The Creation of the Federal Reserve System (Part 2)

You guys aren't understanding this. THE BANK ACCOUNTS ARE MONEY. Whatever accounting jargon you want to use, the bottom line is those deposits are used to pay back loan/investment losses. They are used as money to the very end.

And yes, depositors never know their bank fails until it actually fails. The FDIC keeps a report on how many banks are treading water and how many deposits in total they have, but they never release which banks are in trouble for that exact same purpose.

 

Depends on what bank has failed. I'm sure alot of Lehman Bros customers didn't need to be notified by letter that their bank was failing. Continnental Illinois failed because it got run on. No private bank wanted it, so the government simply nationalized it and put taxpayers on hook. Bank closure sure wasn't seamless for the Lehman and Continnental Illinois customers who felt the need to withdraw their accounts.

Doesn't hurt who? Where does the FDIC get the money to bail out banks and depositors?

 

They are claims on a bank's reserves. The claims get counted as part of the money supply in some equations. So it depends on how you define "money".

Deposits are liabilities, not assets. They can't be used to pay back bad loans or investment losses.

Why did Continnental Illinois get run of if its depositors didn't know that it was going to fail? What about all of the depositors who left Lehman just before it failed? How did they find out about the bank's insolvency?

 

Depends on how you define money, doesn't it?

Deposit accounts are liabilities, obligations. As Dr. points out, they cannot be used to pay back losses.

That would be like trying to pay a loss with a debt you owe to someone else.

 

There are certainly definitions of money that include bank accounts. And it would be fair to say that when people talk about the money supply generally, it includes bank accounts.

 

You're responding to an outdated post. I already edited it before you posted this.

 

Why else would a deposit be lost? If deposits are just liabilities and can't be used to pay back losses than why would they be lost?

It's just a matter of your accounting jargon. If the bank writes off $100k in loans and $100k of deposits are destroyed in the process that is absolutely no different that paying off the loan. It just comes down to whatever you want to call it. I will call it what it is, the deposits are lost because they are used to pay back the loans/investments that defaulted.

 

They are not claims on bank reserves. They are money just like cash is money.

They are assets to the depositor. And if the depositor loses the deposit than where did the deposit go?

Source please. I don't ever recall a massive bank run on Lehman before it failed. By law the FDIC can not tell you in advance if a bank is about to fail.

 

Deposits accounts aren't lost. Deposit accounts lose value.

See above. Deposit accounts are not destroyed or lost. They can lose value or become worthless in terms of money if the bank doesn't not have the assets to cover the value of the deposit accounts (putting aside the FDIC).

 

If you give your friend $5,000 you HAVE $5,000. Not a claim on $5,000, you have $5,000 as long as your friend keeps that money.

If your friend gets involved with a loan shark and owes the loan shark $5,000 and takes YOUR money and pays the loan shark $5,000, you no longer have $5,000.

It doesn't mean the $5,000 your friend has isn't money. It just means the loan shark now has your money instead of you.

Deposits are money just like cash is money.

 

Why do you say this when you know it is not true?

You don't lose the value of your cash if your bank fails. You do lose the value of your bank account.

Therefore, we have proved they are not "just like cash".

Cash are "spendable money". Deposit accounts are claims on a bank's spendable money. You can always spend cash you have. If your bank goes belly up, you can not spend your account balance (putting aside the FDIC).

So how can a bank account be "just like cash"?

 

How can you have $5000 if your friend has it? When you gave it to your friend, you no longer have $5000 cash. Your friend has it. You have a claim on that $5000 by way of agreement with your friend.

You didn't have it anyway. Your friend had it. You had a claim on it.

And you still have a claim against your friend. It's just worthless. OTOH, if you had $5000 in cash, you'd still have $5000 in cash.

That's the difference. Good analogy. The bank is like your friend in your analogy.

Your own example shows that it is not.

In your example, if you had the cash, you'd have $5000.

But when you gave it to your friend, you didn't have the cash. Your friend had it. You had $5000 as a claim on the money your friend had.

When your friend lost the cash, you still had a claim, it was just worthless. OTOH, if you had the cash, you'd have $5000.

Having a claim against someone else for cash, like a deposit account, is not the same as having cash, like reserves. A deposit account is not just like cash/reserves.

good analogy.

 

Proven wrong countless times. They are not money in the same sense that cash is money.

Deposit accounts are not assets to the depositor. If I have a deposit account with $0 in it, it is not an asset. The claim attached to the deposit account is an asset. But if the bank fails, then the claim/asset becomes worthless.

