Fractional reserve banking...recipe for disaster?

Discussion in 'Business & Economics' started by Eflex tha Vybe Scientist, Jan 28, 2011.

  1. Eflex tha Vybe Scientist Registered Senior Member


    The Federal Reserve released thousands of pages of secret loan documents under court order, almost three years after Bloomberg LP first requested details of the central bank’s unprecedented support to banks during the financial crisis.

    The records reveal for the first time the names of financial institutions that borrowed directly from the central bank through the so-called discount window. The Fed provided the documents after the U.S. Supreme Court this month rejected a banking industry group’s attempt to shield them from public view.
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  3. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    And it recently lost more of it. It has been FED policy not to tell which banks were getting loans from the "dicount window" and I think for the good reason that many would assume the borowing bank was in trouble, and so act so that it was in fact in trouble - possibly triggering a run on the bank the destroys it forcing the FDA to payout taxpayer's money, etc.

    Well a freedom of information suit has broken that secrecy. Interestingly much of the borrowing that the discount window has been by US brances of foreign banks - even China was the largest borrower at times!

    When you think about it it makes sense - many have been playing the dollar "carry trade" game -borrow at low US rates and invest the funds at high foreign rate. Why would not foreign banks do the same?

    Read all the gory details here:

    More than Ron Paul is going to be pissed by fact US's FED is a big time lender to foreign banks playing the carry trade for profits while Joe American is being evicted from his home - Can't refinance it at lower rate for longer term etc.
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  5. Eflex tha Vybe Scientist Registered Senior Member

    It is in the interest of a central bank to put a premium on protecting its reputation, and, in the modern world, that means it should do everything to be as transparent as possible,” said Marvin Goodfriend, an economist at Carnegie Mellon University in Pittsburgh who has been researching central bank disclosure since the 1980s.

    “I see no reason why a central bank should not be willing to release with a lag most of what it is doing,” said Goodfriend, who is a former policy adviser at the Richmond Fed.
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  7. Eflex tha Vybe Scientist Registered Senior Member

  8. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

  9. Eflex tha Vybe Scientist Registered Senior Member

    Thanks Billy.
    Here is a portion of your statement, "Cash rich (corporations and individuals) are not investing in the stagnant US and most others are "de-leveraging" old debts so banks have few wanting to borrow to make new US jobs, but even if they had loan applications, banks are not inclined to take on risk of losses when they can get 100% safe returns from FED or US Treasury. What borrowing there is for US investments is mainly for machines that increase productivity with fewer workers. FED holding interest rates at history lows makes that job killing automation equipment more attractive to US businesses."

    So my question is, "Is the FED doing more harm than good with QED in trying to stimulate the dragging economy? What is your solution to this?
  10. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    In general I am a weak supporter of Keynesian interventions when the economy is slow - to bring total damand nearly back to normal but it must be wisely done by building (or repair) of infrastructure as China mostly does. See just released new Chinese effort at:

    China also spends a lot on support of inefficient (even money losing in some cases) SoEs. They employee people and thus keep China with very few living on government support (1 in 3 American gets some financial help from the government, only counting "need based" grants, not Social Security Medicare, etc.) 1 in 7 is living on food stamps. With the Chinese approach to supporting people who cannot earn their own way in a free market economy, China has less welfare cost and gets some useful production - One of China´s "better idea" IMHO, but does draw a lot of western criticism as supporting low productivity, inefficient, businesses that should close.

    Even the FED admits QE2 was less effective than QE1 - only marginal. Despite almost all expecting QE3, as reflected in the recent $100 rapid rise in the price of gold, it ain´t gonna happen. I told what the FED will do instead in Bloomberg quote at: and then told why that ain´t gonna work either in my comments there.

    "What is your solution to this?"
    Answer: There ain´t any. GWB so screwed up* the US than as I said back when he still had two years left as POTUS that the world´s worst and longest lasting depression in US & EU is "inevitable." I predicted it would be triggered by a run on the dollar that happens on or before Halloween 2014 and still see no reason to modify that prediction (were right on, or a little ahead of, schedule with the EU´s troubles.)

