Yves here. This post by Kervick is LONG, but that’s because he unpacks the “creation” of money in a step-by-step manner. Your patience will be rewarded.
By Dan Kervick, who does research in decision theory and analytic metaphysics. Cross posted from New Economic Perspectives
It is sometimes said that commercial banks in our modern monetary system create money “from thin air”. While there is truth in this metaphorical claim, the metaphor can also be seriously misleading, and leads some to attribute powers to commercial banks that are actually retained by the government alone under our system. It is worth trying to get clear about all this.
Suppose you have some debt to pay; or suppose that there is some good or service that you wish to purchase on the spot. How can you make the payment? Clearly you are going to have to hand over something of positive value. In order to pay off a debt you will have to possess some asset that you can transfer to your creditor in a way that discharges your obligation. Similarly, in order to purchase some good or service on the spot, you will need to possess some asset that the seller is willing to accept in exchange for the good or service that is sold to you. The asset you use might be a very specific, unique and particularized kind of thing, depending on the nature of whatever implicit or explicit contract you have with the creditor or seller. But more often than not, you will pay with a generic and widely accepted type of asset, once which in used routinely to buy things and discharge debts, and that seems to exist mainly or solely for those very purposes. Such payment assets have existed in many different forms historically, along with different kinds systems for generating, storing, transferring and regulating these assets. We customarily call these assets “money”.
Payment assets obviously possess value, for if they didn’t they would not be accepted in exchange for other things of value. As a result, it is rare that one can acquire these payment assets for nothing. Usually you need to give something up in return. The money you use to buy a car was most likely obtained either in exchange for some good you traded for the money, or for some labor service you provided to an employer. You can also obtain payment assets in exchange for promises – even for promises to hand over an even greater quantity of the very same kind of asset as some point in the future.
Among the most common ways of paying one’s own debts or paying for goods and services is to pay with the debt of a third party. For example, suppose I give a signed note to Pat Brown that says, “I agree to pay Pat Brown, or the bearer of this note, $100 on demand.” And suppose Pat has a $100 debt to the corner grocer. Pat might attempt to pay the grocery tab with that IOU. If the grocer accepts the note, then Pat has paid a debt with a debt.
Once I have issued and signed the note, and Pat has accepted it, I have a liability. And if that liability is of a kind that Pat is legally permitted to sign over or otherwise transfer to a third party, it is said to be “negotiable”. If Pat does whatever is legally required to convey the IOU to the grocer to pay the grocery tab, the grocer becomes a “holder in due course” of the negotiable liability. At that point, Pat no longer has a debt to the grocer. But I still have a debt. I previously had a debt to Pat; but now I have a debt to the grocer. That’s what it means for a debt liability to be negotiable: the creditor who holds that debt as an asset can transfer it to a third party, so that the debtor ends up owing the same debt to a new creditor.
Where did the IOU come from? Was it created from thin air? More or less. Yes, a certain amount of paper and ink and work might have been involved in producing it, so its production didn’t come with zero cost. But typically the cost of making the promise will be so low in proportion to the amount promised, that we don’t go far wrong in thinking of the promise as having been produced from thin air, created ex nihilo as it were. And it is not as though to make a promise I have to pull the promise out of my pre-existing promise stash. The promise doesn’t really come from anywhere. There is no effective limit on my ability to make promises beyond the length of my lifespan, and the number of people in the world to whom I might make them. But the fact that my ability to make promises is virtually unlimited does not mean that my ability to get my promises accepted is virtually unlimited. Some people and some commercial entities have a much easier time getting their promises accepted than do others. Making promises is a lot easier than making credible promises; and accepting a promise that you personally find credible might be a lot easier than trading such a promise to someone else. To trade away any promises you possess, you must be able to convince others that they should find the promise just as credible as you did when you first acquired it. Also, once I have made a promise and had it accepted, I am bound in a way I wasn’t before. The holder of the promise possesses a legally binding claim on my assets.
A bank deposit account is such a promise, and it therefore represents a debt or liability of a bank to the account holder. If you have a bank deposit account then you are in possession of a promise by the bank to pay you a defined amount. If it is a demand deposit account, then the promise is to pay on demand. The agreement you have made with the bank specifies the conditions under which you can demand payment on the debt or make use of that debt – and those specified conditions usually include the right to transfer part or all of that debt to a third party. Most banks have a good track record in paying the debts represented by their deposit accounts, and there are also reliable government guarantees in place to pay most of the deposit account debts that insolvent banks find themselves unable to pay. Thus bank debt functions as a fairly reliable and very widely accepted payment asset. Bank deposit liabilities are a form of money.
Of course, when you transfer the bank’s debt to a third party, you don’t literally transfer your bank account to that party. Instead you give the party some financial instrument, or send some electronic payment instruction, that ultimately results in your bank having a smaller debt to you, but a correspondingly larger debt to the payee. For example, you might have a demand deposit account with $10,000 in it and give someone a check drawn on that account for $1000. If the recipient has an account at that bank, they can present the check – your payment order – to the bank, following which your bank reduces the amount in your account by $1000 and increases the amount in the recipient’s account by $1000. In other words, the bank’s debt to you has been reduced by $1000 and its debt to the recipient has been increased by $1000. You have paid the recipient with a debt. However the debt you paid with was not your debt. Rather the debt you paid with was the debt of some other debtor – the bank – and is a debt obligation of which you were the initial creditor, not the debtor.
Note that the person who took your check to the bank might not have been willing to accept payment from the bank in the form of further bank debt, that is, in the form of an amount credited to their account at that bank. Instead they might have demanded cash. Generally speaking, that’s up to them. If they accept a deposit balance, then the bank still has a debt to them. If they are paid in cash, then the bank’s debt has been discharged, but the bank has had to surrender a payment asset in order to discharge it – in this case money from its vault.
Now this raises a question. As we have already seen, one way to pay a debt is with another debt – more specifically with a negotiable liability. But if I pay a debt with my bank’s debt, how does my bank pay that debt when they are required to pay it off? Or looked at slightly differently, given that my bank’s debt to me can serve as my payment asset, what kind of thing can serve as my bank’s payment asset? And when do banks pay the debts represented by their depositors’ account balances?
For most banks in the US banking system there are two fundamental types of payment assets banks use to pay their debts. But perhaps another way of putting it is that there are two main forms of one fundamental type of payment asset. That payment asset consists in the negotiable liabilities of the central bank, i.e. the Fed. These liabilities come in two forms: the deposit balances that commercial banks in the Fed system hold at the twelve Federal Reserve Banks, and the paper currency notes that the Fed also issues. Just as you and I possess payment assets in the form of commercial bank account balances, commercial banks possess payment assets in the form of central bank account balances. In each case, that balance is an asset of the holder of the account and a liability of the depository institution at which the account it is held. You and I can pay our debts with commercial bank debt; commercial banks pay their debts with central bank debt. Note, however, that one form of central bank debt is widely held by both commercial banks and the non-bank public: the currency notes that banks hold in their vaults and that you and I hold in our wallets.
