Banking, The Bailout, and Money

[thrombomodulin]

As a US citizen, I've been thinking a lot lately about the recent financial crisis, the bailout bill, and our country's monetary system. I realize this post is a bit off topic for this forum. However, I think that the subject is important for a few reasons: First, a number of readers here are US citizens and the monetary policy of our government does have a profound effect upon our lives. Second, an awareness of the means by which the system works can be helpful in being a good steward of whatever God has entrusted us with. Third, since our government is a republic, it ought to derive its course of action ultimately from the will of its citizens. Thus, in my opinion, there is a place here for Christians to apply the knowledge of right and wrong that we know from the Lord. Fourth, as Christians we should pray for our rulers and in this case I believe we should pray that they turn away from evil ways.

The ideas I have arrived at are, to say the least, critical of the current system. Perhaps I have made some errors in reasoning or matters of fact, so I would like to ask for critical review of the thoughts and ideas expressed below.

One of the first questions I began to consider is this: How can it be that the vast majority of US citizens are living in debt? This is the case for both the area of personal finances of individuals, and also for most businesses. I think this is peculiar in light of the fact that when one person makes a loan to another, then there ought to remain an exact balance between the amount of debit and amount of credit. Thus, it would follow that the 'average' citizen ought to have zero debt, when the amount which one expects to receive from borrowers is considered to count against the amount of debt one might have incurred. However, as it is, the average person is both not owed any money, and is now in living in debt.

So how can everyone get so far into debt? Consider, that under our monetary system, debt is normally incurred when a person or a business borrows money from a bank. Of course, a bank is a business like any other - so each bank should posses only a finite amount of money to lend out. So how is it that the banks have been able to lend out the vast amount of money that they have? Where did it all come from? I used to have the naive idea that the money loaned out by a bank merely consisted of a portion of the total money that was already given to the bank by its depositors. I have read, however, is not actually true. Instead, it is the case that banks are able to borrow money from the central banks (the federal reserve) in an amount of up to nine times that which has been deposited by its account holders.

If this is true, then the next question which follows is where do the central banks get all the money to lend to private banks, which is in turn lent to individuals and businesses? As far as I have been able to learn, the federal reserve, in fact, obtains this money simply by printing it in exchange for an agreement for the borrower to pay back the money by a certain time with interest. In other words the paper money is created out of thin air, on demand.

I would like to assert that if the federal reserve has indeed been granted the power to create money out of thin air, then it follows that it has been granted the power to lend money and receive interest fees without any cost or risk to itself. This is true because the fed is not deprived of any assets, except maybe paper, during the duration of the loan. Further, if the borrower should default, the Fed is protected from experiencing the loss of anything of intrinsic value.

Consider, that in many transactions (i.e. buying a home or business), a buyer is accepting funds indirectly from the federal reserve through the banking system. In other words, banks are serving as a man-in-the-middle to supply funds to buyers with money printed by the federal reserve. Recall also, that it is written in scripture "the borrower is the servant of the lender". In such a transaction, it follows that the ownership of whatever is purchased in a transaction is fractionally divided between the buyer and banking system. This is evident because the buyer must thereafter pay interest to the banking system, and the banks have the right of foreclosure in the case that the buyer defaults.

If this is so, then in a transaction banks attain a degree of ownership in the property for merely the cost of printing a certain amount of paper, and carrying out some bookkeeping. The banks do not contributing anything of intrinsic value to the transaction, yet the banks leave the transaction with a great benefit - the right to claim interest income, and the right to foreclose on the property in the case of a default. It is often well said "there's no such thing as a free lunch", and the gains attained by banks are no exception to this rule. In other words, the benefits attained by the banks have come at someone else's expense - which is immoral. Instead in a transaction all parties should mutually benefit.

Thus, is it not the case that ownership of property is continually being transferred to the owners of the banking system at essentially no cost (or risk) to the bank system as a whole? Granted, a particular private banks may be subject to failure, however, the central banks which loaned funds to the private banks, will never suffer the loss of assets of intrinsic value.

