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y_feldblum

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Posts posted by y_feldblum

  1. Imagine a bank where deposits are not loaned out but simply stay put in the vault. The bank owner notices that never more than 5% of the total deposits are out at any time, so, to save storage space, security and insurance costs, he transfers 90% of his cash to a main branch in the nearest city, where the cost of holding is less. Then imagine that bank does the same thing, transferring 90% of its cash to even larger banks where storage costs are even less.

    Now a run occurs on the local bank and the depositors find that their money isn't there. Breach of contract? No, the bank has in its agreement a stipulation that they can delay withdrawal by some amount of time. If all the local and regional banks face a run, it may take a while to get the cash from the main banks out to the local banks to allow people to withdraw. That is functionally a "fractional reserve bank" at the local level, but it is not an unsound nor an inherently fraudulent practice.

    This is not fractional-reserve banking in any sense of the term. This is not even "local fractional-reserve" banking. The bank continues to hold full reserves, whether at the counter or warehoused. A demand deposit contract would specify a schedule of how much time the bank has to fill its depositors' requests for withdrawal, a schedule which permits the bank enough time to transfer any holdings from the warehouse to the counter. There is no breach of contract.

  2. @Old Toad: Breach of contract is a form of fraud. A demand deposit entails a contractual guarantee on the part of the bank always to be liquid enough to return the depositor's money. Fractional-reserve banking places the bank in the awkward position of being liquid enough to return its depositors' money only some of the time, but not all the time. Lending out a depositor's money, while at the same time guaranteeing that the depositor's account is as good as the money deposited, is a lie. That is breach of contract, and therefore fraud. The depositor is not the one committing fraud, and although he knows that the bank is committing fraud, there is not much immediate reason for him to care - after all, most banks will be liquid enough most of the time, right? The depositor does not place himself in jeopardy: the bank places him in jeopardy and is responsible for it. That the depositor knows what's going on does not change the bank's commission of fraud, in the form of breach of contract.

    Fractional-reserve banking is fiat money and inflation, since credit is created out of thin air. The bank deposit remains tradable as money (since that is what the bank's guarantee amounts to), but now the money is also loaned out to a third party who can trade it as well. So with $100 deposited in a demand deposit account, that $100 remains in the money supply, but now $90 is added to the money supply out of thin air. In a world devoid of fraud, if the money is lent, then only $10 of the depositor's account could be used as money, since that is all that is actually in his account.

    The widely-accepted notion of "bank" as "a safe place to put your money" contradicts the widely-accepted notion of "bank" as "an institution which specializes in lending other people's money." Although today banks are seen as both, they are not in fact both. They are one or the other.

  3. @John McVey: My point was that fractional-reserve banking, as such, has brought about a history of bank failures and economic catastrophe.

    The practical results of a practice must be used in determining the moral status of that practice, because there is no dichotomy between what is good and what works.

    This history has in popular economics not been attributed to fractional-reserve banking (the cause is often said to be "excesses" in modern explanations). Popular economics has been searching in panic for a solution to the cycle of boom and bust. They have not found the cause, but they have come up with innumerable government programs, of all kinds, to attempt to prevent or mitigate the busts. The cause in earlier American history has been fractional-reserve banking as the predominant form of fiat money and inflation; currently, the fiat money and inflation come in many forms, including fractional-reserve banking, central banking with the power to print fiat notes, and central banking with the power to print debt.

    Fractional-reserve banking is inherently unsound, as I have explained previously, because it is a legalized form of breach of contract and fraud. It does not matter that all parties know it. The fraud is not in the deceit: it is in the willful breach of contract. To take an example, suppose Adam puts $100 into a demand deposit account with a fractional-reserve bank. The bank now has liquid assets of $100 and a liability to Adam of $100. Suppose now the bank lends the $90 to Bill; the bank now has $10 of liquid assets and a $100 liability to Adam. And it has promised to Adam (in contract) that he may withdraw all of his money at any time and for whatever reason. The bank has lied, and has committed fraud and breach of contract. In its contract for the demand deposit account, the bank have $100 in liquid assets on hand, for every $100 in demand deposits in accounts with the bank. Suppose Adam writes a check for groceries for $50. The bank cannot fill that check, and now the grocery store has been ripped off (it is not a party to the fraud). If due to swings in economic reality depositors in general decide to withdraw 15% of their demand deposits, every fractional-reserve bank in the country immediately must close its doors. This scenario has taken place numerous times throughout American history, with devastating consequences. Many hardworking, honest and thrifty people have lost their life savings, through no fault of their own. The monetary expansion of fractional-reserve banking fueled booms of unsustainable malinvestments; when their unsustainabiilty became painfully apparent, the destruction of depositors' wealth fueled the ensuing busts.

