WEB OF DEBT BLOG

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

163 Responses

1. 

   Gino, on January 15, 2009 at 6:28 pm said:

   Another Idea:

   Let people lend to each other directly. Give credit to creditworthy people and “punish” sub prime borrowers:

   http://www.change.org/ideas/view/solving_the_credit_crisis_from_the_bottom_up

   You should vote for this as potential solution for the credit crunch. It will get presented to Obama on inauguration day.

   Reply
2. 

   Brock Moore, on January 15, 2009 at 7:34 pm said:

   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.
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   Some points in clarification, here, Ellen.

   In the present system, reserves are what a bank has on deposit at the central (clearing) bank, and in its vault and till in the form of currency. I believe that till currency is counted. I don’t know if coinage held by a bank is counted toward its reserves under the present rules. But the answer to that question is of little consequence.

   Except for coinage, all reserves are in the form of central bank credit on deposit at the clearing bank, or on hand in the form of currency, which is also central bank credit.

   In other words, reserves, in their totality, are in the form of central bank credit, not in a form of credit a member bank has itself created.

   “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.”
   –

   No reserves have been created or destroyed by this transaction, since the borrower paid the deposits created through the loan to someone who deposited the money back into the same bank. If that someone deposited that money into another bank, then the lending bank would have lost reserves in that amount to that other bank. This follows from the requirement that a bank redeem deposits in central bank credit when demanded.

   “When the bank creates a loan, its deposits and liabilities go up by the same amount, so no “excess reserves” are created.”
   –

   Not only is it a fact that “excess reserves” are not created, the bank’s excess reserves are depleted, because the bank’s reserve to deposit ratio has decreased. Reserves are created only by the central bank. This is accomplished mostly through what are called “open market” operations. The textbooks still say reserves are injected through the acquisition of U. S. government securities. The reality is that for several decades this has mostly entailed the purchasing of “repos” created by the member banks themselves.

   “Only when a deposit comes into the bank do the deposits go up without increasing the liabilities.”

   Deposits come into a bank in transfer from another bank, in which case the bank is credited an equivalent amount at the clearing bank, in transfer from that other bank.

   But all deposits are liabilities, so the bank’s liabilities have increased. But its reserves on deposit at the clearing bank are assets, so its assets have increased by an equivalent amount.

   Brock

   Reply
3. 

   Philip, on January 16, 2009 at 2:19 am said:

   Thanks, Ellen and Brock, for the clarifications.

   Brock: With no offense to Ellen, you seem to have the more detailed grasp of this reserve mechanism, so I wonder if you could offer an answer to the second question I posed in my earlier post:

   What is “high-powered money”, and how does it differ from ordinary money? Does this distinction between high-powered and ordinary have anything to do with reserves?

   A lot of us have been claiming for many years that the conventional debt-based, interest-burdened issuance of money is fundamentally flawed. What I”m trying to determine with these questions about reserve banking is the true extent of that flaw. If banks cannot “bootstrap loans on top of loans”, as Ellen says, but are restricted to lending only what their own central-bank reserves authorize — i.e. ~90% of their OWN money, their own central-bank credit — then the “debt virus” is far less severe than if (in Ellen’s words again): “At a 10% reserve requirement, [banks] 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.”

   I’m not pointing fingers here; I just think it’s imperative that we get our facts straight. I need not just to believe certain assertions about how the Fed and its subsidiaries operate; I need to know it, and to be able to explain it clearly. Brock, I’m betting you can help me do it. And I guarantee other readers will benefit too.

   Reply
4. 

   John Williams, on January 16, 2009 at 3:06 am said:

   Dan the money would be backed by the collateral not by a promise to repay. If the loan was not repayed the collateral would be sold on the market thereby getting rid of the inflation that would otherwise be caused if the loan was not repayed and no collateral was put on the market. The money lent would essentially end up buying the collateral it backed retiring the loan. The “savings” are the assets of the borrower the money only gets its value in its relation to the collateral. The bank would be holding the money and collateral in trust it would not be theirs.

   Zarepheth

   I agree it should not be a zero sum game as it is. My post is what I think would be a more equitable system where people can create money with their assets through a state institution that administers trade by making sure rules are followed such as loans are repaid collateral is put up etc and the profits are used as tax revenue. I do not know if this is what Ellen envisions and is just my understanding of how the Pennsylvania state system would work today.

   Reply
5. 

   Brock Moore, on January 16, 2009 at 3:39 am said:

   What is “high-powered money”, and how does it differ from ordinary money? Does this distinction between high-powered and ordinary have anything to do with reserves?
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   ——————————————————-

   It has everything to do with reserves, Philip. It is another name for central bank credit. Central bank credit equals the totality of reserves. It is through the transfer of reserves that accounts are settled between banks. When a bank creates a loan, its deposit liabilities are increased but its reserve deposits at the central bank are not affected. If a deposit balance is transfered to another bank through a check or electronic transaction, the bank loses an equal amount in reserves to that other bank, because of its requirement to redeem any deposit in central bank credit on demand. If a central bank purchases a government security, the seller receives a check which he deposits into his bank. The check clears back to the Federal Reserve, which credits the seller’s bank’s reserve account an equal amount. So the bank’s assets and liabilities have increased an equal amount.
   –

   A lot of us have been claiming for many years that the conventional debt-based, interest-burdened issuance of money is fundamentally flawed.
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   ——————————————————-

   It is a marvelous, wonderful system. The problem is that it wields tremendous power. It is a natural monopoly in that its clearing system requires a great deal of coordination between the banks. That power must be controlled through public oversight to that it is not abused.
   –

   If banks cannot “bootstrap loans on top of loans”, as Ellen says, but are restricted to lending only what their own central-bank reserves authorize — i.e. ~90% of their OWN money…
   ——————————————————
   ——————————————————-

