Alternative to Federal Reserve- what is it?

[Oddball]

The issuance of credit is controlled by the monopoly of the Federal Reserve, which sets the discount and overnight interest rates, by which banks use as a guide to set their rates.

That's not true. Any private entity may issue credit at whatever interest rate the free market will provide them.

No, they cannot...Google "usury".

After that, who is it that controls the floor by which that entity would be foolhardy to lend below, if they wished to stay in business.?...The Fed.

And yes, the banks would basically be big vaults, unless given permission by their depositors or directed by statute to lend the money on a 1:1 basis.

You can already do that. If you just want the bank to store your currency, rent a safety deposit box. If you want the bank to lend out 100% of your money, buy a CD. I fail to see why you wish the remove the freedom of banks to have ordinary checking and savings accounts.

Putting things in a safe deposit box is different from having the money in deposit for banks to hold and post as assets.

There would be no freedom removed from banks, re: creating savings or checking accounts.

 

[SpidermanTuba]

The issuance of credit is controlled by the monopoly of the Federal Reserve, which sets the discount and overnight interest rates, by which banks use as a guide to set their rates.

That's not true. Any private entity may issue credit at whatever interest rate the free market will provide them.

No, they cannot...Google "usury".

Fair enough, but there is no federal usury statute. They can still make the loan at whatever rate they can get with limits set by state and local law.

There would be no freedom removed from banks, re: creating savings or checking accounts.

You just said they could only loan money out at 1:1. Ordinary savings and checking accounts loan money out at less than 1:1, so they have some sitting around if you need it.

 

[Oddball]

The Fed still sets the pace as far as interest rates are concerned at the wholesale level.

 

[SpidermanTuba]

Alternative to Federal Reserve- what is it? Seriously, some of the teabaggers wanna just get rid of the Fed. What do we replace it with?

The usual alternative is a currency board with a commodity, market basket, or reserve currency backing. The commodity doesn't have to be gold. It could be oil or a collection of assets,


The problem is, it is supposed to have enough reserves to pay out when ever people need the alternative to the local currency. And currency boards are usually the last gasp of a desperate economy for stability.

It would be better for the fed to act as a currency board, rather than a central bank. That is, rather than lending the cash, it still just acts as agent for sales of securities. A currency board has no regulatory authority. The problem with the fed is that its regulatory activities have often been disastrous.

Between 1828 and 1914 the US had no central bank. because of the way the law was written, the Fed didn't have total control of the money supply until 1928 when the last of the licenses on paper money expired. So 1929 was the first really big test of the Fed, and it failed miserably.

Between 1828 and 1914 there were often long periods of severe deflation. That hasn't really happened since the fed.

How would we even make the transition to a currency board? Say I have $10,000 in fiat money - how does it get changed over to the new system?

 

[Toro]

Why is this in the Flame Zone?

 

[SpidermanTuba]

Why is this in the Flame Zone?

Because the administrators don't like me, that's the only reason.

 

[eagleseven]

I don't really get it. If every dollar in existence has to be backed by gold, then banks wouldn't be able to loan money from deposits.

Banking existed before Nixon took us off the gold standard forty years ago.

The gold standard requires that banks maintain a specific reserve, so that they can cover any requests for gold/resources that their depositors may make (as the US dollar will be exchangeable for gold/resources).

With our current fiat system, banks like Lehman Brothers were able to loan out 3100% of their hard reserve (31 times), which is one of the direct causes of this current recession.

This fiat-enabled system is why the fat cats on Wall Street have been able to make billions, and why our financial sector is still in very bad shape. We are enabling Wall Street and the Fed to gamble with our economy's stability for personal profit.

P.S.

We've had Fiat Currency for 40 years (thanks to Nixon).

We've had Metal Currencies for 2500 years (since the Iron Age).

We've had Resource Currencies since the beginning of civilization.

 

[Oddball]

Alternative to Federal Reserve- what is it? Seriously, some of the teabaggers wanna just get rid of the Fed. What do we replace it with?

The usual alternative is a currency board with a commodity, market basket, or reserve currency backing. The commodity doesn't have to be gold. It could be oil or a collection of assets,


The problem is, it is supposed to have enough reserves to pay out when ever people need the alternative to the local currency. And currency boards are usually the last gasp of a desperate economy for stability.

It would be better for the fed to act as a currency board, rather than a central bank. That is, rather than lending the cash, it still just acts as agent for sales of securities. A currency board has no regulatory authority. The problem with the fed is that its regulatory activities have often been disastrous.

