[quote=davelj][quote=investor]People fighting griffin’s ideas just don’t want to question their own firmly held beliefs and get angry when you do. So what. Close mindedness is never appealing risk…[/quote]
Pot calls kettle black.
You Conveniently disappeared for a few months after you last brought up Griffin and I pointed out in clear prose – using his own words – that this man does not even understand the basics of banking. Please feel free to pick up the thread.
http://piggington.com/do_you_know_what_the_federal_reserve_is?page=4%5B/quote%5D
davelj. I work for a living. I cannot spend much of my time writing blogs. My blogs are more to enhance interest in subjects rather that stupidly arguing with you and dave from fallbrook. Both of you waste my time with your off the mark replies. But, I’ll try again. Investor wrote:
Your inflammatory language is abrasive and non-productive. Speaking for myself – “I just don’t care enough what you think or why you think it to bother. And I doubt anyone else here does either” as well as the last paragraphs above.
Davelj wrote: My delicate flower… I’m sorry you’re so sensitive to harsh words… I’m sure Mommy will give you a kiss if you’ll finish your vegetables.
Davelj, this is really rude. In words that you might understand, F*** off. Sorry to others for the language but you can see what I am dealing with here.
investor wrote:
I have never told you that you are wrong. I have stated that the 6 pages in griffin’s book details the money flow well and is hard to refute. You quote a 50 page article from the fed about how the fed runs. don’t you think that the article may be alittle biased since it is written by the same people who refuse to be audited?
Davelj wrote: The article from the Fed isn’t an opinion piece, friendo. It’s a technical manual. With debits and credits and flow charts (oh my!). It’s as biased as the owner’s manual to your microwave oven. What YOU might want to do – since this thread is of YOUR own making, after all – is compare and contrast what Griffin is suggesting with what the manual is saying (along with other sources). I think that could prove pretty interesting, frankly. Time consuming, yes. But perhaps also interesting. Investor wrote: Davelj. Do you not understand that using the manual from the fed to define the fed might be a conflict of interest and shouldn’t be used? Are you too stupid to understand that?
Davelj. If you cannot read your own entries and see that you are rude and offensive in your style, you need remedial lessons in the basics of communication. Accounting and economics are seperate subjects. A degree in one does not make you an expert in the other. Obviously, the topic of griffin has excited you enough to spend significant time writing inflammatory entries, much like a roster runs around the barn yard squacking when another fowl enters his space. If you would care to read griffin’s book creature, on page 195, he says, ” keep your eye on the words. They are not meant to explain but to deceive. In spite of first appearances, the process is not complicated. It is just absurd”. And then he goes on to explain how the money flows back and forth through the treasury/federal reserve/ banks and to us. You and dave from fallbrook spent much time explaining how griffin is wrong acording to acounting principles when griffin is saying that what the fed is doing is, from an accounting standpoint, absurd and not supposed to make sence.Allan from Fallbrook
Submitted by davelj on June 9, 2010 – 6:38pm.
Allan from Fallbrook wrote:
Investor: Let’s start off with a simple assertion from my side: I HAVE READ GRIFFIN’S BOOK. I have read those six pages. Griffin is a crank and he lacks a fundamental understanding of his subject, a fact that numerous authors have taken him to task for.
I made the point from the outset that I had read Griffin’s book. I also made the point that I disagreed with him and why, as well as my feelings about his background, which is entirely germane, especially given some of his political meanderings in the book, which were alarming, to say the least.
You come across here as though you’re on the side of the angels, but you frankly are loathe to admit that you suffer from confirmation bias, nor are you willing to answer questions or queries from intelligent posters, like SK, who have a strong background in Accounting and Finance. While I’m not a CPA, I did hold a corporate CFO position for a large insurance brokerage, and know my way around how banks function.
However, if it doesn’t correspond to what you hold as Revealed Truth, you don’t want to talk about. Yeah, I like a good argument, but this isn’t an argument, nor is it a debate. Its you simply refusing to acknowledge that the Fed isn’t some grand conspiracy as cooked up by a noted crackpot. I READ THE SIX PAGES. Griffin IS WRONG.
What more to say is there?
I apologize in advance for butting in here, Allan (and yet I do so anyway!). In “investor’s” defense, he wants someone to explain exactly WHY and WHERE Griffin is wrong. And given where he’s coming from (that is, a conspiratorialist), I can actually understand why. My problem with this is twofold (to which I’ve alluded herein): (1) Reading 6 pages is one thing; rebutting 6 pages in a manner that all concerned can understand (and – sorry here – but “dumbing it down” so that a non-professional – as I presume “investor” to be – can understand it) is another issue entirely. I know I’m going to get a ration of “arrogance” grief for that statement, but it’s true nonetheless. I’ve taught a fair amount of finance in various professional capacities, so I know how this generally works. (2) The burden of proof should be on the original poster to make his point first. He wants someone ELSE to do all the work and I’m not biting. And he’s complaining about it. And that’s patently absurd.
Now… let’s try to get down to brass tacks here and bring this around to the REAL issue, as I see it, anyway. Griffin is a conspiratorialist regarding the Fed and thinks all manner of immoral and illegal things are going on at the Fed (again, admittedly, I haven’t read his book). Now, we can argue about what the role of the Fed should be, whether there should be a Fed, etc. etc. These are “policy” issues and are all debatable.
