege status from the government, the Fed wouldn’t exist, and the “economic greed” of bankers would have prevailed, as any other business, in a voluntary exchange system (free market); that is by providing a productive service, which after all would be desirable by the consumers, for if it wasn’t, no exchange would take place. The problem is not “private” vs “public”, but that the system is not operating in a free market, but instead, as what is already a quasi-government banking system.

   Reply
   • 

     Ellen Brown, on January 13, 2009 at 4:47 pm said:

     My thought is, we have a banking system, we have fiat money, and charging interest is how loans are made. The chance that Congress will either (a) change back to a gold standard or (b) declare interest illegal are about 1 to a trillion. I’m just proposing something that is one easy and logical step away from what we have now, something that could be done by Congress and I think will be done, because there’s no other workable alternative: instead of bailing out banks that can’t be saved, let them go bankrupt in the ordinary course, take them over as public entities, and use the existing banking system as a PUBLIC credit system, with full accountabilty, and profits that return to the public.

     Reply
6. 

   Christine Baker, on January 13, 2009 at 8:21 am said:

   Dan wrote:

   “What the author refuses to acknowledge is that only “real savings” can lead to economic growth.”

   In my opinion, economic GROWTH is extremely undesirable, like wanting your cancerous tumor to grow.

   Bigger isn’t always better and sometimes less is more.

   I’d prefer that we strive for quality of life instead of GNP.

   Theoretically, everybody should be able to live however they want. There should be a part of the planet for people like Dan with everybody working for the “free market”, Chase, Exxon, Haliburton and a few percent of the wealthy.

   And then there should be a part for people like me. People into science, research, hi tech, no war, no GM food, people first, profits last.

   Unfortunately, all the countries who didn’t get in line with Dan’s kind always got taken over, invaded, had elected presidents assassinated and dictators installed, wars instigated, etc.

   Humanity never had a chance to evolve into peaceful intelligent people valuing all life and striving for excellence.

   The morons always killed or enslaved the people who were not into murdering and plundering.

   You can call it the survival of the fittest, but I sure don’t like it.

   I’ve wondered how things would work out if America split up into several autonomous regions.

   The tree huggers and health care for everybody crowd in one area. Doctors and teachers instead of bailouts and bombs.

   How long would it take until the corporations come up with a reason to invade?

   I suppose it’s a rhetorical question for most, but I’ve started my own currency and I’m trying something different. It’s kinda cool to determine how much money to create and what to do with it.

   Well, I got sidetracked, actually just wanted to congratulate Ellen to the links at big sites like Rense.

   Reply
   • 

     Ellen Brown, on January 13, 2009 at 2:16 pm said:

     Thanks Christine and good to hear from you! I’m still struggling with setting up a forum. Just don’t have time to do it. Best, Ellen

     Reply
7. 

   Seven Star Hand, on January 13, 2009 at 8:12 pm said:

   Credit is slavery-by-proxy, just as money is. The more you continue insisting that people remain enslaved by credit, the more it becomes obvious that there is something deeply sinister about your proposals. How can a people remain so deeply rooted to a concept that undeniably results in the struggle and suffering of billions of people and the destruction of all life.

   Sooner than you expect, “Americans” are going to need the help of those you stubbornly refuse to help. After all that has transpired, you still stick to the same old banking and credit song. Why is that? Why is it so hard to discern the great harm that this system has caused? Simply saying that you don’t “believe” that money is evil doesn’t help anyone. Look at the evidence! The following native American saying explains it simply…

   Only after the last tree has been cut down, only after the last river has been poisoned, only after the last fish has been caught, only then will you find that money cannot be eaten.

   The entire concept of money greatly complicates the process of life and civilization and credit and banking simply throw fuel to the fire that destroys life everywhere. Is this truly so hard to discern? Why are so many “westerners” so stubbornly refusing to admit that they are been duped and/or are willing enablers of a blatantly evil concept and global system?