   Please understand that a reserve requirement is merely a method of regulatory control over banks. In the absence of a requirement, prudent bankers would endeavor to keep a certain level of reserves to cover contingencies. With perfect coordination, that is to say, if they receive from other banks exactly a dollar in deposits for every dollar they lose to other banks, banks would not need reserves at all, since the net transfer between banks would be zero. They would still have reserve deposits at the central bank, because reserve deposits would have nowhere else to go. In such a case, banks acting in perfect coordination could create credit without limit. Certainly, they would be capable of supplying all the needs of trade and commerce.
   –

   You, quoting Ellen Brown: ““At a 10% reserve requirement, [banks] simply lend out 90% of their deposits.”
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   ——————————————————-

   Banks do not lend out a penny of their deposits. The theorem is that loans create deposits.

   Brock

   Reply
6. 

   FRT Smith, on January 16, 2009 at 10:44 am said:

   @Dan

   I think you are saying that all economic growth presupposes real savings because capital is always required to realize better ideas (which come from the human mind – the primary natural resource and ultimate source of all economic growth). If that is the case, then I agree with you.

   Take for example a primitive island economy. where a spear fisherman must reduce his consumption or else work longer hours in order to stockpile extra fish, which he will in turn consume while weaving his fishing net. This represents real savings. But once he has the net, he can catch much more. Savings was necessary to realize the better idea and bring about an increase in real prosperity. (Which needn’t imply everyone eating more fish than he needs, but might mean the fisherman has more leisure time to spend with his family, or in the pursuit of God or knowledge, etc. – this comment is for the poster who is against an increase in the GNP)

   If I have correctly understood what you are saying, Dan, as paraphrased above, then I don’t think Ellen Brown disagrees with you. What she seems to be saying is more pragmatic whereas you are speaking more theoretically.

   We have let international bankers become our masters. We pay them interest for bonds, which they “buy” without depriving themselves of anything. Then through fractional reserve banking, they expand that 10 fold and obtain interest on all that. Why not let the government create the money?

   Of course this is giving the government a LOT of power to use or abuse, but this is so much better than giving the same tremendous power to private individuals whose control over us can’t be curtailed at the ballot box, whose identity we don’t even know for sure, and who are comprised of only a handful of mega-rich individuals. What we have now is economic slavery of the masses to the powerful, non-transparent, non-accountable, perhaps non-American few. If we do what she proposes, then we might just wake up free men again, depending on how successful we are in limiting the excesses of government.

   When the Federal Government issues money instead of bonds, it is really levying an invisible tax, which deprives us (the taxpayers) of wealth, i.e., savings. So her system is also based on real savings. In addition, if the government releases the money by loaning it at interest then at least that interest would come back to the government.

   Now we have the government collecting half of the federal budget each year (mostly through income tax) and giving it to private individuals who provide us with nothing and deprive themselves of absolutely nothing in the process.

   Of course ideally a gold standard might be best, because it would take the dangerous power of creating money even out of the governments hands, but given the fact that Fort Knox is probably empty, we don’t really have that option any more. Also, I am intrigued by the idea that the interests from the government money loaned into circulation could finance the Federal Government ( not the current one, but one of more reasonable proportions) without the need for income tax!

   In short, you are talking theory and Ellen is talking practice.

   Reply
7. 

   moneycreation, on January 16, 2009 at 11:14 am said:

   Hi Ellen!
   I´ve asked “sunda pengar” to translate his blog but I haven´t been able to reach him.

   I did some work in explaining the same (but less formulalized) and have translated it into Enlish (for anyone reading this: feel free to help me improve the translation). It´s based on the fact that the banks creates credits from the monetary base in which cash is a component. Banks can create multiple times the amount they have in cash – without this “deposit is relent, coming back to the banks and relent again” and so on – the banks just take the amount of cash they have and multiply it with a certain factor depending on who is borrowing.

   It´s a very simple description with animations that might be to basic for those reading Ellen’s blog. But I have intentionaly made it for begginers.
   Never the less the blog explains the credit creation out of cash, why bubbles are necessary , why bank runs deplete the banks and the universe and everything (just joking)
   And please! Help me improve the text.

   http://moneycreation.wordpress.com/2009/01/16/3/

   Reply
8. 

   Dan, on January 17, 2009 at 12:45 am said:

   FRT smith,

   I’m glad somebody here acknowledges that “savings” are required for economic growth. let me just add that “ideas” come from people, and that is one type of capital, but these ideas are converted to machines and better tools, etc… all capital acquired for the sake of and increase in future production. For that we need savings.

   Another important point you raise is that by government creating the credit, it is extracting resources from the public. Ellen does not concede that this is the case. It is certainly a Tax! It is insidious taxes for people do not understand why their money is loosing value. It is an uneven tax that actually hits the middle class and the poor (In a way it is regressive). It’s an open access to our earnings and savings by government. I don’t quite follow the logic of how that is freedom.

   But the big mistake of your argument is the fallacy that “savings” can come out of a printing press. What you are talking about is what is called “forced savings”. It is quite a well known argument, but it is false The name itself implies an immoral act. You are in essence forcing people to save against their will? I don’t quite get why you would support such a scheme, and it is obvious to me that is incompatible with the concept of freedom.

   But economically speaking, that is not the same as “real” savings. Savings are a result of individual “time preference”. An individual’s time preference will determine the balance between his immediate consumption and savings. You sacrifice immediate “ends” for a greater future “ends”. In order to invest you must first “save” (as you’ve pointed out). In other words, you need to first create wealth.

