Victoria Grant explains Fictional-Reserve Banking and why everything is crashing

[lonelyminer (Peter Šurda)]

Every market participant willing to accept a particular good as payment which makes a good money in the first place.

You are mixing legal and economic factors, again. If A and B exchange a good G1 for a good G2, this act is not an act of A of entering into a contract with C, who is not owner of of either G1 or G2. Now, if C owns another good S, which from economic point of view acts as a substitute of G1 or G2, there is an economic relationship between S on one side and G1 or G2 or the other. But this does not imply a legal connection. It works the same way irrespective of whether one of the goods involved is money or not.

Yet, for some inexplicable reason, you argue that it's different with money.

Money wouldn't be money if it weren't a claim on good and services it would just be a good.

Ok then. Let's assume we have barter, media of exchange evolve, and gold outcompetes the other media of exchange into money. At what point does it start being a claim? At what point do the actions of A and B start violating C's rights?

Ad hominem.

Non-sequitur. You're avoiding answering questions.

Money wouldn't be money if it didn't fulfill the roll of money.

The function of money is an economic one, not a legal one.

Money without the roll of money would just be a good like anything else.

Again, the point where you explain how an economic phenomenon influences property rights is missing from your answer.

[hazek]

Maybe one day; bitcoin will indeed make it standard that we crowd fund our mortgages/company loans from the general public.  That day is not today though.

So now the loans are big enough.  

What?  You make no sense.  Yes, the imaginary loans that are not possible to get today are big enough to buy a house.

Look, the concept is a proven one, it will work with large loans just as it does now with smaller ones. Of course today it's impossible to compete with FRB therefor large are largely their domain. I mean FFS you yourself admit that we will get there one day, all you need to do is admit why we aren't getting there today. Remove the fraud out-competing the honest lending and BOOM, we're there.

Of course it is possible, and I haven't said the contrary.  Deposits are already more than loans.  Numerically it is absolutely possible.  I have said repeatedly that I hope bitcoin is the enabler that lets it happen.  "Why we aren't there today" is because until the advent of the internet banks were necessary.  They are less so today; and bitcoin is making it less and less daily; but banks are still necessary.  To think otherwise is to have covered your ears, shut your eyes and be shouting "la, la, la, la".

You also seem to think that FRB won't/cannot happen with bitcoin.  Of course it will; it just won't be FRB, it'll be FR...

Bob has 1000 BTC.  Alice lends 1000 BTC from Bob to buy Charlie's house.  Charlie instantly lends that 1000 BTC to Dave to buy Emily's house.  Alice owes 1000 BTC to Bob.  Dave owes 1000 BTC to Charlie.  Emily has 1000 BTC "on deposit" in her bitcoin wallet.

OH MY GOD!  1000 BTC has created 2000 BTC worth of loans.

2 mistakes:

Banks in todays form aren't needed, they are simply tolerated but mainly protected and legitimized by the monopoly on violence.

2nd BTC debt cannot be possibly confused with BTC it's a whole new instrument unlike bank loans today where debt = money.

[JusticeForYou]

Incidentally, 30 year loans do benefit the individual -- they have somewhere to live for the 30 years.  Bastiat's "Essays on Politicial Economy" explains why lending is good for the receiver of the loan.  Anyway, if it isn't good for the individual, why are people taking them out?

Having somewhere to live and owning somewhere to live are two different things. And yes, if you have the cash to purchase the home out right, then yes. A 30 Year loan at 3% is good for you if it is a fixed rate.

Anyway, if it isn't good for the individual, why are people taking them out?

Same reason they max out their credit cards.

I am all for homeownership but I more for them keeping their homes during financial hard times.  It is a very rare occurrence when someone keeps their job for 30 years. In the past, it wasn't rare. Today, however, it is rare.

What would your advice be to, say your daughter, who wants to buy a house, in this universe, right now?  "30 year loans are absurd", "good point Dad, but the house I want costs £120,000 and I can't afford £2,000 a month on the mortgage".

I would say: Honey, you can't currently afford that house. So, lets do this. You stay with me and mums, save 30% of your 30K salary each year for 7K savings a year, pay me and mums 300 or so each month for expenses, Then in a 7 years, you go buy that house dear.

Here is a novel concept: Families that help each other grow, rather than destroy each other over stupid crap.

