2007-12-16 ethics chat

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Dec 16 13:46:51 <Sotek> much of what Ron Paul wants would be bad for the US.
Dec 16 13:47:26 <Sotek> (and probably the rest of the world, given the power of the US economy.)
Dec 16 14:06:37 <Robat> Oh god, I can hardly understand what they're saying in their Teamspeak channel
Dec 16 15:00:38 <TheWoozle> Sotek: negative stuff on Ron Paul is something I need to document -- about the only bad stuff I've heard is still in the general class of reasonable disagreement e.g. abortion and gun (lack of) control.
Dec 16 15:06:51 <TheWoozle> and Robat: I think we could avoid the splintering by using wiki-discussion techniques.
Dec 16 15:10:20 <Sotek> Woozle: I refer to ending the fed and reverting to the gold standard.
Dec 16 15:11:35 <Sotek> His belief that the department of education is virtually useless is somewhat less clear-cut but I disagree there as well. (moreso than on the abortion thing, where I disagree with him, but don't think that his policy getting implemented would be purely and dramatically bad.)
Dec 16 15:14:21 <TheWoozle> Ending the Fed... *if* the conspiracy stuff I've been taking in has anything to it, that would be a good idea. According to the latest one, however, converting to the gold standard would be playing into the same hands which created the Fed in the first place.
Dec 16 15:17:40 <TheWoozle> A silver standard would make sense, although you don't actually have to have a tangible basis in order to have a sound currency (again, according to Them Crackpot Theories in the latest video) -- it just needs to be in the hands of the people, in a transparent way so that it's not vulnerable to corrupting influences, and it needs to be debt-free.
Dec 16 15:18:58 <TheWoozle> So maybe Paul is their backup strategy, if the primary one (whatever it is... Bush bombs Iran in spring of '08, declares martial law, yadda yadda) fails somehow... because everyone who opposes Bush will think oh good, Paul got in, we're saved now! and they won't look too closely at the fact that a gold standard again plays into the hands of the rich.
Dec 16 15:19:28 <TheWoozle> (According to Latest Crackpot Theory, that is... and I wish I knew a trustworthy economist...)
Dec 16 15:40:13 <Sotek> If the conspiracy stuff is valid, ending the fed /will do no good/.
Dec 16 15:40:21 <Sotek> And if it's not ... ending the fed will do no good.
Dec 16 15:41:13 <Sotek> Also: A gold standard does not play into the hands of the rich. In fact the only people whose hands it plays into are those who anticipate it ahead of time and purchase gold before the inevitable rise in the price.
Dec 16 15:42:03 <Sotek> (As for the fed - look at historical US inflation rates. Notice what has not happened since 1980ish. Explain to me why the fed is bad.)
Dec 16 15:43:39 <Sotek> I agree that the fed could be more transparent and that such would be a good thing. I agree that reducing and eventually eliminating the US debt is a good thing. (debt should generally only be taken on as an investment strategy - what you can do with the money now is more valuable than what you can do with it later. ie: buying a house, buying a reliable car, financing an essential war...) But ... we don't have to eliminate the fed to make it
Dec 16 15:43:39 <Sotek> more transparent.
Dec 16 15:43:48 <Sotek> And we don't have to eliminate the fed to reduce US debt.
Dec 16 15:46:23 <Sotek> To clarify my thing about ending the fed. It has had effects that are generally considered good - keeping inflation small but never negative. For ending the fed to be good, it would have to have harmful effects greater than those beneficial effects. I'm not aware of any possibilities short of conspiracy theory for that.
Dec 16 15:46:31 <Sotek> So if we reject conspiracy theories, we should keep the fed.
Dec 16 15:48:04 <Sotek> Now, let's assume a conspiracy theory. In that case, eliminating the fed is good, but ONLY if by doing so we weaken the conspiracy. (Because it can still do good if controlled by evil.) But we have no reason to believe that, because we don't know anything about the conspiracy except that it presumeably predates 1971 and/or 1980. (The two key dates relating to the fed.)
Dec 16 15:48:39 <Sotek> Indeed, without a tool against them, we should probably assume that we could only manage to eliminate the fed if they wanted us to. In which case doing so is bad.