   When you “monetize” debt, there is a mismatch between the credit and the “time preference” of individuals since the credit was generated out of a printing press and not form voluntary savings. The economy cannot absorb the new products; it cannot be forced on the consumers. Remember that money was eventually confiscated from them, unlike real savings which eventually return to the individual (with a return of profit) for consumption. So there is no way the public can absorb the new goods and services without abandoning their previous consumption of other goods. Actually, there are many more reasons and different perspectives why this can’t work. I’m not sure I picked the right one.

   At least you agree that there is no “free lunch” and wealth is confiscated for the sake of the credit expansion. But it is still false, just as you can’t create wealth out of a printing press, you can’t also switch the order; that is first invest, then save…

   The Fed is an arm of government. Yes it is in one way benefiting banks, but on the other hand it is benefiting the government (not the people). It is simply a charted bank created by Congress. The “private” status is just a technicality. Congress created it and can destroy it. Nationalizing it is like giving the employees of the Fed a new uniform. Government is the culprit, for it has created this monster. Instead of more government, maybe you should think about the option of less government where banks, as well as other businesses don’t get any special privileges.

   Reply
9. 

   Warren Raftshol, on January 17, 2009 at 4:07 am said:

   April 15, 2009 is hereby declared National War On The Banks Day.

   After this date, no patriotic citizen will make another credit card payment.

   While Ellen’s plans and suggestions have great merit, I fear there is no other alternative than direct action by the people!

   Reply
10. 

    FRT Smith, on January 17, 2009 at 6:08 am said:

    @Dan

    I’m glad we agree on so much. Before I address your last paragraph about the Fed, I wonder if you have seen the video “Money Masters” at GoogleVideo. It’s long – about 3.5 hours, but WELL worth the download. Some of the quotes in there might convince you that, although the Founding Fathers were very suspicious of any government, many of them were far more suspicious of international central bankers. I don’t recall any Founding father considering our own government “more dangerous than a hostile army camped in our midst.” I am afraid that BIG money has compromised the government, and not the other way around…

    Reply
11. 

    moneycreation, on January 17, 2009 at 6:38 am said:

    Warren Raftshol
    Another way might be to encourage people to withdraw their cash.

    http://moneycreation.wordpress.com/2009/01/16/3/

    Dan
    Do you ever stop making assumptions you can´t prove by empirical or logical reasoning?

    Some examples:
    “Another important point you raise is that by government creating the credit, it is extracting resources from the public”
    How? It´s not true just because you say so. And why should private banks credit be an exeception from this rule if it’s true?

    “It is insidious taxes for people do not understand why their money is loosing value”
    Why and empirical reasoning, please! The hyperinflation garbage has been disproved over and over again empiricaly.

    “It’s an open access to our earnings and savings by government.”

    If so, show that a private system isn’t an open acces for the private banksters. The gold based 100% fractional reserve systems have always been manipulated by those controlling the demand, suply and mining of gold (the same group running the show today) – isn’t that the fact, empiricaly?

    “wealth is confiscated for the sake of the credit expansion”,
    Provided money is a commodity which it shouldn’t be. Money should’nt have any value of it’s own, just transfer value in transactions, just as Aristotle pointed out – Adam Smith was wrong. The definition you have of money isn’t the one that should be valid (even though it rules at present – but it isn’t carved in stoned by God to Mises – the definition of money is a social construct and is not a rigid part of the Ten commandments Mises received from God.

    I think we should have a permanet money supply such as cash today (making a permanent digital money supply ougth to be possible) and that new money should be created only if new value is created in society. Money already circulating should only be used as a medium of exchange and have no value of their own.

    Note that thats my belief – it’s not some sort of natural law. You, on the other hand, are preaching a religion where your premises are carved in stone – not needed any proof or validation of empirical evidence.

    “Instead of more government, maybe you should think about the option of less government where banks, as well as other businesses don’t get any special privilege”

    Let’s say that this is true. How are you going to keep private banks from missusing their abitily to create money (which they have always empiricaly done) if not by government? So the people will check the private banks indirectly through the government in a democatic form? Isn’t that close to the system we have today? Is it working? Why should it work any better? Why not democraticly check the money creation directly letting the government create the money instead of having an indirect public check of private banks money creation through the government?

    Reply
12. 

    Dan, on January 17, 2009 at 7:38 am said:

    FRT Smith,

    I understand your concern but allow me to briefly try to convince you that the threat is from government and only government.

    In a free society, the role of government is to protect Individual rights and property rights. Individuals are thus abstained from using violence against each other. Individuals are thus free to choose and peruse their own lives and interests in any way they choose as long as they don’t violate the rights of others. The only time physical force is allowed if for self defense, which we delegate to our government. Therefore, government holds a monopoly on the use of physical force. Any individual who engages in the use of aggression or violence or any form of physical force is, under the law, a criminal.

    Therefore, the only way we, as individuals, can cooperate is by voluntary means. When we exchange our goods and services by voluntary means, that is both parties seek to make a gain as a result of the exchange, we are doing so in a “free market”. This sounds trivial, but it is misunderstood and overlooked by many. If both parties did not (according to their personal subjective judgment) expect a gain, no exchange would take place.

    There is basically only one way for an involuntary exchange to take place; with the use of physical force! So any exchange that results in one’s gain at the expense of another, must be achieved through the means of coercion or extortion, etc.. Of course people make mistakes in their judgments. You may regret a decision to buy a plasma TV, but that doesn’t mean the salesman had taken advantage of you, for at the time, you thought, or was convinced that it is an exchange that would benefit you. Of course if the salesman had coerced you in some way or used threats or any form of violence to compel you to buy the TV, that would then constitute an involuntary exchange, but it would also qualify the salesman as a criminal and you would expect government to do its job and punish him.

