The thread where Jaeger explains banking in detail and takes your questions

[JohnfrmClevelan]

Sure.. create another thread and I will give you a tutorial if that's whats necessary.

I'll start the ball rolling with a quote;

even in medieval times. banks took in the money that you deposited and then doled it back out into the economy.

Please explain, and don't spare the details.

 

[OrphanSlug]

opcorn2:

(I predict disaster, everyone pull up a chair.)

 

[Lutherf]

Banking as explained by Donald Duck -



But seriously, it sounds like you want to discuss something specific so what did you have in mind?

 

[jaeger19]

I'll start the ball rolling with a quote;



Please explain, and don't spare the details.

Sure.. where would you like me to start? Should we start with the fairs of Champagne in the 12th century and Bills of exchange?

OR.. would you wish to start with the early Greco Roman trepezita (from the greek base trapeza meaning "bench, or table" where a professional banker recorded his business)?

 

[JohnfrmClevelan]

Sure.. where would you like me to start? Should we start with the fairs of Champagne in the 12th century and Bills of exchange?

OR.. would you wish to start with the early Greco Roman trepezita (from the greek base trapeza meaning "bench, or table" where a professional banker recorded his business)?

You're the professor. You choose. But it's about modern banking, not historical fluff that can't be easily backed up.

Make sure to include the part about how banks take in your deposits to "dole back out to the economy."

 

[Kushinator]

This ought to be fairly entertaining.

 

[Ganesh]

It's getting awful quiet in here. Anybody home? I do hear a search engine in the distance humming away. Banking systems info? Maybe we will find out.

 

[sangha]

/subscribed

 

[jaeger19]

You're the professor. You choose. But it's about modern banking, not historical fluff that can't be easily backed up.

Make sure to include the part about how banks take in your deposits to "dole back out to the economy."

Okay then... Lets start with where I think you want to go.

Okay.. lets discuss deposits and Dole back out into the economy.

So lets start with asking the question.. does "saving" money mean that you are taking money "out of the economy"..

The short answer is no they don't. and that's because banks are not run like Gingrotts from Harry Potter. There is no separate Personal Vault with a pile of gold and cash in it with your name on the door.
That's not how banking works.. neither now.. or in the past when merchants used "bills of exchange" with certain trading families.

Banks don't have huge vaults of gold bars and cash. What they do have is an accounting of money. At one time it was basically a written ledger.. and now its a computer program.

So other than a reserve of cash.. its just electronic accounting.

So..when a bank makes a loan.. it simply electronically adds to the borrowers deposit account.. in reality creating "new money".

So where do deposits come in? Well banks have to clear their outgoing checks with the Federal reserve or other clearinghouse.. and to do this they are required to have reserves in reserve accounts at the Federal reserve. When Bank A loans money to a person who has an account at Bank B.. The Fed debits Bank A's reserve account and credits Bank B's account. At the end of the day.. if Bank A's account is "in the red".. then the Fed automatically loans them the money. However the Bank is required by law to clear this "overdraft" (.. They can do it buy borrowing from the Fed in the Fed funds market.. but there is an expense to that, or they can get it from buying a wholesale deposit from a broker (at an expense as well) . And that's where customer deposits come in. The best way fiscally for a bank to meet the requirement is through customer deposits. ( In addition, since 2008 and the banking crisis, there has been a limit on the amount of wholesale deposits a bank can borrow) . That's why banks try to attract customer deposits.. even paying interest on them.

So, for the general public who want's to know.. what happens to my deposit? Since there is no finite amount of money.. no bank vault with your name on it, in fact.. its largely all electronic accounting and not even cash and the deposit "balances the books" and allows banks to loan. Its easiest to say.. "it goes back out to the economy in loans".

now in general.. no one. including many if not most economists have a problem with this.

There is however a group of folks that seem to have a conniption with this laymans way of explaining it. And those are the followers or believers of Modern Money Theory.. or MMT.