Dec 16 15:49:02 <Sotek> So ... if we accept conspiracy theory, there's no reason to eliminate the fed, and still at least one reason to keep it.
Dec 16 15:50:23 <Sotek> (meanwhile there's no reason to go on the gold standard. It doesn't prevent boom-bust cycles, it doesn't prevent inflation, and it doesn't prevent deflation. The only potential good it can do is to provide confidence in the money - but we don't need that now, and should conditions where we DID need that arise, we'd be screwed ANYWAY. see: great depression.)
Dec 16 15:53:00 <Sotek> There's also the issue that Paul's desire to eliminate the legal tender law (which is part of the whole thing) could easily have the effect of permitting overt discrimination - as it would permit a store owner, say, to refuse to take any kind of payment from undesireables while still accepting US Dollars from everyone else. (As, to my knowledge, no existing discrimination law would cover that ... because, well, what would be the point?)
Dec 16 17:05:39 <TheWoozle> Sotek: I'm not sold on the Fed conspiracy theories; just saying that If... Then. I need to really dig into them and see whether or not they're consistent with the last couple of decades.
Dec 16 17:06:46 <TheWoozle> However... although we haven't had runaway inflation since Carter, we have had at least one or two recessions; accoring to the theory, these are also the tools of the Fed's owners. I don't think lack of inflation disproves anything.
Dec 16 17:07:46 <TheWoozle> The argument about gold vs. silver is that gold is scarce and therefore the supply easier to control; silver is more common, and hence vice-versa. I *don't* know yet if this makes sense. It sorta does on the surface, but I haven't had a chance to get beyond that.
Dec 16 17:08:31 <TheWoozle> The theory says that eliminating the debt won't do a thing if we still have the Fed; it may be completely wrong, and you may be right that eliminating the Fed is unnecessary.
Dec 16 17:08:44 <Sotek> However, we haven't had deflation which normally goes along with recessions.
Dec 16 17:09:10 <TheWoozle> Yes. Odd, that.
Dec 16 17:09:27 <Sotek> No, it's not. That's the fundamental goal of the Fed - to maintain inflation between 1 and 3%.
Dec 16 17:09:49 <Sotek> And the gold/silver thing ... the real problem with the gold standard is that it produces an economic crosslink which destabilizes the currency. Silver would probably be better than gold, but both have the same problem.
Dec 16 17:09:55 <TheWoozle> And I'd say that one of those recessions -- the dot-com bust -- was probably due to factors outside the control of the conspirators in the theory.
Dec 16 17:11:16 <Sotek> I would claim that if you have booms, busts are guaranteed to happen - some booms will either go too far or be on things that should not boom.
Dec 16 17:11:34 <Sotek> And either case sets up busts.
Dec 16 17:12:25 <TheWoozle> On the if we can do it then it must be what they want argument -- that's second-guessing. Even if it's true, the important thing is to document what we learned so that we don't make the same mistake the next time around.
Dec 16 17:13:12 <TheWoozle> I haven't looked at the legal tender law issue at all... when was that passed? Any other info?
Dec 16 17:13:44 <Sotek> The legal tender law ... I actually don't know when it was passed. lemme look it up.
Dec 16 17:15:20 <Sotek> hmm.
Dec 16 17:15:38 <Sotek> Google is uninformative. most of the results are pro-gold-standard sites declaring it to be theft.
Dec 16 17:17:11 <TheWoozle> A lot of this particular conspiracy may be driven by gold merchants... but then, is there anyone behind them? Or just market forces?
Dec 16 17:18:33 <TheWoozle> Constitution says: No State shall ... coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts
Dec 16 17:19:01 <TheWoozle> So if there'a a law which goes beyond this, it would be consistent of Paul to be against it because it's not in the Constitution. He's a strict Constitutionalist.
Dec 16 17:19:07 <Sotek> Well, most of them read as cranks to me. which means they don't have any reason behind it, short of believing it to be a good thing. otoh cranks are ... well ... strange.
Dec 16 17:19:16 <Sotek> Woozle: But the laws are federal, not state.
Dec 16 17:19:27 <TheWoozle> hmm
Dec 16 17:19:38 <TheWoozle> wikipediaL In 1798, Vice President Thomas Jefferson wrote that the federal government has no power “of making paper money or anything else a legal tender,” and he advocated a constitutional amendment to enforce this principle by denying the federal government the power to borrow.