    It immediately becomes obvious then, that government is potentially the most dangerous entity in society, for it holds the monopoly on the use of physical force. If not held in proper check, if it’s powers are not severely limited to the protector of individual and property rights, the concept of “natural” rights is lost, for now every freedom of action on the part of the individual is actually granted by government as permission, and every “right” in practice, is actually a “privilege” granted by government. It seems therefore, that involuntary action and involuntary exchange can only be legally initiated by government.

    It becomes apparent then, that for anybody to gain at the expense of another, one must use government as a “club”. The only way that banks, for example, can become a threat is by using government to secure special monopolistic privileges and regulations that benefit their interests. Such benefits and privileges that don’t serve your interest as an individual can only have been obtained by government, since if the individual was given the choice, he would not voluntarily agree to accept the service or conditions offered by the bank. Pretty much anything that does not benefit you as as an individual, but you are still “forced” to exchange, is a result of government intervention, for how would a bank (or any other business) force you to take his service against your will without using physical force? How? Only by government. If the government was powerless in such interventions, if it were contained to its initial role as protector of rights, then banks or anyone would be powerless! Any bank would have to engage in trade only by voluntary means. It could not obtain any special powers.

    So the idea that banks are more of a threat then government is logical impossibility, since any threat it poses, must be by definition, through the use of government as a “club”. In reality then, only political power has serious potential to corrupt (and of course it does), since corruption usually involves ones misuse or abuse of the power to use force.

    I agree about the founding fathers fearing banks, particularly Jefferson, but it was clear that the threat, could only be realized through government. It always was and always is. Bankers don’t have an army, but they can, as any other business, bribe, lobby, and you name it….

    Reply
13. 

    Dan, on January 17, 2009 at 8:12 am said:

    Warren Raftshol

    Listen warren, I’m not going to disprove every fallacy that I think you have made in that comment about the value of money, or inflation, or what ever. It is impossible to empirically prove every assertion I make all over again every time I post, or at all. I’ll just say that I think that there is a lot really bad economic garbage that had formed over the years (even centuries), and most of the claims you adhere to are false.

    Don’t misunderstand me, I don’t mean it in any disrespectful way.

    Right now, let me just say that you misunderstood me. I certainly never said that credit expansion by banks today don’t extract resources from the public. Of course they do! But they can only do it because they have obtained special privileges from government. Not because they are some how able to do this alone in a free market. See my long explanation to FRT Smith above. I am advocating for a free market, not for “private” privileged, controlled, or regulated by government. I consider what we have today a quai-government banking system. The point is this. You see the Fed chairman going to Switzerland to discuss with our central bank presidents basically our future in secret meetings and you get really pissed off. I certainly do. But as hard as it is for you to accept, these guys have been empowered by the governments. (many of the central bankers are actually government employees in some of the countries, it doesn’t really matter). So the source of you problem is the entity has empowered them. They are the real culprits. Get your government to abolish the stupid Fed and get out of the banking industry, and for that matter, from every other industry! Let me get this straight, you can’t get your government to do the minimum, that is to protect your from the banks, so you want to hand over the entire industry to it. I just don’t agree with this logic. I think this notion that bank are somehow conspiring on their own (without government) is absurd, and plays right into the hands of government, where it is always ready to seize more power.

    Reply
14. 

    moneycreation, on January 17, 2009 at 8:50 am said:

    “There is basically only one way for an involuntary exchange to take place; with the use of physical force!”
    Nope!
    Imperfect information is another. Since all are expected to do the “rational” choice gaining oneself as much as possible, hiding information is a part of doing so (I wouldn’t buy a used car from you for instance – cause I would definitely think you would be hiding information that would benefit me)-

    “It immediately becomes obvious then, that government is potentially the most dangerous entity in society, for it holds the monopoly on the use of physical force. “

    Obvious based on what? Ever heard of the mafia? Ever heard of corporations and banks blackmailing states with “free trade” agreements, SAP and so on? Take a look how they have banks and companies raped for instance Congo, in order to control their mineral wealth. And so on. Bank and their companies rules the government and not the other way around. Do you really think that the banks wouldn’t continue with there murderous activity if we just removed the government?

    When a company or bank is bigger then the economy of a whole nation, don’t you think that they by them self is a form of government? How are you going to regulate them if not by a government?

    There’s no way around the fact that governments in one way or another will exist. The thing balancing things up is democracy -where politicians and government are held responsible to their actions under maximum transparency. But you see no problem in companies/banks being larger then whole nations and imposing their will on them? You really think if we totally get rid of all governments these giants should do whats good for the whole world not benefiting them self?

    It’s a Platonic fantasy land you are building.

    Reply
15. 

    FRT Smith, on January 17, 2009 at 10:43 am said:

    @ Dan

    We can theorize about who is potentially our greater threat, but in the last analysis, the guy pointing a gun at my head is more dangerous then the other guy aiming his cruise missile elsewhere.

    Reply
16. 

    karen, on January 17, 2009 at 2:50 pm said:

    Ellen –
    Thanks for the great article, either you are getting better at explaining this or I am just finally getting it after reading so much by many people, but I think it’s the former. This comment is long, so I’ve waited to add it after other discussion transpired.

    Your article, along with your explanations on derivatives and your overview of historic monetary policies and controversies in the U.S. have been invaluable to my understanding of the basic, simple core of this problem and a possible practical solutions. The practical solution part seems missing from most other good critics; either they are too wedded ideologically to existing system to think innovatively or they are proposing something I view as too radical from a strategy point-of-view, if not from an ideologic point of view.

    So regardless of one’s ideology or moral viewpoint this has appeal, as at least as it seems to me. To the real zealots that want complete change and to those that just want effective reform of the abuses of our current system, you offer something certainly better morally than current situation (it is at least in the democratic control of the people for their overall benefit) and something strategically practical to start on a small, local basis and expand without being, at least initially, deemed too radical, too global, or threatening to engender a shut down even before something gets out of the gate.