   There is something very, very wrong here…

   Reply
   • 

     Ellen Brown, on January 13, 2009 at 9:03 pm said:

     Au contraire, “ready credit” is what has made this country great. It’s what allows people to get ahead when they don’t have rich parents. It’s the lack of ready credit that has impoverished the third world — I don’t mean bogus credit from US banks with interest going back to those banks, but their own internal credit system. Women in Bangladesh are delighted when they can take out $50 loans, because without them they have nothing to start with, nothing at all. Community currency systems are just credit systems — you take out credit from the community and pay for services with it, and the recipient spends the credits on other services.

     Reply
8. 

   Brock Moore, on January 13, 2009 at 9:31 pm said:

   What the author refuses to acknowledge is that only “real savings” can lead to economic growth.
   ———————————————————
   ———————————————————-

   A fallacy of Austrian Economics. What it ignores is the role of the entrepreneur in organizing the factors of production into their more effective combination, utilizing discovery and the invention of technology. He is enabled to purchase these factors through credit, which does not require prior financial savings. In the modern economy, “saving” is the acquisition of securities, which bring future income through the ownership of productive enterprise. The withholding of consumption is not required.

   I refer you to A. Mitchell Innes’ essay from 1913
   http://www.geocities.com/new_economics/innes/

   Brock

   Reply
9. 

   Seven Star Hand, on January 13, 2009 at 10:43 pm said:

   Sorry Ellen, but terrible times breed difficult decisions. This is not a time of business as usual and you and others have greatly underestimated the scope and nature of the dangers that now face us all. This is the death knell of western civilization, but it need not be the end of all westerners.

   Are you truly incapable of discerning that the American dream has already been killed and the grotesque debts and unfolding debacles are so large that an unstoppable reckoning is now looming large? These problems are far too large to be solved by money alone and rearranging deck chairs has never saved a doomed ship. The so-called bailouts serve the sole purpose of letting the perps escape before the big crash proves the truth in a way that can’t be denied.

   How bad must it get before it dawns on some people that this great country has always been a great deception and you are little more than a slave to that deception? What will stop even worse from happening in the future if we ignore the source of the problem and simply bow down to another money master? Who will pay off debts that are too large to be repaid? How will we solve that problem without others imposing solutions that are far more terrible than you seem to imagine. Here is a word to the wise. As I stated elsewhere recently:

   The head in sand pose may temporarily hide danger from the ostrich, but the hungry lion has no misconceptions about the truly dire nature of that bird’s predicament.

   It is the requirement of money, which is a system, not the stuff you hold in your hand, that is the great problem. Greed is the root of all evil and money is the most effective way to impose greed as a way of life. Anything that is good and necessary can be done easier and wiser without the great complexity and increased difficulty that money imposes upon society and civilization. As soon as you add credit to the mix, then people are loaded down with an additional burden, that need not exist. That burden is both extortion and exploitation, hence the term usury. When money is imposed, as it is, credit is simply piling on to the difficulty of life.

   There is only so much potential in any system and civilization is a system. When most of that potential is sucked away by money and all that it spawns and multiplies, what happens to the needs of the living? Now the problem is greatly increased by astronomical debt and deception. Not only has the national debt ballooned far beyond what is being publicly acknowledged, but corporate debt is far, far greater. These multi-trillion dollar bailout figures are now part of the national debt, which will have at least tripled under the Bush regime. This all exists because people have cluelessly acquiesced to the fallacies of money and credit and trusted to those who manipulate them from the shadows.

   The imposition of money and credit is evil, pure and simple. Must [certain] Americans learn the hard way that no nation or empire can last forever? What happens when those we have enslaved and oppressed via these great deceptions, while refusing to recognize the truth after all that has already transpired, get the upper hand? Why will they treat you any better than they have been treated? Why is this so difficult to discern?