But “investor” seems to be trying to convince us that Griffin is saying that there’s some sort of illegal/immoral/conspiratorial issue with the “flow” of money into and out of the Fed and with and between the Fed and Treasury. And THIS is where I have a problem. Because for this to be true, the Fed would have to have fooled EVERY professor of Money and Banking (and, in fact, most professors of Economics, Finance and Banking, generally, in the world) regarding how the Fed “works.” That’s right – the ENTIRE profession is either (a) in the dark and doesn’t understand, or (b) part of the conspiracy. And that’s where it all breaks down for me. Again, from a “flow” – not a “policy” – perspective. (One could successfully argue from a “policy” perspective that the Fed is largely a tool of the Officialdom and Powers That Be. But, again, we’re discussing a “flow” argument, as “investor” has framed it.)
So, given that there appear to be zero PhD’s that support Certified Financial Planner Griffin’s conspiratorialist musings (again, I don’t like playing the “credentials” card, but…) regarding the Fed, yet there are many who have bothered to take him (and others) to task… I just don’t find myself compelled to spend the time to rebut him until “investor” has put in the time to make his case first. And, under the circumstances, I just don’t feel that this is an unreasonable position. But everyone’s got an opinion.
replyquote
Veritas wrote:IOUSA How’s
Submitted by SK in CV on June 9, 2010 – 6:50pm.
Veritas wrote:
IOUSA How’s that hope and change working for you Obamanites now? “WASHINGTON — The chairman of the Federal Reserve, Ben S. Bernanke, warned on Wednesday that “the federal budget appears to be on an unsustainable path,” but also recognized that the “exceptional increase” in the deficit had been necessary to ease the recession.”
Along with the congress which approved his budgets, which built a much larger piece of the federal deficit than any administration before him, and, at least for the moment, since.
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davelj wrote: I apologize in
Submitted by Allan from Fallbrook on June 9, 2010 – 7:27pm.
davelj wrote:
I apologize in advance for butting in here, Allan (and yet I do so anyway!). In “investor’s” defense, he wants someone to explain exactly WHY and WHERE Griffin is wrong. And given where he’s coming from (that is, a conspiratorialist), I can actually understand why. My problem with this is twofold (to which I’ve alluded herein): (1) Reading 6 pages is one thing; rebutting 6 pages in a manner that all concerned can understand (and – sorry here – but “dumbing it down” so that a non-professional – as I presume “investor” to be – can understand it) is another issue entirely. I know I’m going to get a ration of “arrogance” grief for that statement, but it’s true nonetheless. I’ve taught a fair amount of finance in various professional capacities, so I know how this generally works. (2) The burden of proof should be on the original poster to make his point first. He wants someone ELSE to do all the work and I’m not biting. And he’s complaining about it. And that’s patently absurd.
Dave: Feel free to butt in, Dave. I’m reminded of the Will Ferrell character in “Zoolander” (“I feel like I’m taking crazy pills!”).
I both see and get your point. However, deigning to grant credibility to a noted crank like Griffin is beyond me, rightly or wrongly. Its akin to explaining to someone that storks don’t deliver babies, and then explaining, with facts and pictures, how birth actually works and then getting a blank stare and having them start over with the stork discussion. The real irony is him mentioning hitting you and I over the head with a hammer and my thinking that its being deployed on the wrong person.
If Griffin hadn’t suffered such widespread and thorough debunking, it would be one thing. But, in this case, one can easily find reputable authors fully discrediting Griffin and his work. In addition, his affiliation with various extremist and reactionary groups goes even further in destroying what little credibility remains.
Describing the WHERE and WHY is finally made impossible by the simple fact that “investor” is unwilling to do what he demands of us: Read those alternate sources that FULLY explain the workings of the Fed and stand as an obliterative counterpoint to the six pages he holds so dear. No matter how Herculean the effort, Dave, you will never disabuse him of his misapprehensions because he refuses to do even the simplest of research and thus remains willfully ignorant.
This has all the trappings of medieval religious inquiry. If the Mother Church does not decree it as Truth, it is not Truth. This is Occam’s Razor writ large and plain, but I also forget we’re dealing with a conspiracy theorist, so something evil must be lurking in the closet.
replyquote
SK in CV wrote:Veritas
Submitted by briansd1 on June 9, 2010 – 7:36pm.
SK in CV wrote:
Veritas wrote:
IOUSA How’s that hope and change working for you Obamanites now? “WASHINGTON — The chairman of the Federal Reserve, Ben S. Bernanke, warned on Wednesday that “the federal budget appears to be on an unsustainable path,” but also recognized that the “exceptional increase” in the deficit had been necessary to ease the recession.”
Along with the congress which approved his budgets, which built a much larger piece of the federal deficit than any administration before him, and, at least for the moment, since.
I also blame Bush.
Bernanke recognized that the deficit was necessary to ease the recession (legacy of Bush).
The deficit is unsustainable, but right now, it’s necessary.
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Keep drinking the Kool-Aid!