    To some of the commenters here, I say do not underestimate the inertia of cultural systems and means of the powerful to resist change even in the face of huge crisis. We, as a population, were about 100-1 opposed to the first bank bail-out, across just about all demographics including upper middle class/poor (except maybe super rich), fundy religious to atheist scientists, people of all races, recent arrivals to multi-generational Americans, educated to illiterates, red state to blue state etc… It takes something to get that uniformity of outraged opposition that the bank bailout got, I think it united us more than 9/11 and yet our representatives and media did not respond to us, really at all. Now while I believe this crisis will push us to new levels of awareness and eventually new levels of political organization and power, I do not think we will not adopt revolutionary clarity, fervor and effective organizing systems overnight simply because we are foreclosed, unemployed and hungry. If things get real bad, we are more likely to devolve first rather than evolve into a more enlightened state. Not that we might not get there eventually but it is not that simple. To that end, providing a practical alternative that will much improve the common good is not counter to even a revolutionary desire, as it could show the effectiveness of another way while also bringing along the reformer who is resistant to an alternative banking scheme.

    Having said that, Ellen’s alternatives seemed radical and revolutionary to me upon first look, not that I thought it was the deep a political change that many advocate for in comments to this blog, just that these ideas are not “mainstream” in terms of ideas. However, the more I reflected on Ellen’s proposals, I realized how non-radical they are really are (at least in the sense of being risky, un-proven or a wholly new economic system) and how essentially brain-washed we are as a society in regards to our banking/credit/monetary options.

    Banks do essentially create money from nothing with less and less regulation (essentially, as even when regs in place, complication used to not conform by obfuscation). So taking this power from the private banks and giving it to government banks is not so crazy communistic but rather in my mind a way of simply taking something the we are all now seem to agree the government should be highly regulating anyways and which the government is definitely paying for and backing anyways, and cutting out an unnecessary middle-man that is a gross mis-allocation financial resources.

    Ellen’s proposals still leave a free market to operate and find efficiencies, still leave regular people a chance to get “in the game” with hard work, creative ideas, improved methods but Ellen’s ideas also ensure the practical political means to avoid the usury/loan shark/predatory aspect of poorly regulated private banks/credit systems (because short-term profit incentive taken out), bubbly cyclical nature of private banking (because short-profits from long-term risk less likely an issue in govt system) and the wealth-concentrating effects of our current system, as profit from interest would be used for common wealth government projects and there would be a natural check on interest rates due to peoples balancing of desire for cheap credit and government funding.

    It seems that any of the criticisms of Ellen’s proposal apply even more greatly to our current system, so while govt banking could be inflationary, could be usurious, could take on big long-term risk for short term gains, could concentrate wealth in the govt sector rather than with regular private workers/businesses, we know for sure that the current system certainly has all these aspects in much worse ways. At worst, a government bank would use the interest in bloated inefficient bureaucratic public works projects with somewhat over-paid slothy workers. This still seems an improvement in terms of allocation of resources over the profits going to slothy super rich’s mansions serviced by people making subsistence wages. And government in our current system gets big and inefficient by taxing us and indebting us anyways, wouldn’t it be preferably to remove some of the tax burden by collecting interest rather than paying it. Lower taxes, if we want them, and this still leaves us with our free political to determine how big we want our government spending to be.

    My last comment is the appeal in my mind of regularity of government regulated systems, and thus the appeal of this government banking option. Booms and busts seem the destiny of poorly-regulated market systems. The short-term profits are too appealing to avoid the long-term risk and harm. Excellent piece on how this fatal attraction to short-term gain is inherent if our market systems, if not well regulated, by the MIT blackjack folks at: http://yourmortgageoryourlife.wordpress.com/2009/01/15/the-real-cause-of-the-financial-crisis-an-mit-blackjack-team-perspective/

    Hence businesses, developers, mortgage lenders, financial sector, and realtors constant appeal to politicians to deregulate financial controls, usury laws, environmental protections, labor law protections etc…to keep the boom in profits going, which has now only made our crash worse. In the long-view, it seems the financial regs were in the businesses best interest, at least as business entities, because just like Enron, those banks and mortgage companies lobbied for and got the de-regulatory rope they hung themselves with and meanwhile screwed up our energy and financial markets, hurting most ordinary consumers and running their companies into the ground. That’s not to say a select few can make a fortune (and you only need to make a fortune once in a lifetime to be rich) before they leave us a trash heap, but the businesses themselves, the jobs they provided, the local ecomonies they supported and their self-invested 401k’s are gone due to their risk taking and fraud.

    A small example I am fond of that shows the effectiveness of government regulation to beat back these ills of fraud, boom/bust while still retaining the benefits of capitalistic market systems is the California regulation of car insurance. When that proposition passed, the car insurance people threatened to pull-put of Cali. Instead they like doing business there and have staryed there, despite having to open their books to government regulators frequently and having to forgo super profits. Why do they stay? Because it is a stable business things to out-do them. The businesses just compete on price within certain ranges, operational efficiencies, service and marketing. And the consumers benefit also, having much more competitive rates nationally than they did previously as well as it allowing some other things for the public good such as less unfairness in red-lining etc…

    I believe government banking would yield a similar long-term stable growth with the benefits of a free market, sans the brutal booms and busts, and with a dash of policies that remove some of the unfairness, usurious nature of our private system.

    Reply
17. 