    * Two recession started under GWB, as did two needless wars and his tax relief for the supper rich helped them build the more modern than US has factories in China (now that China does not have low labor cost, they are building these better facilities in Vietnam and Indonesia mainly) getting ~3 times great return on their investment than if making jobs in the US. Plus GWB´s lack of and / or prevention of SEC enforcement of regulations and his corn to fuel stupid program, et. al. (SEC had and sat on 21 well documented facts that proved Maddof was running a Ponsi scheme for several years!)

    If we killed these tax breaks on those making > $250,000 per year then at least this US "job destruction" would cease growing worse. Republicans love to tell that these tax breaks make jobs, and they do, but in Asia and destroy US job in factories that no longer can compete against BOTH cheaper labor and better factories.
  11. quadraphonics Bloodthirsty Barbarian Valued Senior Member

    That is only "wise" if your infrastructure is underdeveloped in the first place. Building bridges to nowhere is not good stimulus - it just loads your banks up with bad loans and distorts your workforce towards unproductive tasks.

    Also China is trying to move away from the infrastructure stimulus they used in recent years, as they recognize that it is not sustainable.

    What you describe there is exactly people "living on government support." The fact that it's funnelled through a loss-taking SoE - with plenty of it skimmed off in corruption in the process - is little more than a question of accounting semantics. At the end of the day, it's people doing unproductive tasks and getting paid by the government to do them, for the purpose of maintaining the social order and stability.

    You have presented no evidence, or even reasoning, to support the contention that funnelling welfare support into unprofitable SOE's produces welfare at less "cost," nor your contention that the production is "useful" (whatever that means). This practice also strains the financial system, as state-controlled banks keep making loans to money-losing SoEs, which then have to be cleared off of the bank's balance sheets throiugh further government subsidy.

    What "job destruction?" The USA is adding nearly 100k jobs per month. Manufacturing output is nearly at an all-time high.

    Again, this is nonsense. The USA is adding manufacturing jobs and capacity, including lots of new, high-tech factories. You are simply reciting the contents of some dated fantasy world that you enjoy imagining.
  12. Carcano Valued Senior Member


    China has given the green light to 60 infrastructure projects worth more than $150 billion, as it looks to energise an economy mired in its worst slowdown in three years, fuelling hopes the world's growth engine may get a lift from the fourth quarter.

  13. quadraphonics Bloodthirsty Barbarian Valued Senior Member

    Considering that China undertook Trillions in infrastructure stimulus a couple of years ago, that kind of number is very much in line with "trying to shift away from infrastructure stimulus." But, yeah, you can expect this to be a two-steps-forward-one-(or more)-steps-back type of process, as the CCP is not about the countenance a sudden drop in low-skill employment, particularly during a leadership transition.
  14. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    CNN states that total will be 158 billion dollars worth of NEEDED items - not things like the US´s "Bridges to Nowhere" that come from Congressional "horse trading" of votes for mutual support of favorite bills.
    Yes, there is some corruption, money skimmed into SoE´s managers pockets - Most Western estimates give it as about 2% of the SoE´s budget or less. - compare that to Walk Steet´s skimming and corruption, which not infrequently bankrupts the company and leaves investors screwed. Many large US corporations pay their CEOs MORE than they pay in US taxes - some like GE don´t pay any taxes. IMHO, just the paying of lobbyist (and under the table bribes to get 73,000 pages of special interest tax code written and passed) is much a greater cost to US tax payers than Chinese people suffer with less than 1000 SoE´s managers skimming 2% of their budgets for personal use.
    I just did.(Quickly again <2% vs sometimes a 100% loss) What is wrong with your thinking?

    Now with more detail in an example: Say the SoE makes bicycles at a production cost of $102 dollars each. (The $2 is for the manager´s pocket.) but must sell them for yuan equal to $92 taking a $10 loss. (We are speaking of feeding those with too little skill or some physical problems to earn their keep in a truly free market). This is an extreme example as most SoEs do make small profits but not enough to pay fair market place interest on their capital. I.e are a modest cost to the government compare to the sales value of the bicycles sold or the salaries paid. If the govern just paid these salary for the non-working people to eat etc. (as in the US welfare system), the cost is about the same as their salaries, but government does not get income of $92/ bicycle sold.
    Yes, that is what happens. To continue the SoE bicycle example, the govern chips in $10/ bicycle to avoid the much large cost of just giving the salaries to non-working people as in the US.