   A super-volcano eruption will end the American empire, quickly and nastily. The resulting ice-age will encase the northern hemisphere. Others will see this as a divine intervention and won’t be so blind as to why. Whether true or not, that will be the accepted conclusion. Let those who brought evil upon others and refused to stop in the face of unfolding calamities now eat what they have wrought. Is this what you and others secretly desire for yourselves and your loved ones?

   Pay very close attention to who is speaking to you and what I have been warning of in recent years. It has all come about as promised and there is not much time left. This is no time to scoff in the face of profundity. This is an unequivocal warning to you and your readers. I am trying to save you also. The worst case scenarios need not occur. Terrible things are about to unfold unless you change paths now…

   Likewise, no one will help you unless you change paths now…

   Reply
10. 

    Christine Baker, on January 13, 2009 at 10:50 pm said:

    Ellen wrote:

    “Women in Bangladesh are delighted when they can take out $50 loans, because without them they have nothing to start with, nothing at all. Community currency systems are just credit systems — you take out credit from the community and pay for services with it, and the recipient spends the credits on other services.”

    That is absolutely true. But here’s the million dollar question:

    WHY do these women in Bangladesh have NOTHING?

    Why can’t they get a job and SAVE $50 in a few weeks?

    Why don’t they get their “dividend” as the Alaskans and as Richard C. Cook proposes?

    Cedit covers up much greater problems that ought to be addressed. Even in Europe and America women are STILL paid less than men for the same job and they are less likely to be promoted. Should I be thrilled because I can BORROW the difference?

    Additionally, to SUCCEED in a business competing with the big corporations, you have to be corrupt and ruthless, provide crappy customer service, exploit your employees, etc.

    The big corporations get huge subsidies and they own the legal system.

    The regulators refuse to enforce the laws. (Litigated, fully documented)

    I saw the link to Kucinich’s call to nationalize the Federal Reserve (finally!), but does anyone think it’ll actually happen?

    And, even if the government nationalized the Fed, would it make a difference?

    Has anyone noticed that many millions of people have student loans at about 10%?

    While the government offers consolidations, they will NOT lower the rates!

    Can you believe that?

    Get a mortgage at 5%, but doctors with $300,000 in student loans pay about $3,000/month just in interest on their student loans.

    And not only that, but people who owe more on their student loans than they originally took out (due to deferment) have lower FICO scores because Sallie Mae and other lenders don’t update the “Most Owed” to the current balance on the credit reports.

    I posted some student loan references and my recent research on consolidations at http://trado.info/forum/176 and if there’s anything I’m missing, please let me know.

    It looks to me like the government/lenders know that there’s nothing short of suicide or leaving the country people can do to avoid having to pay student loans. They can’t be discharged through bankruptcy and you can’t walk away from them as from an over-mortgaged house.

    So, they stick it to you.

    And that shows the true intentions of the banks AND the government.

    Reply
11. 

    Dan, on January 14, 2009 at 7:08 am said:

    Ellen,

    “I’m just proposing something that is one easy and logical step away from what we have now, something that could be done by Congress and I think will be done”

    It is not a matter of what can or cannot be politically achieved. The system you are proposing is no more economically viable then the present (although I could argue that it is much worse, but that is irrelevant to the matter) . It is not viable because you have ignored the link between real savings and economic growth.

    Once you realize the vital role of “savings” in all of this, the game will be over. We can all pack our things and go home. It is not a matter of “who” monetizes debt, but that it simply can never lead to anything productive, except the many “evils”,some of which you have been talking about, and finally will end in collapse.

    Reply
    • 

      Ellen Brown, on January 14, 2009 at 1:06 pm said:

      I don’t know what you are talking about.

      Reply
12. 

    Carl Malone, on January 14, 2009 at 3:59 pm said:

    Hi Ellen,

    Do you have any personal contact with anyone in the Obama administration? I want him to talk with you at length and to read your recent book. I want him to have input from someone who can get him to see our money supply as a natural resource for the public to manage and maintain.