But when do banks pay the debts represented by their depositors’ accounts? We have already considered one occasion: someone presents a check at a bank and receives either cash or a positive increment to their account balance at that bank. Another way in which bank’s pay their debts is by rolling them over into debts of the same kind or a different kind, as when the promise represented by a certificate of deposit is redeemed in the form of an increment of dollars to some demand account balance.
But banks also pay their debts when they are ordered by their depositors to pay someone who does not have an account at the same bank. Suppose you pay $300 to Bob’s Propane with a check or electronic check card, and Bob’s Propane holds its accounts at Maple Valley Bank, while your account is held at Ridge Bank. While the exact procedures for clearing and settling this payment differ according to the mechanisms used, the end result is the same. Bob will end up with $300 more in his Maple Valley Bank account, and you will end up with $300 less in your Ridge Bank account. But banks are not in the habit of giving away money for free, and Maple Valley Bank is not going to increase its deposit account liability to Bob’s Propane $300 without getting something in return. In addition, Ridge Bank does not receive the benefit of reducing its liability to you by $300 without giving something up in return. What Maple Valley Bank receives and Ridge Bank gives up is a $300 balance in their own deposit accounts at the Fed. You paid Bob with Ridge Bank’s negotiable liability; Maple Valley Bank then gave Bob its liability in the form of a deposit balance in exchange for Ridge Bank’s liability, and demanded payment from Ridge Bank. Finally, Ridge Bank paid by directing its bank, the Fed, to reduce its own account balance by $300 and increase Maple Valley Bank’s account balance by $300.
But we often hear that banks create money “from thin air”. Doesn’t that mean that a bank never has to obtain payment assets from some external source in order to pay its debts? Can’t the bank simply create its own payment assets out of the thinness of air, so to speak, and pay its debts with those newly-created assets? Aren’t banks in this sense self-funding?
No, banks are not self-funding, either individually or in the aggregate. The “out of thin air” language, while containing elements of truth, can be extremely misleading, and people using this language sometimes woefully under-represent the significance of central bank liabilities and the government in the US financial system. Banks can indeed create deposit account liabilities from thin air, just as you and I can create liabilities from thin air when we issue IOU’s and someone accepts them. But those deposit liabilities are debts of the bank, just as the IOUs that you and I issue are our debts. And these bank debts are not just so-called debts or pro forma debts. They are real debts which banks must and do routinely pay off in the course of doing everyday business; and the assets a bank uses to pay these debts come from sources external to the bank. A bank cannot simply manufacture its own payment assets from thin air.
Suppose our old friend Ridge Bank, for example, wishes to purchase a fleet of company cars. It might be able to pay for the cars by creating a deposit account for a car company and crediting that account with the total purchase price for the fleet. But that account balance is itself a debt of the bank. Yes, the bank can pay for the cars with this debt, but that is no different in principle than the fact that you and I can pay for a car with an IOU. These debts are liabilities that can and will be extinguished over time by surrendering assets that the issuer of the liability doesn’t create or control. It’s always possible that the car company will just allow the balance to sit in its account indefinitely. But more likely, the company will begin to spend the money. Some of the expenditures might be to people or companies who have accounts at the same bank, which means balances just move from one Ridge Bank account to another Ridge Bank account, without the deposit liability being discharged. But over time a large proportion of that balance will either be withdrawn in the form of cash or used to pay people who bank elsewhere, and in each case the bank will have to surrender some externally created asset to meet its obligation. And note that even if the liability just sits unredeemed in the car company’s account for an extended period of time, the existence of those liabilities reduces the bank’s equity, and thus reduces the degree to which the bank’s owners profit from the bank’s operations.
People who are fond of saying the banks create money “from thin air” often seem to suggest that banks are no different than the government in that regard, and can thus obtain valuable monetary assets simply by manufacturing them ex nihilo, in effect profiting from pure seigniorage in the way a currency-issuing government can. But this picture is wildly inadequate. If banks could simply summon their assets into existence out of the aether, then every bank in the country could be as rich as an Arabian Gulf emir, manufacturing money at will to purchase solid gold chandeliers, 100-story luxury high rises, Olympic swimming pools, indoor ski slopes, and a personal entourage of world-renowned chefs, attendants and masseuses. The sky would be the limit. But clearly this is clearly not the case. There is a lot to complain about with regard to banking; lots of people in the banking system are making completely unwarranted profits from a massively bloated and exploitative financial system. But the wrongness here comes from the banking system’s ability to suck, squeeze and swindle assets from others; not from its simply conjuring these assets out of nothing.
There are several features of the existing banking system that sometimes lead to confusion about the role of commercial banks liabilities in our existing system, and about their dependence on central bank liabilities. We have space to consider just two of them: netting and government deposits at commercial banks.
Netting. Suppose Cogswell Cogs owes $50,000 to Slate Quarry for a delivery of gravel, and Slate Quarry owes Cogswell Cogs $60,000 for a delivery of cogs. The two companies might each issue separate payments of $50,000 and $60,000 respectively to settle their obligations. A more efficient method of settling the obligations, however, would be for both companies to agree to use the Cogswell Cogs debt to reduce the Slate Quarry debt by $50,000. Slate then pays Cogswell the net $10,000 balance and their business is terminated.
Banks can do the same thing. In the US, registered banks can make use of CHIPS, the Clearing House Interbank Payment System. CHIPS has its own account at the Fed, which participating banks pre-fund at the beginning of every business day by transferring money from their own Fed account to the CHIPS account. Net daily payment balances are calculated as the resultant of all of the payment obligations the participating institutions owe to one another, and payments are made by CHIPS by the end of the day to banks that end up with a net positive closing position. If a bank has a negative closing position – that is, if the amount pre-funded is insufficient to cover that days payments – then the bank pays CHIPS what it owes by making another Fedwire transfer from its Fed account to the CHIPS Fed account. Because multiple payment obligations are incurred among those participating banks throughout the day, then just as in the case of Cogswell Cogs and Slate Quarry, the actual amount that needs to change hands in a given day is much less than it would be if each payment were processed separately by the gross settlement system Fedwire.
Notice, however, that the system is ultimately dependent on the Fedwire system, and CHIPS just inserts an efficiency-enhancing intermediary between the Fed and the banking system. Participating banks can settle some of their less time sensitive interbank payments on the books of CHIPS, but they have to settle with CHIPS via the Fed. And larger, more time-sensitive payments are still settled directly via Fedwire.
