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The Global Debt Crisis: How We Got in It and How to Get Out

 
 
Reply Fri 10 Jun, 2011 11:03 pm
This isn't normal conservative fare on money theory and banking; it's several tads better and better thought out than that.

http://webofdebt.wordpress.com/the-global-debt-crisis-how-we-got-in-it-and-how-to-get-out/

Quote:

....The process by which banks create money was explained by the Chicago Federal Reserve in a booklet called “Modern Money Mechanics.” It states:

Quote:
The actual process of money creation takes place primarily in banks.” [p3]


“[Banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts. Loans (assets) and deposits (liabilities) both rise [by the same amount].” [p6]

“With a uniform 10 percent reserve requirement, a $1 increase in reserves would support $10 of additional transaction accounts.” [p49]

A $100 deposit supports a $90 loan, which becomes a $90 deposit in another bank, which supports an $81 loan, etc.

That’s the conventional model, but banks actually create the loans FIRST. (Picture how a credit card works.) Banks need deposits to clear their outgoing checks, but they find the deposits later. Banks create money as loans, which become checks, which go into other banks. Then, if needed to clear the checks, they borrow the money back from the other banks. In effect, they borrow back the money they just created, pocketing the spread between the interest rates as their profit. The rate at which banks can borrow from each other in the U.S. today (the Fed funds rate) is an extremely low 0.2%.

How the System Evolved

The current system of privately-issued money is traced in “Modern Money Mechanics” to the 17th century goldsmiths. People who left gold with the goldsmiths for safekeeping would be issued paper receipts for it called “banknotes.” Other people who wanted to borrow money were also happy to accept paper banknotes in place of gold, since the notes were safer and more convenient to carry around. The sleight of hand came in when the goldsmiths discovered that people would come for their gold only about 10% of the time. That meant that up to ten times as many notes could be printed and lent as the goldsmiths had gold. Ninety percent of the notes were basically counterfeited.

This system was called “fractional reserve” banking and was institutionalized when the Bank of England was founded in 1694. The bank was allowed to lend its own banknotes to the government, forming the national money supply. Only the interest on the loans had to be paid. The debt was rolled over indefinitely.

That is still true today. The U.S. federal debt is never paid off but just continues to grow, forming the basis of the U.S. money supply.

The Public Banking Alternative

There are other ways to create a banking system, ways that would eliminate its ponzi-scheme elements and make the system sustainable. One solution is to make the loans interest-free; but for Western economies today, that transition could be difficult.
Another alternative is for banks to be publicly-owned. If the people collectively own the bank, the interest and profits go back to the government and the people, who benefit from decreased taxes, increased public services, and cheaper public infrastructure. Cutting out interest has been shown to reduce the cost of public projects by 30-50%.

In the United States, this system of publicly-owned banks goes back to the American colonists. The best of the colonial models was in Benjamin Franklin’s colony of Pennsylvania, where the government operated a “land bank.” Money was printed and lent into the community. It recycled back to the government and could be lent and relent. The system was mathematically sound because the interest and profits were returned to the government, which then spent the money back into the economy in place of taxes. Private banks, by contrast, generally lend their profits back into the economy, or invest in private money-making ventures in which more is always expected back than was originally invested.

During the period that the Pennsylvania system was in place, the colonists paid no taxes except excise taxes, prices did not inflate, and there was no government debt........
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gungasnake
 
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Reply Sat 11 Jun, 2011 06:00 am
A word or two about Ellen H. Brown might be in order...

Brown is what I'd term a populist and populism is roughly orthogonal to questions of left/right, liberal/consrervative. Both Sarah Palin and Eva Peron are/were populists, and you still get people you'd never expect to see on the same team calling themselves Peronistas in Argentina. On a 180 degree scale of populists with Eva Peron all the way to the left at zero degrees and Palin to the right at 180, I'd place Ellen Brown around ten or fifteen degrees towards the side of Eva.

I discovered Ellen Brown while trying to figure out the extent to which Hitler having pulled Germany out of the international banking system might have figured as a cause of WW-II (it did). Brown is the author of the ONLY totally intelligent book I've ever come across about the history and politics of money theory, and her ideas actually could resolve our present financial problems to an extent which could not plausibly be achieved within the present money paradigm. Her website and blog start at:

http://www.webofdebt.com

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gungasnake
 
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Reply Sun 12 Jun, 2011 05:53 am
Folks, this is a colossally interesting topic which the usual little gang of shitbirds have voted down to zero as usual. Ellen Brown's ideas about money theory, if fully implemented, could eliminate the income tax altogether while simultaneously eliminating most if not all of the money problems which governments have in the U.S.
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roger
 
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Reply Sun 12 Jun, 2011 03:06 pm
@gungasnake,
I'm not really on board with this. That is, I'm not quite sure I want all our banks to be state owned, which seems to be the pitch.

Also, I don't see how money is going to be loaned without interest. Without profit is a minor possibility, but without interest? There just has to be enough to cover inflation and losses. You can outlaw both, but we both know that ain't going to happen. Then, even disregarding profit, the people processing and approving the loans, and the accounting functions involved in the payment processes are going to have to be paid. That's just how things work.

If interest isn't charge, the whole world would have to go through the mental gymnastics common to the moslem world, pretending that interest is not being charged.
gungasnake
 
  1  
Reply Sun 12 Jun, 2011 08:44 pm
@roger,
Quote:
Also, I don't see how money is going to be loaned without interest. Without profit is a minor possibility, but without interest?


She's not talking about loaning money to anybody without interest. What she's talking about is undoing a gigantic usurpation which took place around 1913 and restoring the power to coin money to the states as was the case in colonial days before George II banned the practice. At least that's part of what she's talking about. Her book is one of the most fascinating treatises I've ever read:

www.webofdebt.com

The interest she's talking about eliminating is the interest banks charge governments for money which they basically produce from thin air; governments could as easily produce money from thin air themselves and spare us the interest payments.
roger
 
  1  
Reply Sun 12 Jun, 2011 08:46 pm
@gungasnake,
gungasnake wrote:


The interest she's talking about eliminating is the interest banks charge governments for money which they basically produce from thin air; governments could as easily produce money from thin air themselves and spare us the interest payments.


Yes, you can always make an argument for cutting out the middleman.
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