Dec 16 17:19:41 <Sotek> That's a restriction on the states, not on the fed. And his opposition to legal tender has not, to my knowledge, been presented as a constitutional thing.
Dec 16 17:19:54 <TheWoozle> But then there's the Jefferson thing above.
Dec 16 17:20:17 <Sotek> But there hasn't been such an amendment, thus ...
Dec 16 17:20:17 <TheWoozle> Not actually in the constitution, but clearly Jefferson didn't want the US printing legal tender.
Dec 16 17:20:40 <TheWoozle> And then there's the Legal Tender Act of 1862
Dec 16 17:22:18 <TheWoozle> Just on the face of it, it seems to me that the government shouldn't force people to *accept* fiat money for payments not involving the government; the most the govt should do would be to say this is how we'll pay *our* debts, and this is what we expect taxes to be paid in.
Dec 16 17:22:30 <Sotek> That sounds like the one. And every one of the founding fathers disagreed with some aspect of the government. So eh :P
Dec 16 17:23:25 <TheWoozle> There is, however, no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services. Private businesses are free to develop their own policies on whether or not to accept cash unless there is a State law which says otherwise.
Dec 16 17:24:10 <Sotek> Hm.
Dec 16 17:24:20 <TheWoozle> So it sounds like the Legal Tender Act is basically the government saying that it's going to make *its* payments in paper money, and we have to accept that.
Dec 16 17:24:56 <TheWoozle> I'm not sure I see a clear/obvious downside to doing away with that...
Dec 16 17:27:03 <Sotek> Mm. Fair enough. I don't see an upside, either, however. And that was somewhat of a tangent. I stand by my claim that the fed has performed a demonstrable good, and no demonstrable harm, however.
Dec 16 17:30:05 <TheWoozle> That certainly deserves to be taken into account.
Dec 16 17:30:34 <TheWoozle> What do you think of the claim that it's a private for-profit corporation, and not part of the government?
Dec 16 17:31:00 <Sotek> My first question is who gets the profit, if so?
Dec 16 17:31:22 * TheWoozle looks to see if there's information on that...
Dec 16 17:34:37 <TheWoozle> It looks rather complicated.
Dec 16 17:34:54 <Sotek> why am I not surprised? How about this: How does the profit even /work/?
Dec 16 17:35:03 <TheWoozle> The Federal Reserve System, created in 1913, is a quasi-public, quasi-private banking system composed of (1) the presidentially-appointed Board of Governors of the Federal Reserve System in Washington, D.C.; (2) the Federal Open Market Committee; (3) 12 regional Federal Reserve Banks located in major cities throughout the nation acting as fiscal agents for the U.S. Treasury, each with its own nine-member board of directors; (4) numerous private U.S. member banks, which subscribe to required amounts of non-transferable stock in their regional Federal Reserve Banks; and (5) various advisory councils.
Dec 16 17:36:01 <TheWoozle> Side point: obscurity and complexity are generally supporting points for the Wacky Conspiracy Theory, because it goes on about how the whole system is designed like a shell game to move money around so you don't notice that large amounts of it are disappearing into certain hands.
Dec 16 17:36:32 <Sotek> Well, but I think it would latch onto any complexity to assert this.
Dec 16 17:36:58 <Sotek> Anyway: Item #4 is private, and while part of the /system/ is not what I would term part of Fed.
Dec 16 17:37:17 <Sotek> Item #1 is part of the government by any definition I can envision. I believe #2 is - but I'm open to proof otherwise.
Dec 16 17:37:21 <TheWoozle> I won't accept obscurity and complexity as direct evidence in support of the WCT, in any case... I want to understand the details.
Dec 16 17:37:40 <Sotek> #3 similar, though depending on their nature it may not be a problem for them to be private.
Dec 16 17:37:50 <Sotek> #5 I assume is largely private special interest groups, which I don't have a problem with.
Dec 16 17:38:09 <TheWoozle> #1 is presidentially-appointed, but not in the pay of the US.
Dec 16 17:38:48 <TheWoozle> The WCT argues that the presidential appointment is a sham... I think it's reasonable to at least concede that the process should be more transparent, though it may not actually be a sham.