The depositor doesn't "lose" the deposit becuase he never had it in the first place. The claim on the bank's reserves becomes worthless.

There didn't need to be a "massive run" on Lehman. It's all done electronically these days.

Irrelevent.

 

Because the $5,000 is yours. You don't need physical money in your position to have money. If I give my friend $5,000 I HAVE $5,000. I don't have a claim on $5,000.

He has MY money. I don't have a claim on it, I have $5,000. Just because my friend has it doesn't mean I don't have $5,000.

This is just a difference of wording. Basically your theory is if you do not have physical money in your possession it is just a claim on money. If my friend has $5,000 and is supposed to buy me stuff when I ask him to, I HAVE $5,000. If he loses the $5,000 than I don't have $5,000. I didn't lose claims on $5,000 I lost $5,000. Just like when you lose your deposit, you don't lose a claim, you lose your money.

But the analogy is showing the similarities between cash and deposits and how the banking system works. If your friend pays off the loan shark with your money, that $5,000 still exists, you simply just lost it. So when someone loses an account, they LOST money, the money didn't disappear, the deposit is MONEY.

The bank using this analogy would be your friend who gambled away YOUR money and lost it. You can technically say you lost your "claim" on $5,000 in either case... but both cases the $5,000 in cash is money and the $5,000 in your deposit account is money.

 

Of course they are

Of course if I have $0 in cash I don't have an asset

Sure he did

Source

 

If a bank loses an asset that means the bank has to lose a liability or equity. That is the bottom line. So when you lose your deposit it means the bank lost it's assets and the only way a bank can lose it's assets is if a loan defaults or an investment defaults.

I haven't been in an accounting class in 6 years and my job has nothing to do with accounting so I don't know the proper lingo. But whatever you want to call it, when you cross off an asset (aka a loan) and the bank doesn't have any equity, than the bank has to "cross off" a deposit. That is no different than the bank using your deposit to pay off the loan.

This doesn't mean the bank ran out of reserves and can't exchange your deposit for cash... it means your deposit no longer exists (aka your money is gone not your claim to money is gone).

 

A bank generally cannot just "lose" a liability. Liabilities are obligations. You cannot just "lose" them.

The bank can also lose assets by making bad investemenst, paying excessive salaries, any number of ways. But bad loans is a biggie.

You remember wrong. When you write off an asset, your equity goes down. When your equity hits zero, you are insolvent.

Your deposit account still exists. It doesn't just disappear. It's just that there is insufficient cash/reserves to pay all the claims ofthe deposit account holders.

 

You don't lose the money you hold in cash if the bank fails. You do lose money you hold in your deposit account.

So how can they be the same.

 

Sure you can. Let's go back to the analogy again. Your friend has your $5,000 and a liability to give you back $5,000. If your friend loses the $5,000, your friend has lost a liability.

Yes, and your depositors can't use their deposits because their deposits (money) is in someone elses hands.

No, the money still exists, but YOUR deposit does not exist.

 

I don't know how else it can be layed out for you. Roon has acknowledged that there is a difference between deposits and cash. Iriemon and I have spent hundreds of posts trying to explain it to you. There is absolutely no way that it can possibly be going over your head at this point. Especially because your analogy about your friend and the loan shark was perfect. You are just too stubborn to admit that you are completely wrong about this.

"Nothing I say can disprove what you said because in your head you aren't open to learning. You have already made up your mind how the system works and there is absolutely nothing anyone in this world can do to change your mind."

Your own words apply to yourself perfectly.

 

Of course you don't. Just like you don't lose the cash you hold if your friend loses your $5,000.

This point your making is irrelevant.

 

Sure. But I don't have it.

You have an interest or claim to $5000 your friend has.

He does have you money. That is the point.

So if your friend blows the money gambling you don't have a claim for it?

If your friend has the $5000 who can you have it?

So if your friend blows the $5k you don't have a claim against him for it?

Compare to the situation where I had the cash. Then if the friend pays the loan shark, it wasn't with my money because I have it.

But not cash. Because if you had the $5000 in cash, you didn't lose it because the bank failed or your friend gambled $5000.

That is the difference between having cash and having a claim or interest in it, and why deposit accounts are not the same as cash/reserves.

 

I believe it's when your equity goes below zero, you are insolvent.

 

No, the point is spot on.

Giving your friend or bank $5000 to hold is not the same as if you have the $5000 yourself.

In one case, you have cash. In the other two, you have a claim on, or interst in, cash someone else holds. But you don't have cash.

 

You might be right.