Also notice that even in the case of a netting system, financial debts are still settled with assets that are not internally manufactured from thin air by the debtor. Consider, once again, Cogswell Cogs and Slate Quarry. To settle their business, Slate paid Cogswell $10,000 and Cogswell paid nothing. But Cogswell began by owing $50,000. So does that mean that Cogswell somehow manufactured a $50,000 benefit out of nowhere? Of course not. Before they settled, Cogswell held a $60,000 debt from Slate, but at the end of the day it received only $10,000. Cogswell received a cancellation of its own $50,000 debt in exchange for cancelling $50,000 of Slate’s debt. In other words, it had to relinquish an asset.
Government deposits at commercial banks. It is sometimes argued that the US government must be dependent on commercial bank money to fund its various activities and public enterprises, because the US Treasury holds some deposit balances at commercial banks. But I believe this is a seriously misleading claim. The government is certainly dependent on private sector economic activity and finance in a more general sense: if there were less private sector economic activity, there would be correspondingly fewer goods and services produced by our society, and thus fewer real assets that the government could make obtain and make use of to carry out its own activities. But the government is not financially dependent in any fundamental way on commercial bank deposit liabilities to carry out government spending.
To see this, let’s first look at a simplified picture of Treasury taxing and spending, before moving to the more detailed and accurate picture. The US Treasury has an account at the Fed called the “general account,” and that is the account from which it spends. Suppose I have an account at Maple Valley Bank from which I pay a $2000 tax obligation to the US government. Here’s the simplified picture: I send a check to the government, and as a result of the check being cleared $2000 is transferred from Maple Valley Bank’s Fed account to the Treasury general account. At the same time, my deposit account balance at Maple Valley Bank is reduced by $2000 and so Maple Valley Bank’s debt to me is reduced by $2000. Thus, Maple Valley Bank has lost both a $2000 asset and a $2000 liability, and experiences no net loss or gain. But the US Treasury now has $2000 more and I have $2000 less. The Treasury then spends that $2000 by buying $2000 worth of sticky note pads from Acme Office Supplies, a company which banks at Old Union Bank. After the various payment operations are completed, Acme’s account at Old Union has $2000 more in it, and $2000 has been transferred from the Treasury general account to Old Union’s reserve account at the Fed.
Now here’s the more accurate picture: In practice it has been found that conducting government operations in the way just described results in undesirable volatility in bank reserve balances, which interferes with the central bank’s ability to implement its target rate for interbank lending: So the government has introduced Treasury Tax and Loan (TT&L) accounts. TT&L accounts are US Treasury accounts at commercial banks designated as TT&L depositories. Suppose Ridge Bank is such a depository. Then when I send my $2000 check to the government, it may deposit it in its TT&L account at Ridge Bank. As a result, $2000 is transferred from Maple Valley Bank’s Fed account to Ridge Bank’s Fed account. At that point, no reserves have left the banking system. But as the Treasury spends over time, it continually transfers money from its TT&L accounts to the general account, and then spends from the general account. As that happens, central bank liabilities first leave commercial bank reserve accounts and then go back into those accounts after the Treasury spends.
Clearly there is no fundamental difference between the simplified system and the more complex system that uses the TT&L accounts as monetary way stations. The TT&L accounts exist solely to smooth out the flow of central bank liabilities to and from the Treasury general account and commercial bank reserve accounts. There is no sense in which the Treasury needs the commercial banks to “create” money in those accounts to carry out its taxing and spending operations.
In a broader sense it should be clear that, far from needing to acquire commercial bank liabilities in order to spend, the government doesn’t even need to obtain Federal Reserve liabilities from commercial bank reserve accounts in order to spend, and could alter the existing system if it so chose. The central bank is itself an arm of the US government and thus liabilities of the Fed held as assets by the Treasury are just amounts owed by one government account to another government account. That the US government chooses to operate in such a way that payments from one arm of the government are processed on the books of another arm of the government is an administrative and policy choice, not a deep feature of the monetary system.
What is true in the “from thin air” metaphor is that commercial banks are able to initiate the process of expanding deposit balances via lending without first obtaining any additional assets that might be needed to handle the added payment obligations and withdrawal claims that the additional deposit liabilities might impose on the bank. It can expand the deposits first and acquire the additional assets, if necessary, afterwards. And, of course, if the bank already possesses excess payment assets, it might not be able to expand its deposit liabilities without acquiring any more payment assets. It is also important to recognize that while banks obtain some reserve payment assets by borrowing them – either from other banks or directly from the Fed – some of those reserve assets are acquired for “free”: as interest on loans the banks make to the Treasury and as interest on reserve balances they already hold.
But it is crucial to recognize that banks do not and cannot simply manufacture their own assets – whether from thin air or otherwise. What they manufacture are liabilities; that is, debts. And they obtain assets from external sources, mainly by trading debts for debts.
Does anyone know where retained earnings of the Federal Reserve are “stored” on the asset-side?
Are their accounting-profits transferred to the Fed realtime or do they make quarterly lump-sum payments to Treasury of profits?
There’s no “cash or equivalent” account on the Fed’s balance sheet, so I imagine they (following the “scoreboard” metaphor) just real-time add any profits in excess of operating costs to the Treasury’s general account at the Fed (so a reduction of Retained Earnings and a corresponding increase in deposit liability of the Treasury General Account that balances out with an asset). Can Kervick or anyone else confirm this hunch?
Here is how the banker’s game works!
Mansoor H. Khan
None of that answers the operational question: when the Fed is making money and there are credits to retained earnings, the corresponding debit on the asset side is where?
Treasury gets the Fed’s profits, so do the excess funds merely go into the Treasury’s General Account at the Fed? Or is there a different mechanism for how the transfer occurs (quarterly, ?)
This should answer most of your questions:
As for tranferring earnings, each member bank does so on its own timetable as the relevant statute only requires surpluses to be returned during that fiscal yer.
Funny enough I read through that paper trying to google the answer myself, and I’m still not clear of the mechanics.
I got to this section:
“2.2.5 Remittances to the Treasury” and unfortunately it didn’t go into mechanics of the accounting process for how the remittances occur.
That’s why I was looking for confirmation of my hunch about this:
Fed making profits:
1. Retained earnings – credit (increase)
2. Simultaneously (a), Retained earnings – debit.
3. Simultaneously (b), Liability – credit (Treasury’s General Account)
4. Simultaneously, (c) Asset – debit (Bills /funds on hand to correspond with the Treasury’s deposit at the Fed).
If this is not the case I just don’t see, accounting wise, where the retained earnings are going until the transfer from the Fed to the Treasury of any profits.
