Uncomfortable answers to questions on Economy • Hacker News Board

Re: Uncomfortable answers to questions on Economy

#11

Post by troystribling » Fri, Jul 25, 2008, 12:49 PM UTC

ars wrote: post #10

troystribling wrote: post #9

Earlier quoted context omitted.

Money can be destroyed by unpaid debts. The past bubble originated from money creation by loans. Read Wikipedia article on fractional reserve banking http://en.wikipedia.org/wiki/Fractional-reserve_banking

The money was not destroyed, the person who took out the loan has it. Maybe he spent it, so whoever he gave it to has it, but it was not destroyed. Fractional reserve banking is a lovely canard that is trotted out constantly, but it is not the monster the internet makes it out to be. Don't believe popular logic just because it's repeated over and over. Fractional reserver banking, at it's core, is a way of converting…

I do not see fractional reserve banking as a monster but the mechanism that makes banking a viable business. I have no problems with it or fiat currency

If the bank is unable to reclaim the physical money backing the loan, for example by foreclosing and reselling or having and investor cover the loss, the physical money would be destroyed. You see this happening now with banks raising money by selling equity. In other words if the loaned money bought things with no value or less value than paid then physical money is destroyed. If the loaned money buys things with more value than loaned then physical money would be created. This is simplistic description but I think accurate.

There has to be a mechanism for money and value creation and destruction. Money cannot be conserved. There is clearly more value/wealth and money in the world than 100 years ago.

Re: Uncomfortable answers to questions on Economy

#12

Post by ars » Fri, Jul 25, 2008, 1:14 PM UTC

troystribling wrote: post #11

ars wrote: post #10

Earlier quoted context omitted.

The money was not destroyed, the person who took out the loan has it. Maybe he spent it, so whoever he gave it to has it, but it was not destroyed. Fractional reserve banking is a lovely canard that is trotted out constantly, but it is not the monster the internet makes it out to be. Don't believe popular logic just because it's repeated over and over. Fractional reserver banking, at it's core, is a way of converting…

I do not see fractional reserve banking as a monster but the mechanism that makes banking a viable business. I have no problems with it or fiat currency If the bank is unable to reclaim the physical money backing the loan, for example by foreclosing and reselling or having and investor cover the loss, the physical money would be destroyed. You see this happening now with banks raising money by selling equity. In othe…

That's quite interesting what you write.

It makes me think about gold backed currency. Suppose someone builds a house, there is now more value in the world, but there is the same amount of gold. So if all currency was gold backed it would cause massive deflation as new value was created in the world, but the amount of gold remained constant.

That makes me think that money is not backed by nothing - it's backed by all sorts of physical stuff all over the world.

Am I wrong?

Re: Uncomfortable answers to questions on Economy

#13

Post by fharper1961 » Fri, Jul 25, 2008, 1:20 PM UTC

What this and other articles on the subject don't seem to explain very well, is why this has happened.

A 1973 article from Time concluded :

"Today, outside the mortgage field, U.S. usury laws are full of holes; business loans, car loans and charge accounts are almost always exempted. As borrowers have been discovering since the federal Truth in Lending law took effect in 1969, they pay as much as 20% on loans from finance companies and even 36% annual interest on mail-order loans. So long as such rates are permitted, usury laws are useless and should be scrapped." http://www.time.com/time/magazine/article/0,9171,907860,00.h...

So guess what? People in government listened (or listened to the financial industries lobbyists...), and they did scrap the few remaining usury laws that were still effective.

25 years later we are seeing, in graphic detail, why all those usury laws weren't so useless after all.

Re: Uncomfortable answers to questions on Economy

#14

Post by troystribling » Fri, Jul 25, 2008, 1:43 PM UTC

ars wrote: post #12

troystribling wrote: post #11

Earlier quoted context omitted.

I do not see fractional reserve banking as a monster but the mechanism that makes banking a viable business. I have no problems with it or fiat currency If the bank is unable to reclaim the physical money backing the loan, for example by foreclosing and reselling or having and investor cover the loss, the physical money would be destroyed. You see this happening now with banks raising money by selling equity. In othe…

That's quite interesting what you write. It makes me think about gold backed currency. Suppose someone builds a house, there is now more value in the world, but there is the same amount of gold. So if all currency was gold backed it would cause massive deflation as new value was created in the world, but the amount of gold remained constant. That makes me think that money is not backed by nothing - it's backed by all…

I agree with what you say about a gold backed currency, or any static currency supply, leading to deflation as new value is created.

I also agree with your other statement that money is backed by all the physical things. I would have said that money is a representation or abstraction of the value of all things that it can buy. As the number of things that can be bought increases the money supply needs to increase to maintain acceptable valuation. If the money available is static the value of things that can be bought would have to deflate to accommodate the new things that can be bought. It seems that the number of things that can bought increases with time so we have to live with one of the two scenarios and seem to prefer the the first. For most people the deflationary scenario would seem more unsettling than the inflationary one.

Re: Uncomfortable answers to questions on Economy

#15

Post by bokonist » Fri, Jul 25, 2008, 3:08 PM UTC

tx wrote: post #3

What I don't get is why aren't housing prices falling even further? In my recent memory (I moved to US in 2000) house prices rose by 200-400% and they haven't fallen nearly as much lately. A decent houses/condos in all interesting US metro areas are still in $400K+ range, which is absolutely insane, considering median family incomes. Even most financial planning books/sites will tell you that it's "normal" to spend a…

The prices are actually only falling in areas where it's possible to build more houses. In those areas, the price of housing must eventually fall to the marginal cost of production. In areas where zoning laws and density make new construction very difficult ( Boston, San Francisco, Seattle, New York) housing prices remain very high. Houses have essentially become collectibles ( like paintings or baseball cards). Because you can't create more of them, the price holds up against an inflating dollar.