[Bas]

$this->bbcode_second_pass_quote('', '[')b]The Federal Reserve System certainly makes large profits. According to the Board’s 1995 Annual Report, the System had net income totaling $23.9 billion, which, if it were a single firm, would qualify it as one of the most profitable companies in the world. How were these profits distributed? By an agreement between the Board and the Treasury, nearly all of the Fed’s annual profits are paid to the federal government. Accordingly, a lion’s share of $23.4 billion, which represented 97.9 percent of the Federal Reserve’s net income, was paid to the Treasury. The Federal Reserve Banks kept $283 million, and the remaining $231 million was paid to the Fed’s stockholders as dividends. Regarding Schauf’s lamentation, the Federal Reserve System has been paying its profits to the Treasury since 1947.

[NEOPO]

Wow - nice free yahoo page....Pffft!

As if people cannot be "owned" by foreign interests........

I found a similar site : Peak Oil Debunked

[Bas]

$this->bbcode_second_pass_quote('NEOPO', 'W')ow - nice free yahoo page....Pffft!

As if people cannot be "owned" by foreign interests........

I found a similar site : Peak Oil Debunked

[MacG]

I feel I have to comment on "The Money Masters" since it's been mentioned. I have seen it (at least the first part, could not be bothered to watch all three) and I don't share the conspirational views. It don't take a huge conspiracy to get our current monetary system rolling - it's enough with cunning greed combined with gullibility. Top it with some social taboos about "money" and the stew is ready to serve.

And please, all Americans out there: The system was NOT invented in 1913. The basic math was rolled out in 1694, and there is no way in hell I will believe that the founders could imagine even 10% of what their little scheme would become. They could not imagine todays world in 1913 either. And they could certainly not imagine the role of the monetary system in our current world. Not to mention hedge funds.

I would like to repeat a recommendation to take it from the horse's mouth and read the little booklet from the Chicago Fed. Things have developed in recent years, but the booklet covers the basics, and they are stunningly honest for once.

http://landru.i-link-2.net/monques/mmm2.html

[mmasters]

$this->bbcode_second_pass_quote('Bas', 'T')he banks don't create money, only the central bank does. If someone borrows from a bank, the bank goes to the central bank and borrows the money from the central bank at the current rate that the central banks sets. Moreover, it still has to be paid back.

[mmasters]

The central banks of the world factually and generally speaking are government owned, but they are not government controlled. It's a smokescreen. A central bank is a partnership between the government and the banks. The benefit of the partnership for the government is they get free funding, mostly in the form of federal reserve money created out of thin air (fed is the largest creditor of the government) - funding which they could never get through taxation. The Federal income tax which people pay is nothing more than interest payments on government loaned money which is chiefly from the Fed. It's also interesting to note that the federal income tax was established within a year of the Federal Reserve Act.

Anyways, the benefit for the banks is much greater. Depending on the reserve ratio (which is typically set around 10%), the banks can loan out many times more money than they have. With a RR of 10% they can loan out over time, in aggregate, 10 times as much money as they have on hand (create it out of thin air) and charge interest on it.

Take M0 money. That is all the physical money (bills and coins) plus FED created money (such as is created to pay for govenrment bonds or is loaned out to banks). Now take M3 money, which is M0 money plus all the electronic money created through fractional reserve banking and remove the M0 component. If you take the ratio of official recent figures of M3 (minus M0) money to M0 money you will find a difference of around 14 times!

The end result is over 90% of the money in circulation has been created by banks. That is a cartel.

[Bas]

$this->bbcode_second_pass_quote('mmasters', '')$this->bbcode_second_pass_quote('Bas', 'T')he banks don't create money, only the central bank does. If someone borrows from a bank, the bank goes to the central bank and borrows the money from the central bank at the current rate that the central banks sets. Moreover, it still has to be paid back.

[mmasters]

$this->bbcode_second_pass_quote('MacG', 't')here is no way in hell I will believe that the founders could imagine even 10% of what their little scheme would become. They could not imagine todays world in 1913 either. And they could certainly not imagine the role of the monetary system in our current world.

