Posted on 12/01/2001 9:02:46 PM PST by floridarocks
| every single non-bank business finances the assets with liabilities of equal or greater maturity.
Yes! Businesses do not want to finance long-term assets with short-term liabilities! As X41 used to say, "Wouldn't be prudent."
You're almost there. You've figured out how money loaned out by the millions for 20 years can wind up in the hands of thousands of consumers in little tiny chunks. Now design a way to scoop it back up and aggregate it into one big pile of millions that can be loaned out for 20 years to build the next factory. Electricians call this "completing the circuit." As soon as you complete the circuit, the money will flow and we can have an economy. To do this, you'll need a special device called a "maturity inverter." This is the thing that takes in money in little tiny chunks from people who can't afford to not see it again for 20 years, and sends it to the output in the form of one big chunk of 20-year money. Be sure to install the maturity inverter with a proper risk sink and a risk fan, because these things generate a lot of risk when they operate. But without them, you don't get to have an economy.
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Central Bank to Gov: The people don't like it when you print paper money at will and spend it into the economy, so let us have that special privilege and we'll lend the money to you at interest.
Gov to Central Bank: Won't the people catch on to that?
Central Bank to Gov: Some of them will but we can label them as Kookburgers.
Gov to Central Bank: You mean people who object to our spending the money when we create it ourselves will not object if we borrow it and require them to be taxed to pay the interest?
Central Bank to Gov: Not only that, get this: we will depreciate the currency by 92% in a sixty year period, while getting a reputation as a fearless inflation fighter. They will beg us to loosen, then we'll reluctantly give in. Works like a charm!
AT FOMC TOMORROW THE GRAND POOH BAH WILL REDUCE BY ANOTHER 1/4% SETTING AN ALL TIME RECORD OF 11 EASINGS IN A SINGLE CALENDAR YEAR. WHAT MONTH DID THEY MISS?
You may have something. There could well be a boat-load of Euros headed to Albania, problem is, the US just took over the front end of the supply chain! Maybe Osama thought he was doing us a favor with the timing?
Nick: Congratulations! You have broken the code! Yeah! Hooray!
Did you miss my point or are you ignoring it? Giving the benefit of the doubt, I will repeat my point:
banking is an inherently unsound enterprise that finances longer term assets with demand liabilities. Without FDIC socialism, taxpayer bailout socialism, centralized planner Federal Reserve's ability to create money at will and then LEND it to us at interest, few people would keep money in a bank for too long.
I know that to you, this sounds like I'm dodging a very important issue, the precise legal form this relationship is going to take. But I'm choosing to play the role of an actual customer, the guy who thinks you sound like one of those annoying salesman who insists on telling me about subordinated convertible debentures when all I really want to know is how rapidly I can put this money to work without spending a lot of time on it.
No, I don't care whether I'm an unsecured creditor of a bank or an owner of 2 shares of the Magellan Flying Leap Fund. I want my money put to work, and I want it done fast because I don't want to screw with it. We're talking about five hundred bucks here, OK? I'm not going to read a prospectus over a year's interest on five hundred bucks.
| Did you miss my point or are you ignoring it? banking is an inherently unsound enterprise that finances longer term assets with demand liabilities.
You won't read this either, but I'm still not going to let you get away with this. You used the phrase:
1. Referring to a central bank as a 'central planner' is ignorant and tells people more about you than it does about the Fed. 2. Telling people that the Federal Reserve has the ability to create money at will is of a kind with telling people that the Pope has the ability to machine-gun visitors to the Vatican. Technically accurate, but not useful. It's an attempt to frighten, not enlighten. 3. The Federal Reserve pays all of its profits to the Treasury as a franchise fee; it is run as a non-profit. The statement that the Federal Reserve "charges us interest" is a lie born of ignorance. I think this is a record. Using only 18 words, you managed to tell two fairly large lies, plus squeeze in a disingenous statement designed to frighten people for no reason. Why are you doing this? |
Nick: But without [fractional reserve banks], you don't get to have an economy.