    There is a great psychological advantage to the Chinese approach to feeding those who, for whatever reason, can´t earn their keep in a free market system. The workers feel productive, not as leaches on society and raise their kids to try to be productive too not to see how much they can get without working. They want and encourage their kids to get a good education etc. so they can get a better job than mounting tires on bicycle frames. Not very true of the US´s welfare classes living on government hand outs.
    Yes, that is sadly true - it means that 50,000 more potential workers EACH MONTH can not find jobs. I.e. just to keep even with the growth of the US´s potential work force US must create 150,000 new jobs each month. US has huge and growing number of potential workers who have given up even trying to find a job, so despite needing 50,000 new jobs just to stay even the official unemployment rate, which should have made the unemployment rate increase (missing 50,000 need jobs), it dropped from 8.3 to 8.1% with 96,000 new jobs added.

    I said "job destruction" as before GWB´s tax cut for the supper rich who build more modern factories in Asian that closed US factories (or at least force great deal of "out-sourcing" to avoid closure) the US had labor shortages, and rising real wages as China does now. A huge number of good jobs have been destroyed in the US. Furthermore 58% of people who had to find new job, and did, are now making LESS salary (AND OFTEN LESS BENEFITS) than they got in the old job. No wonder middle class incomes have dropped 7.2% in purchasing power, even with quite low inflation, since 2007.
    No I am reporting less than year old FACTS from Bloomberg, CNN, Office of Management and Budget, Congressional Budget Office. etc.

    Instead of just attacking me, why not tell what fact I have stated is wrong with some creditable reference?
  15. quadraphonics Bloodthirsty Barbarian Valued Senior Member

    That's your counter-argument? I can't say I'm convinced. In fact, you seem to be very insecure and cagey.

    Exactly - that's nowhere near the sums that China was spending on their investment stimulus binge.

    And how do we know that this stuff is NEEDED? Because you shouted as much at me?

    Why would we compare Chinese SoEs to "Walk Steet?" I thought we were comparing systems of welfare support? Seems like you're just rushing off into the nearest talking point, instead of addressing the issue in question.

    You're suggesting that something is "wrong with my thinking" because you provided a response to a question after I asked it?

    Meanwhile, your "answer" to the question of the relative efficiency of different welfare schemes, was to compare a welfare scheme to a nonsense statistic you simply invented about the US financial industry supposedly operating at a 100% loss and running on government funds. Which is both totally incoherent and a really silly instance of bullshit. Why can't you stay on topic and answer straightforward questions?

    I'm not going to seriously consider "examples" that you are simply making up out of thin air. If you want to present a serious analysis of inefficient SoE's as a form of welfare and contrast that with direct payment programs, then you're welcome to do so. But trying to pass off a bunch of hand-waving and outright invention of facts as an analysis is not going to fly.

    That is silly. You are simply reciting your fixed cultural biases there.

    Dude, those trends in manufacturing go back to long before GWB was president. This is not something that happened in 2005. That process has been well underway since the 1970's.

    Low-end, unskilled manufacturing jobs are not "good jobs." If you can be replaced by a robot, you do not have a "good job," and we should not lament its loss.

    Yeah, big recessions will do that. Is there some point here, or are you just throwing out every negative fact you can think of about the USA to, what? Demoralize people or something?

    You will not find any reputable source asserting the FACT that the US is losing manufaturing jobs or output, because that is not occurring. Manufacturing is actually among the fastest growing sectors of the labor force these days, as was explained in the link I included in my previous post.

    I did. You should go back and read it. Although, one can hardly expect you to get a real grip on large issues like that, when you can't even keep track of basic, major facets of simple conversations with myself.