[mmasters]

$this->bbcode_second_pass_quote('Bas', '
')Fractional reserve banking is basically the fact that the central banks can only guarantee a fraction of the value of the money that's in roulation, be in gold, other currencies, or like in the US government debt; of course I know what it is! you don't have to be an expert (which I'm not, eventhoug I DID complete a university course on the subject)

[Bas]

$this->bbcode_second_pass_quote('mmasters', 'T')he central banks of the world factually and generally speaking are government owned, but they are not government controlled. It's a smokescreen. A central bank is a partnership between the government and the banks. The benefit of the partnership for the government is they get free funding, mostly in the form of federal reserve money created out of thin air (fed is the largest creditor of the government) - funding which they could never get through taxation. The Federal income tax which people pay is nothing more than interest payments on government loaned money which is chiefly from the Fed. It's also interesting to note that the federal income tax was established within a year of the Federal Reserve Act.

Anyways, the benefit for the banks is much greater. Depending on the reserve ratio (which is typically set around 10%), the banks can loan out many times more money than they have. With a RR of 10% they can loan out 10 times as much money as they have on hand (create it out of thin air) and charge interest on it.

Take M0 money. That is all the physical money (bills and coins) plus FED created money (such as is created out of thin air to pay for govenrment bonds or is loaned out to banks). Now take M3 money, which is all of the M0 money plus all the electronic money created through fractional reserve banking and subtract the M0 component. If you take the ratio of official recent figures of M3 (minus M0) money to M0 money you will find a difference of around 14 times!

The end result is over 90% of the money in circulation is created by banks. That is a cartel folks.

[Bas]

$this->bbcode_second_pass_quote('Gideon', 'R')eally, I'm not sure why anybody sides with bankers who aren't pig faced bankers themselves.

[Bas]

$this->bbcode_second_pass_quote('MMasters', 'Q')uote:
And ofcourse we're going to run into monetary problems when PO hits; I proposed that myself in the "institutional rigidness" thread.

I like you bas but you sound like a real ass in the thread.

[MacG]

$this->bbcode_second_pass_quote('Bas', '')$this->bbcode_second_pass_quote('Gideon', 'R')eally, I'm not sure why anybody sides with bankers who aren't pig faced bankers themselves.

[MacG]

$this->bbcode_second_pass_quote('mmasters', '')$this->bbcode_second_pass_quote('MacG', 't')here is no way in hell I will believe that the founders could imagine even 10% of what their little scheme would become. They could not imagine todays world in 1913 either. And they could certainly not imagine the role of the monetary system in our current world.

[Bas]

$this->bbcode_second_pass_quote('MMasters', '
')That is a bit of a red herring point which I don't think anyone can prove or disprove. The fed mostly an enabler, the banks are where the real action lies.

[MacG]

$this->bbcode_second_pass_quote('Bas', '')$this->bbcode_second_pass_quote('', 'Y')es, the CB create some money out of thin air, usually when buying government bonds and securities. That is called "high power money", which can then be expanded by the banking system trough the "fractional reserve multiplier".

[Bas]

Why don't *YOU* make a nice little quote of what I "seemed" to have missed, huh?

[Micki]

Without adding any more to the debate, I just want to thank MrBill and MMasters for taking the effort to clarify facts and their opinions.
Obviously a topic that requires intimate study to find out the whole picture.

[MrBill]

So anyway where is this leading us?

Okay, so I used to work on the emerging market fixed income sales desk in sales & orgination. This is typically how a bank might create money. See if it makes sense to you?

The World Bank, EBRD, EIB, NIB or some other supranational bank with a AAA credit rating can borrow cheaper than a commercial bank with say a single A credit rating.

But everything is based off LIBOR spreads. Everyone's goal is to borrow as cheaply as possible and then lend that money out at a higher rate. Retail banks borrow that money from their depositors at less than LIBOR. Wholesale banks need to take that money from the Interbank market. Usually at LIBOR plus.

Bottom-line your bank's bank account or nostro account works exactly like your own bank account. It cannot go below zero. So if a bank does not have funds on its account (in every currency) it needs to borrow that money from the Interbank market or from the central bank as lender of last resort.

So everyone is hunting around looking for a cheap source of funding.

Let us say that there is investor demand for Hungarian florint bonds because interest rates there are higher. About 7.95% p.a. compared to 4.0% in the eurozone. So investment funds and portfolio managers are shopping around looking for attractive yields to boost the returns in their funds.

