Woo hoo! I angered a Keynesian!

Ray Bradbury said, ""

Thursday, April 28, 2005

Woo hoo! I angered a Keynesian!

I angered my Keynesian Fallacy professor today!

As he was going over the "money multiplier," I pointed out that banks under a fractional reserve system are inherently insolvent, and pointed it out using both his own T-account and Rothbard's examples from The Mystery of Banking.

This is a thing simple enough for a child to understand: You and I deposit a total of $100 in a commercial bank. The bank now holds $100 of our money, and since it is our money, we have the right to reclaim it when we choose. In other words, the bank owes us $100. Now suppose the bank lends out $90. Is it not obvious that the bank can no longer repay its debts to us if we choose to withdraw our money? Is it not obvious that adding more depositors does not change the fact that the bank will not be able to pay someone their own money? Is it not further obvious that each dollar that the bank still has in its vaults, has been essentially lent out more than once? Is it not obvious that the bank is allowed to do what no other business is able to do: to continue to do business while bankrupt?

He responded with a blustery, "if their liabilities exceed their assets, than the government will shut them down. You're wrong."

When I pointed that by definition, under a fractional reserve system the liabilities will exceed assets, and that governments throughout history have, when confronted with bank runs, prevented the people to whom the bank owes money from reclaiming their debts, via "suspensions of specie," rations, and outright lockdowns, while simultaneously forcing people who owe money to the bank, to continue paying their debts, he responded, "well, the FDIC stopped that." I had to point out to him that the FDIC is not an insurance system. It is instead a promise from the government to banks that the printing presses of the Treasury will create money to bail them out in the case their insolvency is realized. The existence of the FDIC is an acknowledgement that the banking system, unlike every other industry, is operating on a fraudulent basis and is given a government privilege by remaining in business where any other business would be shut down and its owners forced to pay their debts. Instead of the government placing police officers at the doors of banks to keep people from getting their money back, the government has simply shifted toward counterfeiting, just like any typical crook.

This got him angry. He responded "no, you're wrong. The FDIC gives money to those banks which need it. I guess we'll have to agree to disagree."

Later in the class, I pointed out that "open market operations." is a weasel-phrase for the outright printing of money out of thin air and the destruction of money. This is obvious: when the Fed buys an asset, unlike the purchases of private individuals who are not counterfeiters, it makes its own money through the Treasury with which to exchange. It is the Fed's production of money which is the crucial element, not the fact that the Fed chooses to disguise this by exchanging this new money for an asset rather than outright bestowing it upon people as gifts. He simply moved on to the next topic.

Posted by: Tom "The Pooklekufr" Treloar at April 28, 2005 09:49 EST | Permalink | comments (8) |
economics, scruffy college student life
Comments open but moderated. I reserve permission to kill spammers on sight.

Comments:

#1 28 April 2005 - 10:03

Oh how I would have loved to be there for that exchange.

Liberty Dog

Anonymous

#2 28 April 2005 - 12:40

Oh Tom, you are a dead man. I had to appeal a studio grade after arguing that Frank Lloyd Wright sucked. I backed my arguments with facts, and it still didn't matter.

Good luck, I feel your pain.

Anonymous

#3 28 April 2005 - 17:57

Lately I have been thinking about the idea of invisible money, money that doesn't exist but people act like it does and something as already been paid for. Such as buying on credit, you still get the product though you haven't paid the full price and you only promise to. Everybody goes fine and they do everything like the full price as been paid. This creates something I term invisible money, money that simply does not exist in the particular situation. Using the bank example you gave earlier, is it legal for a bank to give someone money out of an account when that money is not there? It would almost be like a loan, except it's not. This is money being taken out of thin air that enters the economy, with absolutely no backing. If this can happen, anyone wonder why the $ is so weak?

Anonymous

#4 29 April 2005 - 01:34

Unlogged visitor

Money can be identified by being a final act in a transaction. I give you a dollar for a hotdog, and we never have to see each other again. In contrast, credit cards are not money, because later on you will have to pay in money.

What you call invisible money, is properly inflated money. You see, the Fed buys assets in open market operations. It doesn't matter what these assets are, because the important thing is what the Fed buys them with: money created out of thin air. This money can be either literally counterfeited money which it hands over, or numeraire accounts, which means the Fed just writes in its books a new account for that much money. Either way, the thing of catallactic significance is the creation of money, and the insertion of money into a specific area of the economy. It is obvious that such inflation is not showered upon everyone, but only those who sell assets. These people will have the benefit of being able to use money which did not entail its being first exchanged for a value.

They will benefit from this act just as if they themselves counterfeited the money. And, just as if they counterfeited the money, those whom they trade with will similarly benefit- thus producing the phenomenon whereby those closest to the inflation benefit at the expense of everyone else. It is counterfeiting by proxy of the government.

Pooklekufr

#5 29 April 2005 - 08:13

Actually (assuming a 10% reserve) if the bank just keeps the $100 in the vault, can't it lend out $900?

I guess the government just allows them to count that extra $900 as an asset since they've just lent it and will get it back. Hopefully before someone else needs it.

Once I read this book on the Fed, Secrets of the Temple I think, I remember it said "the Fed exists to protect banks, not individuals" which I guess we've all just accepted. But ... the author seemed to be of the opinion that that's the only thing the government could really do. Were not runs much more common before?

Anonymous

#6 29 April 2005 - 08:14

whoops that was me
Pluto's Dad

Anonymous

#7 29 April 2005 - 11:33

Pluto's Dad

Because the bank does not own the money depositors put into it. It is the depositor's money. Assuming the bank holds anything less than 100 percent of the money people place in it, it inherently defrauds those whose money is not there for them to reclaim.

The most thorough examination of the fractional reserve banking system and centralized banking is Murray Rothbard's "The Mystery of Banking"

Indeed, runs on banks whose inherent bankruptcy became known were common. These runs, before the FDIC, were prevented by literally closing down the bank by force and then forcing the bank's debtors to continue to pay. After the FDIC, these runs are less common because now, when a bank comes up short and people begin to suspect that their money isn't there, the FDIC has the Fed print up enough money to cover it and assuage the depositors into an imaginary security.

Pooklekufr

#8 29 April 2005 - 11:37

"hopefully before someone else needs it."

It is not a matter of whether the bank can successfully estimate how much money people will take out on a given month, and therefore keep at least that much in their vaults. It is a question of even a single dollar of a depositor's money not being there should he wish to reclaim it.

Pooklekufr

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Woo hoo! I angered a Keynesian!

Posted by: Tom "The Pooklekufr" Treloar at April 28, 2005 09:49 EST | Permalink | comments (8) |
economics, scruffy college student life
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Woo hoo! I angered a Keynesian!

Posted by: Tom "The Pooklekufr" Treloar at April 28, 2005 09:49 EST | Permalink | comments (8) | postCountTB('447785'); economics, scruffy college student lifeComments open but moderated. I reserve permission to kill spammers on sight.

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Posted by: Tom "The Pooklekufr" Treloar at April 28, 2005 09:49 EST | Permalink | comments (8) |
economics, scruffy college student life
Comments open but moderated. I reserve permission to kill spammers on sight.

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