No it does not. The Federal Reserve holds promissory notes from banks and issues Federal Reserve notes based upon those promissory notes from the banks. Once again, based upon "fractional banking" a bank is only required to keep 10% in reserve and can borrow against that reserve from the Federal Reserve bank. The Federal Reserve doesn't actually have "money" to lend but instead has the fiat power to create "fiat" currency based upon the promissory note from the bank borrowing the "money" from the Federal Reserve but, in fact, no "money" actually exists. Here is a weird situation related to the US government "borrowing" based upon the credit of the United State authorized by Article I Section 8 Clause 1. The US Treasury issues a "Treasury note" (or similar promissory note) when it borrows but it doesn't receive "money" for that note. Instead it receives a promissory note (i.e. Federal Reserve note) in exchange. No "money" changes hands and the Federal Reserve creates the fiat currency used to purchase the Treasury note based upon the note itself. It's one promissory note being exchanged for another promissory note and the US government isn't "borrowing" any "money" from anyone. It's like a check-kitting scheme being conducted between two people that is against the law if we do it.
Senators Warren, McCain, Cantwell, and King Introduce 21st Century Glass-Steagall Act - JUL 11, 2013 "The legislation introduced today would separate traditional banks that have savings and checking accounts and are insured by the Federal Deposit Insurance Corporation from riskier financial institutions that offer services such as investment banking, insurance, swaps dealing, and hedge fund and private equity activities. This bill would clarify regulatory interpretations of banking law provisions that undermined the protections under the original Glass-Steagall and would make "Too Big to Fail" institutions smaller and safer, minimizing the likelihood of a government bailout. Since core provisions of the Glass-Steagall Act were repealed in 1999, shattering the wall dividing commercial banks and investment banks, a culture of dangerous greed and excessive risk-taking has taken root in the banking world," said Senator John McCain. "Big Wall Street institutions should be free to engage in transactions with significant risk, but not with federally insured deposits. If enacted, the 21st Century Glass-Steagall Act would not end Too-Big-to-Fail. But, it would rebuild the wall between commercial and investment banking that was in place for over 60 years, restore confidence in the system, and reduce risk for the American taxpayer." Interesting, but does it really fix the problem of compounding interest within the national debt on government borrowing?
Yes, it is interesting because TARP was argued on the basis of FDIC insurance costs to some degree. The issue of "too big to fail" is always interesting because these financial institutions were based upon mergers that had to be approved by the FTC. Basically, by allowing the mergers the FTC created "too big to fail" financial institutions. Yes, it is true that this has nothing to do with the national debt and what many seem to not understand is that an economy is affected by the combined effects of both "private" and "public" debt. While "private" debt has been greatly reduced since 2008 the "public" debt has increased dramatically over-powering the reduction in the private debt. The vastly increasing "public" debt that is far greater than the reduction in the "private" debt has serious negative economic consequences because combined they affect the increase in the GDP of the nation.
Most of the banks that failed, were not ones that would have been effected by Glass-Steagall in the first place. In fact, I could barely find 2 or 3 banks that failed, which would have even been affected by Glass-Steagall. So making a new Glass-Steagall, seems pointless, perhaps even harmful, since some of the mergers that the government specifically arranged to end the crisis, would have been prevented under Glass-Steagall. - - - Updated - - - What you said, and what he said, were two completely different things. Yes, it was a good explanation of his perspective. If you meant to say the same, you failed miserably. You should read his post carefully, and determine how to improve your future posts, so you don't come across as ignorant.
I get what you are saying. And I'm not going to argue against it, when I don't know for sure. Do you have a source for this? Any book you would recommend? Because I haven't heard this before. Again, not saying it's wrong, I just never heard that before. Or at least that's not how it has ever been explained to me, and I've been learning about the Federal Reserve for the past 5 years, and never heard this.