The followers of Modern Money Theory have coalesced around the fact that there is no real "limit" to money production. Heck.. there isn't even a limit when it come to paper and ink and that's because all that is needed is the thought that more money is needed.. and an entry is made into the computer program. Taking this, they have come up with the idea that deficit spending doesn't matter, and some followers don't believe that even taxing is necessary. And that's because the us has control of their own currency and is the default currency of the world.

The problem is.. followers of Modern Money Theory don't understand the fatal flaw in their logic. Yes.. the money system is not finite.. its just blips on a screen really. Anytime the government needs more money it COULD simply make an entry in the computer and poof its just "made" more money to pay its bills.

The problem with Modern Money Theory is.. so what? Honestly.. so what if money is not finite.. that the government can "always pay its bills" by issuing more currency with making an entry?

That's really nothing new. The problem with Modern Money Theory is that while the government CAN do it.. there are really dire consequence if it DOES.

And that's because the whole monetary system has been and is.. based on FAITH. Simple faith that the money is actually worth something.. that if I can take this dollar or this balance on my computer screen.. make an entry and pay for food, clothing, shelter.

If there is no faith in the money.. then its worthless because it has no intrinsic value. (even gold is of limited intrinsic value)

For money to have value.. there has to be FAITH that the money has value.

If the government runs continual deficits and simply creates more money to value them.. at some point.. people will not have faith in the government and thus no faith in the currency and it becomes worthless or seriously devalued.. which has dire consequences for everyone.

 

[Captain Adverse]

I think this video explains it better:



It's just a big scam...ever since we went away from "hard currency" we've allowed the banks to take control of real property and our labor in exchange for pieces of paper whose only value exists as long as we have "faith" in it.

 

[JohnfrmClevelan]

So lets start with asking the question.. does "saving" money mean that you are taking money "out of the economy"..

The short answer is no they don't. and that's because banks are not run like Gingrotts from Harry Potter. There is no separate Personal Vault with a pile of gold and cash in it with your name on the door.
That's not how banking works.. neither now.. or in the past when merchants used "bills of exchange" with certain trading families.

Banks don't have huge vaults of gold bars and cash. What they do have is an accounting of money. At one time it was basically a written ledger.. and now its a computer program.

So other than a reserve of cash.. its just electronic accounting.

So..when a bank makes a loan.. it simply electronically adds to the borrowers deposit account.. in reality creating "new money".

So where do deposits come in? Well banks have to clear their outgoing checks with the Federal reserve or other clearinghouse.. and to do this they are required to have reserves in reserve accounts at the Federal reserve. When Bank A loans money to a person who has an account at Bank B.. The Fed debits Bank A's reserve account and credits Bank B's account. At the end of the day.. if Bank A's account is "in the red".. then the Fed automatically loans them the money. However the Bank is required by law to clear this "overdraft" (.. They can do it buy borrowing from the Fed in the Fed funds market.. but there is an expense to that, or they can get it from buying a wholesale deposit from a broker (at an expense as well) . And that's where customer deposits come in. The best way fiscally for a bank to meet the requirement is through customer deposits. ( In addition, since 2008 and the banking crisis, there has been a limit on the amount of wholesale deposits a bank can borrow) . That's why banks try to attract customer deposits.. even paying interest on them.

You need to be more precise when you are talking about this subject, Jaeger, or nobody is going to be able to follow. You should have said that reserves move from the reserve account of Bank A to the reserve account of Bank B when a check is drawn on an account in Bank A and deposited in Bank B, in the amount of the check. When Bank A creates a loan, they create assets and liabilities of their own; often, in a subsequent step, borrower will write a check for the whole amount that gets deposited in a different bank. Reserves transfer as a result of that check. But that's a minor point that I'm sure we all agree on.

So, for the general public who want's to know.. what happens to my deposit? Since there is no finite amount of money.. no bank vault with your name on it, in fact.. its largely all electronic accounting and not even cash and the deposit "balances the books" and allows banks to loan. Its easiest to say.. "it goes back out to the economy in loans".

No, it is incorrect to say that. It is not a simplification, because it is flat out wrong.

