Abolish the Fed

[floridarocks]

Can someone please explain why we should not abolish the Federal Reserve or explain why lawyers won't discuss the bankruptcy of the corporate US in 1933 the keeps us perpetually indebted to the international bankers. How rich are those Rothschilds anyway? Is there such a thing as kazillion?

[Carry_Okie]

See #300.

[Nick Danger]

The word "deposit" implies a bailment, in actuality it is an unsecured loan to the banker.

Agreed.

This bears very little relationship to the broker relationship to which you refer

Disagree. I have hired my bank to go find people who want to borrow some money I have saved while I don't need it. Money is fungible. Whether the bank loans out exactly the same money is indeterminable. They will collect a fee by charging a spread between the interest the borrower pays, and the interest they pay me. They earn this fee by finding the borrower and arranging the transaction. I call this brokering, as in "acting as an agent for others, as in negotiating contracts, purchases, or sales in return for a fee or commission." I suppose we could hire lawyers and call it a reseller arrangement, but for purposes of this thread, that's a quibble.

Very little money would be deposited in banks without the socialistic FDIC protection

You got a pick in tomorrow's third at Aqueduct? I could use a guy that knows the future. Seriously, you have my agreement to strike the FDIC from your next budget. Geico will be on me the next day, like ugly on an ape, trying to sell me Depositor's Insurance. That's probably a better way to do it anyway. Now we gotta watch out for the FDRC, the federal re-insurance corp that bails out Geico when it goes down trying to pay off Citibank's depositors. We have to put the feds in there somewhere; otherwise when it all comes down on our heads in The Giant Collapse, the government will be the only thing left standing. You sure you want that? I say put 'em in.

Bonds, money market funds, commercial paper, bona fide loan brokers come to mind to name a few.

Yeah, your list of et ceteras is about like mine. I had those check-into-cash places in there, too. Big push on for diversity, you know. Still, all this talk about venture capitalists and Wall Street Wizards really misses a big chunk of America. No Wall Street investment house wants to talk to some guy who wants to open a cash management account with a hundred bucks. And no Silicon Valley venture capitalist wants to see a business plan for a flower shop. You say that "Banks aren't even the prime source let alone the only source of investment capital," and I'm sure that's true. The stock and bond markets do a good job of that... for General Motors.

A whole bunch of people run around these threads talking about how we're all being turned into wage slaves by the bankers, and yet it is the bankers who are out there every day visiting the mom-and-pop manufacturing companies that could could no more go public than fly, loaning them the working capital they need to expand. More often than not, it's bankers who loan the money for some guy's dream of having his own restaurant, or for adding the second location across town. These people aren't high tech entrepreneurs, and they aren't looking to raise $40 million. Take banks out of that picture, and a whole bunch of upward mobility will disappear from America, not to mention most of our jobs. The guy who said "it takes money to make money" was absolutely right. For the vast majority of American small business people, banks are where that money is.

But for the vast majority of people, banks are a very convenient form of money brokerage.

The dis-information you put out, in view of all your groupies, is dangerous.

I assume this refers to the dispute above concerning the meaning of the term "broker," or a lament that the sorry state of customer service in banks makes them no longer convenient. If it is a claim that the "vast majority" of people in America neither borrow nor lend through banks... well, let's just say you couldn't have meant that. As for what 'broker' means, I posted the dictionary.com definition above. Your dictionary may vary. But if your dictionary's definition of 'broker' does not include earning fees by arranging transactions, then it's a kookburger dictionary and you need to get the new, official, revised Federal Reserve dictionary instead.

[Deuce]

I have read your post #300 (and your subsequent posts). I suspect you have valid and interesting inputs.

As I understand it, you believe the rapid advance of technology has recently undermined the historical effectiveness of gold as a store of value and that the same applies to any other possible commodity or basket of commodities.

You go on to express a preference for private currencies that you purport partially resolve the problems that these advances of technology have introduced. You offer a single sentence regarding this preference and I must confess an inability to follow it. Specifically, you say:

Personally, I think that an options market on assets as stores of value for competing, insured, private currencies is a partial answer to the problem.

Please elaborate. I have no idea what this means. More importantly, I understand neither the nature of, nor the rationale for, the private currencies to which you refer.