Between 1828 and 1914 the US had no central bank. because of the way the law was written, the Fed didn't have total control of the money supply until 1928 when the last of the licenses on paper money expired. So 1929 was the first really big test of the Fed, and it failed miserably.

Between 1828 and 1914 there were often long periods of severe deflation. That hasn't really happened since the fed.

How would we even make the transition to a currency board? Say I have $10,000 in fiat money - how does it get changed over to the new system?

Between 1828 and 1914 the dispersal of information isn't what it is today...Economic downturns are as much about lack of information misinformation and disinformation as anything else. Also, price inflation/deflation are different form monetary inflation/deflation.

1929 didn't come about because the Fed didn't have enough influence in the marketplace, it came about because of its influence in the marketplace in the first place...All Hoover and FDR did was give a truckload of gasoline to the arsonists.

 

[SpidermanTuba]

I don't really get it. If every dollar in existence has to be backed by gold, then banks wouldn't be able to loan money from deposits.

Banking existed before Nixon took us off the gold standard forty years ago.

The gold standard requires that banks maintain a specific reserve, so that they cannot loan more than a certain multiplier of the reserve.

Non-investment banks presently are required to maintain a specific reserve for everything but timed deposit.

With our current fiat system, banks like Lehman Brothers were able to loan out 3100% of their hard reserve (31 times), which is one of the direct causes of this current recession.

They didn't loan out 3100% of their reserves, they took on loans in a ratio of 31 to 1 to their equity. You are confusing the fractional reserve requirement with leverage.

 

[SpidermanTuba]

The usual alternative is a currency board with a commodity, market basket, or reserve currency backing. The commodity doesn't have to be gold. It could be oil or a collection of assets,


The problem is, it is supposed to have enough reserves to pay out when ever people need the alternative to the local currency. And currency boards are usually the last gasp of a desperate economy for stability.

It would be better for the fed to act as a currency board, rather than a central bank. That is, rather than lending the cash, it still just acts as agent for sales of securities. A currency board has no regulatory authority. The problem with the fed is that its regulatory activities have often been disastrous.

Between 1828 and 1914 the US had no central bank. because of the way the law was written, the Fed didn't have total control of the money supply until 1928 when the last of the licenses on paper money expired. So 1929 was the first really big test of the Fed, and it failed miserably.

Between 1828 and 1914 there were often long periods of severe deflation. That hasn't really happened since the fed.

How would we even make the transition to a currency board? Say I have $10,000 in fiat money - how does it get changed over to the new system?

Between 1828 and 1914 the dispersal of information isn't what it is today...Economic downturns are as much about lack of information misinformation and disinformation as anything else.

Did the internet get invented in 1914? The lack of deflation seems to be much more correlated with the rise of the federal reserve than information technology.

1929 didn't come about because the Fed didn't have enough influence in the marketplace, it came about because of its influence in the marketplace in the first place...All Hoover and FDR did was give a truckload of gasoline to the arsonists.

THe 1929 crash came about because investors were allowed to buy stock on a 10:1 margin. The recent downturn is related to investment banks doing essentially the same thing.

 

[Oddball]

Why is this in the Flame Zone?

Fixed.

 

[eagleseven]

 

[SpidermanTuba]

Some inflation is a positive thing, its certainly preferable to deflation.

 

[Toro]

I don't really get it. If every dollar in existence has to be backed by gold, then banks wouldn't be able to loan money from deposits.

No, they could.

A dollar backed by gold does not have to be kept at the bank. It would almost certainly be kept somewhere else. Rather, every dollar in circulation could be redeemed at a Federal Reserve bank for a set amount of gold, at least in theory anyways. People could still deposit their dollar bills at the bank. However, what couldn't happen is banks couldn't create credit out of thin air, as they do right now.

The problem, to which you are alluding, is that if the money supply is fixed, then such a system would be a constraint on growth. In the normal course of business, demand for money grows as the economy grows. The cost of money is the rate of interest. If the economy grows and the amount of currency stays constant, then interest rates will rise higher than necessary, which would lower economic growth and the economy will grow slower than it would if the rate of money growth were the same as the growth rate of the economy. This is the knock against the gold system. The supply of money should grow at the same rate as the growth of the economy.

In the gold system, since gold is money, when the cost of money rises, then so will the price of gold. The proponents of the gold system argue that if the price of gold rises, that will induce miners to increase their production of gold, increasing supply. Since the supply of gold would increase, so would the amount of money, decreasing interest rates and increasing economic growth until the economy was back into equilibrium.