The moral issue here is the same as that of creating high quality counterfeit money. I use the description "high quality" to indicate the case that such counterfeit money would be of sufficient quality to be indistinguishable from money that wasn't counterfeit. In other words, I am speaking of the case where the seller could spend the funds he receives elsewhere. I would like to assert that creating such counterfeit money is wrong not just because there is a law against it (which excepts the Fed), but it is wrong in regard to the law of God because it is theft. It is a subtle form of theft because it is neither the buyer nor the seller who are in particular cheated. Rather everyone else is cheated by the loss of both real assets (property rights were transferred to the banking system) and the loss of the practical value of the paper money (because of inflation due to increase in the money supply).

If the above is an accurate description of our monetary system, I believe the following conclusions are valid:

1) The banking system enables the transfer of property that it does not own to individuals who are willing to receive loans to make a certain purchase, and hence become a debtor (servant) of the banks. This has been going on for a very long time now, and hence most people are in a state of indebtedness to the banking system.

2) The numerous competing buyers, enabled by the banking system, artificially drives up prices in the market place and also adversely affect those who choose not to borrow. The recent housing market bubble is an excellent example.

3) Whether the recent bailout bill was based upon the giving away funds or the loaning them, I would like to assert that such is nothing less than a violation of the eighth commandment - 'do not steal'. The reason for asserting this is that in either scenario ownership of a company is seized either through the lending mechanism described above, or the printing of money which costs the purchaser (the fed/government) nothing.

Of course, a society can choose either to base money upon objects that by nature exist in limited quantities or objects that exist in unlimited quantities. Objects which exist in limit quantity are silver and gold, whereas those of unlimited quantity are paper and electrons in computers. Our country has embraced a fiat currency based upon the later, which seems to be the key enabling factor that allows all of the above problems to occur. If our currency were based on objects of limited quantity it would perhaps make it impossible for the banking system to continue to commit the theft that it does. It would seem to follow that the banking system has been involved in theft at least since the nation went to a fractional reserve system. Since the gold standard was removed in the 1970's and there is no backing of assets of intrinsic value to the currency, the theft is only more severe.

There is a lot of information in the above paragraphs, and I may very well have made errors along the way. However, if everything is correct then it may very well be the case that the banking system is immoral and that Christians may be well served to keep themselves from borrowing from banks as much as possible.

I look forward to hearing your replies and corrections anyone might be able to offer.

Peter

[Theophilus]

I think this is a great time for the Kingdom of God. It appears that through suffering God calls people to himself and purifies those who are His. This could be a great opportunity to work in the fields of our LORD. The fall-out from the current crisis could last years.

I'm not even sure we should have a 401k. I've never attended a Crown Ministries study, but I've heard from people who have that it is acceptable to store up during good times to make it through the lean times, like when Joseph through the LORD rescued Egypt and his family from the famine.

I think if we spend more time worrying about our accounts than worrying about bearing fruit (love, righteousness, faithfulness) for the Kingdom, then we probably have crossed the line.

Psalm 105:7 He is the LORD our God: his judgments are in all the earth.

Matt 6:21For where your treasure is, there your heart will be also.

Matt 6:24"No one can serve two masters. Either he will hate the one and love the other, or he will be devoted to the one and despise the other. You cannot serve both God and Money.

Matt 6:31So do not worry, saying, 'What shall we eat?' or 'What shall we drink?' or 'What shall we wear?' 32For the pagans run after all these things, and your heavenly Father knows that you need them. 33But seek first his kingdom and his righteousness, and all these things will be given to you as well. 34Therefore do not worry about tomorrow, for tomorrow will worry about itself. Each day has enough trouble of its own.

Matt 22:21bThen he said to them, "Give to Caesar what is Caesar's, and to God what is God's."

Luke 12:20"But God said to him, 'You fool! This very night your life will be demanded from you. Then who will get what you have prepared for yourself?'

John 12:32 But I, when I am lifted up from the earth, will draw all men to myself."

