What functions would/could a Bit bank provide?

[DannyHamilton]

Okay, you're right, I phrased that sentence entirely wrong. It should have read "The system only fails when many individuals default on loans that were more than they could reasonably pay almost instantaneously and the bank is left with the majority of its net worth in illiquid assets at which point a large population of the bank's depositors withdraw."

Better?

That description seems to already be covered by "B) unusual circumstances leave many, many, many, MANY people unable to repay loans".  So are you saying that your A) reasoning does not apply, and that B) is the only time the system fails?

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[MJGrae]

That description seems to already be covered by "B) unusual circumstances leave many, many, many, MANY people unable to repay loans".  So are you saying that your A) reasoning does not apply, and that B) is the only time the system fails?

I wouldn't say that people taking out loans that they can't reasonably pay counts as unusual circumstance. People do it every day.

[DannyHamilton]

That description seems to already be covered by "B) unusual circumstances leave many, many, many, MANY people unable to repay loans".  So are you saying that your A) reasoning does not apply, and that B) is the only time the system fails?

I wouldn't say that people taking out loans that they can't reasonably pay counts as unusual circumstance. People do it every day.

Right, and the system doesn't fail under those circumstances.  It fails under the "unusual circumstances" when "many individuals default on loans that were more than they could reasonably pay almost instantaneously and the bank is left with the majority of its net worth in illiquid assets at which point a large population of the bank's depositors withdraw". Which as I said, seems to be covered already by your statement that "it only crashes because . . . B) unusual circumstances leave many, many, many, MANY people unable to repay loans".  If not, can you explain for me the distinction between:

"The system only fails when many individuals default on loans that were more than they could reasonably pay almost instantaneously and the bank is left with the majority of its net worth in illiquid assets at which point a large population of the bank's depositors withdraw."

and

"it only crashes because . . . B) unusual circumstances leave many, many, many, MANY people unable to repay loans"

In either case it is the responsibility of the bank (or lender) to ensure they protect their assets and not over extend themselves into bad debt. So it really comes down to the fact that the fractional reserve banking system only fails when the banks act irresponsibly maintaining inadequate reserves and extending high risk loans with funds from on demand deposits.

[notig]

 If you take out the fractional reserve method, there is no bank lending. There is no bank lending, because there's no capital to do it with, since you have to have 100% on hand at all times.

Can you clarify what you mean? Because it sounds like you are saying I am advocating a fully backed system. When I said get rid of reserves that means there wouldn't be any reserves. No fractional reserve... and no reserves.

Are you insane? Do you even know what the word economics is? Inflation.. Impossible? This conversation should end right here. More people are added to the system every day, without increasing the money supply ever you actually would create deflation as the available money supply gets spread thinner and thinner among an ever increasing population. Deflation is also bad.

To make this easier to understand... imagine if government money was separate from private money. Lets call the government money "greenback" and the private money "blueback" . You can exchange one for the other. So when you pay your taxes... you can essentially pay with bluebacks or greenbacks. For the government to finance it's operations... if it creates a certain amount of "greenback" and spends it into circulation by paying government employees for example.... then those greenbacks would automatically have value since you can use them as payment of taxes. If the amount of greenbacks that are created in a year are also taxed back  then you cannot have inflation (from greenbacks) . If the greenbacks were not taxed back out of circulation... then whatever wasn't taxed would be inflationary and it would devalue them.  If there wasn't two separate systems but a single system.... and the government still spend theirs into circulation and taxed it back 1:1 then there couldn't be inflation in the currency (from the government sector) .

You also don't understand how lending works. Theoretical new money is created through lending, not actual new money. If person A, B, C, and D are the only depositors at a bank, and they all have loans out for the total value of the bank, then if they were to all demand their deposited money without paying off any of the loans then the bank would have a negative net worth of the entire bank. The bank lends people's money out to others while still acknowledging that the money lent mostly belongs to others. If the depositors of a bank demand their money, they are contractually and legally obligated to provide it by all means necessary including liquidating the bank and all real assets it holds. As long as loans are out, and everyone isn't demanding their money at the same time, there is extra money in the system only on paper because it is double counted by both the person who received a loan, and the person who's funds were used to fund the loan. Person A's money above the reserve amount is not lent out multiple times. It is lent out once. A bank can not lend more than it currently has above reserves (unless it borrows this money from other banks). It cannot lend the same funds out once. Also, when a person takes out a loan, that is not THEIR money. It is the bank's money, and by extension the depositor's money.