[hazek]

What would your advice be to, say your daughter, who wants to buy a house, in this universe, right now?  "30 year loans are absurd", "good point Dad, but the house I want costs £120,000 and I can't afford £2,000 a month on the mortgage".

GO TO WORK AND SAVE MONEY. It's not rocket science you know.

And where should she live while she is going to work and saving money?  Somewhere rent free I suppose?

Loans are a method by which we move our future wealth creation into the present.  Renting/mortgaging is the same process except in one case it is the landlord who's done the lending and acts as a middle man funnelling exactly the same wealth creation into the purchase of a house.

One method ties up the loaned money and the other creates it out of thin air, gotcha. BTW are you really this ignorant of history to not know how people used to come to own a house? Are you really going to defend fraud in order to get a shortcut?

[hazek]

Incidentally, 30 year loans do benefit the individual -- they have somewhere to live for the 30 years.  Bastiat's "Essays on Politicial Economy" explains why lending is good for the receiver of the loan.  Anyway, if it isn't good for the individual, why are people taking them out?

Having somewhere to live and owning somewhere to live are two different things. And yes, if you have the cash to purchase the home out right, then yes. A 30 Year loan at 3% is good for you if it is a fixed rate.

Anyway, if it isn't good for the individual, why are people taking them out?

Same reason they max out their credit cards.

I am all for homeownership but I more for them keeping their homes during financial hard times.  It is a very rare occurrence when someone keeps their job for 30 years. In the past, it wasn't rare. Today, however, it is rare.

What would your advice be to, say your daughter, who wants to buy a house, in this universe, right now?  "30 year loans are absurd", "good point Dad, but the house I want costs £120,000 and I can't afford £2,000 a month on the mortgage".

I would say: Honey, you can't currently afford that house. So, lets do this. You stay with me and mums, save 30% of your 30K salary each year for 7K savings a year, pay me and mums 300 or so each month for expenses, Then in a 7 years, you go buy that house dear.

Here is a novel concept: Families that help each other grow, rather than destroy each other over stupid crap.

HOW OUTRAGEOUSLY BARBARIAN OF YOU TO SUGGEST SUCH MISERY AND WORK! Got to do some FRB fraud and skip that savings part! 

[realnowhereman]

Incidentally, 30 year loans do benefit the individual -- they have somewhere to live for the 30 years.  Bastiat's "Essays on Politicial Economy" explains why lending is good for the receiver of the loan.  Anyway, if it isn't good for the individual, why are people taking them out?

Having somewhere to live and owning somewhere to live are two different things. And yes, if you have the cash to purchase the home out right, then yes. A 30 Year loan at 3% is good for you if it is a fixed rate.

I don't see why they are different.  I also don't understand your second point.

Anyway, if it isn't good for the individual, why are people taking them out?

Same reason they max out their credit cards.

And that reason is...?  People are valuing what they purchase with the loan higher than the cost of the purchase plus the cost of the loan.  They are valuing the purchase now, more than the money later.  That is absolutely their right to do so, and it is not anybody else's place to tell them what their preferences are.  I wouldn't do it; but that just makes me different, not right.

I am all for homeownership but I more for them keeping their homes during financial hard times.  It is a very rare occurrence when someone keeps their job for 30 years. In the past, it wasn't rare. Today, however, it is rare.

You completely ignore that during the time they did "keep their home" they had use of it.  That has a value too.  Perhaps they get kicked out after 15 years; but during that time they owned that home and were probably paying less than they would to rent the equivalent property.

What would your advice be to, say your daughter, who wants to buy a house, in this universe, right now?  "30 year loans are absurd", "good point Dad, but the house I want costs £120,000 and I can't afford £2,000 a month on the mortgage".

I would say: Honey, you can't currently afford that house. So, lets do this. You stay with me and mums, save 30% of your 30K salary each year for 7K savings a year, pay me and mums 300 or so each month for expenses, Then in a 7 years, you go buy that house dear.

Here is a novel concept: Families that help each other grow, rather than destroy each other over stupid crap.

Ah yes, heard that one before.  So you're saying that the parents allow the child to stay with them at reduced or lower than market rent?  That's a gift then, and is no different economically from them paying all or part of her mortgage.

It also a diagonal comparison.  Choice A, remember, was the daughter living where she wanted to live -- a whole house.  How is that the same as living in her old bedroom at her parents house?