    Also: what in the hell does any of this stuff have to do with the thread topic (fractional reserve banking)? Why do you insist on making every thread in this subforum a regurgitation of your old, fixed talking points about the USA and China?
  16. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    Sorry if you can not keep two distinct comparisons separate in your head. I had to address corruption (as well as welfare) after you first brought that up in post 108 with this comment: "loss-taking SoE - with plenty of it skimmed off in corruption in the process"

    (1) We compare US and Chinese financial corruption with Wall Street´s frauds, tax evasion, CEOs collecting more than the firm pays the IRS, etc. vs. Chinese SoE managers taking a < 2% cut as that is where the corruption mainly is in these two different countries.

    (2) We compare costs of feeding, etc. those who for some reason can not earn their keep with US´s welfare providing for their needs (without them working and producing anything) vs. the Chinese SoEs, which provide their needs via salaries from not fully economical viable SoEs that need government subsidies, (which are much smaller than the salaries paid), to remain in business. Typically these government subsidies to the SoE are less than 10% of the salaries, which are the funds needed to live by for those who can not earn their own way in a free enterprise system.

    I will, however, admit that if view from the narrow POV of only business economics, that many SoEs, certainly those that need government aid to keep operating, are not economically viable without this aid in a free market place economy; but from the broader view of the total cost to society, they are much better* solution to the problem of how to feed, cloth and houses those, who thru no fault of their own (The infirm, low IQ, physically disadvantaged, old and ill educated when young, etc.), cannot earn their own way than the US´s totally non-productive hands outs of 100% of the funds they need to live.

    * Approximately 10 times less costly,** and does provide products, like bicycles, fans, baskets, and hair brushes, etc that can be sold, and keeps up worker´s self esteem with ambition for their children to work hard, get educated and become more productive members of society, not just become the next, AND GROWING*** non-working generation of leaches living on the government hand outs as in the US.

    ** The Chinese government aid to the SoE is only the DIFFERENCE between the worker´s life sustaining low salaries and lesser value added by their productivity, NOT 100% of the life sustaining funds that US welfare provides non-workers instead of having them work in subsidized industries to earn low salaries. This difference is seldom even 10% of the salary they receive. For example:

    In the bicycle example the worker got, per bicycle: 100 yuan salary, the SoE manager skimmed off 2 yuan, and the bicycle sold for 92 yuan forcing the Chinese government to give the SoE a 10 yuan subsidy per bicycle made. - That is much better, just considering the economics and not the long term psychological benefits, than paying the worker the 100 yuan he needs to live without him working or producing anything of value as is done in the US.

    *** US now has 1 in 7 living on food stamps and a very rapidly growing number getting disability compensation, or other benefits from the government. People have gotten very good at "gaming the system."**** Now 1 in every 3 gets "needs based" financial aid from the government! ("Needs based" means Social Security and Medicare payments are NOT included in this 1 in 3 collecting government hand outs. I´m not sure, but think "forgiven" student loans are.)

    **** Hell, I even did that once: When hurricane Hazel came thru Maryland, its floods damaged a small concrete dam on stream in property I owned. I asked a construction firm what it would cost to fix it. They said: no more than $10,000 but collect that amount from the government with this application form, so I did.

    Before the $10,000 check arrived months later, the dry season was in full swing, and I discovered a "drain up-steam pond" gate on the down stream side of the dam at the bottom, when the creek below the dam was nearly dry. I opened it and drained the pond in about a week. Then from the up side with some old & soft inflated basket balls pushed into the storm damage hole (to keep the fresh concrete from just sliding thru), and 3 or 4 bags of "redi-mix" concrete, I fixed the dam by myself. 16 years later, when I sold that property, my fix was still holding - in fact silt and mud now covered it by a few feet on the dam´s up side. I guess my keeping some bees on that 15 acre property so it got the low farm tax rate was "gaming the system" too.

