I've been struggling with this question for the past week and I just can't figure it out.
I've come to the conclusion that it shouldn't be allowed for the following reasons:
1) Fairness
In a fair capitalist free-market system, no one is able to generate wealth without accepting their fair share of risk.
When a banker takes a $1000 deposit to create $9,000 (10% reserve rate) for an annual loan with 10% interest, for example, and accepts the risk that ~10% of the loans won't be paid back (very high risk), the banker has the expected virtually RISK FREE return of (9,000-1000)/1000 = 800%...
2) Inflation due to conflict of interest (negative externalities)
Whenever money is created and whenever that money isn't used to produce an exactly off-setting amount of productivity / goods, there is price inflation or asset inflation.
Banks have no interest in reducing inflation, they will loan out the maximum amount of loans possible so long as they are likely to be repaid. So expected asset or good inflation is not likely part of the bank's calculations, leading to the likelihood of negative externality for society of high inflation even when banks make money.
According to shadowstatistics.org, inflation has been remarkably high for the last couple decades as the fed keeps interest rates low and therefore gives banks incentives to increase the quantity of the loans they make.
And what about when loans (money creation) are made for consumption expenditures, debt/interest repayment and imports. How can anyone argue these aren't inflationary activities in a stable economy? This is nothing more than monetization of debt.
Imagine a company that has a long term debt of $1,000. This credit was initially created out of thin air and added $1,000 to the money supply. Then, the company takes a loan from a 2nd bank and pays back the original loan. There is now a total of $2,000 created by banks even though the actual productivity associated with the debt can be no more than $1000 since this is what the firm actually has access to for its daily operations and investment.
3) Banks feed bubbles, especially in low-interest rate climates (banks can create / loan more money and be more assured of pay-bank even when productivity is low)
Bubble phenomena is a very real characteristic of asset markets because it is often hard to know when assets are fundamentally overvalued. Especially new markets and markets with new characteristics.
The dot-com and subprime bubbles were both incredibly exacerbated by the fact that banks are able to create money and make loans to investors (leverage) / consumers. This puts inevitable inflationary pressure on the assets and on their equities because:
a) banks have no limits on lending quantities since they can create money out of thin air,
b) investors think the market is strong since it has a history of high returns and increasing share price (which is only caused by money creation by banks who don't care about inflation but only maximizing returns)
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Since the creation of money can have profound and severe negative externalities for the population in terms of bubble formation and inflation, I believe that only government-run banks should be able to create money.
More information:
http://www.webofdebt.com/articles/dollar-deception.php
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Can anyone counter my arguments?
I've come to the conclusion that it shouldn't be allowed for the following reasons:
1) Fairness
In a fair capitalist free-market system, no one is able to generate wealth without accepting their fair share of risk.
When a banker takes a $1000 deposit to create $9,000 (10% reserve rate) for an annual loan with 10% interest, for example, and accepts the risk that ~10% of the loans won't be paid back (very high risk), the banker has the expected virtually RISK FREE return of (9,000-1000)/1000 = 800%...
2) Inflation due to conflict of interest (negative externalities)
Whenever money is created and whenever that money isn't used to produce an exactly off-setting amount of productivity / goods, there is price inflation or asset inflation.
Banks have no interest in reducing inflation, they will loan out the maximum amount of loans possible so long as they are likely to be repaid. So expected asset or good inflation is not likely part of the bank's calculations, leading to the likelihood of negative externality for society of high inflation even when banks make money.
According to shadowstatistics.org, inflation has been remarkably high for the last couple decades as the fed keeps interest rates low and therefore gives banks incentives to increase the quantity of the loans they make.
And what about when loans (money creation) are made for consumption expenditures, debt/interest repayment and imports. How can anyone argue these aren't inflationary activities in a stable economy? This is nothing more than monetization of debt.
Imagine a company that has a long term debt of $1,000. This credit was initially created out of thin air and added $1,000 to the money supply. Then, the company takes a loan from a 2nd bank and pays back the original loan. There is now a total of $2,000 created by banks even though the actual productivity associated with the debt can be no more than $1000 since this is what the firm actually has access to for its daily operations and investment.
3) Banks feed bubbles, especially in low-interest rate climates (banks can create / loan more money and be more assured of pay-bank even when productivity is low)
Bubble phenomena is a very real characteristic of asset markets because it is often hard to know when assets are fundamentally overvalued. Especially new markets and markets with new characteristics.
The dot-com and subprime bubbles were both incredibly exacerbated by the fact that banks are able to create money and make loans to investors (leverage) / consumers. This puts inevitable inflationary pressure on the assets and on their equities because:
a) banks have no limits on lending quantities since they can create money out of thin air,
b) investors think the market is strong since it has a history of high returns and increasing share price (which is only caused by money creation by banks who don't care about inflation but only maximizing returns)
-------
Since the creation of money can have profound and severe negative externalities for the population in terms of bubble formation and inflation, I believe that only government-run banks should be able to create money.
More information:
http://www.webofdebt.com/articles/dollar-deception.php
-------
Can anyone counter my arguments?
