Now that is an encouraging development. Thanks for informing us, David, and, as always, thanks for all your awesome day-to-day work here.

It strikes me that the power of Occupy is in exactly these focus teams which in effect cut the Gordian knot of false premise and false logistics and false conclusion by presenting directly confrontational ‘where it’s at’ rhetoric. It’s as if the earlier demonstrative Occupies, with toddlers and teens in tow, have been the baby steps of the entire movement – you can’t get anywhere without those babysteps and the importance of a multiplicity of public failures such as we’ve had with all the police violence and property confiscation.

It doesn’t matter that the founders of the Occupy didn’t get their voices heard past the marches and the sleepovers – they invaded our collective conscience with their nonviolent effort, and now that is bearing fruit.

Very heartening!

I second that. If there were a “Paul Revere Award”, you’d get it.

If we could hook up the “Occupy” movement with Mighty Mouse, we’d be friggin’ unstoppable.
Maybe there’s hope for US yet.

There is an incredible amount of misinformation about the Volcker rule and what it prevents, e.g., this from Investopedia:

Investopedia explains ‘Volcker Rule’

Named after former Federal Reserve Chairman Paul Volcker, the Volcker rule basically stops banks from doing their normal business (installment loans, residential mortgages, equity credit loans, deposit services) as well as trading on their own behalf.

Read more: http://www.investopedia.com/terms/v/volcker-rule.asp#ixzz1mNJ64fej


The normal explanation is that it prevents banks from investing their “deposits” on their own behalf. That sounds like they are investing money that they already have. But, remember that banks create money. When they make a loan, they create new money in the form of credit (a.k.a. “deposit”) in the borrower’s account. That new money is a liability to the bank, but it’s offset by the borrower’s IOU, e.g. a mortgage. In other words, “debt is the new gold standard.”

So what I think is happening is that when banks buy municipal bonds, they do the same thing, i.e., they in effect print new money to pay for that bond.

Bear in mind that bank issued money is not merely a liability for the bank. It is also a liability of the U.S. government, because the government has to accept those dollars in payment of taxes. As Warren Mosler put it, a dollar is nothing but a transferable tax credit.

Standing on chair cheering. More please!!

We are a think tank.
If we are asked by FDL leadership perhaps, We are capable of some quite amazing results.
We can counterbalance the effect of all those RW organizations. Give us a topic and a moderator. Let the topic stay up for a few days. After collecting the comments, post a draft for review.
I have quite a lot of faith in the intelligence and experience of the followers of theis site.

I’m confident the regulators will recognize that, for all its complexity, the rules are comprehensible and can be refined to serve the public’s demand for control over a runaway financial system.

Everywhere, at all times, we are invited to misunderstand the central issue at hand, that the financial industry lobbied long and hard to eliminate regulations that protected our economy for over six decades from the sort of risky behavior that resulted in economic collapse within less than a decade once repealed.

Now that same industry is telling us that their business is too complicated to understand and that our wish to re-instate common-sense regulation is wrong-headed and will have a negative impact on the economy.

It is abundantly clear that a simple re-imposition of the Glass-Steagall act repealed in 1999 would be the simplest cure for the immense problem of investment bankers risking the health of our economy by wagering commercial bank deposits.

It’s abundantly clear to anyone that is, who is not receiving hundreds of thousands of dollars in financial industry cash meant to convince them to agree to remain ‘confused’.

There is plenty of wisdom available to turn the corruption around if those with the power to make the necessary changes in the laws avail themselves of that wisdom.

This sounds like a brilliant case where that wisdom is being brought to bear. Now let’s see if the *deciders* bother to read the letter and accept the presentation. Power has the ability to be arbitrary and capricious when it suits their needs and so I wouldn’t expect anything from the *deciders* in this case whose constituency is the financial community and not the people.

Brilliant idea.

While you correctly point out that the investopia link is to mis-information, you don’t fully understand what it is that they wish to mis-inform you about.

The Volker rule would prohibit banks from risking their customer’s money as-if it was their own.

The central issue is the natural conflict-of-interest that exists between investment banking and commercial banking, if both types of business are allowed to be carried on by the same institution.