Your entire theory of economics and finance is wrong, not only is it wrong but it is bad, and you should feel bad. Take a class.

P.S. money and banking will ALWAYS be convoluted. No matter how honest it is. Just look around you, even bitcoin has its issues when it comes to security, processing, dishonest individuals, unpaid loans, etc.

Of course. So if all the debts in the economy were paid back no money would exist. So no money exists right? since it's all just.... theoretical.

[xxjs]

Yes it is like a lending consortium. It is not profitable under the current circumstances. A fractional reserve bank is always more profitable, since it can essentially lend the money multiple times. Until it crashes of course, but that is no problem for the depositors nor the investors. Benny and the Jets come to the rescue. A lending consortium would be possible if fractional reserve banking is outlawed, or when the banks and depositors are not bailed out by the public.

Money can't be lent multiple times. It is lent once until it is paid back. Why is this so hard for you two to understand? Once money leaves the bank in the form of a loan, it is gone. HOWEVER, if somebody's money is lent out and then that person demands their deposit back, the bank must find another individual's funds to then cover that loan. Lend once, wait for repayment, lend again. Also, it only crashes because of A) dishonest or idiotic individuals taking out more than they KNOW they can pay back, or B) unusual circumstances leave many, many, many, MANY people unable to repay loans.

Being bailed out by the public is an off-topic subject, in what I'm analyzing. This is the function of a regular bank discussion, not a central bank.

Read up on fractional reserve banking.

[MJGrae]

Right, and the system doesn't fail under those circumstances.  It fails under the "unusual circumstances" when "many individuals default on loans that were more than they could reasonably pay almost instantaneously and the bank is left with the majority of its net worth in illiquid assets at which point a large population of the bank's depositors withdraw". Which as I said, seems to be covered already by your statement that "it only crashes because . . . B) unusual circumstances leave many, many, many, MANY people unable to repay loans".  If not, can you explain for me the distinction between:

"The system only fails when many individuals default on loans that were more than they could reasonably pay almost instantaneously and the bank is left with the majority of its net worth in illiquid assets at which point a large population of the bank's depositors withdraw."

and

"it only crashes because . . . B) unusual circumstances leave many, many, many, MANY people unable to repay loans"

In either case it is the responsibility of the bank (or lender) to ensure they protect their assets and not over extend themselves into bad debt. So it really comes down to the fact that the fractional reserve banking system only fails when the banks act irresponsibly maintaining inadequate reserves and extending high risk loans with funds from on demand deposits.

Okay, whatever, we'll go ahead and say sure, B) is the only case because the difference is so minuscule it doesn't really matter anyway. Do me a favor, define "high risk loan" then at the same time, define adequate reserves. Because a high risk loan is really basically any loan that is lent to someone other than a corporate entity with very regular and steady income. Loans are inherently risky, especially to individuals. So are you saying that banks shouldn't provide loans whatsoever?

Can you clarify what you mean? Because it sounds like you are saying I am advocating a fully backed system. When I said get rid of reserves that means there wouldn't be any reserves. No fractional reserve... and no reserves.

If you're saying that we should have a 100% unbacked system than that's just as bad, because if a bank were to be 100% extended and someone tried to withdraw $1, that bank would be insolvent. Talk about free money everywhere, then the banks would REALLY need big brother around.

To make this easier to understand... imagine if government money was separate from private money. Lets call the government money "greenback" and the private money "blueback" . You can exchange one for the other. So when you pay your taxes... you can essentially pay with bluebacks or greenbacks. For the government to finance it's operations... if it creates a certain amount of "greenback" and spends it into circulation by paying government employees for example.... then those greenbacks would automatically have value since you can use them as payment of taxes. If the amount of greenbacks that are created in a year are also taxed back  then you cannot have inflation (from greenbacks) . If the greenbacks were not taxed back out of circulation... then whatever wasn't taxed would be inflationary and it would devalue them.  If there wasn't two separate systems but a single system.... and the government still spend theirs into circulation and taxed it back 1:1 then there couldn't be inflation in the currency (from the government sector) .