    You say your post was more than just a personal attack, but did not tell even one fact of mine which was in error as I requested. Should I take that to mean your fully agree with my facts? OR, Just don´t like the conclusions I draw from them such as: the Chinese system for providing via economically inefficient SoEs for the needy, who can not fully support them selves by working in an unsubsidized factory, is cheaper, more humane and makes products for sale, but the US welfare grant system doing this same job does not. It is about 10 times more costly and psychologically damaging to self esteem and ambitions for their children.
    Last edited by a moderator: Sep 8, 2012
  17. Eflex tha Vybe Scientist Registered Senior Member

    I agree with all of this. Wholeheartedly. Looking at the patterns of job loss/business failures/bank failures around 2007-2009 was SCARY. I just didn't see a bottom for the graph, it looked like it was gonna go on forever. Now in 2012, can we look at any jobs gains as a minor miracle, or is it just the calm before the 2014 storm in which we see the double dip begin?
  18. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    I would describe this as: "Yes, a flood of printing press money can kick the collapse can down the road for a few years."

    I will not be voting for Obama (or Romney) as I spent a whole summer as the operational leader of the civil rights movement which opened the restaurants of Baltimore to blacks AND strongly believe that the "collapse can" can NOT be kicked down the road for four years more.

    I.e. when dollar collapses because GWB´s stupidity made that unavoidable, I don´t want a black man to be POTUS, but I cannot go so crazy as to vote for Romney either. - I´m sitting this election out. (As I live in Brazil, this is easier to do and will not keep Marland, where I would vote, from sending all it electors to vote for Obama without my vote.)

    BTW, the "double dip" back into recession, I expect to happen in first half of 2013; What happens after that (by or before Halloween 2014, as I predicted > 6 years ago) is not a simple double dip, but the world´s worst and longest lasting DEPRESION in US and EU, with great social chaos, only partially controlled by military and Marshal law. (Too many guns in private hands exist in the US to be otherwise when many are not able to buy food.)

    Probably in November 2016 there will be no election for a new POTUS. I.e. The US´s experiment with democracy is soon ending. The basic reason for this was published in Demoracy in America in 1832 by Alexis de Tocqueville. Read more details at: A thread that asks and tries to answer the question:
    "Are economies of democratically elected governments stable?"
    My answer is only if public mass education is much better, especially in economics, than in the US. Perhaps democracy will survive in Scandinavia, where that is true. It sure ain´t going to where it was born (Greece) which IMHO is showing the US what to expect soon. Tocqueville thought it was doomed and that was before fiat money had been invented!
    Last edited by a moderator: Sep 11, 2012
  19. quadraphonics Bloodthirsty Barbarian Valued Senior Member

    I evinced no such difficulty. The complaint is that you are answering questions by invokign other, irrelevant (and misinformed) comparisons.

    You do so again, here:

    That is again silly. You are now comparing the US financial system to Chinese SOEs. Why? Why not compare the US financial system to the Chinese financial system? Perhaps it's because said comparison would not favor the point you want to make, given that the Chinese financial system is an actual arm of the state and exhibits a level of waste and corruption that dwarfs anything seen on Wall Street.

    This is again a silly comparison. Why aren't you comparing US welfare to Chinese welfare? The appropriate comparison for Chinese SOEs is the private economy. SOEs do not exist as a "welfare scheme" for people who "cannot earn their keep." These things represent like 50% of China's non-agriculture GDP. And they are subsidized in myriad ways at a much higher rate than you imply with you 10% hand-waving - they get access to below-market loan rates through the government-controlled banking sector, outright debt forgiveness, preferential access to government contracts and business, etc. They represent a massive distortion and drag on the entire Chinese economy. If you are going to analyze them as a "welfare system," then the appropriate comparison would be to analyze the entire US economy as a "welfare system."

    Dude, SOEs in China employ over 30% of the urban workforce, and they get paid at a higher rate than the rest of the urban workforce. You are asserting that these are all charity cases who are sick/stupid/crippled/ignorant and need welfare support to live? That's silly. China has an actual welfare system for welfare cases, the SOEs are a major part of the regular economy.

    Yes I did - I cited several explicitly false statements, raised several more direct challenges to your inferences, and asked several more direct questions to you. It's looking like you do not even really read my posts, but instead simply repeat yourself and throw out insults and baiting tactics.

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