I'm not arguing that loving parents won't do that, and perhaps it is sensible for youngsters to do that.  We're not talking about what is the correct life choice; we're talking about how, in this real world you supply the individuals wants without fractional reserve banking (and your cheat of "change what the individual wants" doesn't count).

[notme]

I really don't want a world were people can't buy a house because there is no FRB system to let the previous generation lend to the next generation at a profit.

I just bought a house precisely because the previous generation lent to me and my fiance at a profit.... but there were no banks involved.  There is no need for FRB when you have a community.  Instead, many people choose to live in a cutthroat world without neighbors and friends.  No thanks.

I'm glad for you.  You are very lucky to have access to a previous generation to do so.

I also would like the world you describe where we borrow directly from people we know; bitcoin will help us get there.

Until then... FRB and banking is filling that gap.  Unless you seriously think that every current FTB has parents/friends/neighbours with enough saved cash to purchase a house?

It's worth remembering that bank lending should have the advantage that they can spread the loss.  If 1000 people deposit $1000 each, and 10 people borrow $100,000 then with your friends/neighbours scenario 10 people lose $1000 if someone defaults.  With a bank, 1000 people lose $100 (of course I've not included profit, which will cover a certain amount of default in a real system).

Except they are filling a gap that was created by convincing people that banks are the only people who should hold money.  Let's make a gap, then fill it so we can be the saviors.

With a community, you know who are are lending to and only give them what you are sure they will pay back.  With a U.S. bank, the bank makes bad loans and gets taxpayer bailouts and everyone suffers.  There is no due diligence anymore.  It's all about numbers, and numbers are easy to fudge.

[JusticeForYou]

I don't see why they are different.  I also don't understand your second point.

The difference is if, and probably when, they have financial problems they can still have a place to live.

Second Point: Plenty of wealthy people take out 30 year fixed rate loans for 3%, because they earn 7% on the money they would have spent on the home. Add in the tax deductions for Mortgage interest and that is a little caviar for them.

And that reason is...?  People are valuing what they purchase with the loan higher than the cost of the purchase plus the cost of the loan.  They are valuing the purchase now, more than the money later.  That is absolutely their right to do so, and it is not anybody else's place to tell them what their preferences are.  I wouldn't do it; but that just makes me different, not right.

Yes, I wouldn't either. It is their complete right to do so. It might not be wise in the grand scheme but it is their decision. I am sure a bank would issue a 300 Year Loan if they could assign the mortgage to their heirs. Imagine how low the house payments could be on that one.

As far as the: "And the reason is...?"  Well, because it's there to use. It's in the psychology of it more than the finances of it. Especially, when the repayments go up slightly compared to the sum used for the purchase.

You completely ignore that during the time they did "keep their home" they had use of it.  That has a value too.  Perhaps they get kicked out after 15 years; but during that time they owned that home and were probably paying less than they would to rent the equivalent property.

No, and I agree. They did have use of the property and there was value there. But, I believe, a portion of that value should go back more towards the 'owner' rather than the 'lender'.

It is basically a Pottersville and Bailey Savings and Loan argument. Both are valid, but one serves the community better the other serves the lenders more.

talking about how, in this real world you supply the individuals wants without fractional reserve banking

LOL, yes indeed we are.

Well let me sum it up this way: You don't always get what you want, but if you try sometimes, you just might find, you get what you need.


Wants of a spoiled generation will destroy the economy. Arrogance is a close second.


Don't get me wrong though. There are abuses of Power from the powerful to keep them powerful. That is wrong and needs to be fixed.

Enslaving people fiscally, is not forced slavery but the trickery behind it is dubious. People scream about Sex Education in schools, they need to be screaming Financial Education.

There are a whole lot of now college educated graduates about to graduate that are going to say: WTF and start learning from the school of hard knox with their fresh degrees.

There is a program on Wall Street from a large financial firm that is hiring ex-soldiers over graduates from universities. Their premise is: we can teach them what they 'need' to know to work here. We 'need' responsible people that show up and don't complain.

Nice thing about Capitalism, it isn't a system of Government. It is a system of Nature. And Nature can be a bitch.

[Mageant]

IMHO, the "outrage" is not FRB per se, but in combination with a state-enforced monopoly money. Since the monopoly money is supposed to be a public resource, the outrage is that there are private entities that have the privilege to create it basically at will.

But the solution I think is not to outlaw FRB, but to simply get rid of monopoly money and special rights to banks.

