Links following my comments:
I sympathize with you over the difficulty you are having explaining these things, although you didn't acknowledge that the bill is ambiguous and requires clarifying language/amending, which of course should be what happens in committee; but unfortunately, the subcommittee where it is now is dominated by anti-monetary reformists.
It did sound as if you were saying that government spending of money into the economy doesn't mean more money that will end up deposited in time-deposits against which the banks will lend. However, you came back to your proper criticism that the MA will mess up or be politicized via the typical machinations of professional politicians, etc. However, you initially objected to the opensource, computerized solution because you found flaw with the basket-of-goods concept. My reply was that all transactions could be and should be used in the aggregate measured against quality-of-life targeted rises. We can grow the economy for everyone without inflation or deflation while monitoring and regulating the whole thing on automatic pilot (with failsafe systems; enough delay and signaling to stop or slow any hiccups, software/hardware problems).
I like your "Central Planning" objection. The system I outline is decentralized.
My understanding is that right now, the total reserves across the whole system must balance each night. The banks do interbank lending and borrowing of excess reserves, which cannot be more than 10% of the demand deposits. They can't borrow each others demand deposits such that, that 10% would fall below an actual 10%. You seem to be under the impression that it's 100%. The banks do not borrow the balance outstanding above the 10%. They only borrow to reach their reserve requirements. Lent monies become reserves in other banks but fractionally. Those banks create debt-money above their reserve requirements.
The bank will only pay back to the government what it borrowed from the government, not all the money it has. It will still retain the depositors' time-deposit amounts. I don't see the specific language in the bill where the banks will be turning all monies less interest and fees over to the government. The government is not going to sweep every bank every night of all of the money in the bank. If I'm wrong about that, I sure would appreciate it if you would cite the language in the bill that I'm missing or misunderstanding.
It seems, Ellen, you might benefit from viewing this video. I don't endorse the video 100%, but it's better than nothing. I don't consider the "shady" language fully correct because of FDIC (but he goes into that in subsequent videos). Judge for yourself though.
It's not an either/or in these competing schools but rather that both work within their self-defined contexts. I see merits and demerits in both.
I'm not sure why you are concerned with the term "funding" when the NEED Act is about funding infrastructure directly. It should be and could be via public employment too.
The Pentagon doesn't "borrow" money from the economy. It pays back in a different way, albeit as a net drain on the whole system. It's not ultimately productive but rather devouring while returning bad, toxic fertilizer, so to speak.
John replied, and the following is an update rather than creating a whole new post:
I completely agree that the NEED Act leaves too much up in the air. It would have been vastly superior to have hammered out every detail before introducing it to for one thing, take away some of the excuse of the subcommittee and committee chairs to blow it off as being too much work or unworkable even if they were to try, which they really do not want to do.
I certainly think the reformers should already be back at the drafting table massaging and tweaking to address the problems we have raised here for the next Congress. Afterall, if we have raised them, certainly they'd be raised by committee staffers who would/should scour the Internet, etc.
Concerning the "single national depository," I said as much when I said Treasury should be the MA and that banking should be public and certainly one entity but with decidedly locally run branches: Those literally closest to the problems that need attention/funding -- decentralization in that sense but taking full advantage of economies of scale and with the ease of oversight that an open-source system would allow.
As for your last point, we are all here discussing the NEED Act to one degree or another and necessarily about new debt-free money. I don't think that's lost on anyone, at least as far as I can tell.
Also, The more I've thought about this, the more I've come to realize that Joe and Ellen are speaking at cross-purposes. Ellen is speaking about the broader M2 money where reserves do not apply. The money multiplier definitely does not explain everything there.
However, a few problems I see with some negative critiques of the money multiplier are that they don't take into consideration risk or the interest rate being paid by the Fed. Reduce the risk or uncertainty banks have about the economy and reduce or remove the interest the Fed pays, and "reserve money" will be lent out by commercial banks (albeit at perhaps relatively high interest rates right now) rather then the bank going to so many outside (non-Fed/Treasuries) sources regardless of the business cycle.