Dec 16 17:39:03 <Sotek> That may or may not be meaningful. Also: Does the president have the power to remove?
Dec 16 17:39:54 <TheWoozle> Like... with presidentially-appointed judges, there's this whole approval process. What's the process for appointing the Board of Governors? And, as you say, what powers of removal are there?
Dec 16 17:40:24 <TheWoozle> I need to read the Fed's articles of incorporation... it *should* be spelled out in there.
Dec 16 17:40:39 <TheWoozle> Or, rather, the Federal Reserve Act.
Dec 16 17:41:41 <TheWoozle> http://www.federalreserve.gov/generalinfo/fract/
Dec 16 17:42:16 <TheWoozle> Well... here's part of the answer to your question about profits: http://www.federalreserve.gov/generalinfo/fract/sect07.htm
Dec 16 17:42:34 <Sotek> Anyway, Eh. A mix of public and private is not automatically bad. All private wouldn't inherently be bad, but would make me far more suspicious of self-interested motives.
Dec 16 17:42:36 <TheWoozle> Which reminds me... the WCT claims that the Fed has never been audited.
Dec 16 17:43:00 <TheWoozle> The fact that it pays out stock dividends makes me think that there is clearly some profit going on, and there should be auditing too.
Dec 16 17:43:19 <TheWoozle> Especially if it's acting as a part of the government.
Dec 16 17:44:07 <Sotek> If it's never been audited, it certainly should be. Assuming the information an audit would reveal isn't entirely public knowledge, anyway.
Dec 16 17:44:22 <TheWoozle> (Hmm, that document refers to stuff in the year 2000... it can't be the original text of the Act, then...)
Dec 16 17:44:42 <Sotek> (It's the current text. if you look at the footnotes they identify modifications.)
Dec 16 17:44:52 <Sotek> Now ... what actually constitutes the profit of such a bank? Not ... entirely clear.
Dec 16 17:46:10 <TheWoozle> If it were an ordinary bank, it would be clearer: payments minus loans.
Dec 16 17:46:27 <TheWoozle> But this is a bank that creates money from nothing. How do you figure *those* profits?
Dec 16 17:46:59 <Sotek> Hence the complexity. :P
Dec 16 17:47:10 <Sotek> I *believe* it woul-it makes loans to other banks.
Dec 16 17:47:16 <Sotek> so wouldn't it just be the interest on those loans?
Dec 16 17:48:02 <TheWoozle> Well... if I receive $x in payments on existing loans, but I also print another $x in bills and loan them out to someone, how do you calculate the profit?
Dec 16 17:48:31 <TheWoozle> It would be easy to say well, I had $x income, but also $x outgo... so my net was $0.
Dec 16 17:48:51 <TheWoozle> But you've still got $x more than you had before.
Dec 16 17:49:00 <Sotek> This is probably why it specifies a fixed percentage that goes in dividends, heh.
Dec 16 17:49:12 <TheWoozle> You've just devalued the currency by $T/x, where T = total currency in circulation.
Dec 16 17:50:30 <TheWoozle> I think the upshot is that you *can't* report the bank's activities in those terms; you have to include an extra figure, i.e. how much extra money was printed (over and above the amount of old bills destroyed).
Dec 16 17:50:44 <TheWoozle> And money printed should be counted as part of the bank's income.
Dec 16 17:51:17 <Sotek> (Eh, bills printed/destroyed aren't actually relevant - since that's something separate entirely. You want the change in the supply of high-powered money.)
Dec 16 17:51:24 <TheWoozle> They can include a loss figure for the devaluation of money they already had, just to be fair, but most of the time this will be a pretty small percentage.
Dec 16 17:51:39 <TheWoozle> high-powered money?
Dec 16 17:52:08 <Sotek> Right. The fed doesn't actually print money. That's the treasury - and printed bills don't change the actual supply of money.
Dec 16 17:52:17 <Sotek> (neither do destroyed bills.)
Dec 16 17:52:28 <TheWoozle> Hmm, ok, I need to revise my understanding of the system...
Dec 16 17:52:54 <Sotek> Bills are acquired by banks and the like based on accounts.