I figured if anyone would know what account any loose Fed profits are held in it would be Kervick or other MMT folks.
by the way did you see the figures in the back of that report? what a goldmine of wonky Fed data & charts !
Most purchases go into the New York Fed’s SOMA account and are then distributed to the member banks. How each one separates its earnings I’m afraid I don’t know. Scott Fullwiler probably would.
I’m wondering if there’s like a temporary holding account that the Fed holds with itself before its earned profits go off to Treasury’s General Account or used for expenses. Or maybe the money is just kind of in limbo? I’ve read all of Mosler’s work and the scoreboard metaphor and the destruction of money and such — but operationally I just don’t see how this works! Damnit.
What relevant statute would that be?
This is worth reading.
But I live in the Netherlands.
How does this function in the case of the Euro-ECB ?
We don’t have FED-wire or CHIPS, and the ECB is not connected to a government in the ususal way.
“While there is truth in this metaphorical claim, the metaphor can also be seriously misleading, and leads some to attribute powers to commercial banks that are actually retained by the government alone under our system.”
This cannot be said enough. Government backing of private debt is obviously inflationary – the values of IOUs extended by nongovernmental actors are variable, not fixed. Deflation is just as natural an outcome as inflation, unless, of course, connected insiders get the government to decree that their character is unimpeachable regardless of the facts.
The check, the limit, the constraint, on thin air money creation by banks is that they are profit-seeking. The banks that have criminal and our incompetent management (should) go out of business when they become insolvent.
‘But the wrongness here comes from the banking system’s ability to suck, squeeze and swindle assets from others; not from its simply conjuring these assets out of nothing.’
The endless cycle of socializing banks’ private losses comes about from fractional reserve lending. Standards such as Basel III prescribe bank capital on the order of 10 percent. However, these capital levels simply reflect an arbitrary judgment.
Eventually, the economic equivalent of a 1,000-year flood will overwhelm the seawall of 10 percent capital, 20 percent capital, or any other given level. Fractional reserve banking never can be made absolutely safe.
Agreed; the problem is management.
I am fascinated though in how much energy some people devote to distracting from the obviousness of the swindling, as if it’s just a natural cost of the modern world that we should all accept and praise and thank our lucky starts for the honor and privilege of promoting full employment through corporate welfare.
They keep your eyes are on the pendulum when you should be focused on the ratchet…
“Prioritizing the damage…
AGC # 4 – The Corrupt Federal Reserve
Aggregate Generational Corruption #4 — The Federal Reserve created in 1913… When one looks at the US Government there are a number of stand out past corruptions that have altered the course of history. One such past generational corruption that still affects our lives today is the creation of the The Federal Reserve in 1913. Created through bribery and corruption of the legislature, under the guise of stabilizing the economy at the time, it was really a power consolidation move by a gangster banking cabal that to this day wields extraordinary power and has reaped the benefits of many subsequent DETODs created along the way. The global power of the Federal Reserve (and a small handful of other global central banks who also owe their existence to corruption and who conspire in unison with each other) is absolutely staggering when one considers how few people control them. The bogus Lisbon Treaty in Europe that was crammed down the throat of the people, and which allowed the European Central Bank adoption, is proof that this blatant economic banking theft by the self anointed piggish elite continues today.
The essence of this Federal Reserve scam is that financial control and power is in the hands of a very few self anointed elite individuals; they control credit — the creation of money out of thin air, the payment of interest for the use of that so created money, the creation of exotic derivative products based on that money, and most importantly, who gets that money and what it is used for. Important to note here is that this financial power can be used either to make profits, a Vanilla Greed function, or to exert societal control and herd thinning, a Pernicious Greed function. Seeing and keeping in mind this functional distinction, and being aware of the very incremental shades of gray that it makes possible, will allow you to assess past and present financial machinations and how they relate to social health.
Don’t take my word for it here. Google around the web, especially in blogs, and when you get past the few pages of up front system friendly fluff links salted in by Google you will learn about the dark heart of this voracious rich man’s beast. The world of finance in its totality is one of the largest DETODs on the planet.
Job number four then will be creating a national banking system that is owned and controlled by the people.
Deception is the strongest political force on the planet.
Banking should be mostly a private sector activity.
Job number one should be the natonalization of the money system, so the government is actually responsible for issuing the money into private bank accounts as equity, without any debt attached.
After that, what happens is up to the collective will of those depositors.
I don’t recognize the government/private sector intentionally created “us” and “them” meme that has been created and promoted to divide and conquer us all.
I believe in the one sector.
Achieving the one sector is essential to getting the banking system I believe we both desire.
Deception is the strongest political force on the planet.
Chris Engel — your question about where the retained earnings of the Federal Reserve appear is answered in the annual report, page 360:
The amount due to the Treasury is reported as “Accrued interest on Federal Reserve notes” in the Combined Statements of Condition.
In turn, in the Combined Statement of Condition on page 346, a liability identified as ‘Accrued interest on Federal Reserve notes’ (amount: $1.407 billion) appears. The corresponding asset is simply the contents of the System Open Market Account, from which this liability will be paid.
Note 13 on page 407 says that the Federal Reserve remitted $88.418 billion to the Treasury during the year. It doesn’t reveal the timing of the transfers.
Excellent! You the man Haygood.
That clears up part of this. I’m still unsure of just how those actual profits coming into the Fed are transferred.
This means that SOMA doesn’t contain any cash deposits, right?
Page 5 shows the 2012 Statements of Condition.
I see the liability account you refer to and the income statement referencing the expense of interest accrued as well.
But I’m still uneasy of how, if the Fed doesn’t actually hold any cash on the sidelines, where the repository is for the actual money coming in from interest income on all their market activities?
It can’t all instantly be morphed into assets, there must be some period where it’s just sitting on the sideline in cash or some highly liquid instrument, but it just doesn’t appear. And SOMA is all term-structured assets.
I’m imagining the cash coming in from a bank paying interest on something the Fed owns, and there having to be some lag where a Fed trader is looking for an asset to throw the cash into. Where in the Fed system is that cash held if there’s no cash/cash equiv asset or even contra-liability? It can’t be that it’s completely empty of cash at all times (perhaps at the time of consolidation of the statements?).
I’m sure there’s something I’m missing.
I greatly appreciate this nugget of info though.
From the annual report:
This is interesting wording. I know that central banks aren’t liquidity constrained, it’s just hard to picture it in the accounting where they’ve got money coming in and operationally they have to hold that moeny somewhere before they put it into assets. Or, if they “destroy” it like the way taxes shred money, then is it really merely an accounting fiction that works in favor of its earnings and then it just, like a score keeper, puts the points it accounts for into the Treasury account whenever it wants?
‘This means that SOMA doesn’t contain any cash deposits, right?’