That said though, going to full-reserve banking would put demand depositors on a sound footing and would not preclude banks lending money from other sources such as by issuing stocks, etc.
Ellen, you quoted your friend: "If any one bank is in a liquidity crisis (i.e. they need money they don't have), they may borrow from the Fed, or from each other."
No one here has disputed that that I can see.
Borrowing for purposes of check clearing and settlement does not though negate fractional-reserve lending. Are you sure we are talking about apples and apples?
Fractional-reserve lending is not in dispute at the Fed. They teach that it exists, don't they? What is a reserve? What's it measured against? Why did reserves become a requirement? (Bernanke wants to do away with the requirement, but he's not very good at educating the public. I'm assuming he has more than M2 on his mind there.)
Check clearing and settlement is an accounting layer that exists in addition to the reserve requirements, and banks certainly can, and have, gotten themselves into huge liquidity and insolvency problems; but to my mind, if what you are saying were the whole story, we wouldn't even have the FDIC. It was created in lieu of full-reserves, etc.
Did you find fault with the video? If so, what part does not take into account clearing and settlement and associated borrowing? I didn't see anything in it that precludes those things. Didn't he mention bank-to-bank (interbank) lending? I thought he did.
As for the part of the bill you quoted, I'll have to look at it in context; however, I've already identified ambiguities myself, so... maybe you're just pointing out that it's not drafted well enough to avoid unnecessary confusion.
Thanks for hanging in here. I'm trying to figure out exactly where the points of divergence lie. I do think you're talking M2 where Joe is talking demand-deposit money.
Ellen, the Fed talks about fractional reserve banking on its website and not in ways suggesting it does not exist. For instance, in 1951, the FOMC said they needed to cut back on the leverage of "fractional reserve banking."
8. This is a program for the immediate future, which also looks
ahead to the time when large Government deficits may make necessary a fixed pattern of Government financing and some recourse to the banking system to meet the Government's needs. At that time we shall need to have at least three things:
(a) A method of bank financing which will cut down or
eliminate the leverage in the fractional reserve system....
Trust me. I'm close to post-Keynesianism. I just see camps talking at cross-purposes where the issue is with defining terms and contexts.
To set all monetary policy based upon the money multiplier or fractional-reserve banking in a non-reformed world certainly would be falling very short; however, the object here is to do away with even that portion of money that does come from debt creation via fractional reserves, which are real. Even the NEED Act addresses these issues (albeit rather indirectly).
QE is better than austerity. Does that help? I said they were doing way too little, too late, and not earmarking all of the money to Main Street.
I'm much more radical than Steve Keen though. You can see that. In my book, Marx is a reactionary. I don't believe that capitalism is THE engine of wealth creation. I think it's been terribly retarding when compared with how things ought to be organized.
The money-multiplier model as an all-encompassing explanation is inadequate, but fractional reserves are a fact. Fractional-reserve banking is a facet. It's impact has been lessening, but the lack of adequate reserves or capitalization and a reliance upon Credit Default Swaps and other "toxic" and exotic derivatives (backed by more IOU's) spelled boom and bust. We need to preclude that from happening again.
The NEED Act is a good platform for perfecting a system that precludes all banksterism. It's heart is headed in the right direction relative to where the banksters are, but it's not good enough. It's not clear enough. It needs a super plain-language version for the general public. It needs to be sold to them in a concerted effort. Just having Dennis give a speech here or there won't cut it. Ows needs to get in on the act (no pun intended) whether they like it or not. We must take steps. They need to be huge steps, but we must take them before we run out of time.
We NEED (pun) monetary reform so we may pay for all the things that need doing, such as getting off carbon burning and full employment.
Public banking and United States Notes together would go a long, long way in all of this. Short of Heaven on Earth, I'm for both. I plan on Heaven too -- moneyless!
"Owners of the warehouses soon learned that the holders of the paper receipts would not simultaneously redeem the gold deposited with them. The warehouses could therefore lend the gold--in turn, often converted into paper notes--holding a reserve of gold that allowed them to meet the normal demands for redemption. This is the beginning of fractional reserve banking.
