The Creation of the Federal Reserve System (Part 3)

The 3 stooges isn't everyone. I would not really claim Dr. R or Snooop to be very informed on anything regarding banking or economics. The fact that you are so stubborn in the defense of this is what is mind boggling.

If you walk in to a bank with nothing to exchange other than a promise and the bank gives you money that can be used in a transaction to purchase goods and services, with out taking money from anyone else, that is creating money out of thin air. It is creating money that did not exist before. It doesn't matter the requirements in which they have to follow to create it, the bottom line is they simply create money by typing numbers in to a computer.

Simple stuff!!

 

Repeating this idiotic theory of yours is useless. Just because there are legal restrictions on how to create money and how much you can create doesn't change the fact that you are simply creating money by typing numbers in to a computer.

And you can have your opinion all you want about banks needing reserves to lend... I on the other hand, will take the opinion of the Federal Reserve.

"In the real world, a bank's lending is not normally constrained by reserves it has at any given moment. Rather, loans are made, or not made, depending on the bank's credit policies and its expectations about its ability to obtain the funds necessary to pay its customers' checks and maintain required reserves in a timely fashion. In fact, because Federal Reserve regulations in effect from 1968 through e1984 specified that average required reserves for a given week should be based on average deposit levels two weeks earlier ("lagged" reserve accounting), deposit creatactually preceded the provision of supporting reserves. In early 1984, a more "contemporaneous" reserve accounting system was implemented in order to improve monetary control."


Game over. Time for apologies!

 

It's not just them and me. It is every other person on the board who has a modicum of understanding of money creation that have tried to explain it to you.

You're simply wrong. The cash you take out from that loan was money that someone else had deposited or the bank had acquired. The cash already existed. The bank didn't create it out of thin air.

 

What does "at any given moment" mean to you?

What does "its expectations ability to obtain the funds necessary to pay its customers' checks" mean to you?

What deos "its expectations about its ability to ... maintain required reserves in a timely fashion" mean to you?

 

I have not heard anyone else but you 3 say that banks do not create money out of thin air

You are trying to combine two actions in to one. Banks don't use reserves to create loans, they NEED reserves to handle a transaction between banks.

If a bank makes a loan and that loan check is given to a member of the same bank. No reserves are transferred yet there is more money in the system. If you look at the banking system as a whole. Every loan created adds NEW deposits to the system. If there is NEW deposits than where is this money coming from other than from thin air?

You are too caught up in the fact that banks need reserves to handle transfers between banks. They don't need reserves to make loans... they need reserves to transfer money between banks.

 

It means if someone walks in to the bank and wants money they don't need reserves on hand to give them money. They simply create an account for the borrower and write a check for the loan amount. The borrower now can go purchase real goods and services and the recipient of the loan check now deposits it in their bank.

Than it's just like any other check we write. Goes to the clearinghouse and than they transfer reserves. If the bank doesn't have enough reserves they become deficient with the Federal Reserve and may have to post fees.

But a bank has a lag time in order to acquire the reserves needed for requirements and transactions.

They don't need reserves to create a loan, that should tell you what a bank is doing when it creates a loan.

 

Right, like when you get that loan and take cash out or write a check on it, which is why anyone would get a loan in the first place.

In the relatively rare case that the person who ulimately gets paid by the loan proceeds uses the same bank, I agree in that instance there is no change in that banks' reserves. There are more deposits created, offset by more loans payable and more loans receivable. And if we use a definition of money that counts reserves, there is more money.

Loans only create deposits when the loan proceeds are deposited. If I go to my bank and get a loan and they give me a check or I get cash, no deposits are created until either I or the person to whom I give the funds deposits it.

 

I'll take a stab at this. Because we aren't authorized by the fed gov't to print legal tender. You have to have the legal means to create said money.

 

Who cares, you still are receiving money with out taking money from any one else. It is NEW money. It didn't come from anywhere... it simply came from a banker typing digits in to a computer.

It doesn't matter if you take out cash or have a check. To the nonbank public no one loses any money. That money was simply created for you which you can now go and spend on real goods and services. It is literally newly created money that came from absolutely no where. A banker simply types it in to a computer and gives you a check.

That is what we call in the sane world, creating money out of thin air. The fact that banks have to transfer reserves between each other has nothing to do with how a bank creates money.

 

If more money isn't created all the time, would we then have a zero sum economy? I keep hearing we don't have a zero sum economy, it is ever expanding.

 

If the money supply was not expanded, growth in production and population would eventually cause deflation.

The economy has expanded over time on average about 3% per year, but it certainly is not ever expanding.

 

Correct, a bank has some lag time, a few days, to acquire the reserves it needs.

The fact that a bank can borrow (assuming it has the credit reputation to do so) short term fed funds to cover temporary reserve shortages does not change the fundamental way money creation happens as explained in MMM and other sources.

Banks will borrow short term from the fed funds market to cover shortfalls, but have to acquire other reserves to continue lending.