Submitted by Aecetia on June 9, 2010 – 7:42pm.
Keep drinking the Kool-Aid!
replyquote
davelj wrote: Anyhow, it took
Submitted by greekfire on June 9, 2010 – 11:48pm.
davelj wrote:
Anyhow, it took me all of 30 seconds to find this criticism of Jekyll Island, specifically, and Fed conspiratorialists in general (see “Myths” at the bottom):
My point is an obvious one (and applies to BOTH sides of any issue): Just because it’s in writing don’t make it so. Lots of legitimate thinkers clearly think Griffin’s a quack and his book is toilet paper. (Doesn’t make them right, but it’s a data point to consider when deciding whether to hang your hat on some specific author’s views.)
In the spirit of presenting both sides, here’s Griffin’s response to Ed Flaherty:
(Sorry this is so long! I tried posting just the link but it got rejected.)
Edward Flaherty is a Ph.D. of Economics who has been critical of my book, The Creature from Jekyll Island: A Second look at the Federal Reserve. Periodically I receive inquiries from readers who have visited Flaherty’s web site, and they want to know if I can rebut what he says. I put this off for a long time because, first, his critique is lengthy and loaded with minutia that requires considerable time to respond properly and, second, the number of inquiries has been so small as to place the importance of this task far down on my list of priorities. Nevertheless, whenever I get an inquiry, I dread that my reader may think that a lack of response is a sign of not being able to defend my work; so, at last, I decided to step up to the plate and swing at the ball that Flaherty has thrown in my direction.
The essence of Flaherty’s critique is that anyone who opposes the Federal Reserve must be some kind of a kook, totally lacking in scholarship. He lumps all Fed critics together, those who bring scholarship to the topic as well as those who do not, and the mixture tends to discredit everyone. It is an old tactic of dumping garbage into the grocery bag so that it all smells like garbage and is rejected in total.
On September 5, 2004, I received an email from a reader who had compared comments made in my recorded lecture with what Flaherty’s web site says and asked for clarification. What follows is his inquiry with my reply embedded at appropriate locations.
My reader begins by quoting from my recorded lecture, followed by a quote from Eustace Mullins:
My lecture: I came to the conclusion that the Federal Reserve needed to be abolished for seven reasons. I’d like to read them to you now just so that you get an idea of where I’m coming from, as they say. I put these into the most concise phrasing that I can to make them somewhat shocking so that, hopefully, you’ll remember them:
1. The Fed is incapable of accomplishing its stated objectives.
2. It is a cartel operating against the public interest.
3. It is the supreme instrument of usury.
4. It generates our most unfair tax through inflation and bailouts.
5. It encourages war.
6. It destabilizes the economy.
7. It discourages private capital formation.
Eustace Mullins, Secrets of the Federal Reserve: “…the increase in the assets of the Federal Reserve banks from 143 million dollars in 1913 to 45 BILLION dollars in 1949 went directly to the private stockholders of the [federal reserve] banks.”
My reply: I stand firmly behind my seven points but I do not agree with Mullins on this. Please do not lump my work with other writers. Flaherty does this a lot. Guilt by association is a ploy that must be challenged and rejected.
Flaherty: It would be a mistake to examine these conspiracy theories….
My reply: Stop right there. There is nothing about my work that merits being classified as a conspiracy theory. In modern context, it is customary to associate the phrase “conspiracy theory” with those who are intellectually handicapped or ill informed. Using emotionally loaded words and phrases to discredit the work of others is to be rejected. If I am to be called a conspiracy theorist, then Flaherty cannot object if I were to call him a conspiracy poo-pooist. The later group is a ridiculous bunch, indeed, in view of the fact that conspiracies are so common throughout history. Very few major events of the past have occurred in the absence of conspiracies. To think that our modern age must be an exception is not rational. Facts are either true or false. If we disagree with a fact, our job is to explain why, not to use emotionally-loaded labels to discredit those who disagree with us.
Flaherty continued: … outside the context in which they were written.
My reply: I try hard not to present text outside its context. When searching through hundreds of documents and thousands of pages, it is inevitable that some subtleties of context may be missed, but so far I have not yet been advised of any instances of this. I welcome any corrections; but, until specifics are brought to my attention, I stand firm on everything I have written. Furthermore, I resent the implication that my work could not stand without taking text out of context.
Flaherty: All the conspiracy authors whose work I study here profess a belief in the alleged ‘New World Order’ conspiracy, or some variant thereof.
My reply: An informed reader would not waste time beyond this point. It is absurd to claim that a blueprint for a New World Order based on the model of collectivism is merely “alleged.” The evidence that this is a demonstrable fact of modern history abounds. Some of that evidence is presented in my work, The Future Is Calling, found in the Issues section of this web site.
Flaherty: Hypothesis: Each of the 12 Federal Reserve banks is a privately owned corporation. Like any firm, their main objective is to maximize profits. They do so by lending the government money and charging interest. They manipulate monetary policy for their own gain, not for the public good. Facts: Yes, the Federal Reserve banks are privately owned, but they are controlled by the publicly-appointed Board of Governors. The Federal Reserve banks merely execute the monetary policy choices made by the Board.
