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Comment by olalonde | Hacker News Reader

As a side note, I find it fascinating how fractional reserve banking is not only legal but considered indispensable to the economy. It just sounds like a big scam. Why do private bankers get to create money and decide who gets it? It feels like there has to be a better way.

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"It just sounds like a big scam. Why do private bankers get to create money and decide who gets it? It feels like there has to be a better way."

It's a time-shift. That's all.

You can absolutely run an economy - and a culture - without leverage and even without debt.

In such an environment it will take multiple lifetimes to accumulate a single lifetimes worth of provision and security ... and we all decided we wanted to provide and secure within our own lifetimes.

... and then we decided we wanted that before we had grandchildren, and then before we even had children.

We're time-shifting and this instability (and, in many ways, incomprehensibility) is the price we pay for it.

No, no, quite the contrary. I mean, money itself is an illusion, but within that illusion, understanding accounting and credit money creation is absolutely fundamental. Read this paper.

https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

Thanks for the link. I read "The Mystery of Banking"[0] recently and understand more or less how it works. I realize that it's not the most neutral source but I haven't found any of the other side's arguments very convincing either (including this Bank of England paper though I just read the first few pages, planning on reading it fully later).

[0] https://www.amazon.com/Mystery-Banking-Murray-N-Rothbard/dp/...

Good link- with respect, to my personal mental model the von mises stuff is a near total misunderstanding both of the mechanics and of the dynamics. Credit in particular seems to be a mystery to them, yet in anthropological terms humans- and other creatures- have credit/reputation accounting in their heads, long predating even organized math. But I have not engaged their arguments directly in depth.

I do all my reading on kindle, that one is only print but I will aim to track down a digital version of their arguments.

> It just sounds like a big scam

It is. Its what happens when a country's currency is used as the exclusive foreign exchange currency in international trade and that country can print money like a banana republic without that currency losing value. The US went apesh*t on the foreign exchange currency position of the dollar and not only printed $ from the Federal Reserve but also allowed quite high % ratios for private banks to do fractional reserve lending.

The legal % ratio was reduced after the 2008 crisis, but right at the end of Obama's 2nd term, they were restored to 2008 levels. So the cycle that started 2008 crash started again - not necessarily backed by high risk mortgages this time, but whatever could be used as a collateral.

Now that many countries are moving to trading in their own currencies, all the printed dollars are coming back to the US and hiking up inflation and causing all this mess.

So youre right. Its literally a scam. It could work if it was tightly regulated with low %es and what the banks could show as the backing asset could be very tightly regulated. But we all know what the corporate lobbies do to regulations in the US...

Every game has winners and losers. The fact that losers exist doesn't mean there aren't winners. Banks with poor management go bankrupt. The ones with good management run the entire economy. One doesn't detract from the other.

The whole system is basically built on "putting money to work" as quickly as possible. Money sitting in "storage" just isn't useful to anyone.

Most of the economy relies on an expectation that a service you provide now will be paid off in the next 30, 60, 90 days.

We need money for economic growth. Creating money causes inflation. So instead we borrow money from tomorrow to build/invest today. There is nothing inherently wrong with this system, and it has worked perfectly fine for hundreds of years (probably longer).

> Why do private bankers get to create money and decide who gets it? It feels like there has to be a better way.

It's the system working as designed.

Because it gives the fed the power to control the economy. That's why it exists...

things would be much worse off without the Fed. look at hard banks lobby to up end the minimal restrictions they have now

Why the downvotes? Is this not why fractional reserve banking exists? Please correct me if I'm wrong. Without it, the Fed would have very control over inflation/deflation.

By the way, I'm not arguing against the Fed. I'm against fractional banking, or at least feel they should require banks to offset their liabilities more than they do today.

We're literally discussing an example of why the current system isn't good.

Because it's good for growth, as far as I know.

Until it isn't.

They don't create money, they loan out deposits. It's not as scammy as people think. You are free to put your cash in a mattress instead.

Sure, but loaning out deposits creates money, does it not?

Most of that loaned out money is getting deposited into another bank account. And that deposited loan will (minus a percentage kept in reserve) get loaned out again. And so on, etc. I might be missing something important, though.

Yes that is roughly how it works.

https://en.m.wikipedia.org/wiki/Money_creation#Role_of_comme...

If a bank loans you money and you use it to build a house, or start a restaurant, then in due course there will be:

  - new money, created by the loan; and
  - a new, valuable asset — the house or restaurant — worth very roughly that amount of money.

Case by case these won’t always balance, but we trust private banks and borrowers to get it broadly right in aggregate. It all works out except for when it doesn’t.

But somebody had better be creating money in a growing economy. Otherwise the stock of desirable stuff will grow while the stock of money remains constant. And once that happens, people start hoarding money rather than doing the hard work of investing in new productive assets. But creating new productive assets is where the growth comes from, not to mention a big chunk of the jobs.

I doubt bank-created money is the only way to avoid deflation and depression. But it’s about the least centrally-controlled alternative I can think of.

I guess it's unclear what you mean by "creating money". Anytime I lend money to someone, they're going to spend it on something.

They have a liability (their debt to me) and an asset (the thing they "bought", which could be anything from a T-bill, to a bagel). Basically, any debt "creates money."

If you lend money to someone, it's no longer available for you to spend. However, if a bank loans out the money that you deposited, both the borrower and you can spend it. This is known as money creation, as it expands the money supply.

> if a bank loans out the money that you deposited, both the borrower and you can spend it.

When you "spend" money that you deposited with the bank, what you're actually doing is getting the money you lent to the bank paid off.

What's the difference between that and you lending money to someone to buy a bagel/T-bond, and then at some point in the future, getting money back so that you can buy a sandwich/car?

If that were true, bank runs could not happen.

Loaning out deposits creates money + debt. The amount of money is cancelled out by the amount of debt.

>> Sure, but loaning out deposits creates money, does it not?

No. It moves it to someone else and creates a debt. It needs to be paid back.

The create money by loaning out many times the amount of deposits they have.

No. Less than their total deposires. But loaned money may well end up in a bank where it might be loaned out again. But it's not IMHO right to try to claim one deposite as somehow "the first one" that gets loaned out repeatedly. Each deposit is loaned out less than 100 percent.

The bottom line is that not all deposited money is not readily available on short notice.

If you deposit $1000 in a bank, and if the reserve requirement is 10%, the bank can lend out $10,000 to a borrower. It gives the borrower a bank account with a $10,000 balance. It has created $9000 of money out of thin air.

Sure, but why couldn't be a bank that's just like a money vault and that's it. I don't care if I get no interest, I may even pay a fee for that service.

For a large enough fee you will absolutely find (or create) such a bank.

That’s called a safety deposit box.

Chase doesn't allow storing cash in them (other than collectible items) and I know that others banks don't allow either (most likely to limit their liability).

I lived through Washington Mutual going through FDIC receivership back in 2008 (I was their employee, shareholder and account holder at that time) and their stock price dropped to almost zero when the news broke about that. I'm curious why this is not the case here.

> I'm curious why this is not the case here.

SIVB trading was halted during premarket at 8:35 EST due to pending news, and never resumed trading.

No, not a safety box. A bank. Like the other ones but without them playing bets with your money. That's literally it.

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