derryl

Nothing Good Will Come of Bankers Being in Control

Smarty_Pants:
I think you're right on. The "real" economy produces and trades for all the goods and services that everyone needs and wants to buy. "Prices" set by free markets allocate resources to their most valued uses, and prices have to be flexible to accomodate shifting supply and demand situations.

The trouble is that minimum prices are set by business' cost structure and profit needs but businesses do not "make money" that is needed to pay their prices. Making money is a separate process performed by banking, which it does by making "loans". New bank lending adds to the money supply; repayment of loans decreases the money supply.

In banking parlance, repayment of loans has the effect of reducing "deposits", because most money exists as numbers in bank accounts (i.e. "deposits") and the money is transferred between banks via checks written by people and firms on their bank account balances. Fractional reserve laws (or 'conventions' that are enforced by banking supervisory authorities, where there is no hard law) link the volume of new loans to the volume of deposits a bank has attracted.

So under this system large scale loan repayment like we see now as everyone simultaneously tries to get out of debt has the effect of reducing the amount of new lending banks are permitted to do.

If the conventional 'fractional reserve ratio' is 20, then banks can lend 20 times whatever new deposits they attract. But banks create a deposit every time they make a new loan and deposit the loan amount in your bank account, so it's a self-accelerating process when people are confident in the future and are borrowing and spending money.

Spending money "activates" economic activity but monetary transactions are not in themselves "economic": what is 'real' about moving numbers around between bank account balances? Money is the economic nervous system which transfers price information around the real economy.

Then in times like now when people are uncertain about the future the process is self-decelerating because every repayment of a loan destroys a deposit which reduces by 20 times the amount of loans a bank can make.

I think it is clear that this system exacerbates economic trends by multiplying any initial change in borrower sentiment by 20 times either up or down. So we get accelerating inflation on the way up and accelerating deflation on the way down.

Our economy cannot work without a functioning nervous system. It seems as if somebody slipped a bag of crystal meth and a couple hits of acid into the money system because it's writhing around like a whacked out junkie.

Who can figure out how to fix this?