My reply: Basically, Flaherty is correct as far as he goes. But, as we shall see in so many of his statements, he stops short of the entire truth. A half-truth is just as much of a deception as an outright lie. Flaherty says that the Board of Governors is politically appointed. This is true and it is supposed to make us feel safe in the thought that the President responds to the will of the people and that he selects only those who have the public interest at heart. The part of the story omitted by Flaherty is that the President does not select these people from his own personal address book, nor does he ask the public to submit nominations. With few exceptions, he makes appointments from lists given to him by the staffs of banking committees of Congress and from private sources that have been influential in his election campaign. The most powerful of all these groups are the financial institutions (including prominent members of the Fed itself) and the media corporations over which they have effective control. One does not have to be a so-called conspiracy theorist to recognize the tremendous influence that these institutions have over the outcome of presidential campaigns, and anyone with knowledge of how our current political system works will understand why the President makes exactly the appointments that the banks want him to make. All one has to do to see the accuracy of this appraisal is to examine the backgrounds and attitudes of the men who receive the appointments. While there is an occasional token individual who appears to come from the consumer sector of society, the majority are bankers deeply committed to the perpetuation of the system that sustains them. Anyone who would seriously challenge the power of the banking cartel would never be appointed. So, while Flaherty is correct in what he says, the implication of what he says (that the Fed is subject to control of the people through the political process) is entirely false.
Flaherty: Nearly all the interest the Federal Reserve collects on government bonds is rebated to the Treasury each year, so the government does not pay any net interest to the Fed.
My reply: Here is another half-truth that is a whopper deception. It is true that most of the money paid by the government for interest on the national debt is returned to the government. That is because the Fed’s charter requires any interest payments in excess of the Fed’s actual operating expenses to be refunded. However, before we jump to the conclusion that this is a wonderful benefit, we must remember that the banking cartel is able to use tax dollars to pay 100% of its operating expenses with few questions asked about the nature of those expenses. After all of those expenses are paid, what is left over is rebated to the Treasury, as Flaherty says. There is no secret about this, and you will find an explanation of it in my book. Technically, there is no “profit” on this money. However, remember that creating money for the government is only one of the functions of the Fed. The real bonanza comes, not from money created out of nothing for the government, but from money created out of nothing by the commercial banks for loans to the private sector. That’s where the real action is. This is the famous slight-of-hand trick. Distract attention with one hand while the coin is retrieved by the other. By focusing on the supposed generosity of the Fed by returning unused interest to the Treasury, we are supposed to overlook the much larger river of gold flowing into the member banks in the form of interest on nothing as a result of consumer and commercial loans.
Flaherty: Hypothesis: Bankers and senators met in secret on Jekyll Island, Georgia in 1910 to design a central bank that would give New York City banks control over the nation’s money supply. Facts: The meeting did take place, but plans for a return to central banking were already widely known. Regardless, the proposal that came out of the Jekyll Island meeting never passed Congress. The one that did, the Federal Reserve Act, placed control over monetary policy with a public body, the Federal Reserve Board, not with commercial banks.
My reply: Here again we have a half-truth that functions as a deception. Plans for a return to central banking, indeed, were already known, but they were unpopular with the voters and large blocks of Congress. That was the very problem that led to the great secrecy. Frank Vanderlip, one of the participants at the Jekyll Island meeting, later confirmed that, if the public had known that the bankers were the ones creating legislation to supposedly “break the grip of the money trust,” the bill would never have been passed into law. The facts presented in my book, and fully documented by references from original sources, show that my version is historical fact. Flaherty attempts to minimize these facts by implying that the original, secret meeting was not important because the first draft of the legislation was rejected. What he does not say is that the second draft that was passed into law was essentially the same as the first. The primary difference was that Senator Aldrich’s name was removed from the title of the bill and replaced by the names of Carter Glass and Robert Owen. This was to remove the stigma of Aldrich as an icon for “big-business Republicans” and replace it with the more popular image of Democrats, “defenders of the working man.” It was a strategy advocated by Paul Warburg, one of the participants at the Jekyll Island meeting. The fact that Flaherty makes no mention of this suggests that he has not made an objective analysis but, instead, has presented a biased critique in the guise of scholarship. His statement that “the Federal Reserve Act, placed control over monetary policy with a public body, the Federal Reserve Board, not with commercial banks” cannot be taken seriously. The Federal Reserve is not a public body in any meaningful sense of the phrase.
Flaherty: Hypothesis: Through fractional reserve banking and double-entry accounting, banks are able to create new money with the stroke of a pen (or a computer keystroke). The money they lend costs them nothing to produce, yet they charge interest on it. Facts: The banking system is indeed able to create money with a mere computer keystroke. However, a bank’s ability to create money is tied directly to the amount of reserves customers have deposited there. A bank must pay a competitive interest rate on those deposits to keep them from leaving to other banks. This interest expense alone is a substantial portion of a bank’s operating costs and is de facto proof a bank cannot costlessly create money.