    Fractional-reserve banking is a form of fiat money and inflation. Like other forms of fiat money and inflation: fiat notes, Treasury debts, Federal Reserve "Open Market Operations," etc., it is the cause of the business cycle: periods of non-productive "irrational exuberance" characterized by the growth of the money supply and significant malinvestment, followed by periods of recession, the destruction of large parts of the money supply, and the failures of these malinvestments.

    @Old Toad: So what if Mulligan's bank in Atlas Shrugged were fractional-reserve?

  4. The practical effects of fractional reserve banking are horrendous. Bank run after bank run, economic crisis after economic crisis. In all cases, it is only the initiation of the use of physical force (or the threat of it, or fraud, or the threat of it) that brings about economic crisis. Free people, who are free from force and fraud initiated against them, do not turn their economies into train wrecks. The evidence is in favor of fractional reserve banking being a form of fraud.

    Depositors are often aware of the practice. I wonder that they could ever endorse it of their own accord. Nevertheless, they endorse it when they are taxed and when they are given free deposit account insurance, when they know the banks will be bailed out if they engage in fraud, when the banks are required by law or regulation to engage in fraud, etc. The issue is not that people are not aware of what's going on. It is that they have voted to sever the connection between cause and consequence. They have voted to legalize fraud. They have voted in the FDIC. They have voted in bailouts. When the connection between cause and consequence is restored, fractional reserve banking will not be possible.

  5. @John McVey Yes, most people know what banks do with their deposits.

    But a contract is a contract. It is impossible for the bank to honor its contract to provide its customers with demand deposit accounts, and at the same time engage in fractional-reserve banking. The bank promises one thing and does another. This is so whether or not its depositors are aware of the practice.

    It is simply impossible for a bank to invest its depositors' money in illiquid long-term assets while, at the same time, promising its depositors that its deposits are as good as cash and that its depositors can withdraw any part or all of their money for any reason at any time. Therefore, whenever a bank promises this, it engages in fraud, because in fact the deposits are only as good as the illiquid, long-term assets which the bank purchased with them.

    Most of the time, only a small fraction of the depositors want their money out. But in a fractional-reserve bank with a reserve ratio of 10%, the moment 10% of the bank's depositors want their money out, the bank is ruined. Sure, the bank might borrow from another bank, and so stave off financial disaster. But the moment 10% of the country's depositors want their money out, all of the country's banks are ruined.

    This practice is, in whole or in large part, the cause of many of the downturns and economic crises in American history - most notoriously the Great Depression. This happens because fractional-reserve banking is a giant fraud, and, sooner or later, giant frauds of necessity come crashing down.

    I am not arguing that, from a highfalutin ethical standpoint, it is fraud - but from a concrete, practical standpoint, there are no consequences. On the contrary - the moral is the practical. The practice of fractional-reserve banking is the culprit in may economic crises throughout American history. It is the culprit behind many Americans losing all their life savings, simply because others got lucky enough to get their money out first. Morally, it is widespread fraud, and practically, it is economic catastrophe. This is so whether or not the practice is widely known.

    The practice is widely tolerated today, in large part, because depositors believe the government will bail them out if their deposits are in trouble, through FDIC if their banks go under, through bank-bailout packages if their banks are in trouble, through TARP, through fiscal stimulus, etc. Fractional-reserve banking is backed by the full faith and credit of the United States, and its power to do violence to its own people.