[Deuce]

Deuce: The word "deposit" implies a bailment, in actuality it is an unsecured loan to the [bank].
Nick: Agreed.
Deuce: This bears very little relationship to the broker relationship to which you refer.
Nick: Disagree. I have hired my bank to go find people who want to borrow some money I have saved while I don't need it.

The interchange above makes no sense to me. You agree that a deposit in the bank operates, in effect, as an unsecured loan to the bank. Then, in the very next breathe you describe the very different broker/client relationship and claim that this, instead, is the true relationship.

This broker relationship is not at all descriptive of the actual relationship between depositor and bank

[Deuce]

Fractional reserve banking is inherently unstable. Even its supporters acknowledge this. When you remove Federal deposit protection, there will be a lot less money deposited. You essentially acknowledge this in your comments below:

We have to put the feds in there somewhere; otherwise when it all comes down on our heads in The Giant Collapse, the government will be the only thing left standing.

The alternative is sound alternative institutions where everybody is aware that no one will rescue them from bad decisions (i.e. the free enterprise approach)

[Deuce]

More often than not, it's bankers who loan the money for some guy's dream of having his own restaurant, or for adding the second location across town. These people aren't high tech entrepreneurs, and they aren't looking to raise $40 million.

You continually bring up the Mom and Pop examples. Raising money for such purposes poses none of the problems you attribute to such activity---with or without the current banking structure.

[Carry_Okie]

In a real sense a Federal note under the gold standard was an option. It was a contract for purchase (exchange or redemption) of a fixed amount of gold at a fixed price. Hold that thought.

Our society has a LOT of assets, some of which even appreciate over time. Consider shares of stocks, a market basket of bonds, shares in real property (and there is nothing intrinsically wrong with gold mines) as the more usual form of such tradable assets. They have a unit of account (shares) that is convertable with a calculation. A hand-held wireless device could make it a snap. Those shares could even be insured, and that starts to look like a good deal when considering promises such as, "the full faith and credit of the US Government." At least they get independently audited and rated by someone with something to lose if they are wrong!

Calculating is getting cheap, which almost obviates the need for a unit of account. A currency based upon a range of assets, with the option of converting them to shares in ownership of those assets might well be store of value preferable to gold. The medium of electronic exchange is obvious and is done all the time with existing currencies when you buy with your VISA card overseas. Marketers of currencies would compete in providing superior currencies, much the way countries do now. They could offer that product with transparent access to independent verification of the assets, and the level of risk associated therewith, much the way we do now with bonds. Intelligent agent software could learn the preferences of the currency owner and diversify the holdings as appropriate. Conversions would be nearly instantaneous. Certainly there wouldn't be the need for a "reserve currency" as all assets could be in production. In fact, such a spread of currencies would reduce the propensity to have a "run" on a single asset and reduce the wild swings in an economy when one is preferred to others and but a single currency among many might be at risk.

There are a number of people doing some serious academic work on this, David Freidman (Milton's kid) among them. I have designed a free-market verification and insurance system that provides an effective set of checks and balances and those principles might be useful toward providing an effective alternative to civic currency.

Finally, consider those functions (medium of exchange, store of value, and unit of account) as what they really are: a substitute for barter. They are a "transaction-facilitation service" and as far as I am concerned, there is no reason that government should have a monopoly on such a business. It has proven to be an untrustworthy agent and because of computers isn't really necessary. What we need from government is the final police power in support of the rule of law (even civil courts are being privatized through arbitration and mediation services).

[Deuce]

But if your dictionary's definition of 'broker' does not include earning fees by arranging transactions, then it's a kookburger dictionary

I agree with your definition of broker; I'm denying that this is descriptive of what a bank does.

[Deuce]

Are the issuers legally allowed to put out more contracts than there are underlying assets? If not, I will give further thought to this.

P.S. Unimportant point offered just to clarify my initial misunderstanding: your use of the word "option" is incorrect and caused me not to understand post #300. As you are describing it now, the currency is a claim on assets not the right, but not the obligation, to buy (call) assets at a specified price within a specified time.

[MrMiteE]

Hello

Read that statement carefully. It does not say that they have audited the FED. It appears to me that it says they have audited the Board of Governors expense accounts or The Board's operating expenses. It's really hard to tell without the accompanying balance statements.

Peace, eh?

[MrMiteE]

Hello

Read that statement carefully. It does not say that they have audited the FED. It appears to me that it says they have audited the Board of Governors expense accounts or The Board's operating expenses. It's really hard to tell without the accompanying balance statements.