Investment banking is inherently exciting, and risky, and consists of facilitating the process by which those who need money to build new businesses sell partial interest in those new businesses to those wish to invest/risk their own money in order to share the profits those new businesses might make.

Commercial banking is inherently boring and less risky and has traditionally meant accepting deposits from their customers in exchange for a small amount of interest, and loaning a portion of that money to others in exchange for a relatively larger amount of interest.

Investment banker’s customers are in the business to take risks in order to make money; commercial banker’s customers are not interested in taking risks, and are more interested in the security that the bank represents.

The Volker rule represents a watered-down version of the Glass-Steagall act that prohibited banks from doing both kinds of business and thus risking commercial bank deposits on investment bank business.

Without this sort of prohibition, commercial bank customers might find that the money they deposited to keep it safe has disappeared because it was lost by bankers investing in risky, new business ventures, as opposed to boring loans.

This is better news than we usually get these days. While the Glass–Steagall Act of 1933 modification by the Gramm-Leach-Bliley Act of 1999 that ended structural barriers between the financial activity corporations could do had near zero to do with the financial crisis (as note by Krugman G-S never controlled the bad guys – the hedge funds and investment banks that were and are under the Fed – the Greenspan no regulations Fed at the time), I would like a return to the greater safety that G-S seemed to provide.

I thought Public comments to the Financial Services Oversight Council on how exactly the rule should be implemented were to be submitted through November 5, 2010 – I’m glad they extended the comment period through this week.

Since a return to a regime of discrete structures for banking entities is infeasible post the worldwide rise of “modern” financial institutions, the Volker rule is all we have, even though some see the brightline, via definitions, ban on proprietary trading by commercial banks, stopping the use of deposits for trading in the bank’s personal accounts, albeit with exemptions, as hard to regulate. So I have been curious as to the details that would be in place when the rules provisions under Dodd-Frank law went into effect on July 21, 2012. Those definitions under the Volcker Rule allow banks and bank holding companies with deposit-taking subsidiaries or affiliates to continue to trade “client-facing” trades but bans impermissible proprietary trades. I had hoped the Volker rule would not end with just rules on institutional structure but also includes transaction based rules, but it does not look likely.

But the Occupy letter does a fantastic job on the structural side. My view from 30,000 feet is that Volker should have force ALL trading operations into separate subsidiary entities with regulations on capitalization, ownership and other characteristics that make clear Financial Institutions trading can not rely on the Fed discount window access and makes clear continuance of their client-serving trading operations are at risk from any trading they do for their proprietary books. But it is too late to redirect the rule making – indeed it had little chance of happening – so the Occupy letter is more than welcome.

LOL Which of us are you “Revering”? If you “Revere” me, then I can die a happy man. Hopefully not today, though.

Second that.

Pretty much the entire financial industry has gone on record to proclaim their own failure to recognize a monumental housing bubble. (“I wasn’t a crook, I was an idiot”–better known as the Reagan Defense lol.) That can be brought out forever after any time they claim special understanding, such that the rest of us should STFU and let them be “creative.”

Just because it’s a promising development, and it is, does not mean that it will immediately triumph over the power of money, amigo. And, of course, I know that you know that. ;-)

The “compliment” was for David. Not that your contributions are not valuable too. They are.

“There is nothing wrong with America that can’t be fixed with what’s right with America. ” President Bill Clinton
————–
I had the right….but not the ability”. Comedian Ron White.

A dysfunctional congress combined with a misguided president MAY be “speed bump” to any changes. Money not only talks but also buys government. And the “people” seem to be at a significant disadvantage in both the former and latter.

“I wasn’t a crook, I was an idiot”
————
Indeed, the banksters are bangn’ that drum for all it’s worth. And Obama and his DoJ or playing the tamborine.

Once more into the breach for my favorite obscurantist.

Since a return to a regime of discrete structures for banking entities is infeasible post the worldwide rise of “modern” financial institutions, the Volker rule is all we have,…

Inviting us, as always to accept that we musn’t look back, it’s ‘infeasible’ we must endure being preyed upon because it’s the “modern” way of doing things.

