Help Me With Sign Pennsylvania Banking IOU

Help me with industry sign banking pennsylvania iou

okay hey what's up everybody this upload is coming to July 26 2017 my name is Dallas post and you're listening to the post money plan podcast we believe empowerment comes through knowledge so our purpose here is to inform educate and stimulate thought on topics within personal finance economics and investing don't forget you can find us at post money plan calm or search the post money plan in the iTunes podcast app or in Google Play so today we're going to be talking about the banking system and breaking down the history of money lending and a little bit about how the banks have developed in the US and the west over time so I have on the show Murray Williams with me what we're gonna go over is a history of money lending roots of the modern banking system we'll go into a little bit about fractional reserve banking and the pros and cons of fractional reserve banking and then we'll move into how the fractional reserve banking affects our economic cycles and then start to wrap things up with talking about causes of the Great Depression and then how fractional reserve banking and stock market cycles interplay and how they work today very important yes all right so you've been on the show several times but just refresh our audience in terms of your background and your experience yes I'm a former bond broker in stock broker as well and I've ridden hard ackles on seeking alpha and other publications why don't you just go ahead and kick us off in the beginning give us a little bit of history on money lending yeah money lending has been around from ancient times probably the earliest record is from ancient babylonian times and lenders have been charging interest on loans back during those times but what's different back then is that the moneylenders were private and they didn't really do one secured loan they did more secure loans that was a primary income source for people with that with excess capital one of the criticisms back then is that the moneylenders would basically just pile up wealth and if you ever read the the book the richest man in Babylon one of the premises of that and that's if you could make your money make money and that's a very proper business model so if money landings been around for that long there's kind of the maxim that people complain about you need money to make money and people that don't have it seems a struggle to get out of that pit but that's kind of where money living comes in if you have money then you have it to lend out to then you can get interest on it so where did the concept of interest on on money lent come from or how did that develop I mean mathematics has been around for for a long time now who invented the concept of charging interest on loans but loans have been around especially bonds since Roman times even before then - whereas the government would issue bonds and then the problem was was that they couldn't service those bonds and then they would devalue the currency you know would make it more serviceable so that's one of the criticisms of government slowing laws out so just talking about some of the reasons for borrowing or lending depending on which sign you're talking about the way I think of it is someone would borrow money because their current needs are greater than their current resources we're gonna say okay I'm gonna borrow so that I can pay today for something that I don't have enough money for and that's kind of under the assumption that your current resources are less than your future resources after borrowing for example you'll morrow so that you can pay for a college education on the assumption that that will help you earn more income later so that you can then pay it back and have more left over because otherwise you wouldn't borrow in the first place because if you're just gonna end up negative so that's the assumption but whether that's actually the case is another thing and and there's different types of lending is what you suggest is probably student loans where you borrow money to feed some education for a skill but probably and that's that's kind of one of the lending practices that makes sense for the borrower what I say is a lending practice that does not make sense for is consumer lending like like spending way on a credit card you know it's like I can't afford to pay for something now so can some kind of a consumer item so I'll just borrow money to pay for it you not really have a future income but it's very very foolish way data to borrow mine but borrow money to learn a value is still like in a student loan or borrowing from a business perspective for working capital that that makes more sense yeah exactly that's kind of a side but I love touching on that because I hate when people get stuck in consumer debt so it's worth making that point while we're here is the difference between investment related debt and consumption related debt right which you just touched on borrowing money for school or a house you could consider those investment related debts but borrowing money for a car or to buy clothes those aren't things that you're spending money on that you're gonna get more money back in the future by any likelihood versus a home you're hoping that it'll appreciate in price mm-hm your student loan that you hope you'll have more income after school you hope so ostensibly is an investment related debt let's move back on to the history of money lending so I would say borrowing enables something to happen that otherwise wouldn't or couldn't happen for example if college cost thirty thousand dollars a year and I'm an eighteen year old I don't have that kind of money I can't go to college if I don't borrow right so then it then makes something possible that otherwise wouldn't be possible right therefore I would say lending is potentially value creating and profitable potentially in investment related situations but then I would differentiate between two types of borrowing where I just call one like situational need you know let's say your Hut gets destroyed in a hurricane but you still need food and shelter afterwards so you might like go and borrow from someone that has enough and you had that situational need but then another type of borrowing would be a profiteering enterprise where you want to build a power plant but you enough money to do that because it's a huge enterprise so then you you borrow enough money from people who have it or a bunch of people and eventually you're able to build that and then you can create value afterwards mm-hmm yeah I'd say that the mysteries of modern banking system is basically it traced that back to the Italian city-states and it was during the time the Renaissance probably started around the Year 1200 and primarily Jesus it was the the cities of Venice Genoa in Florence and this is when you had corporate entities actually