This may be true over the very long run, but the problem with this argument is that it assumes that the costs of getting gold out of the ground is constant. This isn't the case. For a real world example, over the past 10 years, the amount of gold being brought to market by mining companies has actually fallen, even though the price of gold has risen from $300 to $1200.

On the other hand, the Tea Party people have a point. The unhinging of the dollar from any anchor has allowed the creation of credit and money to explode over the past four decades, in particular, the past decade. The primary cause of the financial crisis IMHO is the Fed. Next was Wall Street. Both were responsible for the excess creation of money. And with all the cheap money floating around the world, and the massive deficits being run by government, fiat money is just going to fall even further against gold and other real assets.

 

[SpidermanTuba]

People could still deposit their dollar bills at the bank.

Yeah, but when that money gets loaned out, the money I have on deposit is no longer backed by the gold, its backed by the promise of the lendee to pay it back.

However, what couldn't happen is banks couldn't create credit out of thin air, as they do right now.

No they don't. A bank can't lend more than it has in deposits. Even the fed must take a deposit before it can issue money in return.

 

[eagleseven]

They didn't loan out 3100% of their reserves, they took on loans in a ratio of 31 to 1 to their equity. You are confusing the fractional reserve requirement with leverage.

Leverage = Assets/Equity

Assets = Liabilities + Equity


Any loans a company takes on are considered assets, and thus are included in the leverage ratio. In the case of a bank, virtually all assets are in the form of loans/investments to clients and property. This is why the leverage is used when discussing the stability of a bank.

 

[Oddball]

No they don't. A bank can't lend more than it has in deposits. Even the fed must take a deposit before it can issue money in return.

Huh...WHA?!?

Who deposits FRNs in the Federal Reserve bank, only to get that money back?

 

[eagleseven]

No they don't. A bank can't lend more than it has in deposits. Even the fed must take a deposit before it can issue money in return.

Huh...WHA?!?

Who deposits FRNs in the Federal Reserve bank?

Mr. Printing Press

 

[Toro]

Yeah, but when that money gets loaned out, the money I have on deposit is no longer backed by the gold, its backed by the promise of the lendee to pay it back.

No, that's not correct. What has happened is that when you make a deposit, the bank now owes you money, i.e. gold. The bank then turns around and lends your money/gold out to a borrower. The bank is an intermediary. The net effect is that you have lent your gold-backed currency to the borrower. The bank just facilitates that transaction. This is true if the currency is backed by gold or not.

No they don't. A bank can't lend more than it has in deposits. Even the fed must take a deposit before it can issue money in return.

Well, sort of, but not quite. Its true that both the asset and liability sides of the balance sheet of a bank must balance, and that is what you are getting at since deposits are a liability to the bank. A bank can't just lend out a trillion dollars willy-nilly. There is a foundation from which all lending rests upon. That foundation is known as high-powered money.

High-powered money is all the currency in circulation and bank reserves. Money is created out of thin air when governments literally print more currency, or more likely, effect bank reserves.

When bank reserves rise, banks can increase the amount of lending in the economy by some multiple, usually related to the ratio of reserves to total assets. So, for example, if a bank has $10 in reserves and has lent out $100 for a reserve ratio of 10x, if its reserves double to $20, then it can now lend out another $100 so its total balance sheet is $200. Operationally, the bank lends out $100 to a borrower, who then deposits that money into the bank's account as a deposit. So both deposits and assets rise.

The opposite occurs in a credit crunch. Say the bank loses $5 so it's reserves falls from $10 to $5. If its loans outstanding are $100, it now has to call in $50 to get its reserve ratio back to 10x.

Simplistically, this is what happened during the Financial Crisis. When banks started making massive losses, they wiped out their capital, precipitating a massive credit crunch. The government, fearing a repeat of the Great Depression - and I believe we would have had another Great Depression had the government not stepped in - stepped in the recapitalize and backstop to banks.

 

[blu]

LOL! Gold is kind of heavy. Where do I store it? Under the house?

The dollar would be backed by gold and the market would set short-term interest rates. I don't necessarily agree with this, but that's the argument.

The Fed has been enormously irresponsible in the management of monetary policy. People are right to be angry.

We may be seeing the end of fiat currencies as we know it.

I don't really get it. If every dollar in existence has to be backed by gold, then banks wouldn't be able to loan money from deposits.

yea. the fractional reserve system has ruined us