There is a lot of misunderstanding about how fractional reserve banking works and how "money is made out of thin air. The way it works is that a bank takes in a deposit and then can loan it out keeping a small amount as a reserve. The borrower then deposits that loan in a bank which can then lend it out keeping some back as a reserve etc etc. This is how an initial $1,000 deposit can bring about almost $10,000 in lending in a 10% reserve scenario. Banks also have the capital investment of shareholders to lend out, invest, or use as a reserve. In the past Investment Banks did not take deposits and so had no reserve requirements or prohibitions on what they did with their money. If a bank is a member of a regional Federal Reserve Bank it must deposit its reserves at the Federal Reserve Bank it is a member of. Since banks are required to reconcile their holdings every day some might find themselves with less than the necessary reserves and some with more. They can buy and sell reserves held at the Fed between themselves at a rate decided among themselves. In a desperate case where they need cash to shore up their reserves immediately and are unable or unwilling to raise it in other ways they can bring securities to the Fed's Discount Window and use them as collateral for a cash loan from the Federal Reserve itself. The Fed holds these securities until they are redeemed or can sell them on the open market if it decides that timely redemption has become unlikely. Due to the high discount these securities suffer at the Discount Window banks would much rather redeem them than leave them in the Feds hands for too long. The Treasury sells Bonds and Notes at public auction to finance its borrowing. It does not borrow from the Fed. If the Fed wishes to support the Treasury it must buy on the open market just like everyone else. This is what the Fed refers to as Open Market Operations which may include buying and selling securities other than Treasuries like the mortgage bonds it is currently accumulating. There are many other things the Fed can do that are within its remit to keep inflation low and employment high economy through manipulation of the supply of money in the economy. Needless to say this is a tricky proposition that, after 100 years of experimenting the Fed is still trying to figure out the right things to do when the economy and its trajectory get into certain states. The Fed can increase the money supply by lowering reserve requirements for banks, lending more freely at the Discount Window and influence a reduction in benchmark lending rates by buying securities on the open market. It can remove money from the economy by doing the reverse. By the way, all profits from the Fed are given to the Treasury.
This is wrong... I'll show you. Someone deposits $1,000... The bank can loan $900 of that out. If that $900 is deposited into a bank or banks, the bank can loan out $810 of it because it has to keep $90 as a reserve and so forth down the line. It is not $1000 x 10.
I think that's what he meant. The initial $1000 deposit results in a money supply of $10,000, with $9000 in lending. But the whole scenario of 900 to 810 and so on is not really what happens. Banks just create deposit accounts in excess of their cash--they don't actually loan the cash out. For example, if a bank has a $1000 deposit, it can create a $9000 loan off of that. The whole cycle of continuous depositing and loaning is just what is taught in schools for simplicity. With that said, banks are not really reserve constrained in their credit expansion either. They are more importantly constrained by capital, or more accurately capital. But that warrants a whole separate discussion.
Oh, I just went back and reread what he said and misread it the first time. Yes, the abstract I said was econ101. There are more tools then what I described.
Too-big-to-fail... or I'm just going to call it a monopoly subsidized by government, should be one of our bigger concerns along with the national deficit. The ole' Bank act of 1913 was suppose to produce scientifically measured assurances against depressions and recessions, but instead seems to have scientifically produced depressions and recessions that fed a financial industry into a position that they can not only call for a bail out to "insure" that there is no economical crash, but also force in the bail out under the fear of a crash. If financial institutions that play within the stock ventures of Wall Street are still able to bid on and purchase treasury securities, and have already set a corner monopoly, than I see traditional banks just being siphoned dry by those very securities being sold through the Treasury... FDIC insured or not. I don't think the wall can be rebuilt, there is literally not the same foundation as there was 60 years ago, with a gold and silver standard. How does congress "regulate the Value thereof, and fix the Standard of Weights and Measures;" in fractional reserves, with some institutions ranging into the 100's of percents of backing reserves? Abraham Lincoln beat a very rich south with Greenbacks... the Treasury should be able to compete in a fair and open market.