M1 is cash in circulation plus deposits. If nobody takes out a new loan, and nobody makes any loan payments, M1 will not change. If you save your money in a bank account (or as cash) and don't spend it, then that portion of M1 is not being spent, and not circulating through the economy. And your savings have no bearing on whether or not anybody else decides to take out a loan, and your savings have no bearing on your bank's ability to create a new loan. Nor does the bank's profitability based on the cost of their reserves; a loan will be profitable for the bank no matter how they procure their reserves. Your money, whether you spend or save it, has no bearing on whether or not M1 changes, so you cannot fall back on the "no finite amount" line of reasoning.

 

[JohnfrmClevelan]

(cont.)

now in general.. no one. including many if not most economists have a problem with this.

That's because they don't know that it is incorrect. Including many, if not most, economists.

There is however a group of folks that seem to have a conniption with this laymans way of explaining it. And those are the followers or believers of Modern Money Theory.. or MMT.

Yes, we have a problem with it because it is fundamentally incorrect, and that leads to incorrect conclusions about the economy, as I said before.

The followers of Modern Money Theory have coalesced around the fact that there is no real "limit" to money production. Heck.. there isn't even a limit when it come to paper and ink and that's because all that is needed is the thought that more money is needed.. and an entry is made into the computer program. Taking this, they have come up with the idea that deficit spending doesn't matter, and some followers don't believe that even taxing is necessary. And that's because the us has control of their own currency and is the default currency of the world.

The problem is.. followers of Modern Money Theory don't understand the fatal flaw in their logic. Yes.. the money system is not finite.. its just blips on a screen really. Anytime the government needs more money it COULD simply make an entry in the computer and poof its just "made" more money to pay its bills.

The problem with Modern Money Theory is.. so what? Honestly.. so what if money is not finite.. that the government can "always pay its bills" by issuing more currency with making an entry?

That's really nothing new....

It's news to most people. It was news to you not so long ago, if I recall correctly.

The problem with Modern Money Theory is that while the government CAN do it.. there are really dire consequence if it DOES.

And that's because the whole monetary system has been and is.. based on FAITH. Simple faith that the money is actually worth something.. that if I can take this dollar or this balance on my computer screen.. make an entry and pay for food, clothing, shelter.

If there is no faith in the money.. then its worthless because it has no intrinsic value. (even gold is of limited intrinsic value)

For money to have value.. there has to be FAITH that the money has value.

If the government runs continual deficits and simply creates more money to value them.. at some point.. people will not have faith in the government and thus no faith in the currency and it becomes worthless or seriously devalued.. which has dire consequences for everyone.

Two problems with your analysis of MMT: first, nobody is proposing that the government actually create unlimited numbers of dollars, because we understand that there are possible consequences (inflation); second, your "faith" theory has yet to be backed up by any evidence. We have been hearing about how our deficits are going to lead to massive inflation ever since Reagan started to deficit spend like crazy. You can lose faith in your dollars if you want, but if the grocer still takes them in exchange for food, the dollar will keep its value. No rational person "loses faith" in the dollar unless and until he finds himself with a pocketful of dollars and nothing to spend them on. And that goes for fiat currencies that are not "reserve currencies" as well.

 

[jaeger19]

No, it is incorrect to say that. It is not a simplification, because it is flat out wrong.

M1 is cash in circulation plus deposits. If nobody takes out a new loan, and nobody makes any loan payments, M1 will not change. If you save your money in a bank account (or as cash) and don't spend it, then that portion of M1 is not being spent, and not circulating through the economy. And your savings have no bearing on whether or not anybody else decides to take out a loan, and your savings have no bearing on your bank's ability to create a new loan. Nor does the bank's profitability based on the cost of their reserves; a loan will be profitable for the bank no matter how they procure their reserves. Your money, whether you spend or save it, has no bearing on whether or not M1 changes, so you cannot fall back on the "no finite amount" line of reasoning

.

Wrong. Its why you MMT followers have the wheels fall off your bus.

When deposit your check into the bank " i.e. "save your money in a bank account (or as cash) and don't spend it, " there is NOTHING to ":"circulate".. All that deposit is a transaction on a computer. There is nothing to "circulate".

