Iceland Stuns Banks: Plans To Take Back The Power To Create Money

Zero Hedge ^ | 4-1-15 | Raul Ilargi Meijer

[aMorePerfectUnion]

Who knew that the revolution would start with those radical Icelanders? It does, though. One Frosti Sigurjonsson, a lawmaker from the ruling Progress Party, issued a report today that suggests taking the power to create money away from commercial banks, and hand it to the central bank and, ultimately, Parliament.

Can’t see commercial banks in the western world be too happy with this. They must be contemplating wiping the island nation off the map. If accepted in the Iceland parliament , the plan would change the game in a very radical way. It would be successful too, because there is no bigger scourge on our economies than commercial banks creating money and then securitizing and selling off the loans they just created the money (credit) with.

Everyone, with the possible exception of Paul Krugman, understands why this is a very sound idea. Agence France Presse reports:

Iceland Looks At Ending Boom And Bust With Radical Money Plan

Iceland’s government is considering a revolutionary monetary proposal – removing the power of commercial banks to create money and handing it to the central bank. The proposal, which would be a turnaround in the history of modern finance, was part of a report written by a lawmaker from the ruling centrist Progress Party, Frosti Sigurjonsson, entitled “A better monetary system for Iceland”.

“The findings will be an important contribution to the upcoming discussion, here and elsewhere, on money creation and monetary policy,” Prime Minister Sigmundur David Gunnlaugsson said. The report, commissioned by the premier, is aimed at putting an end to a monetary system in place through a slew of financial crises, including the latest one in 2008.

According to a study by four central bankers, the country has had “over 20 instances of financial crises of different types” since 1875, with “six serious multiple financial crisis episodes occurring every 15 years on average”. Mr Sigurjonsson said the problem each time arose from ballooning credit during a strong economic cycle.

He argued the central bank was unable to contain the credit boom, allowing inflation to rise and sparking exaggerated risk-taking and speculation, the threat of bank collapse and costly state interventions. In Iceland, as in other modern market economies, the central bank controls the creation of banknotes and coins but not the creation of all money, which occurs as soon as a commercial bank offers a line of credit. The central bank can only try to influence the money supply with its monetary policy tools.

Under the so-called Sovereign Money proposal, the country’s central bank would become the only creator of money. “Crucially, the power to create money is kept separate from the power to decide how that new money is used,” Mr Sigurjonsson wrote in the proposal. “As with the state budget, the parliament will debate the government’s proposal for allocation of new money,” he wrote.

Banks would continue to manage accounts and payments, and would serve as intermediaries between savers and lenders. Mr Sigurjonsson, a businessman and economist, was one of the masterminds behind Iceland’s household debt relief programme launched in May 2014 and aimed at helping the many Icelanders whose finances were strangled by inflation-indexed mortgages signed before the 2008 financial crisis.

[Sherman Logan]

Let us assume, for purposes of discussion, that the amount of money loaned in the US last year was $10T.

Under the system you seem to be proposing, that would be probably <$1T/year.

The economy would utterly and totally collapse.

All I’m talking about is the volume of money available to be loaned, not whether its source or methods of distribution are right and proper.

[Toddsterpatriot]

BTW, for an excellent description of the way fractional reserve banking works, watch the bank run scene from It’s a Wonderful Life.

I guess George Bailey was a bankster, too.

Exactly!

If banks could lend multiples of deposits, they'd have no problem with bank runs.

[Talisker]

BTW, for an excellent description of the way fractional reserve banking works, watch the bank run scene from It’s a Wonderful Life.

I guess George Bailey was a bankster, too.

No, if you remember, George Bailey was a Savings & Loanster. Which meant the non-cash assets had to be verifiable as real property and not bank "instruments" protected by Fed-backed "insurance" based on money-printing.

[Sherman Logan]

What I posted: Fractional-reserve banking is the practice whereby a bank takes in deposits, creates credit or makes loans, and holds reserves (to satisfy demands for withdrawals) that are less than the amount of its customers’ deposits.