    Dan, on January 17, 2009 at 4:40 pm said:

    procreational,

    If some one deliberately hides information knowing that if you knew the information, you would not make the exchange voluntarily, that is a form of “fraud”. That is a form of “fraud”, and we have courts to handle such disputes. We should have laws to protect private property. “Fraud” is a clear violation of private property.

    All of your examples require the use of force! All of your examples are a result of corruption in government. For how can one blackmail a state government, if the government is not corrupt? You’re missing the whole point, in fact you are reinforcing my position. “blackmail” a government means the the company is able to do what it does because it is allowed by government. If people are running around “compelling” people to trade against their will, then that that is a violation of property rights, and your government is not doing its job. It’s very simple, the more control you will give to your government over you life, the more the special interests will use that power to take advantage of you. The more money the government collects, the more lobbyists who will want a piece of that money pie.

    If bankers are creating money out of thin air, it’s because government is allowing them to get away with this. Perhaps the government is benefiting from this? Have you thought about that? Who is financing all of the spendings that your politicians are promising all the time? I think you are fearing the wrong kind of greed. You fear “economic greed” but I think that what you fail to realize is that 1. economic incentives can only be productive in a voluntary exchange system, and it is only “political greed” that is so destructive. I’m sorry but the only way that one can coerce you into bad trade is by “political power”. Otherwise, he is a criminal just like any other robber, and in a free society, he is considered a criminal and will be punished.

    Reply
18. 

    Warren Raftshol, on January 17, 2009 at 5:06 pm said:

    Dan,

    I think you might be confusing moneycreation‘s last post with mine.

    Reply
19. 

    Warren Raftshol, on January 17, 2009 at 5:08 pm said:

    The time is getting late for us to wait for our corrupt congressmen to do the right thing. There is only time now for direct action. See my previous post.

    Reply
20. 

    Dan, on January 17, 2009 at 5:23 pm said:

    Karen,

    At what point do people stop to call the system we have Laissez-Faire Capitalism? Seriously, at what point? When there are government cameras in my bedroom? Or in my bathroom? I know you didn’t use that term, but I think that pretty much summarizes your take on all of our problems.

    You have to much faith in the nature of government. I have to disagree with the notion that I can be enslaved to private individuals. Because every time I encounter a situation that my individual choice is compromised, or my private property is violated, it is only by means of government.

    How can a bank create money out of thin air without a “law” that says: “banks can create money out of thin air”? I’m sorry but I don’t get it.

    Banks are operating the way they are because they are set up in such a way with all of their powers and special privileges, which are all granted from government. It’s not regulations per se, It’s the system! It’s not a free market. Just because there are “private” entities doesn’t mean anything. If people are stealing from you, it’s not because of a lack of regulations. It’s because they have been granted legal powers to do so.

    If you want the “fraud” to stop, then you repeal the laws that give them their powers, and the laws that actually hold this system in place. And give freedom back to the people to use what ever money they want, so that no one, that is no one including your government can have the power to debase the currency! There is nothing to regulate except your government which is getting bigger and more powerful.

    The idea that you need to regulate in order to achieve competition is simply missing the point of why there is lack of competition in the first place. (as in the case of your example in California) Monopolies can only effectively form with government help. Government introduces regulations that are always bound to fail, then they simply add more regulations. But they’ll never blame the regulations, they’ll always blame that nature of capitalism. At some point, if we continue on this path we will end up with the German type socialism of the 30’s (National Socialism). They retained the illusion of private ownership, but in fact, all was trade and production was controlled by the state.

    You fail to see that unless the regulations are designed to deter against “theft” or fraud, etc.. All regulation is nothing but restricting trade, usually benefiting one special group at the expense of others, or worse, hampering with the price system of the free market which causes the misallocation of resources, inefficiencies, the unemployment, and you name it. I’m sorry, but you can disagree (as many others here will), but it is the truth. Your problem is not Capitalism per se, it is the crony capitalism, which is nothing more the a mixed system of Capitalism, Socialism and Fascism.

    Reply
21. 

    Brock Moore, on January 17, 2009 at 9:00 pm said:

    How can a bank create money out of thin air without a “law” that says: “banks can create money out of thin air”? I’m sorry but I don’t get it.
    ——————————————————–
    ———————————————————

    It has to do with the right to enter a contract, to tender a promissory note that says “I will pay on demand.” Promissory notes were the primary means of trade for thousands of years according to Innes. Fractional reserve banking is the generalization of the concept. Individual promissory notes have limited recognizability and acceptability. The innovation of banking is that banks exchange their generally recognized and accepted promissory notes in the form of deposits for the notes of their borrowers, greatly expanding the scope of the competive market. You can then spend what you receive in your pay voucher anywhere, not just the company store.

    Brock

    Reply
22. 

    John Williams, on January 18, 2009 at 3:22 am said:

    Dan as far as the last post goes I would agree with most of what you are saying. You are missing the entire point though that while we are subjected to the current state of affairs it would be better if there was a single person or group of people in the government in control of a monetery system similar to the one Ellen proposes. The reason why is there would be direct accountability whereas today there is basically none. Also a select group of people would not be legislated to create money within a monopoly where they can inflate their services real worth for their own gain. The gain would be instead given back basically as reduced taxes or more services depending on what the people want. Is the idea a perfect system? No but it is much better than the current state of affairs and would be a step in the right direction.

    In your example of the person on the island you ignore the possibilities which may arise from the division of labor. If there was 4 people they may decide 2 will catch fish while 2 make nets. The 2 that make nets have no savings (other than possibly net making skills which could be considered an asset and therefore savings) but through a co-operative effort they realize it is more efficient to have 2 people catching fish and 2 making nets so that when the 4 nets are finished they all benefit. In this situation the 2 fish-catchers are lending resources in exchange for greater future resources. Obviously this simple economy is not the same as ours but if someone was put in charge of resources and followed rules they could decide which endeavors will be a worthwhile investment. This is a further division of labor and the basis of banks. If that is a person who is in the public eye which is transparent and accountable I believe there will be better results than if the person is hidden, unaccountable and protected by laws guaranteeing him a monopoly through powers gained from the government.