Peace, eh?

[Nick Danger]

The interchange above makes no sense to me

I am not a lawyer. What I see is a business relationship in which I am buying a service. What the lawyers call it when they draw up the papers is interesting, but it does not affect either the value I assign to what I am buying, or the price which I might negotiate to buy it. To me what's going on is that I have idle money, and I would rather earn a return on it than stuff it under the mattress. In the absence of banks, I would have to take it upon myself to find someone who had a productive use for the funds, such that he or she would be willing to pay me interest to get their hands on my money. Then I would have to read their business plan and examine their financials to see if I believed they had a prayer of ever paying me back if I loan them my money. I might have to do this three or four times before I find a suitable borrower whom I trust. I do not have time for this nonsense. I would like to hire someone else to do it.

Along comes Mr. Bank, whose business is finding borrowers just like the ones I'm looking for. He not only finds them, he checks their plans and their financials, to the extent that he himself will absorb the loss if they abscond with my money.

If I found those people myself, I could probably get 6% out of them, but I would have to do all the work, plus hire an attorney to paper the deal. Or, Mr. Bank will do the work, and the lawyering, and indemnify me against loss caused by a borrower's default, for 3%. I see this as a good deal. I hire Mr. Bank for 3%. What he does after that, I don't even want to know about.

Lawyers will view what happened there as two separate, unrelated transactions. This is why we keep lawyers in cages, in the basement. They don't understand business. They always get bogged down in the details, except that nothing in this paragraph shall be construed to imply that any particular detail, nit, smidgen, crossed t, dotted i, nor any tiny thing, in whole or in part, singly or in combination, will have any purpose whatsoever beyond increasing those fees payable under Section II, Paragraph 3, to said attorneys, in lawful U.S. money, at the address specified below.

[Carry_Okie]

Are the issuers legally allowed to put out more contracts than there are underlying assets? If not, I will give further thought to this.

Perhaps so, but then the perception of risk might discount the currency. There would probably be a resulting equilibruim of some sort. There isn't necessarily a maturity date on an option.

Interesting isn't it? Glad you took the time to consider it.

[Nick Danger]

Fractional reserve banking is inherently unstable.

That's not all bad. Fractional reserve banking moves some decision making power concerning expansion and contraction of the money supply closer to where the customers are. That is inherently going to cause more volatility than a centrally controlled system. I think you'll agree though, that in most areas of human endeavor, decentralization of control adds responsiveness to local conditions and an ability to react more quickly to change. The increased volatility probably means that the right things are happening sooner, i.e. larger numbers of smaller adjustments instead of the quarterly announcement from Mt. Olympus.

Higher levels of fractional reserve banking also weaken the ability of the Federal Reserve to mess with the reserve ratio at all. In theory that ought to be one of the Fed's most powerful tools for managing the money supply, but in fact they hardly ever touch it. With a 20% reserve ratio, even a tiny change causes such a huge swing in the money supply that forecasting what will happen if they move it becomes almost impossible. So as a policy tool, it's become worthless. A cynic might suggest we leave it that way.

[Nick Danger]

Using "currency" literally here, i.e. currency in circulation.

An aspect to the multiple currencies idea that I haven't seen discussed relates to the tendency of markets to squeeze out redundant inventory. The examples I was noodling on were Beta vs VHS and IBM vs The World in the early days of personal computers. Both markets moved toward de-facto monopoly of a single design (although manufactured by multiple vendors).

This was a wonderful thing for third-party people who had to incorporate aspects of these goods into their processes (video duplication & rental, software production and sales, etc.)

With currency you have third parties like vending machine makers, retailers who don't want two- or three-story cash drawers at checkouts, etc., all wanting a single form factor and design. Frequent currency innovations also not welcome here.

Is there really competition in useful areas that bring customer benefits... if retailer wants to give me change, and has only X-brand currency, but I prefer Y-brand currency, will I really turn down X, assuming both equally negotiable? Similar to Coke/Pepsi: most people have preference, but will accept other if only one available. Competition has heavy distribution game component, starts to swamp price/quality component. Leads to high marketing expense and high marketing as percentage of cost. Retailers hold high cards here, can bleed currency suppliers, possibly extracting most profit from 'currency supply business'.

Commodity product with distributors in command. Ugly business for manufacturers.