    Reply
    • 

      Ellen Brown, on January 14, 2009 at 5:07 pm said:

      Hi, not personally; I just write! But I have been doing a lot of conferences. I think these concepts are spreading. Thanks for writing, Ellen

      Reply
13. 

    Michael, on January 14, 2009 at 6:03 pm said:

    Dan is preaching his religion again. Don¨t bother.

    Great article (again)!

    It¨s a good thing that you point out the Basel 2 agreement. The traditional way this is presented (the recycle of bank relenting already lent money in a recursive geometrical series) is actually far more complicated than the real thing and makes the reader believe that the banks creates money out of existing deposits.

    The fact is that the banks just can make up new money from the hat using the monetary base and multiply this with a factor. To conceal the simplicity and basic math and mess it up as much as possible. But basically the banks take their capital and multiply it with a certain factor depending on different borrowers . The funny thing is that the multiplier for municipals and states are infinity, they can make up as much as they please from absolutely nothing.

    There¨s a Swedish guy that´s done an excellent blogg with with very simple examples based on Basel 2. I can asked him to translate it to English (I actually thinks he lives in USA so his English is probably better then mine) ) if you think it will be useful for you. Here´s the blog in Swedish:

    http://sundapengar.bloggagratis.se/2008/12/08/1176068-fractional-reserve-banking-sa-fungerar-det-del-2/

    Reply
    • 

      Ellen Brown, on January 14, 2009 at 7:17 pm said:

      Yes, I’d love the blog in English! “Web of Debt” was actually translated into Swedish; but needless to say, I don’t speak it. Thanks, Ellen

      Reply
14. 

    Brian, on January 14, 2009 at 6:08 pm said:

    Professor Bob Blain wrote two brief but excellent articles – in his site http://hourmoney.org, click on “Mortgages, Government, and Money Facts” on the left column. That will get you to 3 articles. One is “Change the Mortgage Math”. The other is “Private versus Public Finance”. Enjoy!

    Reply
15. 

    Brian, on January 14, 2009 at 6:50 pm said:

    Since Ellen lives in Calif. where shortage of money is a serious problem, Ellen should at least notify Calif governor’s office and reps to the state legislature about the North Dakota solution.

    Reply
    • 

      Ellen Brown, on January 14, 2009 at 7:16 pm said:

      Working on it. So much to do!

      Reply
16. 

    Warren Raftshol, on January 14, 2009 at 6:51 pm said:

    What if they started a bank, and nobody wanted to borrow?

    I’ve recently, through the Community Exchange System, started an exchange called the Leelanau Exchange, Leelex for short.

    Members have a debit limit of 300 dk. Dk is the exchange unit, and is the symbol for doorknobs. The accounts of all members is visible to all other members.

    Members who furnish goods/services receive dk credits. Members who consume goods/services receive dk debits.

    Debits and credits sum to zero.

    No interest is charged on debits and no interest is earned on credits.

    Comparing this exchange with our current economy, I would say that in our current economy interest is allowed on debits but not earned on credits. In fact, credits are deflated.

    How is this not a proper analogy?

    Reply
    • 

      Ellen Brown, on January 14, 2009 at 7:16 pm said:

      Sounds like an excellent idea!

      Reply
17. 

    Michael, on January 14, 2009 at 7:05 pm said:

    I was thinking of joining the bartercard. From their website:

    “Bartercard is unlike any other credit or debit card because you fund our card with your own goods and services…NOT CASH. Bartercard currently helps over 55,000 smart businesses in 13 countries around the world (over 23,000 in Australia) to increase sales, customer base, cash-flow and profit. Is Bartercard any good? Bartercard enables member businesses to exchange goods and services with other Member businesses, saving you valuable cash and increasing your profits.”

    http://www.bartercard.com/

    Anyone knowing anything of this system?

    Reply
    • 

      Ellen Brown, on January 14, 2009 at 7:15 pm said:

      No but it sounds like a good idea.

