On Wed, 30 Apr 2008 18:08:50 -0700, Stray Dog wrote:
> On Apr 30, 1:13 pm, Lantern <lanter...@[EMAIL PROTECTED]
> wrote:
>> On Apr 30, 7:07 am, Money Man <Mo...@[EMAIL PROTECTED]
> wrote:
>>
>> > visualseep...@[EMAIL PROTECTED]
wrote:
>> > > Federal Reserve policymakers will discuss paying interest on
>> > > bank reserves in a closed door meeting on Wednesday.>>
>>
>> Money Man wisely asks some excellent questions.
>
> I agree completely.
>
> Allow me to try to
>> answer. I don't know the answers
>
> I don't either, but I've read a couple of books on banking and
> economics (so, I know the alphabet) and I've read a lot of books on
> scams, frauds, schemes, tricks, tweaks...all designed to make the
> rich, richer and the poor, poorer.
>
> but just to get the discussion going
>> ----->
>>
>> 1. What does paying interest on reserves mean? Answer: Banks must set
>> aside money to pay depositors when required. Under a fractional
>> reserve system, banks can lend out more than they have on hand.
>
> This is true, but I'm not aware that anything like this is going on in
> the USA but a WSJ article said that in China as of two years ago, the
> Chinese banks were loaning out 140-160% of their deposits AND 50% of
> their loans were, at the time, non-performing. Since then, I
> understand that they have cleaned up this problem.
>
> There
>> are all kinds of controls and laws on this.
>
> I think they come from the Fed.
>
> The idea is to prevent a
>> run on banks.
>
> No, you prevent a run on banks by doing something even simpler. They
> call it a "bank holiday" and they lock all the doors and tell everyone
> (if the bank is FDIC covered) that their money is safe and everyone
> goes home until the propeller heads figure out what to do. In recent
> times, the Fed organizes a shotgun marriage with stronger banks and
> has the stronger bank take over everything, including good assets and
> bad loans. The stronger banks don't like to do this, but Bernanke is
> now dictator of banks (etc).
>
> The purpose of reserves is to avoid the day when some depositor comes
> in and wants to close his account and they tell him "Sorry, we don't
> have any money (i.e. cash) here" and then leading to the fireworks and
> rumors spreading faster than the speed of light.
>
>> Banks do not get paid interest on their reserves.
>
> No, but they have to get interest income on the loans they make and
> that interest has to leave them with net earnings after they pay
> interest due to be paid to depositors.
>
>> Reserves must be very, very available, not invested by the bank, like
>> vault cash. Why shouldn't they earn interest?
>
> The last time I've seen numbers on this, we're talking about maybe
> 1-2% of total deposits. Yes, if the bank is a billion dollars bank,
> then one percent is 10 mil and they have to froth at the mouth on
> that.
>
> However, a lot of bank overlings are greedy-selfish assholes, too, and
> don't care that bank solidarity, reputation, and reliability is
> im****tant. As I've read a little about this, there are a lot of big
> banks doing a lot of little dirty tricks and sneaky-cheaty things and
> it gets pretty complicated.
>
>> 2. Who would be paying the interest? The banks would need to put the
>> reserves to work. But they must put it to work so that the money is
>> available on demand. How do they do this? I dunno :) This may be the
>> fly in the ointment.
>
> I'll tell you what banks are doing (one of my banks is doing this),
> they are starting to go into all manner of non-bank business. My bank
> has offered financial services I've never seen from a bank. In
> addition, they are offering "buyer club discount" cards, now (buy the
> card, get X % off merchant prices). Also, the latest is a form of
> insurance card but its not insurance (or they would run into insurance
> regulation), but it is worded in a manner that the "plan" will pay for
> health care problems. I'm sure they paid a lot of money to some lawyer
> to word their "plan" so it is outside of state insurance regulation
> (how many of you knew that Medicaid is not insurance?).
>
>> 3. The banks would be the recipients of any interest they earn. This
>> would be an income source banks do not now have.