What you posted: Fractional-reserve banking is the practice whereby a bank takes in deposits, creates credit or makes loans...that are less than the amount of its customers’ deposits.

It's the reserves that are less than the amount of deposits, not the loans.

I'm unclear if you just don't understand plain English, or if you're rather ineptly attempting to mislead people.

But others are perfectly capable of comparing the two sentences above and reaching their own conclusions.

In any case, I'm off to the sack. Don't let the banksters get you!

[Pelham]

Actually banks make loans that are a multiple of the deposits that they hold, rather than being less than their deposits.

Their reserves are only a fraction of what they loan out, ergo the name ‘fractional reserves’.

[Toddsterpatriot]

http://www.federalreserve.gov/newsevents/press/other/20150109a.htm

[Fungi]

The interest on the federal debt. You don't pay for that? Guess you don't pay taxes smarty pants. "Inquiring minds want to know."

[Talisker]

All I’m talking about is the volume of money available to be loaned, not whether its source or methods of distribution are right and proper.

But don't you see that the "source" of those assets are crucial? The creation of various "instruments" by banks - pure fantasies they would NEVER allow the little people to get away with - is how they've used the cover story of fractional banking to run wild. Yet you go to THEM for a loan, and its Real Property for collateral or hit the road.

[Toddsterpatriot]

It's the reserves that are less than the amount of deposits, not the loans.

Of course the reserves are less than deposits. Reserves more than deposits would make loans difficult.

The reserves plus the loans add up to the deposits.

[Sherman Logan]

I know that, but there are several posters here who persist in claiming the opposite.

Which is very, very odd. Fractional reserve banking has been the basis of the financial system for quite a number of centuries now. It wasn’t invented 20 years ago by evil Jewish banksters.

You can make an argument, not a particularly intelligent one IMO, that we should abandon the practice, but that it’s what we’ve done for centuries is quite beyond dispute.

[Talisker]

So? It’s a self-declared UN-audited report. Just like I said.

You’re tedious. I’ve had enough of you. Bye.

[Toddsterpatriot]

You’re right, we shouldn’t believe the numbers the Fed releases, we should believe a guy like you, who has no clue.

[Pelham]

“Which is very, very odd. Fractional reserve banking has been the basis of the financial system for quite a number of centuries now. It wasn’t invented 20 years ago by evil Jewish banksters.”

In one of his books von Mises makes the point that fractional lending is the very definition of banking. It’s in his “Theory of Money and Credit” as I recall.

There’s a very good history of banking that’s still in print, “Capital and Finance in the Age of the Renaissance: A Study of the Fuggers, and Their Connections” by Ehrenberg.

It’s actually an interesting read, unlike the majority of economic texts. The Fuggers were a Christian German banking family that pretty much controlled the economy of Europe, taking over that role from the Medicis.

[Talisker]

You’re right, we shouldn’t believe the numbers the Fed releases, we should believe a guy like you, who has no clue.

No, of course we should believe the Fed. After all, they're the ones who said they're not a government agency. Don't you believe them?

And as for their numbers, I do indeed believe them when they said they made 16 trillion dollars in secret loans to bail out their favorite banks.

Yes indeed, I do believe the Fed.

[Pelham]

“The interest on the federal debt. You don’t pay for that? Guess you don’t pay taxes smarty pants. “

Well when I pay taxes I make out the check to the US Treasury. Are you telling us that you make your check out to the Federal Reserve?

Interest on the federal debt- that’s the interest owed on Treasury bonds that Congress authorizes to finance their deficit spending.

Congress sets the debt limit. The Treasury sells bonds to finance that debt. Taxes are paid to the Treasury. The Treasury pays interest to anyone who owns a Savings Bond, a T-bill, and any other paper that you can buy from the Treasury.

Notably absent from that process is the Federal Reserve, and for good reason, because we have been paying interest on the debt since Alexander Hamilton sold the first Treasury bond in 1789 and the Fed didn’t arrive on the scene for another 124 years.

