Aboloshing the Federal Reserve

[Zippyjuan]

And the Fed gets money from the taxpayers and most of the taxpayers own houses so it must ultimately be the fault of people who were willing to pay more than they could really afford that drove the prices higher and led to the collapse when people finally realized they had spent (or promised to spend) too much money. Circle complete.

[forsmant]

Originally Posted by Zippyjuan

And the Fed gets money from the taxpayers and most of the taxpayers own houses so it must ultimately be the fault of people who were willing to pay more than they could really afford that drove the prices higher and led to the collapse when people finally realized they had spent (or promised to spend) too much money. Circle complete.

Those people were enticed to get a mortgage because interest rates were at historical lows making money cheaper to get than it has ever been. This opened up the housing market to those who would otherwise be unwilling or unable to pay the higher interest rates that he market would have set.

[Zippyjuan]

In a twist, we can in part blame the Chinese for lower interest rates on mortgages. As I mentioned earlier, mortgage rates are most often tied to the rates on ten year treasury notes. Well, with our huge trade defict, the Chinese had tons of US dollars they wanted to invest somewhere- and they poured vast amounts into US Treasury notes. Their large demand meant that the Treasury was able to sell their notes at much lower rates than they would have otherwise been able to do so- lowering the interest rates on related items like mortgages.
http://www.npr.org/templates/story/s...toryId=5353313

Because China keeps buying U.S. Treasury bonds, the Treasury Department is able to keep long-term interest rates lower than they would be otherwise. (If China weren't such a big buyer, the U.S. Treasury might need to raise rates to attract other investors.) Since Treasury bonds are the benchmark for most long-term debt, those lower rates extend to credit cards and mortgages.

Those low mortgage rates have fueled a dramatic housing boom, raising the price of many homes. All those inflated home prices have injected countless billions of dollars into the U.S. economy. Americans are flush with home equity and cheap debt.

(obviously this article was written before the housing boom peaked).
Another article from the New York Times: http://www.nytimes.com/2005/05/13/bu.../13norris.html

[revolutionman]

the Federal reserve needs to be under the supervision of Government with extreme transparency. 30 Mr. Burns' shouldn't be sitting in some private room some where playing God where not even the President can keep them in line. I'm seriously thinking of boycotting all financial institutions. Credit card companies and banks alike. people need to understand, taking out a loan for a car or mortgage for a house is essentially signing your life away. the greater the debt you accumulate the less autonomy you have as a human being. A man with a new house, and a new car that isn't making $100,000 annually, is the definition of a wage slave, just as much as minimum wage guy working two jobs to pay rent on his one bedroom and car insurance for his hatchback.

[banjojambo9]

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.
Thomas Jefferson, Letter to the Secretary of the Treasury Albert Gallatin (1802)
3rd president of US (1743 - 1826)

[AutoDas]

I have to admit, I don't know much about this issue. This seems to be a core issue to his campaign. Does anyone who has similar political beliefs as me can summarize what this is about? (I know I am against the gold standard and any other similar commodity-backed money)

[roguepatriot]

My 2 cents:

I didn't read every response thus far but the one thing I think worth mentioning regarding the current crisis is that the Fed completely lost control of the money / credit supply because of the wonderful world of structured finance and securitization. This allowed the money center banks to move all sorts of risky assets off balance sheet (ala Enron) - thereby making reserve requirements meaningless.

Secondly, whether one thinks the Fed should be abolished or not is really secondary IMO. What's really important is that we eliminate the debt-based (fiat) money system that we currently have and at the very least legalize COMPETING currencies (ie gold/silver backed currencies). Given the choice of holding Federal Reserve NOTES or a commodity-backed currency the people will quickly vote for the the backed currency. This is important because it limits the amount of money that can be created, thereby reducing the insidious inflation tax.

Lastly, I am of the opinion that the Fed serves no useful purpose to the We the People*, so there would be little lost in abolishing them. They tend to follow the bond market when setting the Fed FUnds rate anyway. Besides, history has proven time and again that central planning DOESN'T work and that prices should be set by the marketplace. To me, this includes the PRICE of MONEY.

*Note: The Fed does however serve a very useful purpose to the Banks in its lender of last resort role. This facilitates situations as we have now and have seen many times in history since 1913 where banks fail and the losses are socialized.

[Zippyjuan]

The biggest players (and the most messed up) in the housing crises were not the regular bank but investment banks like Bear Stearns. They do not have to worry about any banking regulations like reserve requirements and often take on greater risks. The major banks do handle mortgages but they were not exposed as heavily to the subprime segment. SInce they tend to keep more of their mortgages instead of reselling them to someone else, they made sure they signed up better quality mortgages and borrowers. The investment banks bought and sold the loans and looked only at the potential return (forgetting that higher returns mean higher risks) and repackaged them and bought and sold them to each other and other investors. The Bush administration is proposing to have investment banks covered by more of the regulations presently facing standard banks like making them keep a certain amount of reserves.

[gilliganscorner]

Hi Folks,

Let me explain the loan process of a bank. The mathematics will be simplified to illustrate the point. I will strip out banking terminology and accounting language as it only serves to obfuscate the issue.

1) You go into a bank for a mortgage of 300K. Let's say that the mortgage is fixed at 6% for 25 years, payable monthly. You will make no early pre-payments or double up your monthly payments. Very simple.

This means at the end of your mortgage (after 300 monthly payments = 25 years). According to this calculator here, this means that you will pay $1,919.00 a month. You will pay back the amount you borrowed (300K) + the interest (a whopping $275,826.00 - almost double the amount you borrowed.