[Paidion]

So how can everyone get so far into debt? Consider, that under our monetary system, debt is normally incurred when a person or a business borrows money from a bank. Of course, a bank is a business like any other - so each bank should posses only a finite amount of money to lend out.

A bank does not possess any money to loan out.

So how is it that the banks have been able to lend out the vast amount of money that they have? Where did it all come from?

Banks can create money out of nothing. They can create up to 9 or 10 times the amount of money which has been deposited. It is created as a debt. If you go to a bank and borrow $10,000, they simply assign the money to your account; the money has been created. When you pay back the loan, the money goes out of existence. It is a weakness of the money system. Without debt, there would not be enough money in the country to buy the goods and services needed.

I used to have the naive idea that the money loaned out by a bank merely consisted of a portion of the total money that was already given to the bank by its depositors.

So did I. But the fact is, banks are not allowed to loan any of the money placed there by depositors.

I have read, however, is not actually true. Instead, it is the case that banks are able to borrow money from the central banks (the federal reserve) in an amount of up to nine times that which has been deposited by its account holders.

They don't actually borrow it from the central banks. They create it! The whole monetary system of the U.S. and Canada is based on debt. If no one borrows, then there is insufficient money in the country. The country may be rich in goods, and services, but there is insufficient money to buy them. That is exactly what happened during the Great Depression of the 1930s.

[darinhouston]

You may want to check out the following video which describes the operation of the Fed and our monetary system.

Buy here:
http://www.fiatempire.com/

Watch free here:
http://video.google.com/videoplay?docid ... PIRE&hl=en

[thrombomodulin]

Theophilus

I think if we spend more time worrying about our accounts than worrying about bearing fruit (love, righteousness, faithfulness) for the Kingdom, then we probably have crossed the line.

I agree that worry is a sin, and Christians should not worry. I also agree that bearing fruit for the kingdom includes both "righteousness" and "faithfulness". I, however, disagree with the implication that this topic is unworthy of our time and consideration.

An aspect of faithfulness is taking care to utilize the possessions God has allowed us to receive for good, rather than instead having these unnecessarily lost to theft or carelessness. In certain circumstances there is a time period between when one receives wages, and when one will exchange those wages for goods or services that benefit someone (i.e. a family member). During the time between those two events it is quite possible through ignorance or carelessness to loose what one has received.

An aspect of righteousness is discerning which actions are fair and just, and which are not. To be righteous, Christians need to apply this knowledge so that they are not participating in actions that are unjust. One of the reasons for opening this thread is to ascertain whether or not the present banking system is in principle based on theft. If this conclusion is valid, then some quite practical conclusions about righteousness could be reached: For example, Christians who are employed in this industry might be well advised to consider seeking employment elsewhere. Second, it may be correct for Christians to never borrow money from such an institution, lest we are in some measure participating in unrighteous behavior.

Peter

[thrombomodulin]

Paidion

If no one borrows, then there is insufficient money in the country. The country may be rich in goods, and services, but there is insufficient money to buy them. That is exactly what happened during the Great Depression of the 1930s.

Thanks for replying Paidion. I haven't studied the great depression yet, however, the information I have encountered suggests that there are quite diverse opinions about both the causes and the means by which it was resolved. I am not presently prepared to make well enough informed comment about the 1930's.

Nevertheless, I do not agree with the idea expressed in the above quote. Consider that a society can use many different types of objects for money. One of the properties of "good" money is that it is easily divisible into smaller units. The metals gold and silver meet this criteria, and this is one reason for its long history of being an object of choice for money.

My understanding is that the laws of supply and demand apply to money just like any other object. In the absence of other factors, the value of money when it is scarce should become quite high. Thus, sellers should be willing to provide their goods and services for a small quantity of it, and buyers will be able to purchase all the available goods and services with whatever money exists. If the money is divisible into arbitrarily smaller units, the overall quantity of money imposes no obvious barrier to trading.

Peter

[Theophilus]

Hi Peter,

To summarize, I don't think the current banking system is based upon theft. Although not perfect, I think the US banking system is based upon fair business practices, as far I as I know them as a consumer.