Dec 16 17:53:45 <Sotek> What the fed does is issue loans of high-powered money to the private member banks.
Dec 16 17:54:45 <Sotek> The more loans the fed issues, the more high-powered money there is - which means the private banks are allowed to issue loans to customers and otherwise increase the monetary supply.
Dec 16 17:54:51 <TheWoozle> Federal Reserve Notes.
Dec 16 17:54:58 <TheWoozle> The Fed issues and destroys those.
Dec 16 17:55:13 <Sotek> Right. Which are essentially the accounts on the Fed.
Dec 16 17:55:56 <Sotek> By loaning more out, it increases the overall money supply. By reducing the number of loans going out (relative to repayment), it shrinks the money supply.
Dec 16 17:56:10 <Sotek> The main way it accomplishes these things is by adjusting the interest rate that it charges on the loans.
Dec 16 17:56:21 * TheWoozle looks at a $5 bill and notes that it says FEDERAL RESERVE NOTE along the top.
Dec 16 17:56:28 <TheWoozle> I think the Fed prints money.
Dec 16 17:56:38 <TheWoozle> Or at least authorizes the printing of it.
Dec 16 17:56:48 <Sotek> It authorizes the *use* of it.
Dec 16 17:56:55 <TheWoozle> hmm
Dec 16 17:57:15 <Sotek> And banks can then exchange their accounts for bills with the treasury, and the other way around.
Dec 16 17:57:17 <TheWoozle> To supervise and regulate through the Secretary of the Treasury the issue and retirement of Federal reserve notes, except for the cancellation and destruction, and accounting with respect to such cancellation and destruction, of notes unfit for circulation, and to prescribe rules and regulations under which such notes may be delivered by the Secretary of the Treasury to the Federal reserve agents applying therefor.
Dec 16 17:57:32 <Sotek> There's a lot /more/ money in existance than there are bills.
Dec 16 17:57:55 <TheWoozle> supervise and regulate... I should think that this means that the Fed decides when and how much to print.
Dec 16 17:58:16 <Sotek> But not directly, at least not fundamentally.
Dec 16 17:58:37 <Sotek> What determines the amount of physical bills printed is the demand for physical bills - which the fed can only control via the loans it issues.
Dec 16 17:59:21 <TheWoozle> Officially, that's the criterion the Fed uses to decide how much to have printed. As I understand it.
Dec 16 17:59:51 <TheWoozle> Also... do banks not have to have bills on hand to cover the loans they issue?
Dec 16 18:00:30 <Sotek> No. They have to have accounts to cover it. That's not the same thing.
Dec 16 18:00:37 <TheWoozle> Hmm
Dec 16 18:00:47 <Sotek> (This was always the case - hence why runs on the bank happened prior to the FDIC)
Dec 16 18:01:17 <-- Robat has quit (Quit: sleep)
Dec 16 18:01:33 <TheWoozle> http://en.wikipedia.org/wiki/Fractional-reserve_banking
Dec 16 18:01:55 <TheWoozle> Reserves means legal tender assets that can directly discharge the bank's liabilities.
Dec 16 18:02:16 <TheWoozle> My understanding is that legal tender means paper money...
Dec 16 18:02:28 <TheWoozle> Especially given the whole legal tender act thing...
Dec 16 18:02:37 <Sotek> Yes - but the key word here is fractional.
Dec 16 18:02:53 <TheWoozle> Fractional-reserve banking refers to the maintenance of reserves that are a fraction of the bank's demand liabilities.
Dec 16 18:02:58 <TheWoozle> I was getting around to that bit...
Dec 16 18:03:19 <TheWoozle> They don't have to have assets to cover 100% of loans, but they do have to cover a percentage.
Dec 16 18:03:41 <TheWoozle> So the amount a bank can loan out is still controlled by how much actual currency they have.
Dec 16 18:04:50 <Sotek> Well, or loans from the Fed which aren't always in bills.
Dec 16 18:05:06 <TheWoozle> Ah.
Dec 16 18:05:19 <TheWoozle> What forms can they be in?
Dec 16 18:05:51 <Sotek> (silver, gold, and U.S. Bonds in past banking eras and U.S Bonds or Credit in the present banking era) <-- from the same page, those are the forms of assets. I'm not sure what Credit would consist of tangibly, but ... it might even /have/ a tangible form.