  6. @agrippa1 A deposit account which is fractional reserve could not be a demand deposit account (see my previous post for definitions), except by fraud. That is, it could not be a checking or a savings account where you the depositor are able to take your money out at any time and for whatever reason. This is because the only way to guarantee the demand-ness of a deposit account is to ensure that the account is fully backed - that the deposited assets are there, not loaned out, available for withdrawal at any time per contractual agreement.

    Other forms of investment are different. They are not demand deposit accounts. You don't get a written contract guaranteeing that you can take all of your money out at any time and for any reason. Other forms of investment would certainly exist. They would not be called savings accounts or checking accounts. They would be called certificates of deposit, investment accounts, securitized debts, funds, etc.

    Fractional reserve banking is impossible in true laissez faire. Banks which engaged in it would not be able to survive. Moreover, it would be recognized as fraud - it is nothing more than double-counting your money and pretending you have $2 for every $1 you actually have - and would be banned by law.

  7. Would this happen under a free market and why or how?

    A "demand deposit" is "An account from which deposited funds can be withdrawn at any time without any notice to the depository institution" (Investopedia). It is a binding contractual relationship.

    "Fractional reserve banking" is "A banking system in which only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal" (Investopedia).

    "Fractional-reserve demand deposit" is a contradiction in terms. If a bank both operates with fractional reserves and offers demand deposits, it is defrauding it is depositors, because it has a contractual relationship with them that they may always withdraw their deposits at any time, but the bank knowingly and intentionally makes itself unable to honor its contractual relationships by doing other than keeping its depositors' deposits on hand or in safe keeping.

    Serious, pervasive fraud has serious, pervasive consequences. When that fraud is made legal and takes the form of fractional reserve banking and demand deposits, then the consequences take the form of serious and pervasive bank runs and failures, and perhaps economic catastrophe.

    In more practical terms, fractional reserve demand deposits looks like this:

    Adam walks into Dollar Bank and deposits $10,000 into a demand deposit account. He receives a bank-note representing that $10,000. The note has a face value of $10,000, and is redeemable on demand for the deposited funds of $10,000. It fully and completely represents that $10,000. A may walk back into the bank at any time and surrender the bank-note for the $10,000 he deposited. Or, he may use the bank-note to buy goods or services, and the provider of these goods and services may at any time walk into the bank and surrender the bank-note, claiming the $10,000 deposited.

    Bill walks into Dollar Bank and takes out a $10,000 loan, which Dollar Bank finances by using the $10,000 which Adam deposited into the bank. Now, Bill has the $10,000, and owes the bank the $10,000 - payable over the next ten years. But Dollar Bank does not have the $10,000 on hand to redeem the bank-note which the bank gave to Adam in exchange for the $10,000.

    When Adam walks into the bank looking to redeem the bank-note for its face value, the bank will not be able to honor its contract with Adam. And the bank has made itself unable to honor its contract willfully and intentionally, and with full knowledge. The bank simply hopes Adam does not walk in and demand the $10,000 until Bill can pay it back, or that if Adam does walk in, he only demands at most $1,000 each year, which is what the bank expects Bill can pay back.

    If Adam walks into the bank demanding $10,000, the bank will be forced to close its doors. It will have been exposed as a liar, a fraud and a cheat, and now it owes money to Adam which it gave away to Bill.

  8. even though there are no detectable particles or fields, there is still something in there.

    This is a claim to super-natural knowledge, knowledge which is not derived ultimately from detection.

    because there is no nothing

    The claim "that a nothing exists" is not the inverse of the claim "that where no object exists, no object exists."

  9. You seem to be saying that if one object is here and another is over there that our concept of "in-between" is just epistemological rather than the conceptualization of something real.

    You misread my post. An object in between to other objects is in fact in between the two other objects. I said that the "in-between-ness" in between two objects is a part of epistemology, but, unlike the two objects, this "in-between-ness" is not itself a real thing.

  10. What names for what we've found so far have we?

    Space is not a thing and it does not consist of anything. There exist many things, which are located somewhere and which take up some volume - but space is not made up of them.

    We have no evidence from observation that space is composed of anything in particular, let alone any evidence shedding light on the properties of this form of material. There is nothing out there indicating that space has mass, or emits radiation, or can combine with any of the subatomic particles. We as a sentient species have neither directly nor indirectly ever observed the properties of space.