My reply: Flaherty presents facts that in no way contradict what I said in my book. I speak of rotten apples, and he speaks of sweet oranges. My book makes it clear that the bank’s ability to create money is tied to its reserves. The current average ratio (it varies depending on the bank) is about ten-to-one. In other words, for every one dollar on deposit and held in reserve, the bank can create up to an additional nine dollars out of nothing for the purpose of lending. The statement that the banks must pay a competitive interest rate on those deposits is humorous when one considers the math. For example, let us assume for the sake of illustration that the bank pays 1.5% interest. Then it turns around and charges, let’s say 6.5% interest. That’s a spread of 5%. Although that’s a pretty good brokerage commission, it doesn’t sound exorbitant. But, here is another of those half-truths. Don’t forget that the bank uses each deposited dollar as a so-called reserve for creating up to an additional nine dollars in loans. It collects interest on these loans as well. Let us assume that the bank is not fully loaned up, as they call it, and has an average of only eight dollars in magic-money loans for every one dollar on deposit. In that case, it will collect 6.5% interest on all eight of those dollars. That means, based on each dollar placed on deposit, the bank will collect 52% in interest. After paying the original depositor the generous “competitive” amount of 1.5%, the bank actually receives a brokerage fee of approximately 50%. When Flaherty says that “This interest expense alone is a substantial portion of a bank’s operating costs and is de facto proof a bank cannot costlessly create money,” one can only wonder what banking system he is describing. It certainly is not the one in the United States.
Flaherty: Hypothesis: Supporters of the Federal Reserve Act knew they did not have the votes to win, so they waited to vote until its opponents left for Christmas vacation. Since a majority of senators were not present to vote on the bill, its passage is not constitutionally valid. Facts: The voting record clearly shows that a majority of the senate did vote on the bill. Although some senators had left Washington for the holiday, the Congressional Record shows their respective positions on the legislation. Even if all opponents had all been present to vote, the Federal Reserve Act still would have passed easily.
My reply: I agree with Flaherty on this issue and often have said so in the Q&A portions of my lectures. Please note that this is not contradictory to what I wrote in The Creature. What I said there is an accurate historical fact. There is little doubt in my mind that the vote would have passed eventually, but by slipping it through as they did, it circumvented the possibility of challenges and debate. I have never commented on the Constitutionality question, although I tend to think that a strict interpretation would have made this vote invalid. The problem here, however, has nothing to do with the Federal Reserve Act but with the rules of Congress.
Flaherty: Hypothesis: All money is created only when someone takes out a loan. Therefore, there can never be enough of this debt-money in circulation to repay all principal and interest. This imbalance causes inflation, financial crises, social maladies, and will eventually destroy the economy unless there is a massive injection of “debt-free” money. This idea is from Dr. Jacques Jaikaran’s book, The Debt Virus. Facts: The hypothesis shows an incomplete view of how the banking system interacts with the economy. The system necessarily creates an amount of “debt-free” money equal to the interest on its loans. It does this whenever it pays operating expenses, dividends, or purchases assets. As a result, there is more than enough money in circulation to retire all bank-related debt.
My reply: I object to being lumped together with other analysts on this issue. I did not write The Debt Virus, I wrote The Creature from Jekyll Island. On page 191, I explained why I consider the claim that there is not enough money to pay off interest to be a myth
Flaherty: Hypothesis: The Federal Reserve consistently resists attempts to audit its books. This is because any independent inspection would reveal the Fed’s treachery. Fact: Independent accounting firms conduct full financial audits of the Federal Reserve banks and the Board of Governors every year. The Fed is also subject to certain types of audits from the Government Accounting Office.
My reply: I never wrote or implied, as Flaherty says, that “any independent inspection would reveal the Fed’s treachery.” What I wrote is: (1) The Fed resists external audit; (2) If it were audited by an independent party, I suspect there would be nothing illegal found; (3) The problem is not that it steals from the American people illegally but that it does so legally; (4) Therefore, we do not need to audit the Fed, we need to abolish it.
Flaherty: Hypothesis: Major European banks and investment houses own the Federal Reserve. From across the Atlantic they dictate monetary policy for their own benefit. Facts: No foreigners own any part of the Fed. Each Federal Reserve bank is owned exclusively by the participating commercial banks and S&Ls operating within the Federal Reserve bank’s district. Individuals and non-bank firms, be they foreign or domestic, are not permitted by law to own any shares of a Federal Reserve bank. Moreover, monetary policy is controlled by the publicly-appointed Board of Governors, not by the Federal Reserve banks.
My reply: Flaherty is basically correct, and I have never claimed in my book or in my lectures that it was otherwise. I do not appreciate being lumped together with those who claim foreign control over the Fed. The real danger in this line of reasoning is that it is often coupled with the argument that, if we could only get control away from foreigners and put it into the hands of Congress or the Treasury, then everything would be all right. In truth, even if the Fed were in the hands of foreigners, placing it into the hands of American bankers and politician would make little difference. The Fed does not need to be converted into a government agency. It needs to be abolished.
replyquote
greekfire – thanks for
Submitted by jpinpb on June 10, 2010 – 12:22pm.
greekfire – thanks for posting Griffin’s response. I’m not sure if this is the correct link, but I’ll attempt to post it. Griffin response
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greekfire, you are a saint
Submitted by davelj on June 10, 2010 – 1:08pm.
greekfire, you are a saint for providing this. I am far too lazy to find this sort of thing. Allow me to dissect Griffin’s math and expose him for the charlatan he is. (As I’ve acknowledged previously, I haven’t read Griffin, so I had no idea how poor his understanding of banking was.)
greekfire wrote:
davelj wrote:
Anyhow, it took me all of 30 seconds to find this criticism of Jekyll Island, specifically, and Fed conspiratorialists in general (see “Myths” at the bottom):
My point is an obvious one (and applies to BOTH sides of any issue): Just because it’s in writing don’t make it so. Lots of legitimate thinkers clearly think Griffin’s a quack and his book is toilet paper. (Doesn’t make them right, but it’s a data point to consider when deciding whether to hang your hat on some specific author’s views.)