[Carry_Okie]

Good points, upon which I will need a touch of cogitation.

This problem of multiple notes is exactly the hell the Euro faces in January. There is a pretty good special section in last week's Economist about the sheer difficulty of moving coins, bills, managing multiple tills, etc. The more these governments screw up, the longer they take to exchange the currency, the more old (and subsequently valueless) cash the people will be stuck with. The transfer is supposedly going to take only 30 days. Can you smell the scale of this rip off? Note that your VISA card doesn't have that problem. My first thought is that the problem isn't the currency, it's the use of physical exchange media consisting of coins and paper.

I don't think multiple exchange media will work very well without EFT (electronic funds transfer) but this looks like very fertile ground for some clever inventor who could come up with something better than paper and coin that could do the trick. (That's the cogitating part.) "Coming up with something better" could be tough, but I don't see it as at all insurmountable. It took a long time for people to accept paper (and some are still bitching about it as we see here). The key is that it is useful, decrementable, secure, private, easy to use, and tamperproof without need for an instrument. In that respect, we might well see multiple exchange media used in specific sectors or locations with the currency exchanged at the door, much as we see tickets and tokens at amusement parks.

It beats stuffing penny parking meters with gold coins.

[Deuce]

I am not a lawyer. What I see is a business relationship in which I am buying a service. What the lawyers call it when they draw up the papers is interesting, but it does not affect either the value I assign to what I am buying, or the price which I might negotiate to buy it.

With all due respect, it has nothing to do with being a lawyer...You are just not bothering to make important distinctions that are central to the discussion. Specifically, the legal relationship between you and an institution is affected by whether that relatiionship is defined by:

1. brokerage
2. dealership
3. secured creditor
4. unsecured creditor
5. share owner in fund
6. bona fide depositor (i.e., bailment relationship)

Among other things, by not bothering to make the distinction, you end up believing your alternatives are the current institutional structure or no institutional structure, thereby missing all of the shades in between.

The world I favor is one that includes all of the above, all competing on an equal footing and with none of them allowed to lend out demand deposits, for which, by definition, I would insist upon a bailment relationship. That does not preclude CDs, money market mutual funds, and a host of other relationships designed to funnel money from bona fide savers to bona fide investors. The difference between the system I envision and the one we have now is that the one I envision would not be inherently unstable and all parties will be required to bear their own losses (or if they prefer, insure with a suitably deep pocketed insurer.

[Deuce]

Disclaimer: some of my comments, below, may emanate from still not understanding your suggestion. Nonetheless, I venture forth with my current understanding.

Q: Are the issuers legally allowed to put out more contracts than there are underlying assets?
A: Perhaps so, but then the perception of risk might discount the currency.

While this improves on the current system in that it replaces an unredeemable currency with redeemable ones, the fact that you have multiple currencies being issued by multiple parties who do not need to have backing for their currencies takes away all of the benefit that I see…unless I am missing something. Also the concept of discount (from what?) is somewhat disconcerting.

As I understand it, you depart from a commodity standard in the first place due to the fact that technology makes commodities more substitutable (#300). To me, (if anything) that strengthens rather than weakens the argument in favor of adopting a metallic monetary standard. But, even if the commodity used as the monetary standard has industrial uses for which there are no substitutes (which in the case of gold is miniscule relative to the above ground supply), I fail to see the reason for concern.

Interesting isn't it? Glad you took the time to consider it.

On balance, (so far), I remain unpersuaded that the system you propose is as good as a gold standard would be. But I’m willing to listen to your addressing my concerns.

There isn't necessarily a maturity date on an option.

Without a maturity date it’s called a warrant, I believe. In any event, while I now get your point, I’m suggesting that the option terminology is not a useful one for explaining what you have in mind. To most people it conjures up a right to buy or sell at a fixed price an asset whose value (based on some other unit of account) fluctuates.

[Deuce]

That's not all bad [that fractional reserve banking is inherently unstable]. Fractional reserve banking moves some decision making power concerning expansion and contraction of the money supply closer to where the customers are. That is inherently going to cause more volatility than a centrally controlled system.

What makes it inherently unstable is the relationship between liabilities (which are deposits due on demand) supported by assets of a longer maturity. My reforms would require/encourage a closer matching. Then, and this is the important part, when such enterprises fail, neither depositor nor the bank is rescued. Failures will be less frequent due to the injection of reality into the banking equation.