An intellectual's review

[Ming]

Then they should make it game related and not just a general off topic discussion

[nbarclay]

Blake, one of my biggest objections to modern liberalism is that it is based on the politics of entitlement rather than on the politics of generosity. I do not believe that it is right for a family with a child born with health problems to have to pay the entire cost itself. But neither do I believe that it is right for the family to force others to pay against their will, because that turns the family into thieves. What I do believe is right is for the family to ask for help, and for people who can afford to pay to decide to help out voluntarily, or to decide to vote to have everyone who can afford to do so help out as long as everyone who votes to help out is willing to share in the sacrifice required to help out.

I believe that the best mechanism for sharing such sacrifices is a flat-rate tax or similar structure in which the amount of money required to meet people's basic needs is exempt from taxation. That still leaves the wealthy paying a much larger share of the costs in absolute terms. And from a practical perspective, the tax is even progressive because a family making double the exemption amount only pays half the nominal rate as a percentage of its total income, while a family making a hundred times the exemption amount pays 99% of the nominal rate. But with that kind of structure, everyone who votes to expand programs to help the needy has to share in the cost.

I'm definitely not a fan of the current U.S. health care system, for reasons more numerous and complex than I want to go into right now. I believe that it would be good for us to do a better job of helping the genuinely needy - and to do so without using unfunded mandates to engage in unfair cost shifting (which I believe violates our Fifth Amendment's prohibition against taking private property for public use without just compensation). And I believe that there ought to be ways to make the system more efficient.

But I don't think replacing the system with a system where most people expect government to provide them with all the health care they want is the right answer. Such a system is an open invitation to theft because people who pay a below-average percentage of taxes can profit by voting to have government increase taxes and spending. It is one thing for government to help a small percentage of people who have exceptionally serious needs, or whose ability to pay is exceptionally low, thereby ensuring that the votes of the people who pay for the benefits vastly outnumber the votes of those who receive the benefits. But it is something else entirely to have huge numbers of people who can afford to pay their own expenses vote to have government pay them instead, thereby shifting costs away from themselves and onto others.

(I make something of an exception for programs to help children because children are dependent not just on how much money their parents can afford to pay but also on how much their parents are willing to pay. That makes it dangerously easy for children to fall through cracks if assistance programs are based on the income of children's parents, but the parents are not willing to pay as much as they should to meet their children's needs.)

Finally, consider the fact that people who use the politics of entitlement almost always limit their concept of who is "entitled" to receive benefits to people in their own nation. From a moral perspective, it is completely absurd to argue that a poor person born in the U.S. is somehow magically entitled to a standard of living many times higher than the standard of living of the poor in Haiti. There are practical reasons for people to pay more attention to helping the poor who are near them than to helping the poor who are farther away. But if we look at the issue purely in terms of some kind of concept of moral entitlement, the vast majority of the tax dollars collected by industrialized countries to help the poor ought to go to the poor in third-world nations, not to the "poor" in the industrialized nations - many of whom would be considered middle class or even wealthy in third world nations.

[wodan11]

nbarclay, you forgot to mention "civ" in your post. Just do a quick edit, stick "civ" somewhere in there, and everyone will be happy.

It's like when you are traveling on expenses, and take someone to dinner. All you have to do is a token mention of the business, and you may then claim it as an expense (and on taxes).

(ps: moderators: j/k )

Wodan

[nbarclay]

I would consider it entirely reasonable to move this discussion to Off Topic, since virtually nothing in the last few pages has anything more than the most indirect of relevance to Civ IV. Considering how long this thread has become, I think it would probably make more sense to create a new thread in Off Topic with a pointer back to this one than to move the current thread.

[Blake]

Originally posted by couerdelion
Banking also created a mechanism for creating money since banks act as intermediaries between a large number of borrowers and a large number of lenders.

Incorrect!

That is what INVESTMENT companies do!

Banks do something a bit different.

Banks are actually empowered to increase the money supply.

Many countries have fractional reserve banking, but do not have any minimum percentage, USA requires 10%, but UK doesn't have an threshold, the current reserves are ~3.4% (what this means, is that for of the total money supply, 3.4% of it is "real" money, the rest comes from loans) .

The systems without any threshold are easier to analyze..

When a bank wants to give a loan, this is what happens:

The person comes in and asks for a loan. Is it backed by something? Sure, it's backed by XYZ, which I'm going to buy. The bank confirms this, and that XYZ has the value similar to the loan.

