A bank is a license to print liquidity

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presidentbyamendment's picture
Status: Bronze Member (Offline)
Joined: Sep 29 2009
Posts: 64
A bank is a license to print liquidity

A bank is a license to print liquidity, not capital

Fractional reserve banking allows a bank to lend more money than really
exists. For time accounts this can occur at  a high multiple, and if the
bank doesn't make too many bad loans, things can continue to function,
because business has a certain amount of float in it as soon as one
ventures away from an entire economy being conducted on C.O.D.
With secure physical facilities, and loans based on solid relationships,
entities or collateral, a bank can expand a capital base several times
with no ill effect. That is, no ill effect on the bank.

More important than backing, prudence, or security measures protecting
the value of a bank's assets is the fact that even at a low reserve limit, say 3%,
fractional reserve banking allows liquidity to expand, like an optical projection,
over capital to a only a finite extent. This is a bank's license to print money.
Finite. Bearing some permanent relationship to the capitalization of the bank.
Unfortunately, such things aren't as obvious as they should be, and bear
belaboring periodically.

We now see that the Fed today doesn't have this little inconvenience. Creating
capital funds on a whim was, I believe, invented by the New York Fed, on some
dark day in the economic history of the US, and this behavior is now institutionalized.
It is also now under fabulous abuse, which some of the smartest money in the
world believes will be fatal to the US economy.

Creating capital money, by fiat, in a way that expands the money supply, and thus
debases the currency, is logically the province of the government, under the
Treasury, and with the approval of the Comptroller of the Currency. And, said
newly created funds, are not logically the property of banks. The supply of capital
funds of a fiat currency is the property of the people whose nation's name is on
the notes, in this case The United States of America.

Thus we see, without lengthy audits or legislative proceedings, that the Fed is
not the problem, the problem is that the Fed has usurped the Treasury and
populace of the United States. There isn't time, or the need, for a big new audit
of the Fed. One doesn't have to end the Fed. One has to end the FOMC's ability
to print trillions of dollars of new capital funds for a banking system which did
not earn said funds and which is killing the economy like green algae kills a
farm pond, by becoming the only remaining living organism.  The Fed would
be just fine if it were reduced, quite simply, to simply functioning as a bank.
If the USA is forced to purchase its own debt, which has happened recently,
then the Treasury can conduct a "monetization action" by  entering the requisite
new funds on it's books, and inform Congress and the public that a monetization
has occured.

Bernanke is incompetent, but I don't think he's evil. He's under pressure to
function as Almighty God, and he hasn't handled it well. Who would?
Bernanke should be removed, but more importantly, the expectation that
the Fed Chairman is the literal master of the universe is not working, and must be
removed, and it is a very urgent matter, and is not very complex, other than
winding down some of Bernanke's ongoing blunders, such as a completely
artificial housing market.

This isn't going to happen with the Obama administration. Please see
presidentbyamendment.com for an example of how it might.

presidentbyamendment's picture
Status: Bronze Member (Offline)
Joined: Sep 29 2009
Posts: 64
Re: A bank is a license to print liquidity

Email this to your Congressman and my buddy Alan Grayson...


Increases in the supply of capital funds denominated in currency of the
United States shall only be created in the name and accounts of the Treasury of
the United States. The Comptroller of the Currency shall approve such
monetization actions if necessitated by debt service problems, but all
other monetizations shall be at the option of the Comptroller. Prior laws allowing
monetization actions by and/or to the benefit of the Federal Reserve are void.

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