Your wheels have fallen off your bus. On one hand you crow about how there is not finite amount of money (which is true) . that banks can lend irrespective of deposits (which is technically true as I have explained) ...

And then the next minute you are claiming that if I put my money in the bank.. that somehow that has taken money out of "circulation". Sorry sir but you simply can;t see your intellectual disconnect that you are making.

As far as reserves having no influence on profitability.. that's wrong...

There is a reason that banks offer interest to attract deposits.. and its not out of the goodness of their hearts. And before you claim that its so they can "collect fees".. Please note that banks decrease fees the more money you deposit in their accounts.

 

[jaeger19]

That's because they don't know that it is incorrect. Including many, if not most, economists.

Right because most economists don't know as much as you.. got it. :roll:

BS.. its because no one feels the need to get bogged down in the minutia. I understand why you do as a follow of MMT.

Yes, we have a problem with it because it is fundamentally incorrect, and that leads to incorrect conclusions about the economy, as I said before.

No it is not.. and no it does not. In fact.. it probably helps stabilize our economy.

It's news to most people. It was news to you not so long ago, if I recall correctly.

Not news to me. Heck man.. Its not like governments have not tried to print their way out of debt in the past. Now its that much easier because its a blip on a computer screen.

What seems to be news to you is the CONSEQUENCES of doing such..

Two problems with your analysis of MMT: first, nobody is proposing that the government actually create unlimited numbers of dollars, because we understand that there are possible consequences (inflation);

Typical MMT bs. When you feet are held to the fire of reality.. "well we understand that there is possible consequences (inflation").. and that last right up until the time someone suggests maybe balancing the government budget and then MMT followers run among talking about the "real pain" that balancing a budget will cause. Etc etc.

Heck.. look at your next argument.

We have been hearing about how our deficits are going to lead to massive inflation ever since Reagan started to deficit spend like crazy

Come now. When you are held to reality.. then you admit there are consequences.. and then the minute you get a chance its " deficits don't matter"..

Its why your MMT fails at the gate.

second, your "faith" theory has yet to be backed up by any evidence.

Right..:roll: That's like saying that jumping out of an airplane at 1000 feet without a parachute won't kill you because there is no proof that it will. Because no one has done a double blinded study with people jumping out of airplanes without parachutes.

Dude.. don't you get it? the REASON that running deficits since Reagan haven't caused massive inflation is BECAUSE our government has taken steps to curb our deficits. BECAUSE our country is seen as CARING about our deficit.. and has taken steps to reign it in.. for example the Balance Budget Act.. (where we got close to a balance budget) and the deficit measures under Obama.

Yes IF the grocer still takes them exchange. Your argument is predicated on the idea of IF the grocer will except them, and that may not always be the case. Just as its not always been the case in history where fiat currencies were always accepted. Or at least were tremendously devalued. that had dire consequences for those countries and their economy.

 

[Kushinator]

When deposit your check into the bank " i.e. "save your money in a bank account (or as cash) and don't spend it, " there is NOTHING to ":"circulate".. All that deposit is a transaction on a computer. There is nothing to "circulate".

That money that is deposited can be either spent, or not spent. Income - Consumption = Savings

Savings only equals investment in a closed economy without government and no distinction between inventories and capital expenditures.

Sorry sir but you simply can;t see your intellectual disconnect that you are making.

That's what you respond to, his use of circulation? Once again, you made a silly comment and continually backed yourself in a corner of denial, hoping only for people to forget about it long enough for you to start it all over again. When you save money, either by putting it into a bank, or putting it under your mattress, you are not increasing economic activity. When you spend money instead, you are increasing economic activity. Got it?

 

[Kushinator]

Dude.. don't you get it? the REASON that running deficits since Reagan haven't caused massive inflation is BECAUSE our government has taken steps to curb our deficits. BECAUSE our country is seen as CARING about our deficit.. and has taken steps to reign it in.. for example the Balance Budget Act.. (where we got close to a balance budget) and the deficit measures under Obama.

Budget control actually helps reign in inflation when the economy is operating at full employment.