The Fed has no say in the national debt and the only interest they collect is from their own bond holdings, the same as anyone else. Well not exactly the same because they have to turn over the interest they receive to the Treasury and the rest of us get to keep ours.

The Fed doesn’t “charge interest on our money”, it would in fact be a mathematical impossibility even if they wanted to. The only interest you pay is to the Treasury. That’s why you have been writing their name on that check you send to the IRS.

[Fungi]

Nonsense. So we don’t make a check to the “Fed.” Where do the interest payments go? You are too smart by half and don’t know it.

[Pelham]

“No, of course we should believe the Fed. After all, they’re the ones who said they’re not a government agency. Don’t you believe them? “

Toddster may believe Congress, since they were the ones that wrote the legislation creating the Fed in 1913.

Congress created the Federal Reserve System out of private banks that were compelled to “buy” shares to belong to the System. Shares that they can’t sell and which convey no actual ownership. And it’s still made up of private banks to this day.

[Pelham]

“Nonsense. So we don’t make a check to the “Fed.” Where do the interest payments go? You are too smart by half and don’t know it.”

“Interest payments” are made by the government to anyone who owns Treasury bills. But I’m not sure that’s what you intended to ask.

If what you intended to ask is ‘how is money collected that will be paid out as interest on the debt’, then that is the money that you pay to the Treasury when you mail in your check at tax time.

The IRS instructions tell you to make out your check to the US Treasury. That money pays the government’s bills, including the interest owed on the national debt. That’s the only way that money is collected to pay interest on the debt. By taxes. The Fed plays no role in this whatsoever.

[PieterCasparzen]

From the fractional reserve wikipedia article, a nice little example of this "fractional reserve" lending (excerpt, more at link). http://en.wikipedia.org/wiki/Fractional-reserve_banking

Table Sources:

Individual Bank	Amount Deposited	Lent Out	Reserves
A	100	80	20
B	80	64	16
C	64	51.20	12.80
D	51.20	40.96	10.24
E	40.96	32.77	8.19
F	32.77	26.21	6.55
G	26.21	20.97	5.24
H	20.97	16.78	4.19
I	16.78	13.42	3.36
J	13.42	10.74	2.68
K	10.74	0.0	10.74
	Total Amount of Deposits:	Total Amount Lent Out:	Total Reserves:
	457.05	357.05	100

If you look at the Green cells, those are the actual Dollars, as in the first $100 that was initially deposited.

Therefore, what you have in this cycle of depositing and lending where you see Total Amount of Deposits, are bank account balances that are in customers' bank accounts.

So, if you ask how much "money" or "cash" is "in the economy" by asking the banks to tell you the total of customer deposits, you get that $457.05 amount. But that amount is "ON ACCOUNT", meaning the banks have that much liability to their deposit customers. That original $100 bill that was deposited - no new dollar bills were created in this process.

The initial $100 bill was simply put in the teller's drawer and added to the bank's pile of cash on hand. The accounting entry would be: owe customer $100 (credit), cash on hand $100 (debit).

Obviously if you subtract the Total Amount Lent Out from the Total Amount of Deposits, you get back to the original amount of cash money that was deposited, which equals, "magically", the Total Reserves. The individual banks ALL HAVE A PIECE OF THAT $100 AS THEIR RESERVES.

This is why it's very confusing, because we toss around terminology like "creating money" and "charging interest on money created", which are not an accurate depiction of what's going on and also not easily understandable.

Banks earn interest on the loans. Customers may earn a much smaller amount of interest on their balance - "on account". The difference is the "spread" the bank profits by, in effect, "borrowing" from the customer (the customer demand deposit account is a liability to the bank) and lending that borrowed money out. The original capital the bank was started with thus forms a cushion of equity in case loans default. When this equity cushion gets to be less than zero - that's when a bank is insolvent (bankrupt) - its total liabilities are more than its total assets.

