Kucinich And Stephen Zarlenga Anti-Gold Drive

[Zippyjuan]

Repeatedly posting this fictional account does not make it any more accurate.

Other than the reserve portion going to the Federal Reserve (it can also be kept at the bank itself or at the Fed or some combination of both) this IS how it works.

I deposit $100. I no longer have $100- the bank does. They give me a promise to pay later which is considered a liability for the bank. With a ten percent reserve requirement, the bank can loan out up to $90 of that. Somebody will owe them the $90 so that is counted as an asset and the $10 on reserve is an asset. Now they have $10 and the borrower has $90. If that person A does not need the money at that moment, he can deposit his $90 with the bank. He no longer has $90 but a promise from the bank that they will pay him back his $90 later. On this deposit, the bank can loan out $81 and has to keep $9. Now the bank has $11 and person B has $89. Everybody else has a promise to be paid back.

Now if I want my $100 back, the bank has to get that money from someplace. They can't make it from nothing. They can get money from a new depositor or from another bank which may have more reserves on hand than required for the amount of loans outstanding or they can borrow from the Federal Reserve until they can attract or borrow more money from some place else.

What has also happend is that the bank no longer has the $100 deposit they needed to be allowed to have that $90 loan out. They have to keep $10 on hand in reserves to keep that loan out so they also have to get another $10 for reserves.

[Roy L]

They can't do that either.

They can and do.

A deposit is somebody putting money into the bank.

But that "somebody" can be the bank itself, and the money can be newly created.

They can create the account the deposit goes into, but they can't create the deposit itself.

Yes, they can. See, "Modern Money Mechanics," published by the US Federal Reserve Bank.

Definition of 'Bank Deposits'
Money placed into a banking institution for safekeeping. Bank deposits are made to deposit accounts at a banking institution, such as savings accounts, checking accounts and money market accounts. The account holder has the right to withdraw any deposited funds, as set forth in the terms and conditions of the account. The "deposit" itself is a liability owed by the bank to the depositor (the person or entity that made the deposit), and refers to this liability rather than to the actual funds that are deposited.

That is objectively false. The money is owed to the deposit holder, not the depositor. You can deposit money into someone else's account, and the bank then owes them the money, not you. That is what banks do when they lend. If the bank is a merchant or investment bank, the money it deposits in the borrower's account is from its own cash account. But under our current monetary system, commercial banks (members of the US Federal Reserve System) usually just write a higher number in the borrower's account if they think they have enough cash and reserves to cover all the checks they expect to be written against their demand deposit liabilities.

When someone opens a bank account and makes a deposit of $500 cash, the account holder surrenders legal title to the $500 cash. This cash becomes an asset of the bank; the account becomes a liability.

And when someone takes out a loan, rather than the cash they deposit becoming the bank's asset, the loan itself does. The bank simply exercises a legal privilege of converting illiquid loan assets into liquid demand deposit (debt money) liabilities. If the bank holds the loan, its ability to create more money is limited by its ability to cover checks drawn against the newly created deposits. But if it can liquidate the loan (e.g., by bundling and reselling it), it can turn around and do the same thing again right away, as it then has the cash to cover more checks.

[Zippyjuan]

And when someone takes out a loan, rather than the cash they deposit becoming the bank's asset, the loan itself does.

Exactly what we said- a loan is an assset for the bank and a deposit a liability. If the loan gets sold that is the same as it being paid off as far as the bank is concerned- they got their money back for it and it is no longer an asset.

[Black Flag]

Roy,

You are a crackpot and do not understand fractional reserve banking whatsoever.

[Black Flag]

usually just write a higher number in the borrower's account if they think they have enough cash and reserves to cover all the checks they expect to be written against their demand deposit liabilities.

This is not true at all.

They lend only based on the ability to fund the loan with money in their excess reserves or in their capital account.

The loan functionally reduces their excess reserves or capital account - converts cash as an asset into a loan as an asset for the bank.

[Black Flag]

And when someone takes out a loan, rather than the cash they deposit becoming the bank's asset, the loan itself does. The bank simply exercises a legal privilege of converting illiquid loan assets into liquid demand deposit (debt money) liabilities. If the bank holds the loan, its ability to create more money is limited by its ability to cover checks drawn against the newly created deposits. But if it can liquidate the loan (e.g., by bundling and reselling it), it can turn around and do the same thing again right away, as it then has the cash to cover more checks.