You still aren't addressing the problem of deflation in an economy that never adds to the money supply because they always tax is back. Inflation isn't always a bad thing. This is a pointless prospect.

Of course. So if all the debts in the economy were paid back no money would exist. So no money exists right? since it's all just.... theoretical.

No, you half-baked moron. The people deposit real money. Think of it this way: Person A deposits $100 dollars into the bank. The mandated reserve ratio is 20%, so the bank has $80 to lend out. Person B takes out an $80 loan. The bank now only has $20 on hand to cover Person A's withdrawals, HOWEVER person A's bank account STILL SAYS HE HAS $100 TO WITHDRAW. At the SAME TIME person B used his $80 dollar loan to purchase something. Therefore, the bank has "created" $80 of theoretical "new money" because that is the overlap between what it lent out and what it still tells people they own. There is still 100$ of real money floating around, but there is now an additional $80 of theoretical money.

If all the debts in the economy were paid back, all of the theoretical money would not exist, however there would still be money in the system EQUAL TO THE PAYBACK AMOUNT OF THE LOANS PLUS THE RESERVES.

This is NOT that hard to understand.

Read up on fractional reserve banking.

I'm a Finance and Banking student, I think I've done plenty on the subject. See my example to the person above. Person A's $80 is not lent out "multiple times" because the bank that is not a central bank can't print dollars. The $80 leaves the bank in the form of cash in a loan, therefore it is lent once. Cash is king and cash is final. I don't understand where you think this $80 can be lent out multiple times without ever being paid back. You are wrong. Very wrong.

[DannyHamilton]

. . . Person A's $80 is not lent out "multiple times" because the bank that is not a central bank can't print dollars. The $80 leaves the bank in the form of cash in a loan, therefore it is lent once. Cash is king and cash is final. I don't understand where you think this $80 can be lent out multiple times without ever being paid back. You are wrong. Very wrong.

You are mistaken on this point as well.

Here is a scenario:
A total of $1000 in actual physical currency exists...

Alfred deposits this $1000 into an on demand checking account at a bank.
(Bank deposits $1000, Bank loans $0, Reserve on hand $1000, Reserve 100%)

Betty receives a loan from the bank of $800.
(Bank deposits $1000, Bank loans $800, Reserve on hand $200, Reserve 20%)

Betty uses the $800 to purchase something from Charlie
Charlie deposits the $800 that he just received from Betty into his own checking account.
(Bank deposits $1800, Bank loans $800, Reserve on hand $1000, Reserve 55%)

Denise receives a loan from the bank of $640. (re-loaning out the same money that was already loaned out to Betty)
(Bank deposits $1800, Bank loans $1440, Reserve on hand $360, Reserve 20%)

Denise uses the $640 to purchase something from Elliot
Elliot deposits the $640 that he just received from Denise into his own checking account.
(Bank deposits $2440, Bank loans $1440, Reserve on hand $1000, Reserve 41%)

Francine receives a loan from the bank of $512. (re-loaning out the same money that was already loaned out to Betty and Denise)
(Bank deposits $2440, Bank loans $1952, Reserve on hand $488, Reserve 20%)

Francine uses the $512 to purchase something from George
George deposits the $512 that he just received from Francine into his own checking account.
(Bank deposits $2952, Bank loans $1952, Reserve on hand $1000, Reserve 34%)

Hanna receives a loan from the bank of $409. (re-loaning out the same money that was already loaned out to Betty, Denise, and Francine)
(Bank deposits $2952, Bank loans $2361, Reserve on hand $591, Reserve 20%)

Hanna uses the $409 to purchase something from Ivan
Ivan deposits the $409 that he just received from Francine into his own checking account.
(Bank deposits $3361, Bank loans $2361, Reserve on hand $1000, Reserve 30%)

At this point we already have $3361 in deposits from that single $1000.  Alfred, Charlie, Elliot, George, and Ivan all believe that they are the true owners of this money since they each held the physical cash in their hand and then deposited it into their own checking account.  Where did the extra $2361 come from? Meanwhile the bank has re-loaned out the same money over and over without a single cent of it having been repaid yet.