I was afraid you were gonna ask that. Like you, I noticed that no cash appears on the Fed’s balance sheet, despite the SOMA portfolio generating tens of billions in cash income.
The answer, I think, is found at the bottom of page 358:
“Federal Reserve notes outstanding, net” in the Combined Statements of Condition represents the Reserve Banks’ Federal Reserve notes outstanding, reduced by the Reserve Banks’ currency holdings of $228 billion and $172 billion at December 31, 2012 and 2011, respectively.
So in fact, the Fed is sitting on a $228 billion cash pile — richer than freakin’ Apple, who’s only got $145 billion.
But for accounting purposes — since Federal Reserve Notes held by the Fed are both an asset and a liability — the circularity problem is dealt with by netting out.
Now we know where the cash is stashed. But as Jimi used to say, ‘I just don’t know … how to go about GETTIN’ it.’
I read recently that the Federal Reserve liabilities are added to debt held by the public.
Is that what you are saying?
Well, this is a first time for me to reply to myself.
I do admit sometimes I talk to myself, out loud.
But this verbage is astonishing, if I understand it correctly.
From a paper entitled Fiscal Year 2014 Analytical Perspectives of the U.S. Government,” published by the Office of Management and Budget:
Page 72 “The Federal Reserve buys marketable Treasuries. These transactions are non-budgetary and, accordingly, the Federal Reserve’s holdings of Treasuries are included as part of debt held by the public.”
Page 73 “Federal Reserve holdings fell from $780 billion (15 percent of debt held by the public) in 2007 to $491 billion (8 percent of debt held by the public) in 2008, and then increased to $1,665 billion (16 percent of debt held by the public) in 2011. Federal Reserve holdings declined to $1,645 billion(15 percent of debt held by the public) in 2012.”
An author writing such an article with no discussion of fractional reserve lending and derivatives is either woefully naive or just plain deceitful.
What value do derivatives have without government implicitly and increasingly explicitly legitimizing their existence?
In other words, of what value is a debt that is unenforceable – only the underlying value of the credit and character of the issuer. I can promise to kill your sworn enemy for you, and you can even give me a valuable asset for my services, but you can’t exactly take me to court for nonperformance.
My concern with derivatives is the nature of removing debt from the capital reserve requirements, which allows for increased lending based upon fractional reserves. Fractional reserve lending is the same as counterfeiting. Derivatives just extend the counterfeiting.
If you are still talking about fractional reserve lending, you don’t grok how money is created. Go read the article.
I did read the article. I found it to be factually quite accurate. I think I do understand how money is created. My question would be how can you discuss this without talking about fractional reserve lending? Or do you actually buy the concept that just because the process of lending out money creates debt for the bank that they are not really creating money out of thin air? Quite simply money that did not exist before now exists in the form of a debt that bank has towards another entity such as the Fed at a low interest and debt owed to them at higher interest rate.
To ArmchairRevolutionary –
Sorry, no reply button available.
The process you descrbe has no real connection to any particular ‘fraction’ of ‘reserve-based money creation’.
pebird points out several countries operate on zero-reserves.
The issue that you identify as creating the social problem is more accurately about the private creation of money as a debt.
There’s no problem with banks issuing credit.
The problem is that the banks create money as a debt, which introduces several anti-social tenets.
Some elate to fairness. This is why Friedman actually opposed fractional-reserve banking(creating money as debt), what he called the creation and destruction of capital.
He proposed government money creation and issuance without debt.
He opposed banks creating money from thin air.
Another unfair aspect is centralization of wealth around the money-issuers. Basing money issuance on credit-wrthiness via debt(monetary-asset)-creation crowds out the less-creditworthy from first money use, and makes it more costly for them to participate.
Funny how a guy as conservative as Friedman could see the unfairness of the present money-creation paradigm.
Don’t forget Canada, which has no reserve requirement, ooooh infinite money creation.
I found the wikipedia article enlightening, https://en.wikipedia.org/wiki/Federal_Reserve_Bank esp the discussion of the statutory dividend pd to member banks with any excess (in a for-profit business this would be the earnings)’profit’ which flow through to the government. In this case the Fed is a non-profit, and is probably accounted for using a type of fund accounting (see more https://duckduckgo.com/c/Types_of_accounting) rather than the usual financial accounting thused in for-profit businesses.
So, it appears that the answer to Chris Engle’s question is, there aren’t actually any earnings the therefore no retained earnings.
Yea I see that they don’t have Retained Earnings as an account but they do use “Surplus” and refer to a “accumulated other comprehensive loss” factored into it.
Funny, I’ve always been skeptical of official Fed sources (since a lot of MMT people have said they can’t be trusted due to their misinformation on the money multiplier and other things). But this seems to make sense.
The payments to Treasury seem to occur on a weekly basis and by law the Paid-in cap must = Surplus, and any excess of the statutory surplus -> Remittance.
Yet when that remittance is paid, it extinguishes a liability (accrued interest on Federal notes), but then what asset is reduced to correspond to balance it out?
Have the guys at NewEconomicPerspectives already deconstructed all of this somewhere?
And here’s a former Fed official discussing the accounting:
Still unclear how the accounting works though when a payment is made and a liability to pay interest to Treasury is extinguished.
This was also really important which I didn’t know:
It’s probably best that you don’t understand it:
“It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
It took me years to understand it and all it did was make me old, for which I’m actually pretty grateful.
Very nice peek behind the curtain.
Taxpayers are and will continue to absorb all the losses from the Fed’s QE shenanigans. which are a bailout to the banks, most of which losses will come from the Agency MBS hitting the OMO.
You don’t hear much about that, eh?
I think I’d like to switch to a barter economy now so I can avoid the rush later.
And you will pay your taxes in cabbages and dried fish?
“The central bank is itself an arm of the US government and thus liabilities of the Fed held as assets by the Treasury are just amounts owed by one government account to another government account.”
Sorry Charlie, the Fed is a privately-owned bank that creates money out of thin air…as does any bank that lends on fractional reserves. If all of the loans (promises)were “paid” there wouldn’t be enough real assets to go around, by a long shot.
It would be fair to say that the Fed’s ownership has been shrouded in deliberate ambiguity.
Apparently the Fed’s capital stock is held by its private bank members, making it nominally 100% privately owned.
On the other hand, the chairman and a majority of the board are appointed by the president and approved by the Senate. Also, as discussed above, after paying a 6 percent dividend to its private owners, the Fed remits the rest of its profit — $88 billion last year — to the Treasury.
Ever heard the maxim of the uberrich, ‘own nothing, control everything’? The US government doesn’t own the Federal Reserve, but it exercises de facto control over it, and skims off the lion’s share of the profits. This is exactly as its founders intended.