As I've documented under the law we're still on the "gold standard" but the law isn't being enforced. We cannot go to the Federal Reserve and exchange Federal Reserve notes at face value for American Gold Eagles even though the law states that Federal Reserve notes are to be redeemed in "lawful money" (i.e. species coinage produced by the US Mint that are American Eagle coins today) on demand. As also noted there isn't enough gold on the planet for this to happen anyway because the US national debt, which is the only actual requirement for the Federal government to cover, currently represents about 300 billion ounces of gold under the Gold Bullion Coin Act of 1985. The only way the government can "back the dollar" with gold is to re-value the coinage which it has the authority to do under Article I Section 8 Clause 4 that is cited above. So re-value the coinage. I calculated, based upon US gold reserves and the national debt, that we need a $5,000 one-ounce gold coin for this to happen. Once the coinage is re-valued THEN enforce the law and require the Federal Reserve to redeem Federal Reserve notes on demand in US Minted gold coins. The problem of the Gold Standard is not all that hard to resolve.
...operating under "the color of law". I actually found a 1957 $1 silver certificate in my change one day... now stuffed into the pages of "U" in an encyclopedia set... it is nonredeemable as first intended and variably as worthless as its federal note counterpart. I would think that just reinstating the gold standard would leave us just as susceptible to market cornering and monopolization, while a bi-metal standard would be far less easier to capture and corner... if not closer to impossible. ...I smell a run on The Fed... I won't mind... I want to see which end it pulls the gold out of...
With an ounce of gold currently selling for about $1300 I seriously doubt that. Why would someone turn in $5000 in Federal Reserve notes to purchase a one-ounce gold coin when they can purchase an Canadian Maple Leaf 1-oz gold coin for about $1300?
One thing we would see is the Federal Reserve purchasing a lot of gold that would drive up the price of gold though. The Federal Reserve has a lot more Federal Reserve notes (digital and printed) in circulation than the national debt and it would have to back all of those with gold coinage on demand at some point in the future. Someday we know that gold will go over the $5000/oz level if it is unrestrained. Eventually the "market" would balance but the question is whether the Federal Reserve could acquire enough gold in the meantime to cover it's financial obligations. If it can't then it would go bankrupt and that doesn't bode well for people that have their "savings" based upon Federal Reserve notes.
Another factor would be if a fractional reserve would be better phased out for a full reserve. In that regards, I wouldn't see a lot of financial institutions being able to stand ground in that process with some literally fractioned to the 100's of percents. I would think a full reserve is quite more stable and honest than a fractional one. I have heard mentioned once or twice that a better way to maintain a proper monetary system is to allow the states each their own. While this would leave us with a headache of exchange and value (easily done by a computer system these days), it would incorporate a natural checks and balances into the base value as well as driving in true competition into the banking system.
Before fractional banking this was true but it is not true under fractional banking. Under fractional banking the commercial bank takes in a $1,000 deposit and then "borrows" $9,000 from the Federal Reserve that doesn't have any "money" but instead creates the $9,000 in fiat currency (either printed or digitally) based upon the promissory note from the bank to repay the loan. The commercial bank still has the $1,000 on deposit but has loaned out $9,000 based upon it which increases the "money supply" by 10-times and that causes inflation. Of course in doing this the commercial bank makes a huge profit. Currently the commercial bank is paying out less than 1% of the $1,000 on deposit and then collecting anywhere from about 3.5% (on mortgages) to 28% (on credit cards) on the $9,000 in has out in loans. At the bare minimum the commercial bank is paying out $10 in interest for the $1,000 on deposit while it's receiving at least $315 in interest on mortgage loans less the $90 it has to pay the Federal Reserve in interest on the $9,000 loan. Not bad because the commercial bank has a net income of $215 on that $1,000 deposit annually. Of course the Federal Reserve is "earning" $90 for (digital) currency it created out of thin air based upon it's statutory authority to create Federal Reserve notes. The Federal Reserve literally inputs $9,000 on it's computer and transfers that to the commercial bank and gets $90/yr in interest on that digital entry.