Yes IF the grocer still takes them exchange. Your argument is predicated on the idea of IF the grocer will except them, and that may not always be the case. Just as its not always been the case in history where fiat currencies were always accepted. Or at least were tremendously devalued. that had dire consequences for those countries and their economy.

LOL!

If there isn't as much bread, gasoline, tools, internet porn, etc... to consume in the U.S., e.g. a decline in production (and therefore income!), only then will people loose faith in the dollar. This is where you fail to connect the missing pieces; how does deficit spending reduce production? There is a valid answer.

 

[imagep]

I think this video explains it better:



It's just a big scam...ever since we went away from "hard currency" we've allowed the banks to take control of real property and our labor in exchange for pieces of paper whose only value exists as long as we have "faith" in it.

There are parts of this that I really liked, and parts that I really disliked. This is very entertaining, but it is also full of factual errors and distortions. There is no "scam", it's just a system.

I think the only takeaway that has any value is the fact that money is an accounting tool and nothing more and nothing less. It would be easier to understand money if we called it points. But that's common knowledge among anyone who understands the modern monetary system.

I suspect that this video was funded by someone with a interest in selling gold. I'm just glad that I didn't buy gold back during the peak of the Glen Beck days when it was approaching $1900 an oz. If I am looking for stability of value, I will take the dollar over any commodity on earth. Prior to the Federal Reserve, years of extreme inflation or deflation were frequent - the dollar and the banking system in general is much more stable under the federal reserve system that it was prior to the federal reserve system.

 

[Captain Adverse]

There are parts of this that I really liked, and parts that I really disliked. This is very entertaining, but it is also full of factual errors and distortions. There is no "scam", it's just a system.

I think the only takeaway that has any value is the fact that money is an accounting tool and nothing more and nothing less. It would be easier to understand money if we called it points. But that's common knowledge among anyone who understands the modern monetary system.

I suspect that this video was funded by someone with a interest in selling gold. I'm just glad that I didn't buy gold back during the peak of the Glen Beck days when it was approaching $1900 an oz. If I am looking for stability of value, I will take the dollar over any commodity on earth. Prior to the Federal Reserve, years of extreme inflation or deflation were frequent - the dollar and the banking system in general is much more stable under the federal reserve system that it was prior to the federal reserve system.

I'll bite. Identify which portions in this video were less than truthful.

I'll do some research and see if you are right.

 

[jaeger19]

That money that is deposited can be either spent, or not spent. Income - Consumption = Savings

Savings only equals investment in a closed economy without government and no distinction between inventories and capital expenditures.



That's what you respond to, his use of circulation? Once again, you made a silly comment and continually backed yourself in a corner of denial, hoping only for people to forget about it long enough for you to start it all over again. When you save money, either by putting it into a bank, or putting it under your mattress, you are not increasing economic activity. When you spend money instead, you are increasing economic activity. Got it?

BS.. That's just crap because you are not taking money out of the economy.

So I don;t decide to spend. So what? Someone else CAN.. since there is no finite amount of money. Whether I spend money.. or someone else does.. it does not matter.

What matters is things like WHAT money is spent on. WHO is producing the goods that you are spending on..

 

[jaeger19]

Budget control actually helps reign in inflation when the economy is operating at full employment.



LOL!

If there isn't as much bread, gasoline, tools, internet porn, etc... to consume in the U.S., e.g. a decline in production (and therefore income!), only then will people loose faith in the dollar. This is where you fail to connect the missing pieces; how does deficit spending reduce production? There is a valid answer.

Wrong. Honestly.. where do you come up with this BS?

First of all.. not everything we consume is produced here in the US. in fact a lot of what we consume is NOT.. produced here.. so there could be plenty of things to consume here.. bread, gasoline, internet porn, paper products, clothes.. and a very low income as its not produced in the US and demand for US labor is low.

 

[Kushinator]

BS.. That's just crap because you are not taking money out of the economy.

So I don;t decide to spend. So what? Someone else CAN.. since there is no finite amount of money. Whether I spend money.. or someone else does.. it does not matter.

What matters is things like WHAT money is spent on. WHO is producing the goods that you are spending on..

