Then assume for minute that all loans made through deposit expansion (the vast majority of home, car and credit card loans) were proven to be illegal, would you void them if you were the judge, or would you enforce the contract because of the great danger you see to the economy?
Ok, taking your hypothetical, if I were a judge, I'd try to resolve the illegally made loans in the least disruptive way permissible under the law, which would probably involve a procedure like a bankruptcy for the debtor to reverse the loans. For secured loans, it would probably involve the return of some amount of the money paid on the loan, and also the return of the property under lien to the lienholders, unless some alternate financing could be arranged.
If you say you would still enforce them knowing they are illegal, then you have some insight into why judges in the U.S. are actually doing that.
I think it has more to do with the fact that there is no basis in law for the notion that deposit expansion is illegal.
I'm sorry you have been convinced the process is legal and regulated.
I'm not just saying so. It's regulated.
https://www.fdic.gov/regulations/laws/rules/7500-500.html#fdic7500204.1
It occurs under color of law and color of regulation but is neither legal nor regulated.
What is your legal authority for calling it illegal?
How were the loans they forgave illegal?
As far as I know, they didn't forgive loans. One of the main causes of the crisis for Iceland was that their banks were dependent on a large amount of foreign borrowing to continue to function. When the international credit market dried up in 2008, this became impossible, which lead to several huge banks going bankrupt all at once. The Icelandic equivalent of FDIC deposit insurance was used to back the deposits of domestic deposits, but not foreign ones, which triggered problems with other countries.
The people who were prosecuted were those who circumvented regular banking regulations by various devices. I don't know of a case that's directly tied to simple deposit expansion, however, as that isn't illegal as long as it's done as specified by the law.
No. I'm proposing illegal loans are void in accordance with U.S. law. We disagree as to whether or not loans created through deposit expansion are legal.
Ok. You are mistaken.
Now if the system wasn't illegal and immoral, and if it didn't cause so much destruction in the U.S. and throughout the world, and if the People really were that stupid to want such a system instead of the alternative, I would be a banker.
If it's illegal, show me the law that says so. If it's immoral, tell me why. And if it caused destruction, explain the mechanism.
You can't be reasonable certain of that since you have to be assuming many things, and things I have not said.
Specifically?
All banks in the country subject to Federal Reserve Bank rules and regulations have necessarily done something illegal because of how the loan process works.
Because you believe that all loans created by deposit expansion are illegal. But you haven't demonstrated that, so far.
There is good reason to deem every loan made through deposit expansion as illegal.
That being?
What did the bankers do wrong exactly? What law was broken exactly?
Many things, but none of them simply engaging in "deposit expansion".
http://en.wikipedia.org/wiki/2008–11_Icelandic_financial_crisis#Arrests
Before the bailout, lawmakers were told horror stories about what would happen if they let the banks fail, martial law, etc. I think you would have succumbed to the scare tactics since you are using the same tactics in this thread in response to voiding illegal loans.
No. What I would have done is take the failed banks into some sort of receivership, wipe out the investors (less any value actually left in the bank assets transferred), and spun them out again into smaller private companies with investment wings properly segregated from FDIC insured retail banks. A sort of bankruptcy where the investors in the banks lose a lot, the FDIC insurance guarantees deposits, and the further consolidation of the banks is avoided. And I would have prosecuted any banker found to have done anything illegal that contributed, no matter how important their institution is thought to be.
Unlike the U.S., Iceland's central bank is a government entity. And the government of Iceland has been investigating moving to full reserve banking since 2012.
Let me know how that works for them.
:chuckle: No, they are not. Here is how the Federal Reserve Bank explains money creation in their publication Modern Money Mechanics (page 6, second column, second paragraph):
Of course, [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...
That's how it works, not as you say.
It's exactly as I described. The point that they are making is that the money that was deposited does not disappear. It is converted into a promissory note. The money to issue new loans comes from the deposits. Essentially, when you deposit money at a bank, you are lending the bank that money. The bank, in turn, lends that money out at a higher rate. FDIC insurance requires the bank to retain a ratio of their deposits to be paid out on demad, and also guarantees that if the bank is unable to do so, it will cover the shortfall, which it is able to do in part because it (as a part of the Fed) can create money from nothing without borrowing it.
They claim to create the money, which a lie. And it should be obvious it is a lie if both assets and liabilities increased. Why does the bank have a liability if it created money or loaned its money?
It is this essential smoke-and-mirrors trick that our entire economy is based upon. The many-times-over borrowed dollar, which is a fiction created by the Federal Reserve.
The bank didn't really create money; creating money would be increasing a transaction account balance without depositing anything (illegal).
Only the Fed can do that. Or other central banks, in other countries. All other money, which is to say most money that exists, is leveraged and derived from some kind of borrowing.
What they do is borrow a cash equivalent (promissory note) from the borrower (without his knowledge or consent) and use the note to fund the loan back to the borrower.
You consent when you deposit your money. Savings accounts generally stipulate that there are limit on withdrawals. Almost all of the time, banks will have enough cash on hand to cover any withdrawals on the spot, but if need be, they can dip into their reserves, and if they really can't cover the demand for withdrawals (as in a bank run scenario), the Fed steps in as a last resort and creates new money to cover the gap.
So what they are actually doing is fraudulently converting promissory notes.
Read the agreement on your savings account. And this:
http://en.wikipedia.org/wiki/Regulation_D_(FRB)
The whole system is built to be very safe for depositors.
Full reserve banking doesn't make sense to you?
Well, it would essentially mean that all the money would be directly issued by the central bank. It would make it difficult or impossible for commercial banks to exist.
Risky? Like unsecured credit? Try all debt created through deposit expansion is risky.
That debt is backed by the FDIC, which has the ability to print money to cover the liability. Prior to that, bank runs were a real hazard at times. But usually only in a crisis.
The derivatives don't exist without the underlying loans that were created through deposit expansion, so it's the core problem.
Only because most of the money in the system wouldn't exist if not for deposit expansion. That's not exactly a causal relationship. I don't see any reason you couldn't create a system of swaps for 100% reserves.
Please explain how deposit expansion can be done in "a responsible and stable way."
1. The central bank, which issues currency from nothing specifies a required reserve ratio expected to coincide with how money is likely to be demanded from deposits.
2. Banks place themselves under regulation by the central bank, which obligates them to maintain this ratio of reserves.
3. If the required reserves from step #1 are insufficient, the central bank creates money to cover the difference. This creates inflation over the entire system, but ensures that no one loses their deposits up to a covered amount.
How can you say that if you don't even understand how deposit expansion works?
I'm no economist, but I do understand reasonably well how it works in the broad strokes. I'm still not sure that you do.
The problem is deposit expansion. Don't fix that problem and the cycles of boom and bust will continue because they are very profitable cycles for those who create and control the currency.
Well, it's funny you say that, because we went for decades in the post-war era without a real boom-bust cycle. And even until about 2007, the boom-bust cycle was mild compared to what had occurred before FDIC insurance.
It's certainly true that the boom-bust cycle has been made very profitable for some people, and that many of them have lobbied to bring it back for that reason. But it isn't the product of fractional reserve banking. It's actually a product of the removal of many of the stabilizing regulations that were place on the economy.