Dec 16 18:05:57 <Sotek> It certainly doesn't need one.
Dec 16 18:07:02 <TheWoozle> hmm.
Dec 16 18:07:18 <Sotek> Yeah, any kind of loan qualifies. If a bank were to get a loan from another bank (and both were members of the Fed system), the bank recieving the loan would have more assets with which it could make further loans.
Dec 16 18:07:36 <TheWoozle> But in any case, the Fed controls the funds available to the banks.
Dec 16 18:07:39 <Sotek> (the bank making the loan, of course, would be required to hold a higher reserve than before.)
Dec 16 18:07:51 <Sotek> Yes. It does. But calling it printing money is ... confusing matters.
Dec 16 18:07:59 <Sotek> It's increasing the money supply, which is similar but /not/ the same.
Dec 16 18:08:40 <TheWoozle> Okay.
Dec 16 18:09:07 <TheWoozle> We've established that the Fed does actually control the printing of money, but the more important point is that it controls the total money supply.
Dec 16 18:09:54 <Sotek> Okay, right. Now ... why were we doing that in the first place >.>
Dec 16 18:10:20 <Sotek> Oh. Right. discussing the profit of the Fed.
Dec 16 18:11:02 <Sotek> Well, measuring the total money supply is ... hard. because the Fed doesn't directly control it - the Fed limits it.
Dec 16 18:11:24 <TheWoozle> So other factors can increase it?
Dec 16 18:11:32 <TheWoozle> (Up to the limit set by the Fed, I mean)
Dec 16 18:12:06 <Sotek> Right.
Dec 16 18:12:20 <Sotek> Specifically, the higher the demand for currency, the smaller the total money supply.
Dec 16 18:13:51 <TheWoozle> Are we not counting privately-held funds as part of the money supply?
Dec 16 18:13:58 <Sotek> No, we are.
Dec 16 18:14:01 <Sotek> But here's the thing.
Dec 16 18:14:13 <Sotek> Let's say we've got the 20% fractional reserve system used in the example of wikipedia.
Dec 16 18:15:00 <Sotek> The Fed gives a bank $1000 in high-powered money. You then go for a loan - the bank can give you $800.
Dec 16 18:15:23 <Sotek> Let's say you then spend that loan buying a car from me.
Dec 16 18:15:28 <TheWoozle> Hmm, I must be misunderstanding fractional reserve...
Dec 16 18:15:39 <Sotek> And I don't trust banks. So /I/ stick that $800 under my pillow.
Dec 16 18:16:31 <TheWoozle> ok...
Dec 16 18:16:51 <Sotek> In that case, /no/ money was generated.
Dec 16 18:17:08 <Sotek> The bank has $200 in reserves that it can't do anything with, and I have $800 in currency.
Dec 16 18:17:57 <Sotek> The bank has to hold that 200 until you repay the loan - at which point it can make another $800 loan, but that's because you repaying the loan destroyed the 800.
Dec 16 18:18:12 <TheWoozle> Ok, it's a bit more complicated than I thought...
Dec 16 18:18:32 <Sotek> Yeah. Currency is part of the money supply, but it doesn't get the multiplier effect.
Dec 16 18:18:52 <TheWoozle> The table in the Wikipedia article shows a reserve of $1000 being turned into loans totalling $4,570.50.
Dec 16 18:19:01 <Sotek> Right.
Dec 16 18:19:07 <TheWoozle> I'll admit to not yet understanding the sequence of events by which this is possible.
Dec 16 18:20:02 <Sotek> In that table, each bank gets some amount of money - the first bank presumeably from the fed (though potentially from anywhere else, it really doesn't matter), and all subsequent banks from people depositing the loan made by the previous bank.
Dec 16 18:20:12 <TheWoozle> However... I don't think that I was arguing that the *banks* create money (although the fractional reserve thing certainly seems to do so, but that's a separate point).
Dec 16 18:20:36 <Sotek> Well, what happens is that the actual creation of money happens at the banks.
Dec 16 18:20:43 <Sotek> The Fed /authorizes/ it.