>
> The question should be: how much money are banks making now and how
> well run are those banks.
>
>> 4. The interest rates would be set by whoever the banks can arrange to
>> submit their reserves monies to. Probably investors who can use short
>> term, readily available monies.
>
> You would have to have a look at the actual wording of the proposal. I
> don't remember reading anything in any recent WSJ issue on this
> development.
All of this sort of stuff helps in our understanding of money and banks.
The bottom line is that the borrowers and/or the holders of money of all
stripes will pay the bankers in total regardless of how all the plumbing
is arranged. The banks essentially perform an accounting service and that
service must be regulated by representatives of the people to insure that
the bankers do not take too much out of the real economy for their
services. That is the simple fact.
The discussion of interest not paid/(or paid_) on reserves or any other
discussion about money is best opened by thinking in terms of gold coins.
In the world of hard money the banks were required by law to keep a
certain amount of gold on hand so that people could come to the bank (in
decent numbers) and withdraw their money as they pleased. Now obviously,
the gold sitting in the vault was not loaned out and did not produce any
interest income for the bank. My point about the inevitability of the
borrowers paying for the service is demonstrable even in this hard money
system. It should be obvious that the bankers (and their staff) must
derive income from the service they provide or they starve to death. There
is also the capitalization and amortization of the bank and the bank
vault. The bank will have borrowed money to create the bank and to pay
for the land and the safe and the pens and paper to facilitate the the
banking business. And all these costs must be paid by income from interest
on loans. There is also the odd borrower that does not repay a loan. AND
ALL OF THESE COSTS MUST BE PAID BY INTEREST ON MONEY LOANED TO HONEST
PEOPLE.
If there is no way to collect interest on idle funds (the gold coins held
in reserve for normal day to day withdrawals and deposits), then more
income must be derived from the active loans. ALL income must inevitably
be derived from the interest on loans to the public.
But let us now move forward to the fiat money system where money is not
"hard" and where money can be created at will. In this system there is no
fixed amount of money. Unlike the gold system the banks as a whole as
governed by the elected government can create additional money at need.
It is im****tant to understand that the banks can create money only to the
extend that the elected government allows/forces the banks to create
money. The myth of the independent Federal Reserve is, indeed, a myth,
and the Fed (created by and inevitably controlled by the elected
government) is charged with the regulation the banks.
But in a fiat system we see that the cost of the banks (the cost if credit
and finance) can also be paid by the money holders (the
depositors/savers/hoarders of money). For as more money is created then
money will lose value; the money in the vault or on the books as loans or
savings will become worth less than it was. In effect, the holders of
money are being charged for the costs of the financial system. THERE IS NO
WAY TO PAY FOR THE BANKING SERVICES BUT THROUGH THE INTEREST ON LOANS. But
we see that as money becomes less scarce then less interest can be
commanded by the holders of money (the savers).
Within the reality described above let us examine the notion that the Fed
will pay interest on the money in the vault (the money held in reserve to
sup****t the day to day activities of bank users):
In the big picture nothing has changed. If the Fed creates money with
which to pay the interest then money will become worth less due to the
decreasing scarcity of money. It is somewhat irrelevant as to the
mechanism used to create new money but for the fact of who gets the new
money FIRST. The money in total will lose value and those who "HAVE
MONEY", will seem to suffer the loss. But who gets to use or abuse the
new money? If the banks get the money, then the banks are made more
wealthy and the rest of us get the green weeny. On closer observation, the
people who have more money than they no what to do with are not harmed by
the creation of more money so long as the new money ends up in their bank
accounts. The people who must live from wages and who must also acquire
assets for retirement are, of course, screwed.
--
"I know no safe depository of the ultimate powers
of society but the people themselves; and
if we think them not enlightened enough to
exercise their control with a wholesome
discretion, the remedy is not to take it from
them, but to inform their discretion by
education." - Thomas Jefferson
http://GreaterVoice.org/extend
|