      Reply
18. 

    Michael, on January 14, 2009 at 7:37 pm said:

    I know, Ellen!
    I¨ve been reading it and bought some for my friends as christmas presents. Excellent book!

    I´ll ask him to translate.

    Reply
19. 

    Wil Martindale, on January 14, 2009 at 8:43 pm said:

    Ellen, I think you’re right on target again. Though I will probably be riduculed for suggesting it, I have to point out that Lyndon Larouche’s Homeowners and Banks Protection Act of 2007 has been the only credible plan of action that makes sense to me.
    http://www.larouchepac.com/hbpa
    I think you will find that this plan shares a common understanding with about 4 or 5 sensible economists, and yourself, with regard to basically bankrupting the toxic derivatives mess, and separating these so called deleveraging “assets” from real assets, leaving them null and void.
    Though Larouche deserves some criticism for being a somewhat outspoken conspiracy theorist and worse, I cannot fault his economics. I have been following his remarks since the early 80’s and must admit he has been quite phenomenal on economic predictions.
    I can understand distabncing yourself from him, but encourage you to review the HBPA if and when you have time to do so–you may find it useful.

    Reply
20. 

    Philip, on January 14, 2009 at 9:01 pm said:

    Ellen,

    Thanks for a great article, and a game-changing book!

    I’m still confused about one reserve-lending point, though, and it’s a pretty crucial one. On the one hand, you say:

    “Bankers will tell you that they do not create money. At a 10% reserve requirement, they simply lend out 90% of their deposits. The catch is that their “deposits” include the money they have written into their customers’ accounts as loans.”

    But on the other hand, you qualify:

    “Note that the “deposits” created as loans are excluded from this list of allowable reserves: the bank cannot just keep bootstrapping loans on top of loans but must have money from external sources backing up its liabilities equal to about 10% of its loans and deposits.”

    This appears to contradict the earlier statement.

    So: Do new, fiat-created deposits count toward the reserve requirement, or not? If not, and only the bank’s own capital functions as the required reserve, then the banks’ capacity for untrammeled debt creation is far smaller than you and a host of other “debt virus” critics have portrayed it, including myself.

    A related question that perhaps points toward an answer to the first one: What is “high-powered money”, and how does it differ from ordinary money? Paul Grignon in his “Money As Debt” video implies that the former can serve as the basis for loans totaling 900% of its value — hence the “high power” — while “ordinary” customer deposits can only be lent out again at 90% of their value. But he gives too little detail to provide real clarity.

    Thanks again for catapulting the problems of debt-based money into the public eye, and for any help you can offer regarding these reserve-banking questions.

    Reply
    • 

      Ellen Brown, on January 15, 2009 at 6:38 pm said:

      Thanks Philip! When a bank creates a loan, it writes it as a deposit into someone’s account; but those “deposits” don’t count toward the reserve requirement. If borrower Jones writes a check to Mr. Smith and Mr. Smith deposits the money back into the bank, however, then it does count as reserves. When the bank creates a loan, its deposits and liabilities go up by the same amount, so no “excess reserves” are created. Only when a deposit comes into the bank do the deposits go up without increasing the liabilities.

      Reply
21. 

    Zarepheth, on January 14, 2009 at 10:24 pm said:

    Brock — I loved Michael Innes 1913 essay. It was quite informative reading.

    As I understand it, we could kick start commerce, if enough people were willing to exchange receipts of debts owed (or owing) rather than cash. Effectively turning money production over the individuals involved in each transaction. It’s a bit more cumbersome than swiping plastic or handing over dollar bills, but probably about the same as writing a check.

    Reply
22. 

    Dan, on January 14, 2009 at 11:14 pm said:

    Ellen,

    “I don’t know what you are talking about.”

    I know you don’t, but I think that is the problem.

    A private investor, by definition, would have to “save” his money by withholding consumption, in order to invest. Invest his own “savings” which he has earned in order to allow for a future return.