Dec 16 18:21:08 <TheWoozle> If the Fed authorizes the printing of $1000 and sends it to a bank, isn't that the Fed creating the money
Dec 16 18:21:10 <TheWoozle> ?
Dec 16 18:21:20 <Sotek> When the Fed gives a bank $1000 in high-powered money it's authorizing the actual creation of $4,570.50 - and explicitly creating $1,000 of that.
Dec 16 18:21:26 <Sotek> (assuming 20% fractional reserve etc etc etc.)
Dec 16 18:22:18 <Sotek> So the existance of the extra $3,750.50 depends on the actions of the citizenry.
Dec 16 18:22:40 <Sotek> If the money doesn't get into a bank at some point in the chain, the creation halts.
Dec 16 18:22:48 <Sotek> The Fed can't control that - it can only control the initial part.
Dec 16 18:22:54 <TheWoozle> Ok, so the Fed effectively creates some money, which authorizes the bank to create even more.
Dec 16 18:22:59 <Sotek> Right.
Dec 16 18:23:26 <TheWoozle> The Fed presumably doesn't just hand money to banks for nothing; if a bank receives $1000 from the Fed, the Fed must be getting paid interest on that, yes?
Dec 16 18:24:18 <Sotek> Right.
Dec 16 18:24:31 <Sotek> That's the interest rate that everyone makes a big deal about the Fed adjusting.
Dec 16 18:24:36 <TheWoozle> Prime Rate.
Dec 16 18:24:47 <TheWoozle> Or maybe the Interbank Loan Rate
Dec 16 18:24:51 <TheWoozle> ocelot.
Dec 16 18:25:30 <Sotek> Which, btw, is the only actual control the Fed /has/ over the money supply. Banks are allowed to get whatever loans from the Fed they want, pretty much. The Fed adjusts the interest rate to adjust how desireable banks find it to borrow money from the Fed.
Dec 16 18:27:05 <TheWoozle> So... say the Fed decides to authorize an extra $100 this year. (Trivial example.) They then loan that to, say, 10 banks ($10 each). Those banks can then write loans totalling $400+, on which they charge interest.
Dec 16 18:27:36 <Sotek> Right. The rate the /banks/ charge is complicated.
Dec 16 18:27:55 <TheWoozle> The Fed gets the interest on that $100 loan until it's paid back. So they earn money for doing basically nothing.
Dec 16 18:28:12 <Sotek> Essentially, yes.
Dec 16 18:29:00 <Sotek> Well, sort of. Because the Fed earning money controls how much money is in circulation. Note that the primary (only?) stockholders of the Fed are banks.
Dec 16 18:29:07 <TheWoozle> Meanwhile, the banks earn a somewhat higher rate on the loans, which are (in turn) a multiple of the money they are borrowing.
Dec 16 18:30:11 <TheWoozle> So... a bank might be paying the Fed $6/year for that $100, but they get to charge (maybe) 9%, on 4 times as much money... an effective return of 36%, less the 6% they have to pass on to the Fed...
Dec 16 18:30:18 <Sotek> Yeah. Unless the loanee defaults - in which case the bank loses the loan.
Dec 16 18:30:28 <TheWoozle> Right, I don't know what the percentages are for that...
Dec 16 18:30:58 <TheWoozle> Obviously default rates vary depending on economic conditions, but there's got to be a range within x standard deviations.
Dec 16 18:31:22 <TheWoozle> I'm pretty sure it's less than 50%, though.
Dec 16 18:31:33 <TheWoozle> So, let's say 50% default rate.
Dec 16 18:31:58 <TheWoozle> Bank loans out $400, gets paid interest on $200 of that at 9%.
Dec 16 18:32:04 <Sotek> Which is definitely too high, but then a 3% increase is probably also too high.
Dec 16 18:32:17 <TheWoozle> Not if the bank is heavily into credit cards.
Dec 16 18:32:35 <TheWoozle> Those go as high as 30% or more.
Dec 16 18:33:10 <Sotek> Credit cards are too high, yes. They do, however, have a very high default rate as well - especially since the majority of those who /don't/ default on credit cards have little to no debt on theirs in the first place.
Dec 16 18:33:32 <TheWoozle> Higher than, say, home loans... but I bet still not anywhere near 50%.
