Geez, this sounds more and more like a political forum every day.
I do not have the market cornered on "knowing all". There are always things to learn and I hope I never stop learning. Knowledge comes from experience and an inquisitive mind. I think I have both.
I have spent 30 plus years in financial services of one sort or another.
A bank lends both their money and their depositors money. The bank's money is in the form of their paid-in capital and their retained earnings (profits not distributed to stockholders). The depositor's money is just that -- money that a depositor has placed on deposit. The only other source of money for a bank is to borrow money -- which looks and works much like a deposit.
A bank cannot manufacture money. The regulators and accountants would never allow it. There are about a zillion rules and regulations that require a bank to perform all accounting in a very disciplined manner.
All accounting is dual entry accounting. That is the law. That is what is taught in business school. When a depositor makes a deposit of $500 there are two entries. The banks liability to the depositor is increased $500 and the bank's cash (asset) is increased $500. Everything stays in balance. If a part of that deposit is used to fund a loan, then two more entries are made. Cash is reduced and loans are increased. Everything stays in balance. I've seen claims that a $10,000 credit card is recorded on the books as a $10,000 asset. That is nonsense because the books would be out of balance. That new credit card is recorded as a $0 asset until funds are advanced. The advance is funded by drawing down cash. That is the only way it can work, folks. Any accountant will confirm that for you.
There is no such thing as a bank using your signature and multiplying it 9 times or whatever it is that you guys seem to claim. When a borrower signs a note it becomes a promise to pay. Some loans are disbursed in a lump sum -- like a mortgage or an auto loan. Some loans are disbursed in discrete or irregular amounts over time -- like a construction loan. Some loans are "revolving" which means the balance rises and falls over time as the borrower takes an advance or repays the balance -- like a credit card.
Some banks will use their loan portfolios as collateral to borrow more money. Perhaps this is what you are confusing. But the value of the loan portfolios is always expessed in the dollars of loan that has been disbursed (or is outstanding) and never in terms of what has not been disbursed. This is a very common practice with mortgages. The bank makes a mortgage loan. That loan is funded and the pooled with a thousand other loans just like it. The bank then uses that pool of loans as collateral for a loan from an insurance company or a pension fund. The new cash is then used to make more loans.
This is one way that banks grow. But the bank did not create any cash. It just increased both liabilities and assets at the same time. The books are still in balance.
I think all you guys get so hung up on "modern money mechanics" and see something evil there. It is nothing more than the macro economic manner in which the Federal Reserve Bank inceases or decreases the supply of money. They can print more money (deficit financing) or they can increase or reduce the bank's reserve requirement. An increase in reserve requirements reduces the supply of money because banks must hold more of their assets in cash and will make fewer loans. A decrease in reserve requirements increases the supply of money because banks will hold less of their assets in cash and thus make more loans. Other factors can make banks more or less willing to make loans -- the perception of risk, for example. But, I assure you a bank cannot fund a loan without the cash or the ability to raise the cash through deposits or borrowings.
These reserve requirements also confuse people about the way banks calculate their lending limits. Lets see if I can explain this. Assume that a bank is required to keep 10% of their assets in reserves. If I make a deposit of $500, then the bank can lend a maximum of $450 of that amount. Assume they make that $450 loan. The person who borrowed the money pays it to a third party who deposits the check in his bank (probably a different bank). That new $450 deposit is now again subject to the 10% reserve requirement. So bank #2 can lend $405 of that amount. The cycle can in theory go around and around with an endless number of banks until the amount available to be loaned is one cent. So, the original $500 deposit is supporting loan balances much larger than the $500 deposit that got it all started. Right? Well, yes because that is how our capitalist economic system works.
But, there are some major constraints on the theory. First, the world don't sit still and the original guy who deposited $500 is taking part of it out the next day to pay his electricity bill. So, every bank must be prepared to meet those demands and any bank who did not will soon have customers lined out the door and in riot. The cash on hand is constantly rising and falling.
An economist could probably explain this a lot better than I can. I know this is confusing and appears to be creating magic out of thin air. But there is nothing evil about how this works and there is nothing that an individual bank does that creates the result. Every nation on earth (except perhaps North Korea and Cuba) uses this system or something very similar. It is a control mechanism to create financial stability. Without that system, we would be in either a stone-age barter economy or using a billion dollar coin to buy a soft drink. Personally, I chose not to go that direction.
The Creature from Jekyll Island is a political essay. So is Mein Kampf. So is the Federalist Papers. So are the Turner Diaries. They all mean about the same to me -- one person's opinion who is trying to influence others. There is nothing inherently wrong with a political opinion. Some are kinda goofy though.
Whether or not a bank has a copy of your original loan agreement has nothing to do with the federal reserve. In all my years I have never seen the federal reserve take a document from a bank. It really has to do with records retention and the challenge of finding one document in a billion other documents that look just like it.
If you are sued for collection of a debt, you have a legal right to discovery. During discovery you can ask for copies of documents and accounting records. That may or may not frustrate the creditor because of the cost of compliance. Maybe they can or maybe they can't produce the documents you are asking for. Sometimes a creditor will deliver an affidavit of a lost document (they do get lost, by the way) or will deliver a scanned image (more common all the time).
I am however confused by people who insist on every ounce of documentation. If you don't owe the money, damn right you insist on all that. If you do owe, what is the point? Are you looking for a "gotcha"? Why? I know, I know "because it is my right". OK. So what?
Assuming you don't budge and refuse to accept the affidavit or scanned image, then the matter goes to the judge for a decision. That is what judges do -- they judge. The first question the judge will ask you is "do you owe the debt".
Assume you know that you really do owe the debt and you really did receive an economic gain and value from the goods and services that your purchased with the proceeds of that loan. Are you going to lie to the judge?
If you tell the judge "yes, I borrowed the money" then you are toast. If you tell the judge, "no, I did not borrow the money" then he may have more questions for you and for the plaintiff and he will eventually arrive at a decision or a judgment about who he believes. If you tell the judge, "well it all depends on The Creature from Jekyll Island" then next sound you are going to hear is "bang, bang", as in the sound of the judge's gavel.
If you really borrowed the money and tell the judge "no", then you are a liar and you have committed fraud. People have been telling lies since the spoken language was invented so the fact that people lie does not shock me. It does, however, always offend me. I don't remember any lesson in Sunday School about "Times When It Is OK to Lie Because The World Ain't Fair".
I am not suggesting that any of you are liars or crooks. So, don't get all righteous on me. I take each of you at face value that you are sincere but misguided. If I did not, then I would not spend my time trying to educate.
Guys, can anyone show me just one court case where the defendant prevailed on the premise of the Jekyll Island/modern money mechanics theory?
Just one, please. I would dearly love to read the transcript.
This is an interesting intellectual exercise. If anyone wants to dialogue with me privately, please do so by email to
debtguy@hotpop.com.
PS for caliber. The reason for our debt-ridden society is two-fold. First is a culture based upon consumer consumption. Second is a capitalistic structure that is highly responsive to the profits of pandering to consumer demand. Our society seeks immediate gratification in everything. We save for nothing. We spend like we are never going to have to repay our debts. Businesses encourage that consumer behavior in order to maximize their short-term profits. Personally, I think we cannot continue to be the wealthiest nation on earth when our countrymen are up to their necks in debt. The solution lies in more personal discipline.