    A private individual also has to withhold consumption in order to “save” so that he can invest in his future (he may invest directly or through a bank, or investing firm, etc.)

    According to your “economics”, these are all just arbitrary rules that we can do without. We can invest without saving. Something magical happens when you give a bank or government the power to issue credit out of thin air apparently, because it seems that savings are completely irrelevant.

    Have you seriously thought about this?

    I ask you why? Why save if we can get a return on investments without savings (does that last sentence make sense to you? because that is your “monetizing debt” scheme).

    You don’t have to reply, just look into it. More importantly, think about it.

    Reply
23. 

    John Williams, on January 15, 2009 at 12:25 am said:

    There is nothing about monetizing debt that is involved in what Ellen has proposed. The problem is that your idea of savings is narrowed down to gold only. The idea as I understand it is to monetize goods/services to facilitate trade. My way of understanding the idea is that if 2 people have houses they want to sell they can “monetize” the houses then buy each others house. If someone has savings which could also include good credit rating, business experience, business plan etc this can also be monetized for the value the goods/services that would be created would be estimated to be worth based on market price. Gold is not the only form of savings anything that could be considered an asset is “savings” and those would generally back the loan and most times that would be collateral like houses and other forms of “savings”.

    Reply
24. 

    Dan, on January 15, 2009 at 3:07 am said:

    John,

    My idea of saving is not narrowed down to anything. Saving is saving period. You can save baseball cards for all I am concerned. If you want to sell your house for money, and invest that money (you can move in with your Aunt), that’s fine. You’ve given up “consumption” of your house, for the sake of savings. You can lend your house directly, perhaps rent… I don’t care. At no point was “savings” generated out of thin air.

    Monetizing debt is exactly that: creating money out of thin air for the sake of an investment or loan, or call it what you want. You want $100K to buy a house? No problem, I’ll give you a peace of paper that says $100K on it, but as long as you “promise to pay me back”. But don’t worry, I’ll check his credit before hand. Ellen will not dispute this, believe me this is what she is talking about. The is mostly how modern banking works. (or actually doesn’t work)

    Reply
25. 

    John Williams, on January 15, 2009 at 5:10 am said:

    You have to ask Ellen how she envisions what she proposes but based on my understanding of the system used in Pennsylvania there is generally collateral. When the system was originally created land was the collateral but there is no reason not to believe that any collateral such as houses, baseball card collections etc would do as long as the amount lent equaled the market value of the collateral. There may be percentages of loans where the collateral could be said to be a persons reputation (based on credit score etc) skills, and business plan with the worth of the future goods/services determining the amount of the loan or collateral may be required for all loans. There is alot of leeway in how the system could be set up and weighing risk vs reward would be the best way to determine the “rules”

    Reply
26. 

    Dan, on January 15, 2009 at 6:10 am said:

    You keep talking about how a “system” could be set up, or could do that… You have to understand that the rules are not arbitrary, like for a new ball game or something, and all we have to do is agree or vote on it.

    If you consume all that you produce, and don’t save anything, then you can never increase your production or current consumption. It’s that simple.. a law of nature if you will. It’s not a matter of rules. If you want to expand your house, and add an extra room, you must give up on some of your current consumption in order to save, and at some point you’ll have enough money to hire a builder. Or you can take a loan instead, but that is just some other guy that has saved and decided not to add an addition so he can lend it to you, or perhaps even give it to you as a gift. But for the same reason you had to save for the option without the loan, the person that lent you the money also had to save in order to lend you the money. When you saved without the loan, you eventually gained an extra room. You are wealthier. Perhaps, you’ll rent it out, thus increasing your productive capacity and increasing your consumption. This growth resulted from your savings. If you had taken the loan, the savings of someone else, you will have to now save anyway in order to pay back the loan + interest. You simply gained “time” by taking the loan, but the sacrifice you will still make. The guy that lent you his savings did exactly what you had done in the 1st option, only instead of investing in an extra room, he invested it by lending it to you (so you can build it), and as a result earned profit.