With the benefit of this simple example, we can see that we simply have allowed banks to lend customer deposits, which are then typically deposited back into a bank. The key to remember is that the bank that lends the desposits no longer has their deposit customers cash any more - just a fraction of it (in this case 20%).

Customer deposits are an Asset on the customers books - Cash. To them, this is counted as if it were paper dollar bills in their hand, like a stack of $100s. But guess what - it's only "on account" at the bank, the bank does not keep all that cash even though the account is a "demand deposit" account, that is, upon demand of the customer, the bank must pay out the cash that they have on account for the customer in their bank account.

Thus we see that customer deposits are a Liability to the Bank. While the "lent out" monies - to the bank are Assets !

Of course the system is based on the bank not having every customer with a demand deposit account (like a checking account) all asking for all their money on the same day).

Banks can also Borrow... from other banks, etc. Those are also Liabilities to the bank. But such borrowings would be repaid on a schedule, not whenever the lender wants their money. CD's (certificates of deposit) are sort of a hybrid: the customer can get their cash back before the CD matures - but they must pay a heavy penalty, so the bank would not have to pay back the full amount according to the terms of the CD.

Banks thus have to manage their cash position, matching their need to pay out cash with the timing of assets they have that yield cash, either in period payments (like interest on bonds, etc.) or when investment instruments (like bonds, etc.) mature and the principle is returned.

"Full reserve" banking is an alternative to fractional reserve that gets discussed here and there. It's where all the cash for customer deposits must be retained by the bank. This would mean either paper dollars, or in the bank's account at the Fed (so if a bank needed paper dollars they could just make a call and the Fed would truck over paper dollars and deduct the amount from their account at the Fed; in practical terms the paper dollars would typically come from nearby banks). Of course, there rarely would be any "run" on such banks, because they would have all the cash needed whenever they needed it, since they never lent it out or invested it; it just sits in their vault and/or gets transferred to and from the Fed.

If banks' businesses were seperately accounted for, as in different companies under a bank holding company, and the one that does customer deposits was not responsible for the liabilities of the other "sister" banking companies, then customers would always be assured of their deposits being available, and the FDIC would not be necessary. Of course, the customer deposit bank would have to charge fees or interest on those accounts to produce revenue, since they could not produce revenue by lending those amounts out. Those banks would, in effect, be a vault service with checking and debit card capability.

In this scenario as things stand today, as far as bank balance sheets, there would be much less money available to lend out, certainly at first. After a while, people and businesses would probably start operating with less cash in their checking (demand deposit) accounts, and they'd move cash not needed in the short term to time deposits like CDs or they'd invest in other short term investments so they could avoid the charges for having their money in the "full reserve" checking account.

The problem with lending out customer deposits as is done in the "fractional reserve" system is that customers are assuming "cash in the bank" is a near-zero risk place to have their money. Just remember all the old expressions about "money in the bank", etc. Of course there is certainly risk in banks lending out money or buying financial instruments or in some way trying to earn money using the customer deposits - which is why the FDIC was created.

The existence of the FDIC thus allows banks to lend out customer deposits and push the risk of bank insolvency to the FDIC. Of course, the FDIC is supposed to be it's own beast, and not "the government", which is all well and good, normally. But as we can see from the 2008 meltdown when Hank Paulson asked George Bush for $700 Billion (with a B) worth of backing to make sure Wall Street was "ok", we see that ultimately if there is some "catastrophe", the financial burden of the catastrophe in practical terms is shifted to the government, which is really a euphemism for the taxpayer in cases such as this.

[PieterCasparzen]

So all of us “conspiracy theorists” then wonder... what is the deal with the Fed... what is the “conspiracy” that we don’t like.

We ask ourselves:

Is is creating money out of thin air ? Is the Fed money printing the problem ? What’s the big new world order conspiracy ?

There are folks who are anti-conspiracy and think the Fed is ok, and there are folks who think the Fed is bad.

So who’s right ?

Answer:

Both and neither.

The fractional reserve thingy was explained in the prior post.