In the spirit of presenting both sides, here’s Griffin’s response to Ed Flaherty:
(Sorry this is so long! I tried posting just the link but it got rejected.)
[snip]
Flaherty: Hypothesis: Through fractional reserve banking and double-entry accounting, banks are able to create new money with the stroke of a pen (or a computer keystroke). The money they lend costs them nothing to produce, yet they charge interest on it. Facts: The banking system is indeed able to create money with a mere computer keystroke. However, a bank’s ability to create money is tied directly to the amount of reserves customers have deposited there. A bank must pay a competitive interest rate on those deposits to keep them from leaving to other banks. This interest expense alone is a substantial portion of a bank’s operating costs and is de facto proof a bank cannot costlessly create money.
My [Griffin’s] reply: Flaherty presents facts that in no way contradict what I said in my book. I speak of rotten apples, and he speaks of sweet oranges. My book makes it clear that the bank’s ability to create money is tied to its reserves. The current average ratio (it varies depending on the bank) is about ten-to-one. In other words, for every one dollar on deposit and held in reserve, the bank can create up to an additional nine dollars out of nothing for the purpose of lending. The statement that the banks must pay a competitive interest rate on those deposits is humorous when one considers the math. For example, let us assume for the sake of illustration that the bank pays 1.5% interest. Then it turns around and charges, let’s say 6.5% interest. That’s a spread of 5%. Although that’s a pretty good brokerage commission, it doesn’t sound exorbitant. But, here is another of those half-truths. Don’t forget that the bank uses each deposited dollar as a so-called reserve for creating up to an additional nine dollars in loans. It collects interest on these loans as well. Let us assume that the bank is not fully loaned up, as they call it, and has an average of only eight dollars in magic-money loans for every one dollar on deposit. In that case, it will collect 6.5% interest on all eight of those dollars. That means, based on each dollar placed on deposit, the bank will collect 52% in interest. After paying the original depositor the generous “competitive” amount of 1.5%, the bank actually receives a brokerage fee of approximately 50%. When Flaherty says that “This interest expense alone is a substantial portion of a bank’s operating costs and is de facto proof a bank cannot costlessly create money,” one can only wonder what banking system he is describing. It certainly is not the one in the United States.
Houston, we have a problem. And that problem is that Griffin doesn’t understand basic bank balance sheet accounting. [As a side note, this is why microeconomics is taught before macroeconomics. If you don’t understand what’s happening at the micro (re: bank) level, then you’re not going to understand what’s happening at the macro (re: Federal Reserve) level.]
greekfire wrote:
Griffin states: “Don’t forget that the bank uses each deposited dollar as a so-called reserve for creating up to an additional nine dollars in loans. It collects interest on these loans as well. Let us assume that the bank is not fully loaned up, as they call it, and has an average of only eight dollars in magic-money loans for every one dollar on deposit. In that case, it will collect 6.5% interest on all eight of those dollars. That means, based on each dollar placed on deposit, the bank will collect 52% in interest. After paying the original depositor the generous “competitive” amount of 1.5%, the bank actually receives a brokerage fee of approximately 50%.”
What Griffin is saying here is that the bank’s “real” spread (its “brokerage fee”) is 50% because the fractional reserve nature of banking allows the bank to loan out nine of its “deposit dollars in so-called reserve” and earn an interest rate on those nine dollars of loans while only paying interest on the one dollar of deposit in reserves. The only problem here is that it’s wrong and violates the accounting identity: Assets = Liabilities + Equity.
Allow me to explain using a simple example:
Davelj Bank (DBank) is going to start up with $10 million in equity (and receives a charter from the FDIC).
Day 1: Assets = Liabilities + Equity
$10 million Cash = 0 Deposits + $10 million Equity
DBank gathers some deposits and makes some loans (but let’s assume no profits to keep things simple)…
End of Year 1: Assets = Liabilities + Equity
$5 million Cash + $35 million Loans = $30 million Deposits + $10 million Equity
So, what’s happened here is that DBank is “leveraging” its original $10 million in capital and using deposits to “fund” its loan growth. So far, $10 million in capital has turned into $35 million in loans. Thus, money/debt is being created within the system.
DBank becomes fully leveraged:
End of Year 5: Assets = Liabilities + Equity
$10 million Cash + $90 million Loans = $90 million Deposits + $10 million Equity
So, $10 million of original capital has given birth to $90 million in loans – that’s fractional reserve money/debt creation.
