Full Reserve Banking

[Sava]

Do you want my credit card and banking information now? or later?

[Fake Boris]

I'm not a member of this forum, but I wandered in here yesterday and found myself so pissed off with Fake Boris that I had to take a moment to show that the guy has no ****ing clue what he's talking about. In particular, I'm going to show that the following statement is total BS: "If your average balance is 2K then they get to earn interest on 15-20K."

I'll start with three simplifying assumptions: (i) there are only two banks in the economy: a central bank and a single commercial bank; (ii) the commercial bank only finances itself using deposits --- i.e., no equity, no bonds etc; (iii) the commercial bank faces a 20% reserve requirement and always lends up to this cap.

So, let's suppose that person A comes along and deposits $400. The bank places $400*0.2=$80 in reserves and lends $400*0.8=$320 to person B. Person B uses the loan to buy something from person C, who then deposits the proceeds, which the bank then distributes between $320*0.2=$80 worth of reserves and $320*0.8=$256 worth of loans. Repeat and you end up with

$400*(0.8 + 0.8*0.8 + 0.8*0.8*0.8 + ...) = $400*[ ((1-0.8)^(-1)) - 1 ] = $1600

worth of loans, against $1600/4=$400 worth of reserves and $1600+$400=$2000 worth of deposits. Admitted, the 80% reserve requirement is kind of arbitrary, but replacing it with any number between zero and one hundred won't alter the fact that Boris should STFU right the **** now.

[Sava]

yeah that was a good one

[N35t0r]

I know it's Fakeboris, but still, it's a bit harsh for a spambot...

[Fake Boris]

His calculations are wrong. I won't bother with them.

[hitokihitoshi]

there's absolutely nothing wrong with my calculations. either identify the mistake or admit that your initial claim was wrong.

[Fake Boris]

Your calculation assumes $400 average balance rather than $2K in the case of Rah, and a 20% reserve ratio, while it's much lower than that in the US.

[hitokihitoshi]

first of all, this isn't true: "Your calculation assumes $400 average balance rather than $2K in the case of Rah". more importantly, let's replace the initial deposit with any amount x > 0 and the reserve requirement with any number r in (0,1). you still end up with

x*[ (1-r) + (1-r)*(1-r) + ... ] = x[ (1/r) - 1 ] = x[(1-r)/r] =: L

dollars worth of loans, against L*[r/(1-r)] = x dollars worth of reserves and L+x = x*(1/r) =: D dollars worth of deposits. you still end up with L < D, which contradicts your claim.

[N35t0r]

Your initial argument is that the bank earns interest on between 7 and 10 times the initital deposit, that should remain constant regardless. In any case, your claim falls down in that the bank actually needs to attract whoever got paid with the loan to deposit that cash again to continue to lend (and, in which case, the bank is making money of that third person's deposit, not on the first guy's deposit).

What is true, however, is that for each (to follow these numbers) $400 of 'primary' money, the market in general benefits of up to $2000 of economic activity; only the $1600 extra by necessity need to be invested rather than spent, in order to eventually return the loan.

The suggestion you posted eliminates this, so a very large chunk of this extra cash will be directed towards consumption, which, with the associated lowering of investment in production, will cause prices to go up, and since there will be a general lack of available credit, it will be very hard to remedy that in the short term.

[hitokihitoshi]

i know it's probably a little harsh. basically, the situation is as follows: i'm a grad student in economics, so i've spent a good chunk of the last few years teaching this kind of stuff; every year, i see one or two people like Fakeboris bully some of the weaker students in the class into believing this non-sense, namely by acting a lot more confident with the material than they have any right to feel, and i'm never able to rebut as forcefully as i like. i'm sorry if i'm hurting anyone's feelings, but i'm pretty sure boris can take it.

I know it's Fakeboris, but still, it's a bit harsh for a spambot...

[N35t0r]

Nah, don't worry, new faces are always welcome, it's just that we get very few of those (and most of them are spambots). Welcome, btw

(that is, as long as you don't start spamming us with viagra and cialis links in a week )

[rah]

Nah, don't worry, new faces are always welcome, it's just that we get very few of those (and most of them are spambots). Welcome, btw

(that is, as long as you don't start spamming us with viagra and cialis links in a week )

Or claim that you have a history degree and a hearing disorder.

[N35t0r]

The site is so much better without him

[Fake Boris]

Your initial argument is that the bank earns interest on between 7 and 10 times the initital deposit, that should remain constant regardless. In any case, your claim falls down in that the bank actually needs to attract whoever got paid with the loan to deposit that cash again to continue to lend (and, in which case, the bank is making money of that third person's deposit, not on the first guy's deposit).

What is true, however, is that for each (to follow these numbers) $400 of 'primary' money, the market in general benefits of up to $2000 of economic activity; only the $1600 extra by necessity need to be invested rather than spent, in order to eventually return the loan.

The suggestion you posted eliminates this, so a very large chunk of this extra cash will be directed towards consumption, which, with the associated lowering of investment in production, will cause prices to go up, and since there will be a general lack of available credit, it will be very hard to remedy that in the short term.

Sorry, you're not making any ****ing sense.

[hitokihitoshi]

i'm not sure that i understand this rebuttal. who is the "you" in "Your initial argument", "your claim", etc?

Your initial argument is that the bank earns interest on between 7 and 10 times the initital deposit, that should remain constant regardless. In any case, your claim falls down in that the bank actually needs to attract whoever got paid with the loan to deposit that cash again to continue to lend (and, in which case, the bank is making money of that third person's deposit, not on the first guy's deposit).

What is true, however, is that for each (to follow these numbers) $400 of 'primary' money, the market in general benefits of up to $2000 of economic activity; only the $1600 extra by necessity need to be invested rather than spent, in order to eventually return the loan.

The suggestion you posted eliminates this, so a very large chunk of this extra cash will be directed towards consumption, which, with the associated lowering of investment in production, will cause prices to go up, and since there will be a general lack of available credit, it will be very hard to remedy that in the short term.