What the **** are you talking about? Nobody else can spend your money unless you give it to them, and then it isn't your money anymore.

Income - consumption = saving

Saving, by definition, takes money out of the economy.

 

[Captain Adverse]

What the **** are you talking about? Nobody else can spend your money unless you give it to them, and then it isn't your money anymore.

Income - consumption = saving

Saving, by definition, takes money out of the economy.

Only if that saving is done by placing the money in a sock or a safe in your own home.

If you deposit it in a bank account, most of it will be used as loans or bank investments, and all you will have is a "number" indicating what they owe you in your account.

Of course, ever since the Federal Reserve gained thr power to print money "at-will," you can go and take it out any time you want, they'll just print some up for you. :shrug:

 

[imagep]

Only if that saving is done by placing the money in a sock or a safe in your own home.

If you deposit it in a bank account, most of it will be used as loans or bank investments, and all you will have is a "number" indicating what they owe you in your account.

Of course, ever since the Federal Reserve gained thr power to print money "at-will," you can go and take it out any time you want, they'll just print some up for you. :shrug:

You are making the incorrect assumption that bank lending is constrained by deposits or reserves. That assumption seems logical enough on the surface, but our system doesn't work like that.

Banks can actually lend without regard to the size of their deposits, because they are allowed to loan first and then come up with the funds overnight, essentially writing bad checks and then figuring out how to cover them. And funds for lending don't have to come from deposits, they can be obtained by a variety of sources.

The banking system is setup to guarantee that they can cover all they checks that they write, if they don't have enough excess deposits at the end of the day, then they can borrow money from other banks, or acquire money from investors, or even borrow directly from the fed.

Somewhere in the system there will always be ample money floating around to cover any loan, because when the bank makes the loan, the money is deposited back into the banking system, so that deposit can actually be used to cover the loan (even if the bank which made the loan has to borrow the money back from the bank that received the deposit). And the federal reserve is tasked with insuring that our banking system stays liquid, so the federal reserve can and will instantly inject more money into the banking system on an as needed bases.

Your bank deposit will not result in additional bank lending. Banks are only constrained by the amount of credit worthy customers who wish to borrow money at an interest rate that the bank can make a profit on.

But what really puzzles me is that you seem to already know all of this (based upon your last sentence), you just haven't really put it all together yet.

 

[Captain Adverse]

You are making the incorrect assumption that bank lending is constrained by deposits or reserves. That assumption seems logical enough on the surface, but our system doesn't work like that.

Banks can actually lend without regard to the size of their deposits, because they are allowed to loan first and then come up with the funds overnight, essentially writing bad checks and then figuring out how to cover them. And the banking system is setup to guarantee that they can cover all they checks that they write, if they don't have enough excess deposits at the end of the day, then they can borrow money from other banks, or acquire money from investors, or even borrow directly from the fed.

Somewhere in the system there will always be ample money floating around to cover any loan, because when the bank makes the loan, the money is deposited back into the banking system, so that deposit can actually be used to cover the loan (even if the bank which made the loan has to borrow the money back from the bank that received the deposit).

Your bank deposit will not result in additional bank lending. Banks are only constrained by the amount of credit worthy customers who wish to borrow money at an interest rate that the bank can make a profit on.

I don't think the video I posted said anything about bank lending being constrained by deposits.

In fact one of the first points made is that the Federal Reserves "writes" checks to purchase the treasury bonds from banks from an account with NO money in it. Add to this the fact that Federal bonds aren't sold at face value, but for a fraction of face value with the promise to pay face value at the redemption date.

Where did you get the idea it ALL depends on consumer deposits?

 

[imagep]

I don't think the video I posted said anything about bank lending being constrained by deposits.

In fact one of the first points made is that the Federal Reserves "writes" checks to purchase the treasury bonds from banks from an account with NO money in it. Add to this the fact that Federal bonds aren't sold at face value, but for a fraction of face value with the promise to pay face value at the redemption date.

Where did you get the idea it ALL depends on consumer deposits?

The video didn't say that, but you indicated that savings (other than physical cash in the savers posession) was injected back into the economy by lending it back into the economy.