Now, where’s that 50% brokerage commission of which Griffin speaks? It doesn’t exist. Because, you see, as DBank was generating its loans, it ALSO had to bring in deposits to FUND those loans (that’s how the accounting works, folks). And it has to pay INTEREST on (essentially) ALL of those deposits, NOT just the “original deposits,” as he suggests. (Technically, commercial DDA accounts don’t collect interest, but that’s not what Griffin’s talking about here. 90% of the country’s bank deposits collect interest, however minimal.)
So, using current figures, if DBank is really well run and has no credit quality issues, DBank’s asset yield is about 5.5%, its overall cost of funds (including deposit costs) is about 1.5%, for a “spread” of around 4%. But after taking into account operating costs (SG&A, etc.) of about 2.25% of assets and credit costs, you’re probably down to a 1.5% pre-tax return on assets, under 1% after-tax ROA, and maybe a 10% return on equity. That’s if you’re well run today. In normal times the industry as a whole earns maybe a 13% ROE. Right now, it’s barely positive (and arguably negative).
Griffin wants you to believe that every bank charter comes with a license to print money on behalf of the OWNERS (the “50% brokerage commission”) and that this activity is COSTLESS. In fact, nothing could be further from the truth. Yes, each charter does come with a license to print money (via fractional reserve banking) – but that money goes into the economy in the form of loans… and must be MATCHED with deposits, which also COST MONEY (which is what Flaherty points out). Once you get outside of the largest 100 banks in the country (there are almost 8,000 total), you don’t find a lot of really wealthy managers/owners. Community banking is not where folks go to make a fortune. (The Big Banks are a different story because of all of their non-banking activities – which is a separate discussion entirely.)
So, there are all sorts of legitimate arguments that one can make against a fractional reserve system (and the Fed). But one of them is NOT that every bank charter essentially comes with a “50% brokerage commission” to the owners. (When someone finds a bank making this magical “50% brokerage commission” please let me know. We can definitely do business.) That’s completely absurd and betrays a complete lack of understanding as to how a bank actually operates. (Based on his response above, I’d be willing to bet that Certified Financial Planner Griffin has never worked at a bank, sat on a bank’s board, or understands a bank’s financial statements.) Which, of course, begs the question: Who in their right mind can claim to be an expert on the Fed (macro level) if that same person doesn’t even understand the basics of how the system works at the operating (micro) level? Answer: A charlatan.
[Also, on a side note, I see that in several different instances, Griffin refers to Flaherty’s “half-truths.” Do you know what the definition of a “half-truth” is? It’s a “whole-truth” in which you simply disagree with the other person’s interpretation.]
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davelj So, there are
Submitted by Allan from Fallbrook on June 10, 2010 – 1:20pm.
davelj So, there are all sorts of legitimate arguments that one can make against a fractional reserve system (and the Fed). But one of them is NOT that every bank charter essentially comes with a “50% brokerage commission” to the owners. (When someone finds a bank making this magical “50% brokerage commission” please let me know. We can definitely do business.) That’s completely absurd and betrays a complete lack of understanding as to how a bank actually operates. (Based on his response above, I’d be willing to bet that Certified Financial Planner Griffin has never worked at a bank, sat on a bank’s board, or understands a bank’s financial statements.) Which, of course, begs the question: Who in their right mind can claim to be an expert on the Fed (macro level) if that same person doesn’t even understand the basics of how the system works at the operating (micro) level? Answer: A charlatan.
[Also, on a side note, I see that in several different instances, Griffin refers to Flaherty’s “half-truths.” Do you know what the definition of a “half-truth” is? It’s a “whole-truth” in which you simply disagree with the other person’s interpretation. wrote:
Dave: This is why I asserted in my last post that debunking Griffin was pointless. Its been done before (and extensively) and he (Griffin) has no clue what he’s talking about. As I said, he’s wrong and trying to disprove a negative to someone like investor, who was completely unwilling to do even the simplest of research and garner some basic banking facts seemed a pointless waste of time.
When you find someone like investor with that level of fanaticism and an unwillingness to brook even the slightest disagreement, well, it gets back to that old adage about teaching pigs to sing. Wastes your time and annoys the pig.
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To be fair to both sides, I’d
Submitted by jpinpb on June 10, 2010 – 1:40pm.
To be fair to both sides, I’d have to agree that a bank must incur some expenses for its buildings, whether owned or leased, for all is employees, starting from tellers on up to CEOs, etc. etc. That’ll cut into some of the profit. But judging from the bonuses given, I’d say there’s plenty of profit. If this did not work in the banks’ favor, I’d imagine they would ALL be out of business. They wouldn’t continue to operate. There’s some major profits being made.
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I found a video, for those
Submitted by jpinpb on June 10, 2010 – 1:58pm.
I found a video, for those who can’t sit in front of a computer to read, you can just play it in the background Creature From Jekyll Island – A Second Look at The Federal Reserve
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jpinpb wrote:To be fair to
Submitted by davelj on June 10, 2010 – 2:06pm.
jpinpb wrote:
To be fair to both sides, I’d have to agree that a bank must incur some expenses for its buildings, whether owned or leased, for all is employees, starting from tellers on up to CEOs, etc. etc. That’ll cut into some of the profit. But judging from the bonuses given, I’d say there’s plenty of profit. If this did not work in the banks’ favor, I’d imagine they would ALL be out of business. They wouldn’t continue to operate. There’s some major profits being made.