But it is too late to redirect the rule making – indeed it had little chance of happening – so the Occupy letter is more than welcome.

Inviting us to join you in accepting that nothing can be done, but hey, a little complaining around the edges of the issue is good for the soul?

Here’s my invitation to you;

I’m confident the regulators will recognize that, for all its complexity, the rules are comprehensible and can be refined to serve the public’s demand for control over a runaway financial system.

The problem is clear, it’s a runaway financial system, the solution is also cllear, it’s putting rules in place to serve the public interest.

Please explain to me how your efforts to obscure serve anyone’s but the banks interest in remaining outside the bounds of regulation?

My worst fear realized!! Elizabeth, I’m coming! ;-)

Per the Wikipedia:

Fractional-reserve banking is a form of banking where banks maintain reserves (of cash and coin or deposits at the central bank) that are only a fraction of the customer’s deposits. Funds deposited into a bank are mostly lent out, and a bank keeps only a fraction (called the reserve ratio) of the quantity of deposits as reserves. Some of the funds lent out are subsequently deposited with another bank, increasing deposits at that second bank and allowing further lending. As most bank deposits are treated as money in their own right, fractional reserve banking increases the money supply, and banks are said to create money. Due to the prevalence of fractional reserve banking, the broad money supply of most countries is a multiple larger than the amount of base money created by the country’s central bank. That multiple (called the money multiplier) is determined by the reserve requirement or other financial ratio requirements imposed by financial regulators, and by the excess reserves kept by commercial banks.[1][2]

IIRC, the current reserve requirement is less than 20%. So when a bank makes a loan, 80% of the money loaned is freshly issued money and NOT money deposited by other customers.

I believe (but have not confirmed it) that the same holds for assets that banks buy, e.g., municipal bonds which are, in fact, simply IOUs on loans to cities. Please correct me if you have a reference that says otherwise.

In further support of my claim that banks create money when they make loans:

“Modern Money Mechanics. Page 37. Money Creation and Reserve Management” (PDF). Federal Reserve Bank of Chicago. ” Page 7. Of course, they do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts. Loans (assets) and deposits (liabilities) both rise by $9,000. Reserves are unchanged by the loan transactions. But the deposit credits constitute new additions to the total deposits of the banking system. Page 37. In the real world, a bank’s lending is not normally constrained by the amount of excess reserves it has at any given moment. Rather, loans are made, or not made, depending on the bank’s credit policies and its expectations about its ability to obtain the funds necessary to pay its customers’ checks and maintain required reserves in a timely fashion …’”

But, I’m not sure whether this same effect holds when banks buy bonds, and I’d appreciate authoritative information one way or the other.

“Once more into the breach for my favorite obscurantist.”

(smile) :-) It is good to be the favorite!

As to your points:

First as to your last point: “how your efforts to obscure serve anyone” – I hope the points do not obscure and indeed I hope they shed light on the reality that may be currently ignored. In any case, My efforts, like almost all posting on the FDL, begins with the idea I can add a bit of value – and is not intended to “serve” anyone or anything.

As to the Global finance situation, the purchase of US banks by foreign banks, the AIG/Lehman/EU banks inter-relationship and how that showed that banking is not just “US Banks”, the need to be “full service” to retain the accounts of American, and non-American international corporate accounts and wealth management accounts, and how all that means, sans legalization of Japan “family” groups of companies providing product/service in the US, that US financial operations if they want to be international must have a post G-S structure, I refer you to the last 15 years of research on the subject.

But one can certainly advocate the position that there is no need for US Banks to do the banking of the international companies or to do wealth management, so there is no reason to not go back to G-S.

Indeed if I thought governments had any control, anywhere on anything, involving international corporations, I’d join you in asking that G-S be returned. But money in politics means big is better and if big is outside the US then the American worker has an even smaller chance of getting political decisions that help him as oppose to workers in other countries.

“But it is too late to redirect the rule making” reflects the Democrats and Republicans and Obama that gutted proposal after proposal by Barney Frank – allowing only watered down versions to pass – so the time to change from a pure structural approach via the addition of transaction rules was in committee and that time is past – albeit one can do regulation rule making the brings it back – but if Obama didn’t want it to pass the House Committee why would he allow Treasury to backdoor such a change?