    Now saying that I do agree with your belief that there should be free banking in the private sector but even one step further I believe government should be allowed to compete too with voluntary customers. Realistically though the chances of this happening without certain steps in between is basically zero. I think Government taking back a private monopoly it has created would be the first step towards private free banking since it would remove a lot of power and money that is directly opposed to free banking namely the current monopoly. I do not agree with your belief that private free banking would revolve around gold though and think that gold would be a very small part of what most people would be willing to accept as a business model for money. Banks based on real bills doctrine, community, commodity, and other currencies could arise and with innovation it is hard to say which one would become dominant today since there are many technologies available today which would make them realistic when they might not of been in the past. The free banking model has a good history and the drawbacks such as multiple currencies could be overcome with digital banking today. Customers will regulate the banks just like they do in all industries and Government regulation could fill in the rest.

    Reply
23. 

    Dan, on January 18, 2009 at 6:38 am said:

    John,

    Basically, what you want right now (in the short term) is transparency over the Fed. Fed Chairman Bernake was appointed by the president, so that’s already your government appointee in charge of the money. Transparency and oversight bills were introduced in the 90’s. Bill Clinton strongly rejected. Ron Paul right now is calling for oversight and transparency over the Fed, but as president Elect Obama was recently quoted: “I don’t want to second guess the Fed” So you know that all of this will not go anywhere. Pretty much this is the state of mind of all governments around the world.

    I still don’t quite follow the logic of “taking back the monopoly” since the monopoly is already in government’s hands. Remember, the monopoly was granted by the government to the Fed, which itself was created by guess who. So it is a government monopoly. You’re not going to have any change by having these guys at the Fed change uniforms.

    I think the trick is actually to take the power away from the government and not give it more. Transparency, oversight,..etc. I just think that’s all a dream. There is human nature and there is government nature. You can’t change the nature of politics. Why give someone so much power over you anyway, and then rely on a bureaucratic system to oversee that it is not abused. Or why rely on elections to oversee that power, when people vote for the guy who is most charming and promises to give out the most free stuff. If they don’t have the power, they can’t abuse it. It’s that simple. Then you don’t have to worry about transparency, and oversight. I don’t want my freedom hanging by a thread, just so someone else can vote it away.

    Do you worry about transparency at your supermarket? Who cares, if they start to treat me bad, I just go somewhere else. The market offers me a wide variety and abundance of choices. All constantly shifting and changing to meet consumer demand. The market will sure enough get rid of the inefficient, and those who are unable to get their act together. I don’t worry about oversight. They exist solely for the purpose of serving me, and not the other way around. I think to many are taking it for granted.

    “Government regulations could fill the rest”,

    I will agree with you only if they are anti-fraudulent based laws. In other words, protection of your property rights. Certainly not regulation interfering with the voluntary exchange system. All prices, integrity, quality should be regulated by the market. Any government interference will distort this process, have adverse effects, and lead to more regulations. Eventually you will end up once again in the same place.

    Reply
24. 

    John Williams, on January 18, 2009 at 8:30 am said:

    Your argument in the last post is not self consistent. You are saying the monopoly is in government hands but that transparency and oversight bills were rejected. If they do not have oversight and transparency it is not in government hands. You say “I think the trick is actually to take the power away from the government and not give it more.” but if it is in government hands how would the solution proposed by Ellen give them more power?
    This confusion is the reason it should fall squarely into government hands so that accountability is not obscured in a quasi government quasi private institution that privatizes profits and nationalizes losses. At least if it was in government hands someone would be accountable there would be transparency and profits and losses could be nationalized which is not the case today. There would also no longer exist a powerful special interest who is completely dedicated to making sure no competition could ever be allowed such as free-banking. As I said before a nationalized bank is a good first step. Congress could take back control of the monetary system if there was an outcry to do so but they are not going to open the banking industry to unregulated competition especially not while the special interest groups of the current monopoly are still around.

    Reply
25. 

    Warren Raftshol, on January 18, 2009 at 3:30 pm said:

    I still don’t quite follow the logic of “taking back the monopoly” since the monopoly is already in government’s hands. Remember, the monopoly was granted by the government to the Fed, which itself was created by guess who. So it is a government monopoly. You’re not going to have any change by having these guys at the Fed change uniforms.

    While Dan’s statement is literally true, the fact that the banking cartel has corrupted the government means that there is no democratic oversight, nor can there be any reform expected.

    We the people are going to have to organize a do-it-ourselves jubilee.
    Following Richard C. Cook’s suggestion, stiffing the banks on credit cards is a good start.

    Reply
26. 

    karen, on January 18, 2009 at 5:27 pm said:

    Dan –

    I don’t think we are so far apart in some of our analysis and I totally agree that our current regime/govt is corrupt in that they do legalize all type of things for certain interests that are illegal for the rest of us or our cleary at odds with our best interests. I agree it is not simply private vs government and its just private bad, government good. The question, is our government/regime so corrupt that there is nothing we can do to improve our financial systems within current politics? I don’t know.

    It seemed to me Abe Lincoln used our system and the peoples perception to accomplish much good under the US Constitution and while still adhering to the rule-of-law. Meanwhile some greedy manipulators were busy laying in the means to rip us off which were successful later.

    US history shows this tug and how our system can be reformed for good and how it can also be corrupted for great evil, and US people can support awful imperialism and genocide and also be cultural leaders on democracy and equality and freedom of expression. We have evil trusts and monopolies that were counter free markets and the interests of the common good, and we have also had people exposing these evil trusts, in magazine stories no-less, and legislators passed anti-trust legislation.