This process can continue over and over, expanding the money supply until there is $5000 in deposits, since the maximum the bank can ever have in reserve is the full $1000 of physical cash in existence.  This would result in $5000 in deposits, $4000 in outstanding loans waiting on repayment, and $1000 in reserves. Notice that at this point the "PAYBACK AMOUNT OF THE LOANS PLUS THE RESERVES", as you put it, would be $5000, but there is not $5000 of "real money" as you state.

Now, what happens if Alfred decides he has found a new bank that he likes better?  He withdraws his full $1000 from this bank and deposits it into a checking account at the other bank.  Later that same day Charlie tries to withdraw $10 from his account, but the bank no longer has any reserves because Charlie unexpectedly left with all of it.  Where does the bank get the money from to allow Charlie to withdraw his money?

Notice, at this point the bank fails, and there isn't a single person who defaulted on their loan.

[MJGrae]

. . . Person A's $80 is not lent out "multiple times" because the bank that is not a central bank can't print dollars. The $80 leaves the bank in the form of cash in a loan, therefore it is lent once. Cash is king and cash is final. I don't understand where you think this $80 can be lent out multiple times without ever being paid back. You are wrong. Very wrong.

You are mistaken on this point as well.

At this point we already have $3361 in deposits from that single $1000.  Alfred, Charlie, Elliot, George, and Ivan all believe that they are the true owners of this money since they each held the physical cash in their hand and then deposited it into their own checking account.  Where did the extra $2361 come from? Meanwhile the bank has re-loaned out the same money over and over without a single cent of it having been repaid yet.

This process can continue over and over, expanding the money supply until there is $5000 in deposits, since the maximum the bank can ever have in reserve is the full $1000 of physical cash in existence.  This would result in $5000 in deposits, $4000 in outstanding loans waiting on repayment, and $1000 in reserves.

Now, what happens if Alfred decides he has found a new bank that he likes better?  He withdraws his full $1000 from this bank and deposits it into a checking account at the other bank.  Later that same day Charlie tries to withdraw $10 from his account, but the bank no longer has any reserves because Charlie unexpectedly left with all of it.  Where does the bank get the money from to allow Charlie to withdraw his money?

Notice, at this point the bank fails, and there isn't a single person who defaulted on their loan.

Theoretically this could happen, sure, but in the real world banks that don't know what they're doing don't last very long. A bank would never go down to a reserve ratio of 20% with only one customer, moreover, their risk management team wouldn't allow multiple loans on the same funds, especially with one entity that has the ability to take all of it out. Each loan adds a degree of risk to the bank's portfolio, and in the even of an even-withdraw which becomes ever more likely over time they would, indeed, go under.

But you are assuming that we are dealing with a bank that is 100% abusing the reserve system and not paying attention to it's risk. Loans are a liability, because of their inherent default risk. Banks keep cash on-hand that don't count to the over-all reserve ratio to cover large portions of their risk similar to how an insurance company keeps a reserve amount to cover any potential short-term payouts while investing the rest.

Banking doesn't only consist of the fractional reserve, and you can't make an example of a bank ONLY using fractional reserve principles. In this case, the bank would NOT have lent out the extra funds without having additional capital to back them at a ratio determined internally. Bankers aren't stupid, they think about these scenarios.

[DannyHamilton]

Banking doesn't only consist of the fractional reserve, and you can't make an example of a bank ONLY using fractional reserve principles. In this case, the bank would NOT have lent out the extra funds without having additional capital to back them at a ratio determined internally. Bankers aren't stupid, they think about these scenarios.

Certainly, and perhaps I confused the point of the post by demonstrating at the end that a bank can go under without anyone defaulting on a loan. Note, clearly many banks have gone under due to inadequately managing the risk (I've had the FDIC shut down 4 of the banks that I've used in the past 6 years, without that insurance to protect me from the irresponsible banks that don't pay enough attention to the risks they are taking I certainly wouldn't be using any banking), so apparently they don't think about these scenarios enough.

However, the point of my post was to demonstrate that with fractional reserve banking, the same money IS loaned out repeatedly.  My example is oversimplified, since there are a LOT more than 1 bank, and the initial funds come to the bank from a central bank rather than a single depositor.  Loans from one bank end up deposited at another bank which re-loans out the same loaned money.  That loan may end up deposited in three other banks that re-loan out the same money.  Some of the funds of some of those loans may make their way back into deposits at the first bank which can now re-loan out the same money that it initially loaned out.