"Seventeenth-century English goldsmiths are usually credited with this transition to modern banking, though the first paper money was introduced in China in the seventh century, a thousand years before the practice became widespread in Europe. Paper notes and early banking were introduced in Europe in medieval times and further advanced by the great banking families of the Renaissance. The spread of paper notes and fractional reserve banking opened up the potential for credit expansion to support economic development but also introduced the possibility of runs and liquidity crises as well as the risk of insolvency through the credit risk associated with the lending." Source: "The Future of Money and of Monetary Policy," by Governor Laurence H. Meyer, At the Distinguished Lecture Program, Swarthmore College, Swarthmore, Pennsylvania. December 5, 2001.
"Fed funds are unsecured loans of reserve balances at Federal Reserve Banks between depository institutions. Banks keep reserve balances at the Federal Reserve Banks to meet their reserve requirements and to clear financial transactions. Transactions in the fed funds market enable depository institutions with reserve balances in excess of reserve requirements to lend them, or "sell" as it is called by market participants, to institutions with reserve deficiencies. Fed funds transactions neither increase nor decrease total bank reserves. Instead, they redistribute bank reserves and enable otherwise idle funds to yield a return. Technical details on fed funds are described in Regulation D." Source: "Federal Funds," Federal Reserve Bank of New York. http://www.newyorkfed.org/aboutthefed/fedpoint/fed15.html
You will note the "Fed funds transactions neither increase nor decrease total bank reserves." You will also note that there is a reserve rate (that is not 100%), per my previous comment in which I quoted the current reserve requirement of 10%. The 10% total reserves requirement appears typically to be adequate for outstanding check clearing and settlement, barring the need for the Fed to step in as lender of last resort.
Come on, Ellen, you know you're learning things via this discussion thread.
Let's keep it friendly. We aren't arguing. We're saving the world! We all need to get on the same page as much as possible. Look how far everyone is from what I want, but I'm still here talking it out.
Now, I think the only sensible thing for you to do is to put this stuff directly to the banker(s) you know best you feel won't beat around the bush on it. You have to start with the person or those people by asking them whether or not fractional-reserve banking exists and at what reserve requirements before you get into check clearing with those funds.
Look, what's the worst thing that will happen? You'll get a major article out of it and maybe a chapter in a book or even a whole book on how to combine public banking with United States Notes.
P.S. When you find out the answer, of course you'll owe it to us here to report back (light-heartedly).
You said, "The reason banks have a reserve requirement is so they'll hold some money back to clear their checks." That's not contested by the video I suggested you watch. In fact, that is the fractional-reserve model. The reserves though are only 10%.
If the people want 20%, the reserves will only have half of what the people want. Then the Fed must supply emergency funds (at interest). Also, there's general fear. The economy goes into savings mode, which they call "the paradox of thrift." Just when we need spending to keep things going, everything slows down.
So, they did QE, which you were not against. Neither was I, with qualifications: It was way too little and slow to roll out and went to the wrong people in many sectors. The commercial banksters sat on it (so it was "pushing on a string") at the Fed that started paying interest in 2008 on excess reserves. Great timing that.
What do you think about United States Notes? Are you opposed to them? You're not opposed to debt-free money are you? Can you see them working in conjunction with public banking? I can.
You like socialized banking but also the Fed? The Fed is privatized and hyper-elitist. Your public banking is Populist. Why do we need the private Federal Reserve Banks when the whole system can be public? If we don't have a Fed, we won't have Federal Reserve Notes.
So, why don't you write an outline for national legislation that takes the best of NEED and your public banking tenets and merge them. That would be killing many birds with one stone -- just what the doctor is ordering. Put your outline out here so we can all discuss the various aspects -- pros and cons -- and hammer out the image. Then we can put the fine points on it and get Dennis Kucinich to get staff to put it into the proper format with all of the cross-references checked and doubled checked.
In the next Congress, he can introduce it and we'll all, all be ready to publicize it. We'll get the progressives and libertarians and populist all working together to push it through.
The worst case would be that it would just increase public knowledge of the issue and encourage more people to clamor for public banking and debt-free money.
The Greenbackers were even a political party. The 99% should catch on if it's done right.