Deleveraging nothing with nothing

[Munky]

I want to discuss something I've had on my mind recently. Anyone familiar with the concept of fractional reserve banking knows that banks can legally create money out of thin air and lend it out for the exchange of real, tangible goods and services.

Well, now we have this problem that the banks are stuck with a pile of "assets" that are worth only a fraction of what they used to be valued at, and can not cover their liabilities. Yet, they are holding the economy hostage and demanding bailouts to cover their losses.

The looming question nobody has asked so far is why does our system allow the creation of loans backed by "nothing" but not the repayment of such loans also with "nothing?" It seems to me such a concept would solve our so-called "economic crisis", if it really was a crisis that the bankers and the government really wanted to "solve."

 

[her209]

Mortgage backed securities?

 

[Bird222]

I want to discuss something I've had on my mind recently. Anyone familiar with the concept of fractional reserve banking knows that banks can legally create money out of thin air and lend it out for the exchange of real, tangible goods and services.

Well, now we have this problem that the banks are stuck with a pile of "assets" that are worth only a fraction of what they used to be valued at, and can not cover their liabilities. Yet, they are holding the economy hostage and demanding bailouts to cover their losses.

The looming question nobody has asked so far is why does our system allow the creation of loans backed by "nothing" but not the repayment of such loans also with "nothing?" It seems to me such a concept would solve our so-called "economic crisis", if it really was a crisis that the bankers and the government really wanted to "solve."

Are you saying here to let the fed pay back these loans by just printing money to give to the banks?

 

[Munky]

Are you saying here to let the fed pay back these loans by just printing money to give to the banks?

That still requires the fed to print money and dilute the money supply. I'm questioning why should the banks get anything at all? They created these loans backed by money that's not printed by the fed. It doesn't exist at all, but is simply an entry on their books.

 

[zephyrprime]

It's because the banks would then lose money and they won't allow that.

 

[Bird222]

That still requires the fed to print money and dilute the money supply. I'm questioning why should the banks get anything at all? They created these loans backed by money that's not printed by the fed. It doesn't exist at all, but is simply an entry on their books.

Oh ok, I see what you mean. Just reverse the entry in essence.

 

[heyheybooboo]

Leverage ain't all that bad, but ...

to the extreme it was taken from 2002-2007, it was outrageous.

Warnings were ignored, and the incestuous relationships between institutions made it much worse.

Facts is facts. Our banks (and investment firms functioning as 'holding companies') are functionally insolvent in the short term, and as the Fed and Treasury roll back all of their special cash-bumping programs it will be more (and more) difficult for many to get the credit they need to operate.

Which is okay with me ... easy credit is killing this country.

In the long-term (we're all dead, anyway, right?) the banks will be fine as they adjust to the negative effects of their 'bad paper'.

I mean, all those tranches have to be worth something, don't they?




--

 

[glenn1]

I want to discuss something I've had on my mind recently. Anyone familiar with the concept of fractional reserve banking knows that banks can legally create money out of thin air and lend it out for the exchange of real, tangible goods and services.

Well, now we have this problem that the banks are stuck with a pile of "assets" that are worth only a fraction of what they used to be valued at, and can not cover their liabilities. Yet, they are holding the economy hostage and demanding bailouts to cover their losses.

The looming question nobody has asked so far is why does our system allow the creation of loans backed by "nothing" but not the repayment of such loans also with "nothing?" It seems to me such a concept would solve our so-called "economic crisis", if it really was a crisis that the bankers and the government really wanted to "solve."

Yes, fractional reserve banking is a plot to enslave us. Financial intermediation should be done away with in order to allow us to progress to the financial systems of centuries yore. Let's go for 100% bank reserving, where we get to pay banks for the privilege of safekeeping our money, or loan it out at interest so you as a depositor have no access to it until the person the bank lends it to repays their loan. Sounds like a great improvement!

 

[BoberFett]

Yes, fractional reserve banking is a plot to enslave us. Financial intermediation should be done away with in order to allow us to progress to the financial systems of centuries yore. Let's go for 100% bank reserving, where we get to pay banks for the privilege of safekeeping our money, or loan it out at interest so you as a depositor have no access to it until the person the bank lends it to repays their loan. Sounds like a great improvement!

Clearly, the only alternative to middle aged banking is 1000:1 reserve ratios. Hell, shoot for the moon. 10,000:1. Debt is wealth, right?

 

[glenn1]

Clearly, the only alternative to middle aged banking is 1000:1 reserve ratios. Hell, shoot for the moon. 10,000:1. Debt is wealth, right?

Here's a protip for you, if you oppose fractional reserve banking then you support 100% reserve banking by definition. So it doesn't matter whether you say 10,000:1, the current requirement to be considered "well capitalized" (10% risk based capital ratio reserves, or 10:1), or anything less than 1:1 (would 99.9999~ repeating nines percent count as being equal to one? OK - different thread).

 

[Acanthus]

I want to discuss something I've had on my mind recently. Anyone familiar with the concept of fractional reserve banking knows that banks can legally create money out of thin air and lend it out for the exchange of real, tangible goods and services.

Well, now we have this problem that the banks are stuck with a pile of "assets" that are worth only a fraction of what they used to be valued at, and can not cover their liabilities. Yet, they are holding the economy hostage and demanding bailouts to cover their losses.

The looming question nobody has asked so far is why does our system allow the creation of loans backed by "nothing" but not the repayment of such loans also with "nothing?" It seems to me such a concept would solve our so-called "economic crisis", if it really was a crisis that the bankers and the government really wanted to "solve."

M1 M2 and M3 assets are what we are talking about?

The only entities that can create money out of thin air are the treasury and the fed.

I think you are referring to the interest rate "ripple effect" that creates a "money multiplier" because of the fractional banking system. This makes it appear from an accounting perspective that there are more total assets than there actually are (along with dozens of other accounting tricks), thus allowing them to lend more when their capital reserves are low.

 

[Munky]

Yes, fractional reserve banking is a plot to enslave us. Financial intermediation should be done away with in order to allow us to progress to the financial systems of centuries yore. Let's go for 100% bank reserving, where we get to pay banks for the privilege of safekeeping our money, or loan it out at interest so you as a depositor have no access to it until the person the bank lends it to repays their loan. Sounds like a great improvement!

You forgot to mention going back to gold bullion, and that no bank would be too big to fail.

Sarcasm aside, I'm not advocating going back to 100% reserve banking. But our financial system is no longer just an intermediary between lenders and borrowers. When it has been allowed to grow and cease power over the government as well as the economy, to the point where the taxpayers are forced to bail out the banks from the consequences of their own greed, clearly there is something wrong with out current system.

 

[glenn1]

You forgot to mention going back to gold bullion, and that no bank would be too big to fail.

Sarcasm aside, I'm not advocating going back to 100% reserve banking. But our financial system is no longer just an intermediary between lenders and borrowers. When it has been allowed to grow and cease power over the government as well as the economy, to the point where the taxpayers are forced to bail out the banks from the consequences of their own greed, clearly there is something wrong with out current system.

Okay, so you do support fractional reserve banking then. So that means this thread boils down to a discussion over what capitalization ratios should be required of banks.

 

[Munky]

Okay, so you do support fractional reserve banking then. So that means this thread boils down to a discussion over what capitalization ratios should be required of banks.

More than that, I'm considering the possibility that the fractional reserve system should be revised with some new accounting rules, which would enable a kind of "reverse-fractional banking" effect, thereby allowing the banks deleverage without sucking up trillions of taxpayer money.