2) The bank puts you through some preliminary hoops to see if they are going to make money off of you. I.e. you have a job, your credit is not maxed out, etc.

3) The bank creates 300K out of thin air. They do NOT take that money from their depositor's accounts to give to you. Because of the fractional reserve requirements, they only have to keep a very small amount of "money" in the vault to back that loan. I say "money" because that is easier for most of us to understand, rather than the term "capital instruments".

So if the Fed requires the bank have a reserve requirement of 10%, this means that they have to have $30,000.00 dollars of "money" in the vault. Here in Canada, the reserve requirements for our private chartered banks is 0%. That is not a typo. Our banks, in reality DO keep reserves, but there is no law that requires them to do so.

4) You pay the seller of the house. Be it the builder or the owner, they take that money and (a) pay for all the labour and materials used to build the house and keep a profit, or (b) the owner of the house takes that money and buys a yacht or another house or whatever. That new "money" you borrowed (the 300K) makes its way out into the economy. In otherwords, by you willing to shackle yourself to debt, you allowed the bank to add 300K to the money supply.

By a simple accounting trick, the bank records the loan in two columns in the ledger book. The mortgage goes in the asset column as it is an interest bearing financial instrument. It ALSO goes in the liability column as someone will deposit it into an account and start writing checks against that account. Thus, the books balance.

5) You work for 25 years to pay that back, paying your $1,919 a month.

6) Around year 13 of your 300K mortgage, you would have paid the principle back. You still have 12 years to go to pay the $275K in interest back. Question. Where did the money come from to pay back the interest? What created the $275K and added it to the money supply in order for you to obtain it by working to pay the bank?

Do you see at this point? The bank loan actually reduces the amount of money in circulation over its lifetime! It transfers wealth out of the economy and gives it to the bank for the bank's unearned work (their right to mint "checkbook money")! Normally, this system would collapse!

But our system hasn't collapsed. So what gives?

The answer is simple.

The money comes from people who borrowed AFTER you. They borrowed the money via the same mechanism from their private banks, dumping their newly minted "money" into overall money supply.

7) To sustain the money supply, we need to attract new borrowers into the system as old loans are being paid off. Rate of money created = rate of money disappearing = stable money supply.

If the rate of money creation is higher than the money being destroyed, we are told it is economic "growth" and possibly inflation, which rewards producers/spenders, but hurts consumers.

If the rate of money creation is lower, we have the opposite effect. The money being retired, we are told we have a "recession" and possibly deflation, which rewards consumers, but hurts producers.

8) This is where the Fed (or any central bank) comes in. These central banks (or cartels of government agents and banking interests) look at a pool of economic data, have the power to artificially raise or lower interest rates. If they see the economy getting "hot" and inflation rising, they raise the interest rates.

This deters people from lining up for new loans. The money supply begins to contract. The economy slows down.

If the economy gets too slow, they lower interest rates, thus enticing people to line up at the loan window of the banks. New money is dumped into the economy. It heats up again.

In other words, the Fed is always looking for the sweet spot where banks can maximize its members profits of the backs of slaves (run as fast as you can on the old hamster wheel = keep up payments), but not kill them (i.e fall off the hamster wheel = bankruptcy). What's that old saying? "You can't beat a dead horse."

9) The bank, believe it or not, does NOT want to foreclose on your house. They hate that. Now they have a non-paper asset they have to pay taxes and maintenance on. They might have to sell it into a market where there is a glut of foreclosed homes on the market = lower prices. They hate that. They just want your payments.

10) That money you paid back to the bank does NOT stay in the bank. Banks record the interest as profit. From that profit, they pay their employees, taxes, shareholders, capital/operational costs, finance business growth, and of course, the obscene bonuses to the CxO's. Since shareholders are making a profit, they cheer the bank on! Employees are grateful for their jobs! Government relishes the tax revenue!

But all of these people who work at the banks/government/shareholders have loans they have to pay back too.

Since the money is backed by debt and issued by the bank, it's ultimate destination is always back to the bank.

11) You can see where this is all going right?

Because we have a money supply that demands new loans to be created to keep the money supply stable, this means that we MUST have infinite economic growth.

This is not sustainable. The economy is 100% driven from whatever we can fish out of the sea, farm off the land, or dig out of the earth. It can't go on forever. The planet will collapse into a smoking hole. I am not a big truther on global warming, but it would be insanity to ignore ALL arguments. The earth is flashing warning signs at us.

And we bicker without understanding the nature of the problem. Their can be no environmental sustainability unless the money supply issue is fixed. We need to have a non-debt based money where we can prosper in a zero-growth economy. This concept is usually pretty foreign to most people.

And as the earth declines, it will be the banking industry and their debt based money standing on our corpses, before they are killed too. All their power won't save them.

[Zippyjuan]

You do have some inaccuracies in your post.
First, the money they loan out does come from deposits.
The reserve requirement is the percent of those deposits they are required to keep on hand (either at the Fed or at the bank itself or some combination therof)- not on the loan amount. And yes, there is a law that they do keep a certain level of reserves in the US. That came in responce to the run on banks in the 1920s that contributed to the Great Depression because banks were unable to meet withdrawl demands. Unless they are an investment bank like Bear Stearns.

If they have $300,000 to loan out, and a ten percent reserve requirement, they must have had $300,000 on deposit- 90 percent that they can loan out and ten percent to keep on hand.

As you pay back the mortgage, the bank has more money available to loan out to someone else. The money to pay back the interest came from wages you were given in exchange for work you performed. Your employer received that money from someone who purchased the product of your labors. It did not come from thin air.