    The meter between two objects separated in space by one meter is not itself a real thing. It is but our form of measuring the spatial relationship between the two objects. It is not our form of measuring space, because space is not itself subject to measure. The concept of measurement depends on the concept of observation, and since we have never observed space, whether directly or indirectly, we cannot properly use the concept of measurement in relation to space. There is no real "in-between" in between the two objects, since in-between-ness is a product of our mode of cognition, of our scientific methods of measuring the objects around us. The "in-between" is neither filled nor unfilled, since it is not properly a concept from metaphysics, but from epistemology.

    The treatment of general relativity as the geometry of space does not, in itself, lend any weight to the idea that space is real. Geometry describes the distance between two objects, and the way in which the distance between the two objects will change based on how the objects move. It does not attribute causal properties to space. There are many physicists who do attribute causal properties to space, but that is not the same thing as claiming a geometric interpretation of general relativity in and of itself attributes causal properties to space, which it does not.

  11. All other social systems take into account the idea that we must not think on our own and that we have a moral duty to sacrifice one to another.

    However, we must think on our own and we are not moral slaves. Capitalism is the only social system which takes actual human nature into account.

  12. Perhaps you could expand on that a bit?

    Sarbanes-Oxley holds CFOs personally accountable to the police state for a traded company's accounting and financial documents, which the other government agencies prescribe. These documents are extraordinarily difficult and extremely expensive to write, and serve only one purpose: to force traded companies, presumed guilty under Sarbanes-Oxley, to attempt to prove their innocence under punitive conditions.

  13. Hasn't the free market failed

    We are not in a free market. The financial industry is one of the most heavily regulated sectors of the economy. We have socialism - central planning - in banking by way of the Fed. We have draconian rules on investments and trading, thanks to the SEC. We have the DOJ blocking the way every time two companies talk about cooperating. We have Congress demanding that corporate executives put their entire careers on the line every time they sign financial documents - documents which make no sense, but which Congress nevertheless forced on them.

    The Fed, the SEC, the DOJ, and congress have failed. Not the free market.

  14. Volition a corollary too, so would that just make it a dependent axiom?

    It is an axiom of epistemology, although not an axiom of metaphysics - in other words, one needs to go into detail to discover how volition is related to (knowledge of) every single fact, whereas it is self-evident how existence is part of the nature of every fact.

  15. My understanding is that there are five axioms. There are three axioms of metaphysics: existence, identity (from which we get the corollary: causality), and consciousness. There are two axioms of epistemology: the validity of the senses, and volition. The axioms of epistemology are not at the root of all of philosophy and are therefore not said to be among the axioms of philosophy.

  16. Instinct is a form of knowledge. Knowledge is acquired by observation and integration. Instinctual knowledge is acquired by observation and extremely crude integration at a subconscious level. Instinctual knowledge is automatic - that is, the subconscious operates as it will, and in the higher animals instinct cannot be overridden (there is nothing in higher animals to override it).

    Reason is a form of knowledge as well. It is also acquired by observation and integration. People have the gift of complex integration at a conscious level. Reason is not automatic - conscious activity is volitional. The subconscious nevertheless continues to form knowledge form observation and extremely crude integrations, of course, but in people this activity can be monitored and controlled consciously.

    This makes instinct in people very different from instinct in animals.

    - Instinct is the primary form of knowledge for the higher animals, but people have reason in addition.

    - Instinct in the higher animals is automatic, but reason does not happen unless it is consciously and volitionally chosen.

    - Instinct in the higher animals cannot be overridden because there is nothing to override it, but reason can override instinct at any time. When reason does not override instinct or at the least monitor and control it, that is called evasion.

    For these reasons, it is very misleading to say people have instincts. The subconscious in people does the same things as the subconscious in animals, true, but beyond that there is no similarity between people and animals in terms of mode of knowledge or mode of action.

  17. Why should we believe that almost all higher animals have instincts, but humans have none?

    Instinct is automatic knowledge. That is, knowledge which is not subject to volition.

    Higher-order animals possess knowledge, but they do not possess volition. We call that instinct.

    People possess knowledge as well as volition. We call that reason.

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