Banking, The Bailout, and Money
Posted: Thu Oct 09, 2008 7:25 pm
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
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