The World Bank or EBRD do not necessarily need HUF, but it does not matter. A bank like mine will structure a eurobond in HUF to sell to the asset managers, while using a cross-currency swap and an interest rate swap to 'swap' the proceeds back into US dollars or euros. Ideally, at a rate that is below LIBOR for the supranational, so cheaper than they could borrow US dollars or euros alone.

Everyone gets what they want. The investors get a HUF bond paying 7.95%, while the supranationals get funding below LIBOR. The investment bank collects the fees from issuing the bond and perhaps some after market trading income if the eurobonds in its book go up in value.

So is that creating money out of thin air? I think not. Yes, we issued a bond completely separate from any central bank, but the asset managers paid for that bond out of their investors savings via a pension or mutual fund or whatever.

Yes, there is a money multiplier effect. The World Bank of EBRD can turn around and lend out those funds to earn a spread between where it borrowed and where it lends.

Also, even if there was no World Bank or EBRD involved the investment or commercial bank could use those funds for its own use. For example to meet their minimum reserve requirements, so that they free up other funds to lend out.

There is nothing mystical about fractional banking. Minimum reserves are a drag on the bank's performance. If you have to set aside 10% of your entire capital in a central bank account earning zero interest it drive up your cost of borrowing and lowers your returns.

You might say so what, fooking bankers in any case, but of course they just turn around and pass those costs along to their depositors with lower interest rates on their savings, and to their borrowers through higher interest rates on their loans.

The whole idea behind Basel II was to identify ways to lower capital adequacy requirements, but without increasing systemic risks. The regulators allow the banks to net their risks. For example, a long position offset by a short position, instead of making the banks margin for both sides of the transaction, which does not lower the risk, but ties-up more capital.

In a worse case scenario you have a club of banks taking in deposits from retail savers and not lending that money out into the real economy like happens in many emerging markets. The banks make a nice profit by just lending those funds to the government through buying government bonds. That is of no use to the general economy. Those that need to borrow money have no access to credit. The result is stunted growth.

Within in very recent memory I can think of a whole host of eastern European countries where their citizens could not take out a mortgage or buy a car on credit. Annual interest rates were also close to 20% p.a. Now in places like the Czech Republic, Slovakia and Poland, for example, interest rates are closer to 4% p.a.

That happened because governments, commercial banks and central banks got together a hammered out such mundane details as bankruptcy laws, the enforceability of collateral agreements, private property laws, etc. No legal framework, no way banks can lend money.

Heck, I used to do back to back lending where we took in local currency as collateral against hard currency loans. How inefficient is that? Give my an equivalent amount of Ukraine hryvnia that I will pay you no interest on and I will lend you US dollars at LIBOR + 6.00%. It was good business for the banks. Not so great for the borrower. Mind you if they could make 20-30% ROI per year by buying up assets on the cheap then it was good for them as well. Pity the poor person that did not have the collateral though. They were excluded from the credit system completely. That means they could not afford to buy their own apartment, for example, so they have to pay rent.

Solid banks are a sign of a healthy economy. Show me a backwards, fooked up country and I can guarantee you that the banks in those countries do not work like they should. Micro-credit schemes are a sign that a country's banking laws are weak, not a solution to alleviating poverty.

So anyway, yes, I am a scumbag banker, but I have lifted more people out of poverty through the capital markets than any aid worker.

I did the first ever Slovak koruna eurobond to help build a factory there. That factory now employs thousands and exports to the EU. Just one example. Hang the local banker and you may as well shoot yourself.

[MacG]

Mr Bill:

There is a lot to what you are writing. Perspectives are easily lost when pondering over individual issues.

Our current monetary system has brought a lot of blessings for a lot of people. Although the purpose of William III's alliance with the bankers was to finance wars, I think that the monetary system probably have prevented a lot of wars. Hard to prove, but why fight over things when it's cheaper (and more predictable) to just buy them?

All in all, a single mother with four kids living off wellfare in a western state today have a higher material standard of living and much higher security for the kid's lifes than a succesful local merchant in the 1600's. Our systems cant be entirely bad if they generate such an outcome!

My cause of worry is that it's hard to imagine how our system could work in reverse, that is without continous growth. Who will borrow money to invest when the expected return is only 90% of the investment? Or even just 100%? In order to pay interest, any investment must generate more money than invested.

This worked nicely as long as economic growth was possible, but what about the time when it's not possible anymore?