$88 billion a year might seem like a high price to pay for protection. But banksters hit the jackpot for trillions in 2008. For Goldman Sachs and Morgan Stanley, who got a free pass to flout the rules and rebadge themselves as commercial banks, survival was priceless.
Each and every Federal Reserve bank is a private stock bank-corporation owned by its Member-bank stockholders.
This includes the CB-functioning FRBNY.
Private bank-corparations are the Fed.
It’s not a theory, or a sort-of.
“Permit to issue the nation’s money and I care not who makes the laws.”
And, who issues the money?
The private Member-bank stockholders of the private Federal Reserve bank-corporations issue the money.
And do you really claim that actual control of the Fed system rests with any informed group in government – who would that be? LOL.
Finally to “skimming off the profits”.
Perhaps hyperbole, but I hope you realize that throughout history those ‘profits’ have come from the taxpayers who pay interest upon the Treasury holdings of the Fed banks.
So, rather than skimming profits, the Fed has been forced, by the likes of Wright Patman and Henry Gonzalez, former public-minded members of the House Banking and Currency Committee, to return excess earnings to those who paid the excess earnings to the Fed in the first place.
The Fed was totally opposed to this change, and prevented it from becoming law via the Board of Governors adopting the policy for doing so.
Add the irony of any losses on Fed operations being charged against the Fed’s remittance to Treasury, and the whole thing is a private banking charade.
The President and Congress are appointed by the banksters that fund their campaigns and give them cushy million dollar jobs after their terms. So saying that they are somehow a government check on the privately owned Fed misses the mark a bit. The government is privately owned as well. That’s how Fascism works.
I hear what you’re saying, but to offer a different perspective, that’s not the root of the ownership. It is government that is ultimately responsible.
The specific mechanism of the Fed may appear to mostly be in the hands of private actors, but that is no different in fundamental essence than today’s Defense Department or Justice Department or Treasury Department or Homeland Security Department.
Our problem is the leadership of the government, not that private actors have rendered government irrelevant. In fact, I think this is one of the more successful Big Lies out there – the predator class depend upon the government now more than ever to protect their thieving. They are completely and wholly dependent upon government being on their side.
I think this is one of the more successful Big Lies out there – the predator class depend upon the government now more than ever to protect their thieving. They are completely and wholly dependent upon government being on their side.
Absolutely. James Galbraith wrote a great book about this: The Predator State, which you doubtless refer to, but which can’t be recommended often enough.
Agreed. Dean Baker has done a lot along these lines of creating info for public consumption, too. And of course Reich and Stiglitz and Klein and Greenwald and Wolf and Warren and Barofsky, and of course Yves Smith. We really have an embarrassment of riches explaining our systemic failures.
That’s part of what makes me think there’s a legitimate, nonzero risk of a much bigger catastrophe in the end game of this mess, because this isn’t some big secret or complex intellectual notion. Everybody who looks at the problem sees the predation of the system, yet none of us have an inkling how to actually effect change. There is no group of Smart People who have things Under Control. We’re just flailing about until the bottom drops out. Or we get hit by a meteor or something.
* * *
“Think happy thoughts on the way down.” — Phillip K. Dick, Now Wait for Last Year.
See my comment above. It looks like the Federal Reserve is no different than China, when it comes to buying Treasuries, and adding to the debt held by the public.
I assume this would not be debt held by a “foreigner.”
Commercial finance lending in excess of collateral (leverage) creates new ‘money’. All money save for $300 million in demand notes (US Notes) is debt, the vast bulk from commercial finance. This is what ‘credit money system’ means.
GDP is measure of unsecured credit, precious ‘growth’ is that credit increase. Secured credit cannot — ipso facto — grow. The central banks cannot ‘print money’ in the generally accepted sense.
The government can create new currency as it wishes in the form of additional demand notes but it chooses not to do so as note issuance would destabilize ordinary, debt-dependent finance.
Unsecured credit is any loan without collateral or with re-pledged (re-hypothecated) collateral. The $1+ trillion in student loans is unsecured, as is revolving consumer debt in a similar amount. Most finance debt is unsecured in that collateral is debt/promissory notes repledged over and over, the finance institutions are leveraged 30- or more times. These institutions are insolvent; this insolvency is a large and growing component of our current decline.
Yes Virginia, there are real limits to credit creation, one being the decreased productivity of leverage- leading to insolvency and debt-saturation (where total lending capacity is deployed toward servicing existing debt).
I take issue with this:
Payment assets obviously don’t! As such the entire argument offered by Mr. Kervik is false. Money is the residue of capital destruction by industrial means; it has no value and as a fact cannot and still remain as money. Valuable money becomes a collectible and falls out of circulation. Money is both the enabler and cost of our doing ordinary business in our ordinary, heedless, wasteful way.
Ignoring the costs as we have for the past 200 years does not make them less real. This conflation of money-worth and ‘value’ is the core of our onrushing crisis and collapse. The time period for us to learn the difference and make the required changes is running very short indeed.
If we don’t do so we will destroy ourselves (finger cutting gesture across throat).
“”If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought.
We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve.
We are absolutely without a permanent money system.
When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is.
It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied.””
Robert Hemphill, Economist
Chief Credit Officer
Federal Reserve Bank of Atlanta
Like the IRS, the exact status of the Federal Reserve vis government causes a lot of confusion and angst. They both came out of the same era when the focus amongst elites was how to contain social dislocation caused by their own rapacity.
It’s no wonder at all that a century later, with the same socio cultural forces at work, there’s a renewed focus on just how banking and taxation work in the US, the mechanics of the system, who operates it and how this relates to democratic governance.
… and controlling all that discontent requires consumerism – aka a very long term ponzi scheme… now hitting the wall unless we can all fly off to Mars. It is unfortunate that the reckoning will fall to the poor and not the assassins.
But are you not encouraged by the efforts of Adair Turner to propose having government step in and issue deficit-closing money, without issuing debt, as proposed to FDR by Simons, Fisher and others.
Video and paper, and slides, of his presentation available here.
Turner’s novel construct is that of Overt Permanent Money Finance(OPMF)
Quite revolutionary, really, for a Lord in the system.
Another view on money:
“The Creation of Money by Banks and the Fed.
First, consider what happens when you, as an individual, borrow money. Suppose you go to the bank and obtain a loan:
The bank gets a new asset (your note) and a new liability (additional funds in your checking account).
You have new money to spend, and the balance in your checking account, which is part of the nation’s money supply, is raised by the amount of the deposit.
Banks are required to keep a percentage of their deposit liabilities as reserves, either on deposit at the Fed or in vault cash. When you spend the money and your check clears, your bank loses reserve deposits at the Fed and the other banks gain new reserve deposits at the Fed. Thus, reserves as well as deposits are redistributed among banks. The amount of money a bank can create by lending is limited by the amount of its excess reserves.”