First of all, let me apologize for having missed the fact that you did, indeed, respond to my point in the very last sentence of your response in #383. After several hundred words, in the very last sentence, you offered the explaination reproduced above. Great! It's excrutiating but we are making progress.
If I can paraphrase, then, you fully recognize the inherent risk of a fractional reserve bank, but you feel the risk is necessary because without fractional reserve banks you don't get to have an economy.
I assume, then, that if all the pluses you see that emanate from these risky enterprises can be achieved without having to undertake the risk that you acknowledge exists, you would be open to the idea. (A simple yes or know will do. Don't worry, I'm not going to try to sell you a convertible debenture).
Nick: Referring to a central bank as a 'central planner' is ignorant and tells people more about you than it does about the Fed.
Deuce: Could you explain to me why?
Nick: Telling people that the Federal Reserve has the ability to create money at will… is technically accurate, but not useful. It's an attempt to frighten, not enlighten.
Deuce: The fact that, say, the Fed enabled the money supply to double in the last dozen years is not useful? That it could have easily restricted it to “only” 50%? That they could have also made it 1000%? Why is it not meaningful to you?
Nick: The Federal Reserve pays all of its profits to the Treasury as a franchise fee; it is run as a non-profit. The statement that the Federal Reserve "charges us interest" is a lie born of ignorance.
Deuce: I was imprecise. The Fed buys $10bn in open market operations (this actually reduces effective interest, because Fed doesn't keep the interest). But then (pay attention here) This enables its client/owner/benefactor banks to piggyback $100bn+ of additional bond purchases. We only get charged on the latter $100bn. Is that better?
BTT!!!
You don't get to have anything like the same kind of an economy.
Imagine Prudenceland, where we have fractional reserve banking, but no one ever defaults on a loan. For whatever reason, it never happens. No one ever makes a bad investment decision in Prudenceland. How much risk is there in fractional reserve banking? None.
This tells us that the risk is not coming from fractional reserve banking per se, but from making loans that fractional reserve banking makes possible.
That in turn tells us that abolishing fractional reserve banking will abolish a whole bunch of loans. Not just the small percentage that were going to default, but all of them. Every loan that was made possible by fractional reserve banking is gone from the economy.
You have just imposed a severe credit crunch on the economy of Prudenceland. Growth slows; job creation goes with it. Young people find it difficult to find work. Only the most creditworthy companies can borrow at all. Small companies in growing markets must restrict their growth rate to their pre-tax profit rate. As a result, small companies are constantly being mowed down by large ones, even when they had a head start in some promising new market.
When the people of Prudenceland come to your house with torches and pitchforks, and tell you that little guys can no longer get ahead in Prudenceland, you tell them that you have eliminated risk, and that they should be happy.
They tell you that you have eliminated reward, and they are not happy at all.
By all means, do tell us how you are going to increase the amount in reserve without decreasing the amount that's in play. Everyone likes reward without risk... if you know how to get it, I'll nominate you myself for a Nobel Prize.
In other words, you seem to have decided, a priori, that what exists right now is exactly what’s needed. It doesn’t appear that you have done any particular analysis to get to this position. As best I can tell, your mindset is: we’ve been changing for the better for hundreds of years so now we must have it just right. In fact, you appear almost fearful of the prospect that maybe what exists right now might not be exactly the way things should be. That’s why, when I ask:
If all the pluses you see that emanate [from fractional reserve banks] can be achieved without having to undertake the risk that you acknowledge exists, would you be open to the idea?
Your answer is relatively unintelligible:
By all means, do tell us how you are going to increase the amount in reserve without decreasing the amount that's in play.
However, I will take the “by all means” part to mean “yes” and leave the rest for others to decipher. We are slowly making progress.
The next step is to determine the criteria of how to measure whether we need more or less risk. I’ll propose a measure and you tell me whether you agree and you can suggest additional criteria. I have several that come to mind, but in the spirit of trying to reach some sort of consensus, let me start with this one to see if you agree:
Risks are too great if the people who reap the rewards when things go right are incapable or unwilling to absorb (or buy insurance against) the losses when things go wrong.
Please acknowledge whether you agree and submit criteria of your own and then I’ll proceed.