That is why a bank cannot lend unlimitedly which they could do if a bank could create money out of thin air. As explained in detail in your own source, MMM.

Which you should consider reading. I'll quote the specific language again, if you need it.

 

You were the only who pointed out the process starts with a deposit. You can't explain your own example?

Why does it need a deposit to start the process, as explained in MMM?

 

They are capital constrained in lending. They are not reserve constrained. They can always borrow more reserves based on their capital. Banks don't need reserves to make loans. How many times do I have to say it and how many times do I have to quote the banking system.

They do not need reserves to make a loan. They simply create the money by typing digits in to a computer. No one loses any money in this process. It is NEW money. The bank just CREATED money. This is really really simple stuff. My 5 year old nephew understood it perfectly, I'm sure you can to.

Banks transferring reserves and banks creating money are two complete separate events. Reserves are simply how the Fed controls how much money banks can create. Very very simple stuff.

 

That is actually an excellent stab at it Dairyair. You are pretty close to spot on.

While banks as a whole create new deposits by lending, they cannot create new "legal tender" or, in the venacular we've been using, cash or reserve deposits at the Fed (which are the electronic equivalent of cash).

So when a bank makes a loan, it has to have enough cash/reserves on hand to be able to pay out the cash or check the borrower rights, which reduces the amount of cash/reserves the bank has.

Since it must maintain a "required reserve" of cash/reserves equal to 10% of its deposits, the amount of deposits (a bank's primary source of funds) it has effectively acts as a limitation to how much a bank can lend.

Amazing how most can figure this out in a couple of posts while others take hundreds or thousands.

 

The process doesn't need to start out with a deposit. I simply stated there was $1000 in deposits. I didn't say there had to be deposits. You can take your money, start a bank, and create loans with out getting a single dollar from another person.

You guys have serious comprehension problems. This is one of the easiest concepts known to man. Since the days banks simply created bank notes people understood they were creating money out of thin air. You are centuries behind the learning curve.

 

You forgot that last two:

What does "its expectations ability to obtain the funds necessary to pay its customers' checks" mean to you?

What deos "its expectations about its ability to ... maintain required reserves in a timely fashion" mean to you?

 

Isn't that a contradictory statment? If money is not expanded we'll get deflation, but it is not ever expanding?

We haven't had deflation since leaving the gold standard, have we?

 

Nobody is disputing that banks create money. You're being dishonest again.

Sufficiently debunked by Iriemon already.

 

You think?

Let's try it.

Bank A starts with -0-, and loans $10k to Borrower by creating a deposit account for Borrower.

It's account look like this.

Asset | Liability
10k Loan Receivable | 10k Deposits.

Let's put aside the fact that it is now in violation of the reserve requirements.

Now Borrower says he wants $10k cash from his deposit account, or wants to write a check for $10k

What happens when he tries to get his $10k in cash or write a check?

Oooop. The bank doesn't have it.

That is why it needs to start with a deposit account and you are wrong in your explanation above. It needs the cash/reserve to fund the loan.

You say this all the time, but then why do you have such a hard time understanding it?

 

You are conflicting two separate questions.

1) Can banks create money out of thin air?
2) How much money can a bank create out of thin air?

The answer to #1 is simple. Yes, they most definitely can. You walk in to a bank with absolutely nothing and you leave with NEW money. This money did not exist before it was not taken from anyone else. It is new and it was simply just created.

Now what you are talking is #2. How much money can a bank create? That depends on it's ability to acquire reserves. This is how the Fed controls the money supply, by manipulating the cost of borrowing reserves. The more reserves the cheaper the cost the more loans a bank can make. The less reserves the greater the cost the less loans a bank can make.

But in reality, banks simply create money out of thin air. But they need reserves to handle transfers between banks.

Two completely separate questions and stuff that is very easy to comprehend.

 

That's why banks are capital constrained. This is why someone with no money can't start a bank.

 

I don't think so. First off I said the economy is not ever expanding, not money. But the supply of money is generally expanding at a rate equal to the growth of the economy plus a couple percentage points.

No, but almost in this last recession. The reason we didn't is because the Fed injected about $1.5 trillion into the money supply. Had we been on a gold standard the Fed could not have done that, and we'd have seen serious deflation like we saw in the great depression.

 

This is incredibly untrue once again. The Fed did not inject $1.5 trillion in to the economy. It injected $1.5 trillion in to the banks as reserves. That is why our money did not increase by $1.5 trillion. Our money increases by taking out loans or by the Govt crediting our accounts. Not by the Fed's OMO's.

 

Please answer my questions. They are directly from a quote from MMM you've made dozens of times. These are fair questions to ask. Dodging fair question is not an honest discussion practice.

What does "its expectations ability to obtain the funds necessary to pay its customers' checks" mean to you?

What deos "its expectations about its ability to ... maintain required reserves in a timely fashion" mean to you?