Seems like a better view of what is happening.
The article and discussion were informative. Our eyes are off the ball though. As mentioned, the problem is how the few manage to divert money to their troughs in such massive amounts leaving others working hard for little return.
A big problem with money (or capital) is that it achieves neutrality however it is come by. Drug dealers and lobbyists use the same money as the rest of us. We pay taxes on our baccy and rum, they press us into foreign adventures and from the mayhem and criminality they get rich. Then they describe themselves as risk takers. ‘Hindmosts’ might be better.
There is another side to money – as there usually is in the argument of mainstream economics. What is money to the indebted Indian farmer about to commit suicide? What is it to the indentured university student?
What justifies the proportion in which money is held, or used to prevent politics through “economics”?
On the basis of what history do we allow money to be managed by banks or managed without full public scrutiny, especially as we now have the technology to do this? One can at least imagine a money system in which amounts held were closely connected with contribution made in this life and work that needs to be done. We are scared of rational practice – not without reason on occasion. What would rational money be? The stuff we have is preventing democracy.
To answer your question of “What would rational money be?”
PLEASE have a read.
… my eyes lost the ball right after the kickoff.. but I’m curious about all the capricious bank-favorable rules (from agencies and never challenged) and laws (from corrupt politicians) which change the rules so that commercial depositaries can be stuffed with derivatives. Huh? Are they negotiable “liabilities?” Sounds like the answer is no, and/or who knows. Isn’t this a form of money printing when the rule also says that in the event of a default the derivatives must be paid out first? Then all the little savers might or might not get their money back. Money printing limited to an elite class.
Banks create money out of thin air to make loans and then go looking to borrow the money elsewhere to cover the loans they have made. That “elsewhere” is ultimately the Fed which creates money in turn out of thin air to back this action.
All of this lending is based on the notion of collateral, that there is an asset somewhere which ultimately balances the money the Fed creates. We tend to think of this collateral as a physical object like land, a house, or a factory, but it doesn’t have to be.
We live in a credit economy. Think of your credit card. The collateral can be your bank account. You say that you don’t have enough in your bank account to cover your credit card bill? No problem, your collateral is the expectation of your future earnings.
Banks want their loans to be repaided, but this is not why they make them. They make loans for the fees and interest they can charge on them. These minus their operating expenses and the interest the Fed is charging them are their profit.
This brings up the important point that
Collateral = amount of loan
Repayment = amount of loan plus interest and fees
While the first equation balances, the second doesn’t, and we are left asking where the money to cover the interest and fees comes from.
Well, if we were all making loans to each other, this might all cancel out, but we aren’t. The banks and credit card companies are. The result is that the money from the interest and fees is being extracted from the many and concentrated in the hands of a few: the Jamie Dimons and Warren Buffetts. Now this still wouldn’t be a problem if government taxed away these profits from them and recycled this money to the rest of us, but it doesn’t.
We could also make up this imbalance through exports, but only if we exported more than we imported (which we don’t), but if we did, that this money was distributed to the many (and not the few which is the case).
Finally, the government can make up the imbalance by deficit spending, again with the stipulation that the money from its deficits go to the many (something which also doesn’t happen that much). The government can deficit spend by issuing debt (a de facto subsidy to the few) which will work as long as it never pays back that debt but just keeps rolling it over and increasing it. Or since it has a fiat currency, it could simply deficit spend by creating money equal to its deficit, that is without any issuance of debt.
A more fanciful approach to the problem of interest (and why I didn’t put it with the others) is if the few spent all their wealth on things of marginal value to the rest of us, –if Warren Buffett spent all his money buying the weeds in people’s yards, for instance. This too would recycle money in a way that addressed the problem of interest.
Up to this point I have buried an assumption that needs revisiting. That is that the collateral retains its value. But it often doesn’t. So what happens? The money created ultimately by the Fed out of thin air is still out there. However, now there is a loss. The Fed could lay the loss off on the bank, but what if the bank goes under, what if all the banks look like they are going under (as happened in 2007-2008)? Well, it only is a loss if the Fed forces the banks to recognize and deal with the loss. But what if the Fed doesn’t? What if it buys up the asset at par knowing it isn’t worth that much? What if it lends money to the banks at ZIRP so they can maintain these bad loans/losses indefinitely? What if the Fed even goes so far as to allow banks to borrow at ZIRP, deposit this money as reserves at the Fed, and have the Fed pay them interest on it? And how does the Fed do all this? By creating money out of thin air, by mispricing its buys so that money stays in the economy, by creating yet more money out of thin air by paying borrowers (the banks) to borrow money from it.
“While the first equation balances, the second doesn’t” > “While both equations balance, they are not equivalent. One does not repay just the amount of the loan (the principal).
I’m glad someone else understands this. Maybe you can explain it to Kervick.
Not a chance.
Just hope you’re not left without a chair when the music stops.
That’s all well and good (the article) sounds feasible but it’s always what’s been omitted that is the problem.
The INTEREST on all that credit creation! Where does it come from and who pays it? One guess…
Tim, Please. Can I please have two guesses?
1. Someone else’s Principal.
How ’bout three?
3. The interest recirculates in the economy and is never used to repay a debt, so never extinguished.
Two and Three are false and represent the inanity of current economic thinking. And so we persevere.
One is correct, and represents the insanity of our system, one that Frederick Soddy called – a confidence trick.
Keeps that ole economy just a runnin’, and explains the growth imperative.
I once saw a documentary where a great artist created paintings out of anything he came across.
I guess what I am saying is that if banksters were any good, they could create money out of anything: thin air, thick air, carbon emissions, false hopes, etc.
The system makes less sense to me the more I see of it. Finance is a cost that someone pays sooner or later – and mostly it seems those who pay never contracted to do so. If these financial services increased the size of the overall cake I suspect the cost would be increased diabetes. Derivatives and the rest remind me of learning games like Majong I don’t want to play. We would not choose to pay the debts and winnings in a game we didn’t play in – which is more or less what TARP and QE entail. The complex financial services could only be part of competitive advantage when most of the competition isn’t using them. Once everyone is, they are a cost to all and an unproductive cost at that.
Money is often the reason we can’t do something. In my last years as a cop we began costing investigations to find out if we could do them, regardless of whether we really should or not. Nearly all devolved budget holders I talk to have little concern about expansion of revenues compared with holding down costs. Investigations don’t get done, kids don’t get provision they need and so on. All this is ‘money’.
It’s an excellent article, missing only the section you might wish to write next: How the Federal Government DOES create dollars out of thin air.