    Yet, everyone here is coming up with schemes for “getting something for nothing” . for a “promise” or for what ever…. Savings? who needs them? This isn’t about us making the rules. It’s about self-evident laws derived from the scarcity of “time” and “resources”. When you don’t save, but still hand out pieces of paper that say “credit” on them, you discover that there is no free lunch after all. Just as counterfeiters print money and extract resources from the public by diluting their purchasing power, so does “credit out of thin air”. But unlike cash that is counterfeited and spent mostly on consumption, credit is usually directed towards investments, which leads to the emergence of the modern business cycle.
    I think I’ve said enough on this issue for now.

    Reply
27. 

    John Williams, on January 15, 2009 at 6:36 am said:

    There is absolutely nothing that says it is based on thin air it is basically monetizing goods/services not thin air. If you want to build a room you put up your baseball card collection as collateral for whatever it’s market value is. Have the room built then rent it out and repay the loan. If you cannot rent the room to repay the loan the baseball card collection is sold and the loan repaid. Nowhere in that process is there money from air.

    There is also no reason to believe rules cannot be set up not in an arbitrary way but based on risk vs reward which is not arbitrary at all and is the determining factor to all economic activity.

    Reply
28. 

    Dan, on January 15, 2009 at 3:47 pm said:

    You are misunderstanding. No problem, put your baseball card collection as collateral. That isn’t the point.

    Where did the loan come from? Some one or some bank, or whatever, lent you money. Where did it come from? if it came from savings, there is no problem. But if it came simply by printing a “check”, backed up by nothing (except your promise to pay back), then that loan was “monetized”.

    It’s not a matter of your collateral; it’s the matter of the source of the loan.

    Reply
29. 

    Zarepheth, on January 15, 2009 at 5:25 pm said:

    Dan, John:

    It seems to me that banks are already creating money out of nothing. They currently lend money without actually spending the money of other depositors. They turn the borrower’s future capacity to generate wealth, convert it into money, and then rent it back to the borrower.

    If a private citizen or a non-bank corporate wants to extend a loan, they must use their existing savings. Unlike a bank, they cannot create the money by fiat. If they did, they’d soon end up in jail.

    Now, savings is all well and good, but I believe there is more to it. The economy as a whole should be a positive sum game – in other words, we’re all better off living together in a society than living alone. However, our accounting systems assume a zero-sum game – that wealth is neither created nor destroyed, only transferred. These two concepts do not work together. Somewhere in the economy we need a means of generating money to make up for the difference between accounting and economics.

    Reply
30. 

    Dan, on January 15, 2009 at 6:09 pm said:

    Zarepheth,

    Yes, of course banks are already doing this.

    There is no accounting problem.

    You are confusing money and wealth. They are not the same thing. The value of money is derived from it’s purchasing power, not it’s quantity. Here is part of a previous post of mine, from the Q & A section:

    The fallacy stems from the confusion between money and wealth. Wealth is measured in terms of production of real goods and services. Money is just used as a medium of exchange of such goods. There is no optimal amount of money to meet a given supply of goods. Unlike consumer goods, money only performs an exchange function, therefore “any supply of money will be equally optimal with any other” (see The Theory of Money and Credit, by Ludwig von Mises).
    Although more consumer goods or capital goods will increase the general standard of living, all that an increase in the money supply accomplishes is to dilute the purchasing power of each dollar. So the real measure of wealth is the purchasing power of the money and not its quantity. The purchasing power will always change so that a new equilibrium is reached between the money supply and total supply of goods. (See “The Mystery of Banking” by Murray N. Rothbard for more detailed explanation).
    So a growing economy with a fixed money supply is perfectly fine. An increase in purchasing power expressed in falling prices will accommodate the growing economy

    Reply