start to lend money on on a widespread scale these institutions would lend money to governments to businesses and private enterprise as well and coincidentally this is also at the time when the double-entry accounting bookkeeping system was amended well it was through the Italian bankers and if you think about it just throughout history in practices like Billick farmers would want to borrow in order so that you can have enough money to buy land or seed so that you can grow crops that you borrow ahead of time so that you can then plant it you're investing for the future and then eventually you have the crops which grow you have your yield and then you can sell that back and then and settle your debts hopefully have some profit left over afterwards right so that naturally necessitate or gave birth to desire for lending or borrowing and then lending right and the potential downside of course when you borrow money is that you're not able to pay it back it's whether it's student loans or business loans or farming if your your income or your business profits over your crop yield didn't match the money you borrowed then and you would take a loss and then and Lander would take a loss as well this has always been one of the primary considerations of the risks of lending but that's why I think it's all I think lending should only exist in situations where there is collateral to be held the difference being you if you you could potentially lend money with nothing to secure the loan and that would be an unsecured loan but a secured loan would be there's some kind of collateral some kind of other asset that the lender can either hold or at least have legal claim to if the borrower defaults on the loan and that way there's some guarantee to the loan and some security that the value just won't poop into the air because otherwise you know if you say like oh okay I'll just borrow billions of dollars as an individual and then I'll go spend it but then I have no way of paying it back that's a huge risk to the lender so a way of protecting lenders and keeping the whole economy going is by making sure that all loans are secured and that that was one of the big dangers of derivatives credit default swaps where they just went crazy in 2008 you can end up creating markets where things are 100-fold insured like where the money doesn't really exist to pay all those settlements for those debts because there isn't that actual collateral there to secure them that's a good point and I remember a couple years ago I just personal story I'd lend money to people I knew I'd never get paid back and then I said well I'm just gonna get some some Shirky and I'm gonna get some collateral next time you know I lent some money somebody said well you have to give me some collateral for a loan and you actually lend me an electronic devices I actually probably worth twice as much as the money you borrowed and he paid me back in short order it was quite amazing yeah yeah that's another point I'll just make while we're here is that I think it's very important to always try to align incentives as much as possible right so when there's so when there's collateral to a loan it starts to align the incentives of the lender and the borrower that they both want the same outcome Thank You Ryan all right move and move us into the roots of the modern banking system just some points that I had there on the roots of the modern Magnus in order for someone to land or want to land they have to have excess cash so you have people that either have a deficiency of cash versus what they want or need and then you have other people who have surplus what people have found throughout history is that people who have need will pay for it and people who have extra and make interest or profit from that so the de-facto lender is going to be people with the most cash in society if you think about like who has the most cash as people who have quote-unquote protected money which is essentially the banks now before banks like the predecessors to max even though it wasn't their money they're holding for other people but then they're sitting on a bunch of money in times past gold was the main form of money and I'm sure a lot of people have heard of the history of how Goldsmith's would you know gold is heavy it attracts thieves if you're like holding it under your mattress or at home or whatever so that created the demand for money storage and protection and so someone protecting everyone's money ends up having a lot of cash even if it doesn't necessarily blowing to them directly so then you basically had Goldsmith's who were the gold dealers and they would hold on to people's gold for a fee and then they would end up having all the gold in their reserves and just while we're here I'll make a point that money storage is not the same as money lending there are separate services so you could have a demand for lending which is kind of going back to what I had said about like you have situational needs and then profiteering enterprise but then you can also have the demand for storage because it's risky carrying all your gold around and kind of inconvenient right you have a deposit bank or a loan bank and they're two different separate separate businesses but they've been combined in recent years to exactly that so that's the point on differentiating there's two separate services but Goldsmith's found that when they're sitting all the time all this money that belonged to their clients that had these deposits of gold with them and then they write out I are use to their customers they found that okay not all their customers are coming to them all of their gold at the same time so most of the time they're sitting on maybe like 90 percent of the deposits and then only like there's maybe a 10 percent churn or whatever you know it would vary from person to person or wherever you know at times but basically in practice they found that like not everyone is coming for their goal all at the same time which meant that they're sitting on gold that's just being idle so what they found out that they could do was they could actually start lending from that gold out to people who wanted to borrow the reason it could work is because the people that borrowed would pay interest on that and eventually they came profit from that and then they could return the deposit that was borrowed to make the loan and no one was hurt and they made a profit in the mean time so then that kind of attracted them to just do it more and more and lend out more and more of the gold that's sitting in their reserves until eventually you could get down to where you have no money in reserves and then someone comes to go get their gold out and clean it back and they don't have it there and that's the ancient form of a run on a bank and a bank being quote-unquote bankrupt where like they don't have the money to pay out the deposits that people want and