Congress and the President pretend to believe the myth that the Federal Government can run short of dollars, which is why they talk about balanced budgets, “unsustainable” deficits and the imminent bankruptcy of Social Security and Medicare.
The Federal Government’s ability to create dollars is limited only by its desire to limit inflation. Ever since the U.S. has had the unlimited ability to create dollars (i.e Monetary Sovereignty), deficits have not caused inflation (See: http://mythfighter.com/2010/04/06/more-thoughts-on-inflation/)
So the President and Congress are dead wrong about balanced budgets, “unsustainable” deficits and the potential bankruptcy of Social Security and Medicare.
And being wrong, they are destroying the American economy by pretending otherwise.
So, why are the President and Congress doing this? They have been bribed, by the upper 1% income group, via campaign contributions and promises of lucrative employment, to cut spending that benefits the lower 99%.
Sadly, the 99% buys into the myth, thus assisting in its own financial suicide.
Do I understand the problem is that the Ninety-Nine percent believe the myth, and the 0ne-percent KNOW it’s a myth, but the One-percent bribe the President and Congress to pretend to believe the myth?
And the myth is that the government can NOT, right now, create all the money it wants (absent inflation)?
And the solution here would be another article by someone on “How the Federal Government DOES create dollars out of thin air” ?
Not “could” create?
But DOES create?
I totally agree.
Let’s get somebody on that.
I found the article difficult to read.
Needless complexity to hide the truth.
A Greenbackers perspective from a few years ago.
“its a huge farming operation”
There are two ways of presenting this:
1) How does the system work?
2) How should the system be working?
Answer for 1): Nobody really knows. It’s changed over and over and over.
What matters is the 2nd.
In other words all money is debt. The only asset being the ability of an economy to produce. Can this really go on indefinitely?
Well, you might be right for the most part. But I wrote the article becuase in recent weeks I have been coming across lots of people who seem to be claiming such things.
This seems to me to be taking the long way around to actually confirm the premise that the article was trying to debunk. That is, no one is suggesting that to “create money out of thin air” means that a bank can just issue its own money and become, as the article says, “as rich as an Arabian Gulf emir.”
What “creating money out of thin air” means is that a person gives a promissory note to a bank which is then “balanced out” by a “funding check” in the amount of the promissory note. The bank can then take that promissory note and sell it for its face value, turning it immediately into cash (and the note itself is as valuable as cash even if it isn’t sold–hence the vaults built for holding such “collateral”). So quite literally, a piece of paper that is only debt in the hands of the borrower instantly becomes only profit to the bank as soon as it leaves the hands of the “borrower.”
Then as thanks for that service to the bank, the “borrower” is expected to “repay” the amount of the note PLUS interest. In essence, banks charge “borrowers” to create money for the banks. As I see it, that’s the problem and the injustice–that the note of the “borrower” funds the “loan,” which under pain of asset confiscation, must be paid back with interest.
And as long as we’re going to take the Fed’s word for it, we can start with this sentence from the Dallas Fed’s website: “Banks actually create money when they lend it.” Google that sentence in quotes and the publication will be the first result.
And what they mean by that sentence is what I outlined above–banks convert promissory notes into “funding checks.” What the banks do is create “money” by selling you your own promissory note. Pretty good gig, if you’re the bank.
What has happened to oour Constitution? The money issue is why we have a Constitution and not the Articles of Confederation any longer.
September 5, 2011
The abominable banking system that is in place today, gives a bank great incentive to foreclose on an Ultra Vires contract, as the bank demands lawful money returned for the unlawful money lent.
By what Authority are the Banks doing this? There is no authority for doing this. This is in complete prohibition to Art 1 Para 10 Cl1 of our US Constitution.
All of our cases with slightly different facts all stem from the same Fraud.
The Bank did not lend you LAWFUL MONEY but the Bank intentionally wrote
a bad check and gave it to you –to circulate as money
I certainly did not know this kind of fraud was going on when I signed my mortgage and note. Did you?
The Mortgagor puts up a down payment, the Mortgagor pays a lot of fees and probably paid an attorney to represent them, all in order to get this bad check
Would a Mortgagor have put in all that money, if one knew the truth of how the Banks ran their illegal business. I bet not.
Did anyone notify you after that big day – the Banks check bounced – of course not. When the check that the Bank wrote came back to the Bank that wrote it, the bank didnt say we only have 5% , if that much and it was not stamped insufficient funds the bank stamped it paid
So since the Bank did not have the money sitting in the banks account when they wrote the check, what the bank gave you is their credit.
That is exactly what is prohibited by Art. 1 Para 10 Cl 1 of the US Constitution.
What authority gives the Bank the right to make contracts with bad checks
Lawful money is needed to make a contract valid.
Over and Over Mortgagors gave a Bank a mortgage on their castle , in return for a Bank giving you a credit entry on their books and charging you Interest on this credit. Also illegal.
Did the Bank give you lawful money or is that what you got, credit?
Banks are not allowed to lend their credit- Banks are in the business to lend
lawful money There is not a Bank charter that allows a Bank to lend their credit.
And as we continued to make monthly payments the Bank collected more money on their fraud.
You try writing a check when you dont have funds sitting in your account to cover it.
You can be sure that check is coming back markedinsufficient funds You are not allowed to do it and either is a Bank.
This scam of Ultra Vire contracts caused injury to us, the true homeowners.
In addition the banks are laundering bad checks.
The Banks violate Truth in Lending Laws.
The Banks are collecting Interest on money that doesnt exist. (Lending you 5% and collecting Interest on 95% of thin air)
And once the Bank gets their Ultra Vire contract going, they start flipping them to MERS, Securitizations , Wall Street, Title Companies etc. there is no shortage of people all wanting to get their piece of the illegal profits
Borrower in Custody Program….
BTW the Fed doesn’t list cash as an asset because to the Fed… it’s not…it’s a liability.
The article is just another limited hang out.
Banks can manufacture assets. When they create a loan they manufacture an asset.
The flaw in this piece is that it is assumed that the debt is paid sometime in the future.
The reality is that banks create money by loaning it out, until they reach the point where it is obvious that many of their loans are not going to be repaid, at which point the liability is either written off as worthless or socialized(transferred to the federal government).
This results in the banks being able to create money out of thin air, then years later someone else has to pay for it. Sure, in the long run, you can make the case that banks do not simply create money out of thin air, but in the long run we are all dead…
Please Sir, I don’t get this.
I have no economical education. I have read some popular books and I try to follow Naked Capitalism. But as I understand your post, what goes out must be in. I have read that banks can have a two figured leverage, that they can have loans more than ten times their equity. As far as I can see, there is no place for this in the scheme you are describing. Is not loaning more than your equity the same thing as creating money out of thin air? Of course, it could be somethin I misunderstand.