By changing the reserve requirement, the Fed can push banks to lend more or less.

There’s no money creation - there is an increase or decrease in money “on account”.

Well, economists include checkable deposits in the “money supply”.

I don’t.

Cuz it’s just “on account”. It’s a statistic, that’s all, IMHO.

Because amounts deposited are offset by liabilities. Every “Lent Out” amount in fractional reserve - means a bank customer OWES a bank that much. Again, the Green boxes are the actual money.

The whole thing creates confusion and distraction, which works nicely for new world order.

They key point to focus on (like when you’re trying to figure out how an illusionist does a trick)...

the Federal Reserve is in charge of “monetary policy”.

There’s one very simple, basic alternative to that: a government is in charge of its own “monetary policy”.

The establishment people would have you believe that this would be insanity. But that is exactly why new world order got the whole conversation rolling the way they did: a great fear of mass money creation by the government, and how that would greatly decrease the value of the dollar.

Well... what have we now ?

We have a Federal Reserve that has had a dramatic “easy money” policy, using the various methods at their disposal, even if they are largely related to borrowing.

Business borrowing is generally a good thing, because businesses generally are putting the borrowed capital to work by expanding, which stimulates the economy and creates jobs. Business revenue is not confiscated from citizens (well, it shouldn’t be), business revenue is a result of a transaction where the business customer receives something they wanted or needed in exchange for the sale price.

The real pain for the citizen is when the government borrows. That’s because the government’s only source of revenue is taxation, which is money confiscated from citizens, in most cases without the citizen receiving anything in return directly (just the indirect benefits of government). Ergo, taxes are generally an overhead expense - just something you have to pay out of what you earn, just for the privilege of... existing.

And that is the key feature that new world order wants: a lot of government spending (which new world order controls and benefits from), a lot of taxes on working people to pay for it all (programs, buildings, planes, etc., etc., etc.), and the elites of finance, diplomacy, espionage, government planning, etc., are the ones government goes to for, well, pretty much every step government takes.

What happens when a government - instead of borrowing dollars - which are “US” dollars, mind you - simply prints its own dollars ?

In other words, if government spends say $4 trillion on vendors and employees... and is a little short on tax revenue, maybe needs $100 million (just 2.5% shortfall), if they make an entry on their books, “Dollars Created, $100 million”, and they pay their bills...

there’s one missing piece of the puzzle.

The government did not have to have a Treasury bond auction and sell $100 million of bonds that it would have owed interest on.

The government would not have had to sit down with the international banks and say, “ok, what rate is it gonna be this month, can we float $100 million” ?

The banker’s phone would not ring.

So what of the government going mad and creating way to much and spending way too much ?

Well...

What’s going on right now ?

Government spend hundreds of Billions more than we collect in taxes.

And they borrow these hundreds of Billions (of US dollars)...

So taxpayers have to pay back... at this point... $18 trillion or so.

That’s how much more they’ve spent than they took in.

They borrowed “out in front” of tax revenue - and the interest is running into the hundreds of Billions.

Clearly, the idea of having to run to bankers to borrow - instead of printing dollars - rather than constrain spending - has always allowed it to run wild.

The “conspiracy” part kicks in when you realize the happy little world of cozy links between:

government
high finance
espionage
diplomacy
government consulting
military
defense contractors
news and entertainment media
politics

etc.

This is where the “establishment” supporters fall short - they fail to want to do their homework and just for a lark, check out some of the links.

Whenever someone gets curious, and really keeps researching, and keeps ignoring all the wacky claims and keeps just looking for key links... they find some scary-@ss links that make them say - OH CR@P ! I’ve been lied to from the moment I was born. This is all a huge, gigantic scam.

It takes a long time and a lot of effort to start catching on. After you do, you’ll become very disenchanted, very negative, unless you realize that it’s better to know than not know. At least you’ll know what hit you, and be able to start planning your own personal moves a little better, and hopefully avoid winding up on the losing end of the stick.