It is worth exploring a bit how banks work, for those unfamiliar with it. As I understand the matter, all banks are required by law to keep in reserve a certain amount of “hard” currency. That amount is determined by the Federal Reserve. This is interesting, since no one at the Fed answers to Congress directly, yet they directly control the cost of our money.
Be that as it may, if you deposit $100 at your bank, they have to keep $10 of that in reserve, and can loan the rest. What actually seems to happen, though, is they keep your $100, and loan $900 against it. That $900 comes out of thin air. Their “reserves” are actually the only hard currency they have. They may own securities, which count in my mind as money, but the loans they make do not.
When I go to the bank to take out, say, a home mortgage, the bank writes the seller of the house a check, say for $100,000. What happens is they put that loan down on both sides of the ledger, as both a debit and a credit. It is a liability, and an asset. It is a liability, since they wrote the check, and since they have to keep $10,000 around (in the vault or deposited at the Fed) to “secure” it. It is an asset, since the borrower signed a promissory note–a mortgage, if my legal terminology is right–to pay the money back. It is money owed the bank.
If the borrower defaults, even though most of the money was created from thin air, it still shows as a debt owed. This is how the accounting is done, I’m sure per some formalized system of accounting. Thus, too many defaults, and you go bankrupt, even though you don’t actually owe the money to anyone, since you created most of it. This is logical, since otherwise banks could just loan money to anyone, and just make it vanish if the borrower defaults through the same feat of magic by which the loan was created. This would be massively inflationary. The vulnerability to bankruptcy for bankers is, then, a partial check on what is still a bad system.
If the system were fair, anyone could create money, but that isn’t the case. You have to get a charter, and presumably mass a certain quantity of actual assets. In most cases, this is likely the personal assets of those who create the bank in the first place. Those assets are “real”, and in my proposed solution to our monetary problems they would of course be paid in full for those.
We would simply wipe clean both the liability and the asset sides of the ledger for loans which were based on “unreal” money. It would seem reasonable, as well, that to the extent real money was in the loan, that that part would be retained.
What is at issue is the long term viability of a system in which loans are used as collateral for futher loans, and in which the whole thing is underwritten by the taxpayers–not just here, but in almost all industrialized nations–but the profits, when they occur are private.
That will have to do for now. Things to do. I will add to this over the next few days.