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Author Topic:   "Completely false and misleading financial intermediation theory"
Posts: 167
From: Australia
Joined: 08-15-2016
Member Rating: 2.1

Message 1 of 2 (815620)
07-21-2017 9:58 PM

So I have done quite a bit of research since I first barged in here demanding answers to my questions regarding what I now know to be the 'half-truth' of fractional reserve banking. I linked to this study in another thread, in its own words -

This paper presents the first empirical evidence in the history of banking on the question of whether banks can create money out of nothing. The banking crisis has revived interest in this issue, but it had remained unsettled. Three hypotheses are recognised in the literature. According to the financial intermediation theory of banking, banks are merely intermediaries like other non-bank financial institutions, collecting deposits that are then lent out. According to the fractional reserve theory of banking, individual banks are mere financial intermediaries that cannot create money, but collectively they end up creating money through systemic interaction. A third theory maintains that each individual bank has the power to create money ‘out of nothing’ and does so when it extends credit (the credit creation theory of banking). The question which of the theories is correct has far-reaching implications for research and policy. Surprisingly, despite the longstanding controversy, until now no empirical study has tested the theories. This is the contribution of the present paper. An empirical test is conducted, whereby money is borrowed from a cooperating bank, while its internal records are being monitored, to establish whether in the process of making the loan available to the borrower, the bank transfers these funds from other accounts within or outside the bank, or whether they are newly created.

In other words, until now all our economic theories of money have been based on the musings of economists as opposed to evidence. A quick google search on financial intermediary theory reveals it to be the dominant and unquestioned 'theory' regarding what banks do. It is the theory repeated in all economics discussions in the MSM.

The study first looks at the financial literature of the 20th century, it then conducts an experiment with a small bank to determine whether money is created by the loan(credit creation), whether reserves are multiplied(fractional reserve) or whether depositors funds are reallocated to fund loans(financial intermediary). Here's what they found.

The empirical evidence shows that of the three theories of banking, it is the one that today has the least influence and that is being belittled in the literature that is supported by the empirical evidence. Furthermore, it is the theory which was widely held at the end of the 19th century and in the first three decades of the twentieth. It is sobering to realise that since the 1930s, economists have moved further and further away from the truth, instead of coming closer to it. This happened first via the half-truth of the fractional reserve theory and then reached the completely false and misleading financial intermediation theory that today is so dominant. Thus this paper has found evidence that there has been no progress in scientific knowledge in economics, finance and banking in the 20th century concerning one of the most important and fundamental facts for these disciplines. Instead, there has been a regressive development. The known facts were unlearned and have become unknown. This phenomenon deserves further research.

Sobering? That is an understatement! Man on moon, check. Nuclear weapons, check. Heavier-than-air flight, check. Almost instant global communication, check. Unlimited information at everyone's fingertips, check. Mastery of the invention, which we use to organise and allow us to achieve those things? Nope! Not only have we regressed from the truth but the truth is ridiculed!

Note the bolded part, the author suggests the phenomena of regressive development itself deserves further research. Since this is the first study of its kind and science has been around for hundreds of years it is hard not to assume interference of some kind. Why did it take this long? Why have we been taught and continue to this day to be taught a completely false theory?

I have emailed many financial organisations displaying the financial intermediation theory as fact questioning why they present empirically refuted ideas as fact. I cite both this study and the money creation paper released by The Bank of England as evidence. I have yet to receive a response or see any of them remove the innacurate information from their websites.

I have been banned from finance forums for talking about the 'perpetual debt conspiracy'. Perpetual debt is a direct logical conclusion of our monetary/economic system. It is not a conspiracy. I have since made an observation that lead me to the inference that the interest is created, however.

Say I just signed a mortgage for $300k at 6%pa. The bank deposits the funds into my/the sellers account and creates a corresponding -$300k loan account. Ignoring repayments and other fees for simplicities sake, at the end of the first month I am charged $1500 dollars interest. My loan account now looks like this -$301,500. I know empirically that the bank created $300k when it created the -$300k, I therefore infer that when the bank adds the -$1500 to my loan account it is simultaneously creating the interest and paying itself. My negative value account is simply anti-money, repayments simply vanish. This doesn't change the ponzi-scheme nature of the sytem though.

Economic activity occurs either due to new money being created and spent or existing money being spent. The creation of money and the velocity of money. Since all our money is borrowed into existence and owed back to banks(where it is destroyed), we need either the velocity of money to increase as debt is repaid and money is destroyed or we must continue to borrow money into existence. Failing to do either will result in economic collapse. Since the velocity of money cannot be increased indefinitely in a money supply that would shrink to nothing if people stopped taking on debt, our economic system is fundamentally a Ponzi scheme.

A ponzi-scheme that is considered sacrosanct by governments of both sides. Why?
One argument I've come across is that our retirement funds depend largely on banks and interest, therefore we should accept the system. I have been unable to find data on the net amount of interest paid/received by income bracket but I find it hard to believe however, that a majority of people ever get into the positive. I find it hard to believe that I couldn't do a better job investing the interest I pay for my own future and end up with more than I'll get back from my retirement fund, if I even live to collect it!

Given the system, every dollar accumulated at the top is also someone's loss down the chain. A fundamentally dog eat dog system. Debt slavery is an entirely rational assessment of the situation. The author of the study seems to agree with me that money should be not for profit and we need a means of issuing debt free currency.

The Bank of England's recent intervention has triggered a public debate about whether the privilege of banks to create money should in fact be revoked (Wolf, 2014). The reality of banks as creators of the money supply does raise the question of the ideal type of monetary system. Much research is needed on this account. Among the many different monetary system designs tried over the past 5000 years, very few have met the requirement for a fair, effective, accountable, stable, sustainable and democratic creation and allocation of money. The view of the author, based on more than twenty-three years of research on this topic, is that it is the safest bet to ensure that the awesome power to create money is returned directly to those to whom it belongs: ordinary people, not technocrats. This can be ensured by the introduction of a network of small, not-for-profit local banks across the nation. Most countries do not currently possess such a system. However, it is at the heart of the successful German economic performance in the past 200 years. It is the very Raiffeisen, Volksbank or Sparkasse banks – the smaller the better – that were helpful in the implementation of this empirical study that should serve as the role model for future policies concerning our monetary system. In addition, one can complement such local public bank money with money issued by local authorities that is accepted to pay local taxes, namely a local public money that has not come about by creating debt, but that is created for services rendered to local authorities or the community. Both forms of local money creation together would create a decentralised and more accountable monetary system that should perform better (based on the empirical evidence from Germany) than the unholy alliance of central banks and big banks, which have done much to create unsustainable asset bubbles and banking crises.

We all know that vested interests will pay to maintain the status quo. I find it hard to believe that we have this system as a result of governement looking out for our best interests. The central banking system certainly did add stability to the system we had but it did not fix the inherent problems, nor did it make life better for the majority. It did however provide a more stable system of wealth redistribution from poor to rich.

I don't care what you think is the most important issue, from climate change to inequality, standard of living or enviornmental destruction, immigration or war/terrorism. Every single one of those things would be helped by a better monetary system. Until we change the system we will never be able to meaningfully address them all.

Edited by Riggamortis, : No reason given.

Posts: 3829
Joined: 09-26-2002

Message 2 of 2 (815623)
07-21-2017 10:24 PM

Thread Copied to Coffee House Forum
Thread copied to the "Completely false and misleading financial intermediation theory" thread in the Coffee House forum, this copy of the thread has been closed.
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