In other words, simply allow everyone to make their own money and banks.

If there still is a need for FRB then, people will provide it.

[hazek]

I just had a long walk outside thinking through all the arguments and scenarios and I believe I was mistaken, FRB in a market regulated by market consumers is not fraud.

Yes it's true FRB operators compete with savers about who is going to offer lower interest rates but this is not theft since savers aren't exposed to counterparty risk while FRB operators and their depositors are. As long as this risk isn't somehow removed by some monopoly on violence i.e. a state or FRB lending isn't being done based on debt but on capital reserves then there's nothing wrong with it. Savers lose out but they avoid risk, depositors and operators gain but they do so at a risk of loss.

Ownership of money carries no special entitlement of goods and services but is a good like any other subject to competition.  If my interest rate is being undercut by a FRB operator that's ok because it's being balanced out with him carrying risk that I do not. Yes that costs me a bit of my purchasing power but the trade off is no risk and so the balance is there.


I now believe I was wrong. Everyone defending FRB in a market regulated strictly by market consumers(i.e. free market) was right.

[JusticeForYou]

I just had a long walk outside thinking through all the arguments and scenarios and I believe I was mistaken, FRB in a market regulated by market consumers is not fraud.

Yes it's true FRB operators compete with savers about who is going to offer lower interest rates but this is not theft since savers aren't exposed to counterparty risk while FRB operators and their depositors are. As long as this risk isn't somehow removed by some monopoly on violence i.e. a state or FRB lending isn't being done based on debt but on capital reserves then there's nothing wrong with it. Savers lose out but they avoid risk, depositors and operators gain but they do so at a risk of loss.

Ownership of money carries no special entitlement of goods and services but is a good like any other subject to competition.  If my interest rate is being undercut by a FRB operator that's ok because it's being balanced out with him carrying risk that I do not. Yes that costs me a bit of my purchasing power but the trade off is no risk and so the balance is there.


I now believe I was wrong. Everyone defending FRB in a market regulated strictly by market consumers(i.e. free market) was right.

I now believe I was wrong. Everyone defending FRB in a market regulated strictly by market consumers(i.e. free market) was right.

I agree. The 'regulations' start mucking up the works. Free Markets make people and businesses to 'keep working' rather than being able to sit on one's duff.  e.g. If there were no, MSB requirements, there would be an explosion of businesses. Yes some would scam people, but others would make the big boys to start earning their money rather than just lobby the Government to protect their interests.

Some regulations should be 'lightly' applied to protect people (usually from themselves).

[hazek]

Some regulations should be 'lightly' applied to protect people (usually from themselves).

Not really, that's just a slippery slope inevitably leading exactly to where we are now. Regulations strictly by market consumers is all that's needed.

[JusticeForYou]

Some regulations should be 'lightly' applied to protect people (usually from themselves).

Not really, that's just a slippery slope inevitably leading exactly to where we are now. Regulations strictly by market consumers is all that's needed.

You might be right. I was thinking along the lines of size of 'small print', legible and commonly understood procedures and policies. i.e. No legalese to confuse the customer.

More along the lines of Simple Promissory Notes with some clauses for 'we don't' do this... etc...

[hazek]

I believe regulations by market consumers would handle that as well 

[lonelyminer (Peter Šurda)]

I just had a long walk outside thinking through all the arguments and scenarios and I believe I was mistaken, FRB in a market regulated by market consumers is not fraud.

I praise you for admitting a mistake. You've got my respect . On all the points you mentioned in this post, we seem to agree, even though we appear to be using different approaches.

[bigbeninlondon]

Some regulations should be 'lightly' applied to protect people (usually from themselves).

Not really, that's just a slippery slope inevitably leading exactly to where we are now. Regulations strictly by market consumers is all that's needed.

You might be right. I was thinking along the lines of size of 'small print', legible and commonly understood procedures and policies. i.e. No legalese to confuse the customer.

More along the lines of Simple Promissory Notes with some clauses for 'we don't' do this... etc...

Full, transparent disclosure.  As long as I can make an informed decision, the government should GTFO. 

[Stephen Gornick]

At the same event was a talk by Libertarian presidential candidate (#2 rank in straw poll) Bill Still.

It is worth a listen regardless of whether or not you believe in his platform:
 - http://www.youtube.com/watch?v=f68sOuMkhsU