that used to happen all the time because that's what they did they would lend it out and there were no restrictions necessarily and if people got scared that they didn't have enough gold in reserve then people would run and try to get that gold before the others did so that they got theirs back kind of similar to a Ponzi scheme in the sense like if you're the first people to get paid then you're fine but then the people who are the last ones they don't there isn't any money there and then they get stuck so that's how I would say where the fractional reserve banking concept came in so why don't you walk us through that yeah I mean you just described it perfectly and I would say that the concept of fractional reserve banking it probably started in England during the Middle Ages with the Goldsmith's back then the problem is was that like for instance if say you had a million dollars in gold deposits you can actually safely lend out 1 million dollars in loans so if somebody came to the banker to the task for their money back and you - granted - um the problem is is that it would actually land promissory notes that would extend loans beyond what they had in their vaults like if you had a million dollars and gold bill in that ten million dollars and this is when this is where the economic system changed we're actually debt or promissory notes for gold actually became money I think there's a great illustration of this if anyone has seen the movie Dumb and Dumber so when the main characters they find a briefcase full of money and then they're trying to return it to the rightful owner but in the meantime they accidentally open it and find out there's like a million dollars in there right and they think like oh well we need some money to go by they end up spending it all and then they put in these paper IOUs in the briefcase and then the bad guys find them and want the money back and they open up and find out there's only hi or use a nice like what is this there's nothing in here they're like oh no no it's all good it's just their ideas there's good as money and that really is literally our money system and how the fiat money system started and with the Goldsmith's which you're talking about the Goldsmith's would take the gold deposit and then give the customer an IOU and then the customer would have that IOU the promissory note and they could come back to the Goldsmith and get their gold back as long as the gold was there but it wasn't always there and that's where the problem comes in if something happened where the Goldsmith he general public who deposited money with the Goldsmith that they felt like the Goldsmith was doing something fraudulent like lending out money they didn't have then they would lose confidence in the Goldsmith and all ask for their money all at the same time and that's where you have a run bank fractional reserve banking has been going on it's been happening in the United States since its founding as I said before it started it probably started back in England during the Middle Ages during that time let me jump in here and just clarify what we mean by fractional reserve banking just for clarity's sake fractional reserve banking is a practice of keeping only a fraction of the money that the bank has in deposits in reserve and the rest gets used elsewhere so for example if I put a hundred dollars in Bank of America and more you put a on Bank of America they now have 200 dollars in deposits if they keep only 10% in reserve and then lend out the rest then they keep $20 in deposits and then they lend out a hundred and eighty out to other customers and hope to make a profit on it there's only $20 actually sitting there in their vault that would be a ten percent reserve ratio where there have used fractional reserve banking what I've discovered is it even goes even beyond that coming like legally it's a ten percent reserve requirement but banks can actually issue promissory notes even and beyond that and they can keep these loans off the books and this is where it gets where it gets really hairy or it gets kind of dangerous for banks when they get over leveraged and you see the problem is is that a bank has to keep a certain amount of money as far as either cash or gold inside the bank in their vault so depositors want cash they can get cash exactly and that's what determines how risky things are in the bank and then throughout the economy because the banks are the crux of the economy if you had 100 percent of your deposits in reserve the bank would be essentially riskless there would be no loans out they would just be holding on to the cash so there's no risk of not having the money it's just sitting there but then the further you stretch it you could go down to 75 percent in reserve 50 percent in reserve 25 percent reserve or only 10 percent in reserve in the u.s. today and has been for decades the legal requirement for banking purposes is 10 percent reserve requirement on demand deposits right which is pretty incredible to think that it's that loose it really is and it just goes to show like how fragile the banking system has been in times past and going through the history banking in the United States that was the banking panic of 1907 where a lot of banks were just going belly-up and of that Bank panic that was the catalyst for creating the Federal Reserve System but the entire banking system and our money supply in general is just based on confidence basically and if other lenders lose confidence in a bank like for instance if there was a run on the bank and depositors wanted their money back if they all asked for cash that may be in trouble if a bank can't get any liquidity to borrow like for instance in the federal funds market which is which is the overnight liquidity market where banks loan money to each other if a bank that is considered insolvent they just lose confidence with the other banks then the bank is in trouble I don't get too much in the Federal Reserve but one of the reasons for the creation of the Federal Reserve was to back up the banking system and the purposes of it well if you had the Federal Reserve then there won't be any bank failures well we learn how that turned out and so just because we have a central bank doesn't doesn't stop us from a bank failure so banks have to engage in safe lending practices which a lot of them happen all right I think we still actually have a good amount of content to cover in terms of the fractional reserve banking we could go into the Fed a little bit too so I'm going to go ahead and cut this one off for part one and then we'll come back next week for part two continuing just discuss Monday lending and fractional reserve banking system and going to a little bit about the Fed thanks Maria for joining us don't forget to subscribe to our podcast on the itunes podcast app and we'll catch you next time on another edition of the post money plan podcast you