The bank manager now sets up this transaction:
You now have $100,000 in your account.
You now owe the bank $100,000

Nowhere does the bank actually having $100,000 to lend come into it, the bank manager just "creates" the money out of thin air. Systems which do have fractional reserve thresholds obfuscate this a little but the money is still being created out of thin air. If the bank with 10% threshold, gains $100,000 in new "good money" reserves, it can then make $900,000 in loans. (look up "Fractional Reserve banking" to see how this works).

What happens to that $100,000 is this, it circulates through the market for a little while and ends up in someones saving account, so it's true that the bank system (as a whole), is not getting "Free money" from doing this, it might earn money at 11% from the loan, and pay it back at 5% for savings.

Banks create money and they do earn a lot of money for this service. Creating money is necessary, but doing it through the medium of loans with punitive interest rates for the profit of others is not necessary.

This interest cost seems to be the big stumbling block for most of you. Why I cannot understand because interest is simply the mechanism which controls the supply of money (those willing to lend) and the demand (those willing to pay). To say that interest is wrong is like saying it is wrong to charge money for bread or almost that gravity is wrong. Why there is some philosophical problem with this I do not know but if there is, it is because people fail to understand what interest represents or why it exists. Maybe I am missing the point here because the empiricist in me can see why it exists and what purposes it serves.

Understand the point I made about banks poofing money into existence out of thin air. The loan is enabled, NOT by other peoples savings, BUT by what is backed by.

Interest in the sense of "You lend Jim $100, and he returns $110 next month", isn't so bad. I don't have a problem with investment, per-se.

Maybe I should introduce my own scenario which introduces a state ban on interest (or anything that can be expressed as a payment for the supply of money). Now I don’t suppose many of you can imagine what the world would be like in this situation – I certainly can’t – but it is presumably easy to see that if interest was set at zero, nobody would be willing to lend any money.

And here again, it's not required for existing money to be lended. Loans can and simply are poofed out of thin air. It would be just as possible to poof 0% loans out of thin air as 11% loans.

If you want a fun topic to look up, check "Social Credit"

[Krill]

Please please move this to OTF.

[Ming]

While some seem to have understood my last post, it seems others haven't...

Is it really all the difficult to work civ back in the discussion

Wodan had it right

nbarclay, you forgot to mention "civ" in your post. Just do a quick edit, stick "civ" somewhere in there, and everyone will be happy.

[nbarclay]

Originally posted by Blake

The bank manager now sets up this transaction:
You now have $100,000 in your account.
You now owe the bank $100,000

Nowhere does the bank actually having $100,000 to lend come into it, the bank manager just "creates" the money out of thin air.

You're looking at the wrong point in time. As long as the borrower's money remains in the bank, the loan exists only on paper, not as an actual transfer of funds out of the bank. The $100,000 loan is offset by a $100,000 deposit, so the amount of the bank's loans and the amount of its deposits remain in balance.

The situation changes, however, when the borrower pulls the money out of the bank in order to use it for whatever purpose the money was borrowed for. When that happens, the bank's deposits and loans are no longer in balance, forcing the bank to dig into its reserves (or possibly borrow from another bank) until such a time as it can gain money from other deposits, loan repayments, or such to replace what it loaned out.

[Blake]

That's correct when looking at it from the perspective of a single bank, but not the banking system as a whole.

The banking system as a whole, poofs money out of thin air, increasing the money supply.

[Kuciwalker]

You're looking at the wrong point in time. As long as the borrower's money remains in the bank, the loan exists only on paper, not as an actual transfer of funds out of the bank.

Bzzt. That ignores the reserve requirement. Money loaned out to one person can't be loaned out to another, even if the money hasn't been withdrawn yet.

[nbarclay]

Originally posted by Ming

Is it really all the difficult to work civ back in the discussion

At present, there is a major limiting factor on how closely this discussion can be kept tied to Civ. It is hard to talk about how real-world economic issues should translate into Civ when we have serious differences of opinion regarding how real-world economics actually work. Still, we can try to keep at least parts of the discussion on topic.

One of the things that this discussion makes clear is how vastly more complex economics are in the real world than they are in Civ. Now that I think about it, there might be some ways to reflect a few real-world complexities with events.

- A run on a bank, forcing the player to either pay to bail out the bank or lose the bank.