Dec 16 18:33:44 <TheWoozle> (And if they are that high, it should be a scandal.)
Dec 16 18:34:13 <Sotek> Of assets, though? The only person I know personally who defaulted on a credit card is also the only one who ever paid interest.
Dec 16 18:34:51 <Sotek> If 1% of people default, but each one has fifty times as much debt as those who don't ...
Dec 16 18:35:19 <Sotek> Anyway! Let's see what this calculation tells us.
Dec 16 18:35:41 <Sotek> The bank is getting ... 18 dollars. It pays 6 of that back to the Fed.
Dec 16 18:36:24 <Sotek> So a profit of 12% of what it's being loaned.
Dec 16 18:36:30 <TheWoozle> (When I say default rate, I mean dollar value lost due to defaulting.)
Dec 16 18:36:52 <TheWoozle> (Or rather {dollar value lost to defaulting}/{total dollars loaned})
Dec 16 18:37:03 <Sotek> (Yeah, I follow.)
Dec 16 18:38:41 <TheWoozle> That seems like a pretty hefty profit, given the amount of loss involved.
Dec 16 18:39:02 <Sotek> Anyway: Where're you going with the example? Because one thing to remember is that it /is/ possible to shop around for loans. There /should/ be a competitive pressure on interest rates - my understanding is that typical interest rates are much closer to the prime.
Dec 16 18:39:06 <TheWoozle> (I have to wonder what the actual numbers are like.)
Dec 16 18:39:16 <Sotek> (That's what would determine how reasonable it is, yes. .p)
Dec 16 18:39:34 <Sotek> There's also the question of how much it cost the bank to actually do the loan(s).
Dec 16 18:40:02 <Sotek> I mean, it has to process the borrowing from the fed, repayments, evaluation of the loanees...
Dec 16 18:40:12 <TheWoozle> I think it basically comes down to the Fed controls the supply of money, even if other factors multiply its effect greatly downstream.
Dec 16 18:40:28 <Sotek> The Fed controls, but not entirely.
Dec 16 18:40:52 <Sotek> That is, there's fundamentally uncontrollable factors involved - the Fed is the only actual point of control, though.
Dec 16 18:41:12 <TheWoozle> I would think that their degree of control could easily overwhelm any other factors, if they want it to.
Dec 16 18:41:33 <TheWoozle> If they wanted to cause a recession, they could easily do this by calling all loans due and not issuing any new ones.
Dec 16 18:41:47 <Sotek> That wouldn't be a /recession/. ;-)
Dec 16 18:41:53 <TheWoozle> Depression.
Dec 16 18:42:14 <TheWoozle> If they wanted runaway inflation, they could do the opposite.
Dec 16 18:42:40 <TheWoozle> I suppose the justification for the Fed's existence is that they serve to find the balance in between the extremes...
Dec 16 18:42:42 <Sotek> Right. The Fed could destroy our economic system. This I agree with.
Dec 16 18:43:00 <TheWoozle> ...which is a moving target, and takes a skilled hand at the wheel to keep the economy from going off track.
Dec 16 18:43:08 <TheWoozle> I mean, that's basically the justification, right?
Dec 16 18:43:12 <Sotek> Right.
Dec 16 18:43:42 <TheWoozle> And before the Fed existed, we had depressions and all kinds of junk, which is why they decided to create the Fed -- so there would be more stability, right?
Dec 16 18:43:53 <Sotek> Well, there's a few issues.
Dec 16 18:44:10 <Sotek> First: Are we talking about the modern Fed, or just the money-issuing Fed, which is older but didn't do as much?
Dec 16 18:44:53 <Sotek> (The Fed was established in 1913. On the other hand, until 1980 it really didn't try to affect the economy, and I'm not entirely sure that it even had the tools to do so before 1971.)
Dec 16 18:45:24 <Sotek> But yes, if we're talking about the modern Fed, that's the fundamental justification.
Dec 16 18:46:28 <Sotek> And I would argue that it's been holding true so far.
Dec 16 18:48:21 <TheWoozle> Ok, I hadn't heard of this classic/modern Fed dichotomy...
Dec 16 18:50:56 <Sotek> Well, fundamentally, the Fed has changed methods of doing things over time. :P