The post was in reply to your statement:

. . . Person A's $80 is not lent out "multiple times" because the bank that is not a central bank can't print dollars. The $80 leaves the bank in the form of cash in a loan, therefore it is lent once. Cash is king and cash is final. I don't understand where you think this $80 can be lent out multiple times without ever being paid back. You are wrong. Very wrong.

[MJGrae]

Banking doesn't only consist of the fractional reserve, and you can't make an example of a bank ONLY using fractional reserve principles. In this case, the bank would NOT have lent out the extra funds without having additional capital to back them at a ratio determined internally. Bankers aren't stupid, they think about these scenarios.

Certainly, and perhaps I confused the point of the post by demonstrating at the end that a bank can go under without anyone defaulting on a loan. Note, clearly many banks have gone under due to inadequately managing the risk (I've had the FDIC shut down 4 of the banks that I've used in the past 6 years, without that insurance to protect me from the irresponsible banks that don't pay enough attention to the risks they are taking I certainly wouldn't be using any banking), so apparently they don't think about these scenarios enough.

The post was in reply to your statement:

. . . Person A's $80 is not lent out "multiple times" because the bank that is not a central bank can't print dollars. The $80 leaves the bank in the form of cash in a loan, therefore it is lent once. Cash is king and cash is final. I don't understand where you think this $80 can be lent out multiple times without ever being paid back. You are wrong. Very wrong.

Okay, I see what your saying. You've been through four banks from improperly managed risk? I'm sorry to hear about that, that's the most cases I've ever heard of for one person.

And I also see where you're coming from on the multiple lending front, my point was that the actual, physical cash, is only in one place at one time. The rest of it is all on paper, but the cash is only ever in one person's hand at a time. It's not like they take someone's $1000 and simultaneously give four people a loan for $1000. The lending occurs in steps and has infinitely more to it, as you said.

Ya dig?

[xxjs]

Read up on fractional reserve banking.

I'm a Finance and Banking student, I think I've done plenty on the subject. See my example to the person above. Person A's $80 is not lent out "multiple times" because the bank that is not a central bank can't print dollars. The $80 leaves the bank in the form of cash in a loan, therefore it is lent once. Cash is king and cash is final. I don't understand where you think this $80 can be lent out multiple times without ever being paid back. You are wrong. Very wrong.

Ok, read better books or switch school. By the way, you can read about it on the Fed's website. Look for "money multiplier".

These things are essential to money creation:

1) The deposits are availlable for immediate redraw. The loans are not.

2) The deposits are guaranteed by the state.

3) The bank is refunded by the state when necessary.

If it were not for this, fractional reserve banking would be limited, because depositors would loose money and banks would go bankrupt, and the public would have limited trust in such banks.

Fractional reserve banking is really fraud, and should be outlawed and prosecuted.

Why can it go on? I found this tidbit as a note in Rothbard's "Man, Economy and State"

"Perhaps one reason for continuing confidence in the banking system is that people generally believe that fraud is prosecuted by the government and that, therefore, any practice not so prosecuted must be sound. Governments, indeed (as we shall se below), always go out of their way to bolster the banking system"

Compare this to HSBC's money laundering:
"The US department of justice said HSBC had moved $881m for two drug cartels in Mexico and Colombia and accepted $15bn in unexplained "bulk cash"..." (the Guardian)

"The US authorities said HSBC did not face criminal charges because the bank was too big to prosecute and no individuals were implicated. " (the Guardian)

"...the bank is now under new management and will not make the same mistakes again" (HSBC according to the Guardian)

[DannyHamilton]

You've been through four banks from improperly managed risk? I'm sorry to hear about that, that's the most cases I've ever heard of for one person.

Yep.

I opened a NetBank account in 2006.
NetBank was closed by FDIC on Sept. 28, 2007.

I moved my funds to Founders Bank
Founders Bank was closed by FDIC on July 9, 2009.

I moved my funds to George Washington Savings Bank
George Washington Savings Bank was closed by the FDIC on Feb 19, 2010.

I moved my funds to Citizens First National Bank
Citizens First National was closed by the FDIC on November 2, 2012.