- Economic boom and recession events that cause a civ to have higher or lower production and commerce than normal. (Maybe just commerce because fluctuations in commerce would be less disruptive to gameplay than fluctuations in production.)

- "Workers are striking in ..." events that can hurt production in a city if a civ is running Free Market.

And so on.

[nbarclay]

Originally posted by Blake
That's correct when looking at it from the perspective of a single bank, but not the banking system as a whole.

The banking system as a whole, poofs money out of thin air, increasing the money supply.

What banks increase is the velocity of money, not the actual money supply. If you add up the amount of money people have deposited in banks, it appears as if the money supply has increased. But in reality, most of what the depositors have is IOUs backed by loans, not actual money. If all of the depositors asked for all of their money back at the same time, the banks could not give it all back because they have not actually increased the amount of money in existence.

To understand how the system works, imagine a hypothetical economy with only five people: Albert, Bruce, Charles, Daniel, and Eva. Albert deposits $1000 in the bank. Bruce borrows $900 to buy something from Charles, who then deposits it in the bank. Daniel then borrows $800 and buys something from Eva, who deposits it in the bank. The bank now has $2700 in deposits, $1700 in loans, and only $1000 actually in the bank.

As long as Albert, Charles, and Eva together don't try to withdraw more than a total of $1000 from their accounts, the bank is in good shape because it can give portions of the $1000 to whichever of the three depositors wants to withdraw the money. This is not an actual increase in the money supply, but is merely a matter of moving the same money to whichever of the three people wants to use it.

But if Albert, Charles, and Eva would try to withdraw a total of more than $1000, the bank would default on its obligation to repay them in a timely manner because the bank doesn't have enough money to go around. This is where the fact that the bank has created only the illusion of an increase in the money supply, not an actual increase, is important. Since the actual money supply has not increased, the system can only remain sound as long as people do not try to withdraw their deposits more quickly than the bank gets back the money it loaned out.

Note that the system is essentially the same regardless of whether there is just one bank involved or several. If Albert, Charles, and Eva each have their money in a different bank, the banks can work out an agreement among themselves (or have one pushed on them by government) by which they lend each other money when necessary. So if Albert wants to withdraw $500, but his bank only has $100 that it hasn't loaned out, it can borrow $450 from Eva's bank (since she's the one whose deposit hasn't been mostly loaned out yet) enabling it to give Albert back $500 of his deposit and still maintain a reserve equal to ten percent of its deposits (which are now only $500).

There are three reasons why the system can work so reliably well with as small a reserves as are possible today. First, most people do not need large amounts of physical money at any given time, and electronic money can move from place to place, wherever it is needed, at almost literally the speed of light. So even though the vast majority of what the depositors have is IOUs rather than actual money, the money gets to where depositors need it when they need it. Second, today's banking system is so huge and so interconnected that loans between banks, or sales of loans from some banks to others, can handle fluctuations where particular banks might occasionally have greater than expected numbers of withdrawals. That enables banks to maintain smaller reserves than they would need if each bank had to have enough cash on hand to cover a worst-case scenario. And third, especially when deposits are backed by the full faith and credit of a reasonably strong government, depositors feel confident in their ability to get their money back when they need it in spite of the fact that the banks don't have more than a small fraction of the money they would need for everyone to withdraw their money at once. That feeling of security is what causes people to base their deposits and withdrawals on how much money they need at any given time (with different people needing different amounts at different times) instead of trying to withdraw all of their money at once.

For most economic purposes, banks are so successful in creating an illusion of the same money being in multiple places at once that the practical effects are the same as if banks actually increased the money supply. But from a perspective of fairness, the fact that banks merely increase the speed at which money flows rather than creating money out of thin air is important. Also, the fact that banks merely speed up the flow of money rather than actually increasing the money supply is important because it is what makes banks vulnerable to collapse if people lose faith in them.

[Ming]

Do you guys really want this moved to the OTF?

Humor me a little and just make a random civ oomment in each post

I hate reading PM's from people whining about how this is now an OTF discussion...

Thank you in advance for your consideration

[Blake]

Um civ, yeah.

Banks do increase the money supply.

In your example, Eva has $800 in the bank. If she wants she can go to someone else and buy something from them, but she doesn't do it by withdrawing the cash, she does it by check or electronic transaction.
This is a simple -$800 from Eva, +$800 to whoever else, it's the same bank so no actual money in the vaults moves.

Eva can spend that $800, use it to buy things, that makes it part of the money supply.