You argue that there is too much prudence in any proposal designed to modify the current system to make it sounder if such proposal would cause some investment not to occur.That's overstating anything I said. I was responding to the argument you posted concerning 100% reserve requirements for banks. Yes, given all we know about default rates, that's an unnecessarily high degree of caution.  The degree to which that policy would reduce investment is not paid back in increased safety. On the other hand, I would not argue that we couldn't tweak the reserve rate one way or the other a few points to see what happened. My hunch is that "tweaking" is exactly how it got to where it is, which makes me suspect that it's probably in about the right place already. Presumably, you would also argue there is too much risk in a proposal that allowed anyone who wishes to invest to just use his own IOU (rather than use the bank?s IOU)I just think it's impractical. Even if Bill Gates himself writes me an IOU for $50,000, the first time I go to pass the damned thing, people are going look at it and say, "Oh yeah, right. Bill Gates. Why just yesterday, somebody was in here with an IOU from Elvis." Maybe this system could work in a little tiny village somewhere, but not in a continent-spanning nation of 250 million. How the Hell do I know whether an IOU from some guy three states away is worth anything? It's much less costly if the people who have to accept an IOU have some clue that whoever wrote it can be expected to pay up. If I go into Fry's and offer them my bank's IOU, they swipe the card, get it authorized, and out I go with hundreds of dollars worth of stuff. They know the bank will pay, and then it's up to the bank to chase me for the money. If they let just anyone do that, they'd have to have their own army of skip tracers and bill collectors. That just ties up assets in something that's really not related to the business they are in. As best I can tell, your mindset is: we?ve been changing for the better for hundreds of years so now we must have it just right.I don't claim we have it just right, but I do believe we need to respect the accumulated wisdom of people who have been working the problem for a long time. That attitude is pretty typical of political conservatives; we tend to distrust social (or financial) engineering and favor solutions that have evolved by trial-and-error over time. Liberals always see those as old fashioned, or even as the work of oppressors; they want to pull the two-parent family out by the roots and substitute this new and better idea. Or they want to ban cars and re-engineer the whole country's transportation system from the ground up, because they know how to do it better. Conservatives tend to believe that these things got to be the way they are because a lot of people tried a lot of things, and the stuff we see today is the collection of what worked, minus the things that didn't work. New ideas are still welcome, go try them somewhere and we'll see how you did. After all, that's how everything else in the current system got there. Just don't try to smash what we have now that sort of works, in order to put in your gleaming new idea. One thing we all know for sure is that Revision 1.0 of anything sucks. Your answer is relatively unintelligibleThat's because it is another one those box canyons I got you into, and your dependable response to those is always to pretend that you didn't read or understand them. You'll recall we had a money supply divided into "amount in reserve" and "amount available to invest." You were going to provide the benefits of fractional reserve banking, which is to have an amount not in reserve, so as have money available to invest, but you were going to simultaneously move all of the money into reserves, so as to elininate risk. It sounded amazing to me, so I welcomed your contribution to investment theory and even offered to back you for a Nobel prize if you could tell us how to hold all the money in reserve while still making investments with it. Unfortunately, you would not tell us your secret plan. Instead you proposed a formula for assessing risk and asked whether I would agree with it. Absolutely not. By that criterion, what entrepreneurs do is unacceptable unless they are risking their own money. No wonder people haven't made you King; you have more schemes for holding people back and keeping the peasants in their place than Ivan the Terrible. Here's mine: Risks are too great if, when we add up all the gains and losses from all the things we invested in over a ten-year period, the losses were larger than the gains. Risks are too little if, when we add up all the gains and losses from all the things we invested in over a ten-year period, we find we had no losses but no gains, either. That's not investing, that's just washing money. If the CFO tells us we had spectacular gains and no losses, we need to bring some independent auditors in, and quickly. |
It got "tweaked" to 0% on time deposits?
that's your primary objection to people writing their own IOUs?
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Congratulations! You have broken the code! Yeah! Hooray!
So they sell 20-year bonds. And they use the money to put up a factory. And they pay construction workers who build the factory. And once the factory is built, they buy equipment. And the equipment makers pay their workers.