My funds are currently with Heartland Bank and Trust.


See the following link for a list of the 496 banks that the FDIC has closed just since the year 2000
http://www.fdic.gov/bank/individual/failed/banklist.html

And I also see where you're coming from on the multiple lending front, my point was that the actual, physical cash, is only in one place at one time. The rest of it is all on paper, but the cash is only ever in one person's hand at a time.

Certainly, but the full inflated $5000 is all available in the economy to be spent, so it all contributes to inflation of the money supply.

It's not like they take someone's $1000 and simultaneously give four people a loan for $1000.

Regardless of whether they do or not, the end result is the same.

[notig]

If you're saying that we should have a 100% unbacked system than that's just as bad, because if a bank were to be 100% extended and someone tried to withdraw $1, that bank would be insolvent. Talk about free money everywhere, then the banks would REALLY need big brother around.

We really aren't on the same page. In the system I proposed where money is created through a loan and there are no such things as reserves, reserve ratios.. or a fractional reserve system...... How would a bank be insolvent if someone tried to withdraw $1? That person's money isn't loaned to anyone. There is no reserve ratio. There are no reserves... so how? The answer: you aren't actually thinking about what i'm saying.

You still aren't addressing the problem of deflation in an economy
 that never adds to the money supply because they always tax is back. Inflation isn't always a bad thing. This is a pointless prospect.

If a government prints money ,it is a tax through inflation. If a government gets the Federal reserve to print in for them... the same. Unpreventable inflation isn't a bad thing. But preventable inflation is. Otherwise why is counterfeiting illegal? If a government taxes back what it prints/spends and not extra............ then it is not taxing additionally through inflation.  The point is that if government was not allowed to spend beyond what they can tax... and not allowed to inflate our currency... then taxes would rise to such a level that people would revolt when they saw the true cost of what it all really is.

In the first scenario where there is a public money system and there is a private one... if there is inflation in the public money system what happens to the private one? Nothing. Government employees and government money would just have less purchasing power. If there is deflation in the government money system what happens to the private one? There would obviously be less government employees since I doubt they would be working for free. Anyways there wouldn't be a sudden surge of government money then a sudden disappearance. Money would be spent throughout the year and money would be taxed throughout the year.

Now what happens if it is all the same system? Would there be massive deflation? Think about what you are saying here. You are basically saying that taxes  (removal of money from the system) would cause deflation.  Yet all I am doing is basically defining taxes as the payment of a debt. That's how banks operate. When the principal is paid back... the money is destroyed. The interest recirculates. Taxes (the repayment of the public money that was spent) would be no different. The taxes represent the exact opposite of what the spending itself first represented. There is a cancellation. And there is no deflationary and virtually no inflationary aspect to that system. It's simple..... and perfect. As long as you can get the government to agree not to print/spend more than they can actually tax. If the government simply created the money it needed to finance itself and taxed it back, no more and no less... then we wouldn't have a public debt. And we wouldn't be taxed by our government through inflation.

[MJGrae]

Unpreventable inflation isn't a bad thing. But preventable inflation is. Otherwise why is counterfeiting illegal?

Did you just assert that counterfeiting is illegal because it creates additional inflation? Officially withdrawing my discussion from this thread. I can't help you.

[whitenight639]

Money can't be lent multiple times. It is lent once until it is paid back.

.

Your so so wrong, if you ask a good accountant or someone thats works in a bank quite high up they will tell you when doing accounting with banks its different, what me and you would think of as an asset (depositors money) Is classed as a liability, because it is not the banks money it has an obligation to pay it back, Now loans are classed as assets as they are contractual debt obligations, infact if you look on a British Pound note it very clearly says: 'I promise to pay the bearer on demand the sum of £...' The paper money we use is no different from a loan agreement it is a contractual debt obligation, only nowadays the bank of england will not redeem your promisory note for gold it will infact replace your note with another note and it states as much on the bank of England website.

So money is debt, if you want to find out the reserve ratios that banks are supposed to keep then look up Basel 2.

http://en.wikipedia.org/wiki/Basel_II

Basel 2 is set by the Bank for International Settlements, you should read this article if your are interested in who owns everything

http://www.thedailybell.com/28462/The-Bank-For-International-Settlements-Beware-a-Crash