One of the reasons for opening this thread is to ascertain whether or not the present banking system is in principle based on theft.

The ability to loan money from depositors or the Fed that is not held on reserve is still a contractual obligation of the bank and represents a business interest or endeavor of the bank. No stealing here. You want as much capital engaged in the system as possible and as little as possible sitting in the vault to meet the daily cash requirements.

Someone with an accounting background could answer this definitively, but my understanding is that banks are required to calculate what their daily value at risk (VAR) is and then to keep 10 times that amount (10 day VAR) on reserve. How this relates to the minimum reserve requirement I'm not sure. Both may be required at the same time as both are law. The requirement of 10 times could be a state law, so it may vary. Banks that are part of the Federal reserve system could have different requirements.

The Fed issues bills, notes and bonds whenever it needs to raise capital. I don't think this is theft either. It is assumed that the Fed, through taxpayer money, will meet those obligations.

I'm not aware of the Fed just printing money to meet its obligations. That would lead to excess capital and inflation. If this did happen, this might be considered theft because the value of the current money in the system would be devalued relatively. Finance professionals may have projections about what is the optimal levels of money in the system (M1..Mn). The Fed does print money to replace worn-out money.

I think the current system is based upon trust and confidence that counterparties will fulfill their contractual obligations as required by law.

I'm guessing when greed rules, the normal risk processes that the average person would expect go out the window. For example, predatory lending either through credit cards or mortgages is unethical. Who loans to someone who can not repay easily? This appears criminal.

If this conclusion is valid, then some quite practical conclusions about righteousness could be reached: For example, Christians who are employed in this industry might be well advised to consider seeking employment elsewhere.

Who better than Christians can be entrusted to conduct their affairs righteously? We are the salt and light and are meant to impede the rot and decay. If God calls someone to work in banking or finance, then that is a blessing to all of us.

I don't consider banking or finance to be an inherently immoral business.

Second, it may be correct for Christians to never borrow money from such an institution, lest we are in some measure participating in unrighteous behavior.

I don't think the act of borrowing money from an institution is wrong. What could be considered wrong is to borrow more than you can reasonably expect to repay.

Entering into a contract is like taking an oath. But Jesus says let your yes be yes and your no, no. This could mean that whatever you do, you should be a man faithful to his word. So contractual obligations should not be entered into lightly. As the Psalm says, a righteous man will keep his oath even when it hurts.

Just some thoughts. I hope I do not offend.

Your brother,
Theophilus

[thrombomodulin]

Darin,

Thanks for the video reference. I just finished watching it earlier this evening. The producers of the video certainly hold a similar view of the Fed to the one I expressed above.

I would like to share the following website of the Ludwig Von Mises Institute which I only discovered about one or two weeks ago. I've gotten a very good initial impression of the material available here.

Peter

[thrombomodulin]

Theophilus,

Thanks for you reply - no offense taken. I hope I did not come across as offensive or offended. It's half past midnight here, and I've got a busy weekend ahead of me. I'll try to write back to your post by Sunday night.

God Bless,
Peter

[Theophilus]

I just watched the FiatEmpire video and I thought it was good for pointing out the differences between the Constitution and our current monetary policy. I don't think it was even handed though on why we went off the gold standard. It doesn't mention the problems with being on the gold standard and it how it also could have contributed to the Great Depression.

I will think about this more, but I don't think the gold standard alone will solve the inflation problem or smooth out business cycles.

An argument in the video was that a gold coin has inherent value and a gold coin in Roman Empire times has the same purchasing power as today. It seems to me that gold is as arbitrary as fiat money. It also is a means for conducting a transaction or holding value. Someone can always dig up more gold. The obvious difference is that gold is a physical thing so it is harder to come by than a virtual thing like fiat money. So maybe gold has greater potential for limiting inflation because it itself is physically limited. But it also seems like this limitation also has its own set of problems, like less credit.

The obvious statements are:
- Government should not spend more than it taxes. We the people should demand this.
- Currency is a means of representing inherent value but in itself it introduces no new value. The production of goods and services should determine the amount of capital in the system.