So yes – I am just “complaining around the edges of the issue” as I commend the Occupy folks for a great letter that follows the do structural regulation only rules.

I doubt that the runaway financial system will be “totally” controlled until money is out of politics, and I doubt that my efforts can/will do much to change that.

Guess I am not an optimist.

What’s at issue is the purpose those dollars are put to, and the attendant risk involved.

The money loaned to existing businesses has less attendant risk than money loaned to people promising to build new businesses.

The traditional commercial bank was enjoined from risky investment, and self-dealing.

In discussing the causes of the great recession, we’re not looking at the way money is created, as important as that is, it’s not at the root of this discussion.

It is true that there are areas where the two issues converge, but what we’re really addressing at this point, or not addressing in a very important sense, is the appropriate regulation of what can be done by banks with the funds entrusted to them.

The financial industry successfully argued that the regulations imposed on them since 1933 were a useless encumbrance, and so they were largely repealed in 1999.

That turned out to be a mistake.

My point was, and is, that what the bankers are hiding is their responsibility for creating the great recession, and our quite reasonable expectation that sane regulation is necessary.

Yes, there is no argument that banks create money when they make loans, for example a home loan.

That money is almost instantly taken by the seller as the purchase price of the house, and most often some portion of that amount is used to pay off the seller’s mortgage.

Let’s call that a ‘normal’ or ‘safe’ creation of capital.
You are happy that the money was created because you could never afford a house if it wasn’t, and the seller is happy to be able to pay off his mortgage and perhaps buy another house, and the bank is happy to make a bit of money by charging you interest.
None of that money creation is very dangerous, and it makes our economy tick for normal people.

Now let’s look at the activities of those who bundled and securitized mortgages over the course of the years leading up to the great recession.

They bundled mortgages together by the millions and sold them to investors in the form of RMBS, (Residential-Mortgage-backed=Securities). The rules governing the creation of those securities mandates that the mortgage notes must be assigned to the fund that backs the security within a very short time period from the time that security is created.

What has come to light is that in many cases those who sold the RMBS did not follow the rules, and did not assign those mortgage notes as required, and in a sense they sold investors RMBS that did not really exist as promised.

So in that sense, those selling RMBS created money out of thin air, which they paid themselves for being so smart, but which, because it was phony has come to cause some very great problems, like the great recession.

So there’s creating money, and then there’s creating money, some of it is useful, and safe, some of it is pretty risky and in the end worthless.

I’m not really much of an optimist either, but neither am I a cynic, and I don’t encourage my friends to adopt a cynical attitude about the possibility of fixing our problems.

I certainly agree. If we think of debt as the new gold standard, debt-based money backed by subprime mortages is like gold-standard money backed by lead. But then they sold the lead that backed that money to investors whom the rating agencies assured it was gold. But then they never even delivered the lead — it was unregistered lead on which the new owners couldn’t foreclose. And, yes, it was the moral equivalent of counterfeiting.

Okay, so here my point.

Banks are in the business of loaning money, which is, in fact, a form of gambling; risk is involved. The way they make a loan is by accepting an IOU from the borrower and giving the borrower credit in an account with that bank, which involves nothing more than incrementing a number in a computer. The credit in that account is a liability and the IOU is an asset.

One kind of IOU is a home mortgage. Another is a corporate bond. My (mis)impression is that banks pay for both of them in the same way, i.e., by issuing new money (up to their reserve limits which are somewhere around 20%).

Of course, the don’t want to be restricted to mortgages and loans to startups. The big money gets made one the much bigger stuff. And, it mostly funny-money anyway, i.e., it’s not their skin in the game.

I understand your point, the issue is that the relative risk involved in the bank accepting your house as collateral on one hand, and investors paying real money for fraudulant RMBSs on the other is many orders of magnitude different.

The bank is taking a reletively small risk because your house is worth something close to what they loaned you, and they can and will sieze it if you don’t pay.

The RMBS buyers are/were taking a gigantic risk buying securities that we have learned were so rife with fraud that we suspect they may be worthless.