Claiming that banks do not increase the money supply, or that it's only an illusion, is delusional.

[couerdelion]

Blake, what do you think a bank is if it is not an investment company?

OK we’re all in agreement, I think, that banks, in effect, increase money supply. They do this particularly well in CIV where they increase gold by 50%. Stock Markets are even more efficient and most modern economic theory agrees that these improve that factor to 65%

I’m not sure of the precise definition of money supply (there are several anyway) and the simple answer may even be that banks may increase some measures but not others.

But one thing that they do not increase is “net assets”. The initial $1,000 that is deposited in the bank and, through reserve requirements, grows to $10,000 of deposits, is offset by $9,000 of loans.

Blake, you agree that it is fair for Jack (the merchant) to lend $100 to Jim (the axeman) and to agree for Jim to repay $110 back in a month. There are two factors that are included in the $10 that the merchant “earns” in this period. First is the price of money or interest. Second is a fee for credit risk: that Jim may run away with the money or simply be unable to repay is means that Jack has to receive more to compensate for the risk. There might also be some element of “arrangement fee” for Jack.

The system we describes of borrowers and depositors in the Albert, Bruce, Charles… scenario is one where the bank(s) is/are acting as intermediaries between all the parties. The margin that the bank makes between loans and deposits represents

a) service fee (costs for setting up and running loans/accounts)
b) a charge to cover the risk of default
c) a charge to cover the capital that the bank needs to maintain.

Note here that the bank does not earn any interest (apart from on its own assets). It only earns on the margin.

Here, I suppose we can introduce another test to decide whether or not the bank earns “too much” for what it does. In most free markets, if margins in one line of business are consistently high, new entrants will enter the market to take advantage of these higher profits. As long as the markets are not too sticky – i.e. barriers to entry are not too high to offset the profits – new entrants will come in and competition will ensure that the margins return to something near the “correct” level. In short, the “market” – in the wider sense – is there to correct any temporary period of high or low profits.

Another test I would perform might also be to look at the number of banks around. The fewer banks there are, the more likely it may be that, they act as a sort of oligopoly being able to extract exorbitant profits at the expense of companies and consumers. Most large developed countries have a choice of banks which seems to indicate that there is healthy competition in the market to keep margins down.

Take the UK market as an example and you see several banks in distress, particularly this year. I’ll come back to the sub-prime problems shortly, but this may also be another indicator that profits are not as certain as a simple explanation of banking might suggest or imply. Northern Rock, a middle-ranking bank based in Newcastle (a city I founded in a recent Civ game as Victoria (IMP/FIN) has effectively lost 90% of its shareholder value in the last year as a result of its failure to secure short-term lending from the interbank markets, which in turn led to a run on the bank from depositors. The whole debacle was hardly a shining example of UK banking regulation but it does at least tell us that banks are still prone to market failures.

Which leads on the sub-prime mess that has originated in the US. Briefly, a lot of banks have lost a lot of money – and most still don’t know how much – from mortgage-backed securities which they used to fund a lot of their mortgage business. Those used to back the higher interest sub-prime mortgages have been badly hit. And where has all this money been lost. It has been because borrowers have borrowed money which they cannot repay. Banks have lent money to them and will lose a lot of this.

So where has all this money gone? Who has gained?

I think the simple answer to this is that the money originally helped to fuel a housing bubble. The banks won’t get a lot of the money back while those who default will hardly be better off if their homes are repossessed although they will, at least, have had their own home up until the point of repossession.

If anyone has been a winner it has been those home-owners who managed to sell near the top of the market at prices fuelled by the bubble. Also, you could argue that some house-builders will have made extra profits because demand for property was higher and more mortgages were available before the recent credit squeeze.

But as messy as things may be now, it is not necessarily fair to lay the blame solely on the banking system. Perhaps banks themselves may have had lax lending standards and even may have pursued questionable selling tactics. But the system itself at least allowed these loans to be made and some consumers have benefited who would not otherwise have been able to do so.

Note also that hindsight has 20-20 vision. There is an unhealthy habit – particularly likely to occur in Americans – to blame others for almost everything that goes wrong for themselves. It may be unfair to label Americans in this way since it is a common human trait. But in the US, people are more likely to go to court over these things and lawyers are more likely to win silly amounts of money for stupid people. I can only assume that the headline cases we hear of are isolated because it seems odd for an economy to be so successful when careless people are given so much money.

Almost forgot to mention civ,…