    I think other modern democratic countries have also shown the same dynamics. Sometimes people pushing for great reforms that help themselves their country as a whole, and whole world as well as, and also people going to their basest instincts to support aggressive wars and being used and corrupted by a select powerful minority to enrich themselves.

    From what I have seen in recent history, It seems to me the most hopeful point for us to exert the power we have as American population is to reform our government to be less corrupt and legalize and establish entities that are for the common good. Its not that government in the abstract is good but rather that a government made to be responsive to the common good of the people is our best hope. And I still think that such reform is at least possible, if not probable. Starting local and making something work, proving its good to outside doubters and to thwart power elites that want to scare people about the wrongness of such reforms and then spreading is the most effective place to start with financial reforms. This is why Canadians have universal health care. Sure there were monied interests and insurance companies in Canada that resisted this, but once one province did it and people liked it, the other province’s governments were forced implement the same. Regardless of what someone thinks of government health care, the people of Canada got what the majority of them thought was in their overall best interest in spite of resistance.

    Also know I am very sympathetic to concerns about the tyranny of government, I think even a democratic government can be quite tyrannical, if the people are vigilant and moral and do not exert their power. However, that is just what I think Ellen is proposing, using organixing of people around a good idea to make government to be the servant or the people, not its ruler

    Reply
27. 

    Dan, on January 18, 2009 at 6:48 pm said:

    John,

    “At least if it was in government hands someone would be accountable ”

    Again, I just don’t want my “natural” rights to be in the hands of someone else. Those aren’t rights. There is no accountability what so ever. We can’t even agree about what accountability means. Is printing money a “hidden Tax”, or is it something else? So according to the latest elected officials, we can run up deficit spending and print money like crazy. Who is running this country? Even the advisors that are selected by the elected officials are done based on their “political cloud” and on their virtue. Freedom can only be achieved by prohibiting anyone from violating your “natural” rights. A democracy is nice, but if you can vote individual and property rights away, then we are all delusional here about being “free”. This is nothing more then a high tech. slavery system, where the individual is enslaved to the system. Does it matter if one is enslaved to the king of the tribe or to the tribe itself? In both cases you are “forced” to sacrifice your natural rights for the benefit of others.

    There is no inconsistency here, the fact that Congress rejects oversight means that government is in control, for if it wasn’t, how could they “reject” the oversight. In reality, the more the public is in the dark, the more the government can benefit. They use the excuse of that it will “undermining the integrity of the financial system”, and most people buy into it. Who is going to buy most of the government securities to finance the “public works” schemes. Who? You guessed it. The Banks.
    When I say “to take power from the government”, it obviously means that the laws that privilege the special interests are repealed. The benevolent leader who takes power for the sake of giving it up later is, in my opinion, a fantasy.

    Reply
28. 

    Julian, on January 19, 2009 at 2:12 am said:

    @Philip, Brock & Ellen

    I need clarification on something that I think is the same as what Philip is getting at.

    Paul Grignon, in ‘Money as Debt’, makes a clear distinction between deposits of money and high-powered money. With a 10% reserve requirement 90% of money deposits can be re-loaned and re-loaned and re-loaned, with 10% of the deposit being added to reserves with each iteration. But high-powered money, in a 10% reserve system different. It IS the 10% reserve and so can be loaned out by 900%.

    – I have $1 million in high powered money
    – I deposit it with the Federal Reserve to establish my reserve account
    – I can now make loans of up to $9 million based on my reserve
    – When the $9 million is deposited in another account it is now ‘low powered money’. 10% must be held in the reserve account of the receiving bank, but $8.1 million can go back out on loan, and so on and so on.
    – So the initial $1 million in high powered money ends up generating interest collection on ~$90 million in loans, not $9 million.

    Say that the reserve ratio is 1:10…

    – I get $1 million dollars and buy $1 million in treasuries
    – I deposit the treasuries with the Federal Reserve
    – I can then leverage and loan out up to $10 million dollars
    – I make the loan to myself and use it to buy $10 million in treasuries
    – I deposit the treasuries with the Federal Reserve
    – I can then leverage and loan out up to $100 million dollars
    – …you get the picture

    Then, whenever I feel like it, I can stop bootstrapping and enter the usual low-powered money fractional reserve game. The Fed is none-the-wiser that my high powered money was bought with thin air.

    If this is the case, then treasury issues must go like hotcakes with banks snapping them up like crazy. Whoever snaps up the most dominates the banking game.

    So, Ellen, Brock, is this correct?

    Reply
    • 

      Ellen Brown, on January 19, 2009 at 5:05 am said:

      My understanding is that $1M can only become $10M. Super busy right now so I’ll defer to Brock!

      Reply
29. 

    Julian, on January 19, 2009 at 2:20 am said:

    Follow up, if it is correct then a primary objective of the Fed is to acquire treasuries in ‘open-market operations’, ahead of other banks. Shell banks in the Cayman Islands?

    Reply
30. 

    John Williams, on January 19, 2009 at 3:39 am said:

    If the government has to ask for oversight and transparency then they are not in control. If I am in control of a company then I do not need to ask for oversight and transparency since I would already have it. If I do not have oversight and there is no transparency then I am not in control someone else is. Just because the government could take control of the Federal reserve does not equal them having control over it.
    When I say accountability I mean someone who has control over the banks who is a representative of the people and therefore answerable to the people. Currently the government does not have complete oversight and there is no transparency so I do not see how they could be considered accountable. This is the problem everything is once removed from the government so responsibility is obscured this allows plausible deniability to everyone involved therefore a higher chance of corruption.

    Reply