I’m guessing when you say “bonuses given” you are referring to the largest 20 commercial banks and largest dozen investment banks, as these are the only bonuses that make headlines. These institutions make up, oh, less than one half of one percent of the banks in the US (although, about 60% of total assets – which is the big problem). Over 90% of the banks in the US have less than $200 million in assets with CEOs that earn about $150K annually, which includes benefits and bonuses (when there are bonuses). Now, that’s a nice living, don’t get me wrong. And particularly if you live in Jerkwater, USA, which is where a lot of these banks are. But, I wouldn’t exactly frame it as getting rich at the unknowing public’s expense, which is clearly what Griffin implies. And, again, the owners – as opposed to management – certainly aren’t getting rich with 10% returns on their (very risky, generally illiquid) capital (over a few cycles), although it’s certainly been a reasonable return historically.
I’ve said this many many times here at the Pig, but it bears repeating: When you discuss “banks,” you probably need to note exactly what type of banks you’re referring to. Without context, the word “banks” often doesn’t convey sufficient meaning for an intelligent discussion.
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jpinpb wrote:I found a video,
Submitted by davelj on June 10, 2010 – 2:22pm.
jpinpb wrote:
I found a video, for those who can’t sit in front of a computer to read, you can just play it in the background Creature From Jekyll Island – A Second Look at The Federal Reserve
jp, a philosophical question: If one doesn’t know enough about a (somewhat complicated) subject to rebut an author’s contentions… what is the point of reading said author’s book? If all one is going to do is read a book and just assume that the author is correct regarding the subject – because the reader doesn’t have the experience/knowledge/educational foundation to critique the author’s points – what’s the point?
“The Creature from Jekyll Island” may be a worthwhile book to read (I’m giving it the benefit of the doubt here – apologies, Allan). But before reading it, however, I would read a few books on money and banking (perhaps that 50-page operators manual put out by the Fed linked above), basic accounting, as well as micro and macroeconomics. (This is a crawl before walking before running argument.) Then perhaps one could read Griffin’s book with a critical eye and spot the flaws. Otherwise, it’s just an exercise in the blind leading the blind. Don’t we have enough of that already?
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I don’t take anything I read
Submitted by greekfire on June 10, 2010 – 3:07pm.
I don’t take anything I read or hear for gospel. The Creature from Jekyll Island does have heavy conspiratorial leanings in areas. And G. Edward Griffin is not a financial expert. What I take from reading the book is it’s one man’s take on some complicated yet important stuff, like the Fed, fractional reserve banking, etc.
Some of these topics are enough to give most people headaches. Maybe that’s part of the strategy. Let the experts take care of things and just hang on for the ride. Griffin’s book is more for the layperson to understand these topics – through the author’s perspective. Like all things, read it with a jaundiced eye.
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greekfire wrote: Some of
Submitted by davelj on June 10, 2010 – 6:07pm.
greekfire wrote:
Some of these topics are enough to give most people headaches. Maybe that’s part of the strategy. Let the experts take care of things and just hang on for the ride. Griffin’s book is more for the layperson to understand these topics – through the author’s perspective. Like all things, read it with a jaundiced eye.
To wit, I present you with the Expert/Layperson Literary Theorem:
The degree to which any author attempts to simplify an inherently complicated subject for the benefit of the layperson is directly correlated to the degree to which said author can monkey around with the facts and body of knowledge underlying said subject.
Importantly, this is NOT to suggest that “more complicated” is better. Rather it’s merely to suggest that simplification CAN engender shenanigans if the author is so inclined (regardless of which side of an argument the author may be on).
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« first‹ previous12345 As Allan from Fallbrook says, griffin is wrong. I find it amusing that both you and Allan from Fallbrook fell for not understanding the basics of what griffin is saying. I assume because both of your ego’s get in the way. AS I have said before both of you insulted me, I do not know if griffin is correct or not. He brings alot of good information forward and it worth discussing, just not with you two. Also, as I have said before, griffin does sound conspiratorial; this is why I reached out to this blog for further insight. I have not heard one rebuttal from either of you except that griffin is wrong according to your opinions and the federal reserve of Chicago. That doesn’t convince me. Also, quoting the federal reserve of Chicago in your facts of the Federal Reserve is completely infantile. I don’t know how the two of you treat the people in your world, but I hope someone slaps both of you on the side of your heads and knocks some politeness into you. You need it badly. For everyone else reading this blog, ignore these two blowhards. Read the book and then read other books on the subject. Allen from Fallbrook also blasted another investor in some blogs around 1/2010 and was so rude, the guy left. Pity, I would have enjoyed learning from him. Allen from Fallbrook and davelj are two good examples of why other people don’t enter blogs, for fear of someone blasting away at them. I again ask that you two guys don’t pollute my blogs with your sarcasm and arrogance. I do want to hear from others. I am also currently reading the book the sellout by gasparino. If any traders have insight into the accuracy of his book, please respond. Ignore these two idiots if they chirp in.
