Arariel wrote: J Thomas wrote:
Of course theft is immoral. That's not a regulation on the money market.
If you lend money that doesn't belong to you, how is that not theft?
Many of your arguments are perplexing, but this one is especially so. Money is lent to banks. That's what a deposit is. If that's theft, so is spending lent money. In which case, no one should do anything with borrowed money, because that's theft and immoral, and just let it sit there.
Thank you for inviting me to explain this. The trouble is, banking is counterintuitive and hard to explain. Also, recent developments are not exactly transparent....
Let's see.... If somebody lends you $20, and you then lend the money at interest, there's nothing wrong with that, agreed? If that was what banks did I'd agree that there's no problem. There might be some naive people left in the USA who believe that when you put your money into a bank that the bank keeps it safe, but I learned in grade school that the bank lends that money. Probably most people know that. So that part isn't fraud.
But what if somebody lends you $20, and you lend the $20 at interest, and then you counterfeit another $80 and lend that at interest too. You agree that would be wrong, don't you? You would be counterfeiting money, and lending it, and getting something for nothing. The $20 you borrowed is worth less than it would be otherwise because the counterfeit money is competing with it to buy things. Supply and demand, you have increased the supply of money and diluted the demand, and you get the profit from doing that.
And that's what banks do. A long time ago bankers found by experience that if a bank has $1 million, they can lend out around $19 million and be OK. If they actually have 5% of the money they say they do, people will keep putting more cash into the bank about as fast as they take it out, and 5% is enough to cover the statistical fluctuations. And if most people keep most of their money in banks? Then 95% of the money in circulation is money the banks lent out, and it has diluted the value of your money about 95%.
However, every now and then we had problems with depression, usually after a bunch of banks went bust. The government tried to regulate banks. (They were kind of regulated before. It's illegal to start a bank unless you have a government charter, which is essentially a license to steal.) The government decided that if a bank has $1 million, it shouldn't be allowed to lend more than $3 million or $4 million, so it will have 20% or 25% of reserves in case too many people want their money. That way the banks can in theory reduce the value of your money by only 75% or 80%.
This is a little bit oversimplified, but I'm trying to make it short. Really, the "money supply" isn't just the number of dollars. It matters how fast the dollars turn around. If everybody spent their money twice as fast, then half the number of dollars would.... Never mind, I'll present it simply and if you get interested you can look at lots of details.
We set up a central bank, the Federal Reserve, which was supposed to regulate things more. Since it was managed by bankers, they handled things the way bankers would. The Fed became a bank for bankers. Bankers would deposit money with the Fed, and they could then get loans from the Fed. Since they usually needed temporary loans to pay other banks, and the other banks kept their reserves with the Fed, the Fed could lend out much more money than the Fed had.
Part of the reason the government tolerated all this was that the government faced a need to expand the money supply. Lots of voters wanted that, and it seemed to help the economy. But also lots of voters didn't trust the government to do that responsibly. So the government used a lot of sneaky tricks to expand the money supply without actually admitting they were doing that. For a while the Treasury printed money that had "Gold Certificate" on it. Some of these were theoretically redeemable in gold. The government printed money that was not redeemable in gold at the same time, and gold certificates were worth more to some people. The Treasury also printed money that had "Silver Certificate", redeemable in silver, and later they printed Federal Reserve Notes. I saw some silver certificates when I was a kid, they spent just like money. When the price of silver went above $1 a newspaper op-ed writer said he collected a bunch of silver certificates and traded them for silver dollars, and he put them in a safety deposit box waiting for the price of silver to go high enough it would be worth melting them down. After he thought about it he was not hopeful, but I expect he did OK. So anyway, the government had been printing fiat money, not backed by anything, since at least the Civil War and a minority of voters were upset about it. At one point in response the government made a law that they could only print 4 silver certificates for every dollar's worth of silver they had, and they could only print 5 Federal Reserve notes for every Silver Certificate.
So here we are. Banks lend far more dollars than exist, inflating the money supply for their own profit. The Fed gets to decide how much they can do that, theoretically independent of political pressure, because we don't trust the government to do it right. That's why when Bernanke announced that he thought a 3% inflation rate was a good target, it was important. He (together with the rest of the Board) gets to decide how much money to release to set the inflation rate, and it's mostly his choice.
It used to be, you gave the bank a dollar and then if they could find good credit risks they lent $4. But now they don't depend on your money. They can get money from the Fed to lend. But what if the Fed wants to increase the money supply but nobody wants to borrow the money? The Fed can't make people borrow money. Well, if the government cooperates, the Fed can lend money to the government which then spends it. Or the Fed can lend money to banks who then lend it to the government at a higher rate. Done right, that increases the money supply just the right amount.
And now the banks don't really depend on your deposits. They can get their money from the Fed. The Fed monitors how much money they have in their computers. It compares what they owe against their deposits in the Fed's computers, and if they owe too much the Fed makes them fix the problem or it shuts them down in some orderly way.
Recently you may have noticed the Ronpaul trying to get Congress to decide they had the right to audit the Fed. Right now, nobody knows what the Fed is doing except the Fed. They aren't responsible to anybody. Are they lending more money than they have? Of course. How much more? Nobody knows. It used to be, you could count the number of dollars the Treasury printed and that was a measure of how many actual dollars there were, compared to virtual dollars. Now the printed dollars don't matter except we need some of them for ATM machines etc, for people who want paper money. The Fed could, if it wanted, release any amount of virtual money to banks and nobody knows. the Ronpaul was trying to dramatize that.
There are various moral stands possible about all this. Some people say that nobody should try to manage the money supply at all. Go to a strict gold standard, maybe with paper money backed 100% by stored gold. That way nobody gets to cheat. Winmine has been saying to go to a strict gold standard but let the banks cheat all they want to, with no regulation. I don't understand that -- why let the government-licensed banks inflate the money supply by 5 times or 9 times collecting interest on most of the money out there? He says they will be careful not to do it too much since they don't want to hurt themselves.
I think we need to manage the money supply but I'm not clear how. Maybe it's true we can't trust the government to do it. I don't see that it's such a great idea to trust bankers to do it, for their own profit. We need to find somebody we can trust about that. Then there's the question, when new money comes into the economy, who gets to spend it? Currently, bankers can lend it to borrowers who spend it, plus the government spends part of it. As a moral thing I see no reason to give it to bankers to lend. The government case is sort of neutral -- if they didn't spend new money they'd tax somebody for it. If you don't like the government spending your money, it's kind of mute whether they do it by taxing you or by inflating the money supply -- except if they inflate the money supply you can't avoid the consequences, while if they tax somebody you might have the political clout to make sure they tax somebody else and not you.
So the Republican idea of the government borrowing the money at interest and cutting taxes is not so bad, except why should we owe bankers interest instead of just printing money? First the government gives the bankers money and then they lend it back to the government at interest? Also, if we wanted to, instead of a flat tax we could have a flat tax rebate. Give every voter the same amount. That's fair.
Morally, I don't see why banks should get to borrow $10 and then lend $50. It's legal, because they have a license to do it. It would be illegal for you, but it's legal for them. But why should it be? But that's the way it used to be. Now it's unclear what's going on. Some of the banks are losing, others are winning even more. The fewer banks that survive to compete.... Presumably partly it's political patronage that decides which banks win. Partly good management, plus it's only natural that the bigger ones eat the smaller. Say this continued until it was one bank dealing with the Fed.... Who has the political power then? The economic power?
Would it be so bad if nobody but the government was allowed to lend money unless they actually had the money they were lending?
The Law of Fives is true. I see it everywhere I look for it.