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Do We Need Central Banks? (2017)

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Re: Do We Need Central Banks? (2017)

#61

Post by erikb »

I'm surprised that the obvious isn't mentioned even by the "opponents" of the current banking system. What increases the risk is that banks create investments without safety backups and what destroys economic growth is the huge bonuses they take out of these investments.

Maybe it's because I played poker in the past that I can intuitively see it? In poker usually players play against each other in a zero sum game. The best takes the biggest piece of the cake. But when you play in a Casino it will take a "rake", meaning a tax from big payouts. Usually on higher stake games that doesn't matter much, but on lower level stakes the average percentage of rakes is so high, that even the best players can't make a profit. Everybody will lose, no matter his skill.

And since the banking system got more and more deregulated they paid themselves higher and higher bonuses. That means even if you are the best investor today, as long as you pay banking fees it's likely you are paying all your profit plus some more, considering a normal 5-digit yearly income.

Sometimes I wonder if in fact in this system the best approach is to borrow a lot of money that you know you can't pay back and hope that for some lucky coincidence you are not put into private bankruptcy, maybe keeping yourself afloat by borrowing more money to pay off fees/interest on old debt.

Re: Do We Need Central Banks? (2017)

#62

Post by brian_cloutier »

beefield wrote: post #56
brian_cloutier wrote: post #54

Earlier quoted context omitted.

This is mostly correct but you have one thing backwards. When you pay the coffee shop (with a debit card) you're not giving them an IOU, you're giving them the same kind of dollars which you originally deposited into the bank. The system does include IOUs but those don't move around. When you give your hard cash to the bank it creates an IOU, that's what the balance you see when you login is. Your bank then lends out…

I am quite confident I do not have this backwards. (I may be bad at communicating this, though...) When I pay coffee shop with a debit cards, exactly what happens is that the bank just tells me that hey, we owe you now less, and we owe the coffee shop a bit more. At that point there is nothing else happening. I am definitely not giving any "real" dollars because I do not have them left, but I have lent them to the ba…

Okay, I'm not a banker so there's a good chance I'm the one who's wrong, and I bet the answer changes depending on the specific transaction.

> What you see in your bank account is at the same time real money (as usually talked about), but really really nothing but a bank's promise to pay you some later day real real dollars

We completely agree on this part.

> When I pay coffee shop with a debit cards, exactly what happens is that the bank just tells me that hey, we owe you now less, and we owe the coffee shop a bit more

I don't think this is true. Or, I don't think this is always true.

I can see it being true as a special case: If both you and the merchant use the same bank then sure, probably all that happens is two different IOU tallies are updated.

But I'm currently visiting Turkey, and when I swipe my card Chase definitely does not "owe the coffee shop a bit more", Chase has absolutely no relationship with the Turkish coffee shop I'm sitting in.

And maybe a temporary IOU is created between Chase and whatever Turkish bank the coffee shop is using, but I expect that IOU to be quickly resolved in a few days, when settlement happens. Real money is moved from your bank to the acquiring bank, and an associated IOU shows up in the bank account of the merchant.

Re: Do We Need Central Banks? (2017)

#63

Post by a008t »

yasp wrote: post #3

Probably not. I suspect the Austrian school of economics will be proven right about money and credit eventually.

What do you mean by "eventually"?

I find Austrian ideas very interesting. Yet the usefulness of an economic theory can be demonstrated in two ways:

1. How well the implemented ideas/policies work in practice. This is usually difficult to evaluate, as it involves counterfactuals (we never know what would have happened if other policies had been followed). Sometimes one may be able to draw a comparison between two similar economies/time periods that followed different paths, however.

2. How well the economic theory predicts the effect of certain policies / what is going to happen. The track record of the Austrian school is poor on this one; the most recent example being the prediction of the consequences of Fed's response to the "great recession" of 2009. As far as I know, both Austrian academics and practitioners (Robert Murphy, Peter Schiff) predicted that the Fed's actions would result in high price inflation, weak dollar, and would generally not be effective in promoting economic growth. Both have been wrong so far, and investors that have listened would have lost money.

Of course, you can say that the economic growth has been "malinvestment" that will need to be corrected, but without a time horizon such predictions are useless. It's been a decade now since 2009. Has the US economy been malinvesting since the abandonment of the gold standard in the 70s? At what point can we say that the Fed did a reasonably good job at stabilizing the economy and promoting economic growth?

Re: Do We Need Central Banks? (2017)

#64

Post by a008t »

badminton1 wrote: post #37

It has been only 200 years since the industrial revolution and we have managed to completely waste the planet. https://en.wikipedia.org/wiki/Anthropocene_extinction We are running out of topsoil, fresh water, fish, pollinators, oil... the oceans are becoming an acid mess full of plastic, species are going extinct, forests and the ecosystems they contain are disappearing. And all of this has been done in the name of a…

I think the question of what is the optimum human population of a country, continent, planet that maximizes prosperity and welfare is an interesting one.