This is where Roy confuses himself.

He is correct - a loan turns liquid cash (an asset) into a less-liquid debt (also an asset) for the bank.

He is incorrect to believe a bank has a legal privilege of doing this - anyone can do this, even Roy.

The limits on Roy is that he can only do this to the amount of cash on hand, since he normally cannot accept deposits. The banking "privilege" exists here - the accepting of money for deposits - not in the lending. Anyone can lend if you have money.

So, you can see where Roy goes off into lala land with his crackpot theory, because he does not properly understand where a bank "is a bank" - not in lending, but in the acceptance of deposits.

He is also wrong in believing a bank is unrestrained in making loans as long as it can guess right on how many repayments of deposits it will face. Nothing is further from the truth. Banks have legal limits to the amount of loans that exist and there is no guessing here.

He is correct that a bank to improve its liquidity will sell its portfolio of loans for cash in hand. But if banks create money out of thin air "debt money" as he says they can - why would this be necessary? He does not answer, because his crack pot theory cannot explain it.

[Paul Or Nothing II]

Oh... i see. So for the sake of argument lets just forget for a second that the bankers and all the other special interests and complexes don't infest and control government. We just put the printing press into the hands of guys who bring us such wonderful things as the patriot act, NDDA, assassinations of US citizens, TSA, the war on drugs, endless foreign wars and 10s of trillions in debt and unfunded liabilities and things will be sooooooo much better....

+1

Zarlenga believes in central-planning & Kucinich as we know, is a socialist so they'd love government issuing money!
So we'd take the power of issuing money from bankers to politicians & bureaucrats! Great, ain't it!
NOOOOOOOOOOOO!
History will repeat itself & government will overissue it because guess what, issuing monopolized money is a profitable business & people & their savings will get wiped out by inflation-tax

The bottomline, be it bankers or government, they're all made up of people, not angels - SELF-INTERESTED people - so they'll use their power to benefit themselves, at the expense of ignorant people who believe in freeloading & that their "leaders" will make their lives so great!

[LibForestPaul]

ten percent reserve requirement[/I], the bank can loan out up to $90 of that..

Ohh, that's so cute, a reserve requirement...based on deposits no less...very quaint... I have a Nyan cat here for you, have a rainbow pop-tart, mmm mmmm good.

[Roy L]

This is not true at all.

It is definitely true. See "Modern Money Mechanics" published by the US Federal Reserve.

They lend only based on the ability to fund the loan with money in their excess reserves or in their capital account.

As I said: contrary to your false claim, they do not transfer their own money into the borrower's account at the time the loan is made. They simply have to have enough reserves to cover all the checks drawn on that account -- and they can borrow reserves from the Fed.

The loan functionally reduces their excess reserves or capital account

It reduces reserves.

- converts cash as an asset into a loan as an asset for the bank.

Nope. Those are two totally different things. The latter is what a merchant or investment bank does: act as a financial intermediary or lender on its own account. The role of a commercial bank under the Fed or any equivalent debt money central banking system (such as the original debt money banking system, the BoE) is quite different: it creates demand deposit money by lending it into existence.

[Roy L]

He is incorrect to believe a bank has a legal privilege of doing this - anyone can do this, even Roy.

But that is not what commercial banks do.

The limits on Roy is that he can only do this to the amount of cash on hand, since he normally cannot accept deposits. The banking "privilege" exists here - the accepting of money for deposits - not in the lending. Anyone can lend if you have money.

Anyone can lend, it is only commercial banks that can create deposits.

He is also wrong in believing a bank is unrestrained in making loans as long as it can guess right on how many repayments of deposits it will face. Nothing is further from the truth. Banks have legal limits to the amount of loans that exist and there is no guessing here.

There are legal limits on both capital adequacy and reserve ratios, but they are not the major limit on lending, as the explosion of subprime loans proved.

He is correct that a bank to improve its liquidity will sell its portfolio of loans for cash in hand. But if banks create money out of thin air "debt money" as he says they can - why would this be necessary? He does not answer, because his crack pot theory cannot explain it.

Wrong again. The answer is simple: they can't create debt money out of thin air. They need a debtor, a willing borrower who agrees to repay the money they create, plus interest. That is why when firms and households don't want to go into debt, as they currently do not, the government has to step in and borrow, or the economy will collapse in deflation.