Yet, apart from the problem of humans still having to be in actual close physical proximity to each other for economic activity, which results in housing problems in major cities, I do not see the signs of overpopulation or too much economic activity in Western countries. If anything, the situation in terms of the ecology seems to be getting better, not worse.

Re: Do We Need Central Banks? (2017)

#66

Post by a008t »

erikb wrote: post #61

I'm surprised that the obvious isn't mentioned even by the "opponents" of the current banking system. What increases the risk is that banks create investments without safety backups and what destroys economic growth is the huge bonuses they take out of these investments. Maybe it's because I played poker in the past that I can intuitively see it? In poker usually players play against each other in a zero sum game. Th…

That last paragraph sounds suspiciously close to what most governments with a sovereign currency are doing.

Re: Do We Need Central Banks? (2017)

#67

Post by [deleted] »

pjc50 wrote: post #33
dogma1138 wrote: post #4

Earlier quoted context omitted.

Since there is no fractional reserve and the blockchain ensures that you have the equivalent of fully correspondent banking with each node in the network there is no need for a central bank on the other hand the blockchain itself can be viewed as is the central bank with the large mining pools acting as its board of directors. That said since no blockchain currently offers a credit system it’s not really possible to…

Bitcoin exchanges certainly can "print more bitcoin" in the same sense as fractional reserve banking - the exchange doesn't have to have a stash of coins that exactly corresponds to the sum of bitcoin-denominated customer accounts. Mtgox blew up by being a fractional reserve "bank" destroyed by a "bank run". Heck, bitcoin exchanges can even print ""dollars"" in the form of USDT. > should the economic system be based…

[deleted]

Re: Do We Need Central Banks? (2017)

#68

Post by beefield »

brian_cloutier wrote: post #62
beefield wrote: post #56

Earlier quoted context omitted.

I am quite confident I do not have this backwards. (I may be bad at communicating this, though...) When I pay coffee shop with a debit cards, exactly what happens is that the bank just tells me that hey, we owe you now less, and we owe the coffee shop a bit more. At that point there is nothing else happening. I am definitely not giving any "real" dollars because I do not have them left, but I have lent them to the ba…

Okay, I'm not a banker so there's a good chance I'm the one who's wrong, and I bet the answer changes depending on the specific transaction. > What you see in your bank account is at the same time real money (as usually talked about), but really really nothing but a bank's promise to pay you some later day real real dollars We completely agree on this part. > When I pay coffee shop with a debit cards, exactly what ha…

> But I'm currently visiting Turkey, and when I swipe my card Chase definitely does not "owe the coffee shop a bit more", Chase has absolutely no relationship with the Turkish coffee shop I'm sitting in.

Admittably I made some shortcuts. Obviously chase does not likely have a relationship with that Turkish coffee shop, but it does have a relationship (which may be complex, involving visa, mastercard etc.) with the bank of that coffee shop.

So practically Chase says that now that you paid your coffee in turkey, we owe you a bit less, but at the same time we as a bank have agreed to owe that amount of dollars to the Turkish bank, who the on owes to the coffeeshop owner some turkish lira. (and someone makes also the currency conversion there). The banks have between themselves some credit/limit arrangement that they do not need to actually start moving "real" central bank money [1] every time I buy a coffee. At the end of the day, most of the time the customer payments should not have a systematic drift (if there were, it would be called bank run), so banks just work within these credit limits.

It may sound like turtles all the way down, but that is exactly what the modern financial system is. Credit all the way down. There is very little else than credit in the system.

[1 ]which the turkish bank does not even have access but that is one more complexity layer I ignore here...

Re: Do We Need Central Banks? (2017)

#69

Post by rufusroflpunch »

alexhutton wrote: post #42

The purpose of central banking is to protect private banks from bank runs. Free banking operated prior to the introduction of central banking and it was less stable. In free banking a bank either had the capital to pay its depositors or it didn't, and if it didn't it failed. Although this was a less stable situation it meant that credit couldn't expand indefinitely because each time one of the periodic bank failures…

Banks runs may be part of the origin story of central Banks, but it's definitely not the only or main reason they exist. That's what deposit insurance is for, and in the case of the U.S., bank runs continiued for decades after the Federal Reserve was created.

Central Banks exist to be a monopoly creator of money and credit for the purposes of manipulating the market. They exist to execute macroeconomic policy.

Re: Do We Need Central Banks? (2017)

#70

Post by osrec »

a008t wrote: post #66
erikb wrote: post #61

I'm surprised that the obvious isn't mentioned even by the "opponents" of the current banking system. What increases the risk is that banks create investments without safety backups and what destroys economic growth is the huge bonuses they take out of these investments. Maybe it's because I played poker in the past that I can intuitively see it? In poker usually players play against each other in a zero sum game. Th…

That last paragraph sounds suspiciously close to what most governments with a sovereign currency are doing.

Yes, the last paragraph is pretty much the system every country uses. Look at the UK, for example, where the national debt continues to rise - there is no real plan to pay it off - the system is designed in such a way that overall debt issuance must rise in order to service older debt. It's a horribly unstable system, but unfortunately we seem to have embraced it across the world.
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