tag:blogger.com,1999:blog-648884752216444797.post5109424627225914588..comments2024-03-28T06:00:18.802-07:00Comments on bionic mosquito: A Simple Property Rights Question for FRB Criticsbionic mosquitohttp://www.blogger.com/profile/12002548958078731031noreply@blogger.comBlogger8125tag:blogger.com,1999:blog-648884752216444797.post-4934961154643868502014-01-30T15:18:09.141-08:002014-01-30T15:18:09.141-08:00"How is it nonsense that the liabilities of t..."How is it nonsense that the liabilities of the banks exceed their assets? That is what FRB means."<br /><br />If you are a CPA that audits banks, walk me through the t-accounts. If not, walk yourself through it. Follow these three simple rules and see if you can make it work:<br /><br />1) Assets on the left; liabilities and equity on the right.<br />2) The left and the right must balance<br />3) Cash is an asset.<br /><br />If necessary, make a spreadsheet and send it to me. Demonstrate how a one-dollar deposit (recorded on one side of the balance sheet) results in a ten-dollar entry on the other.<br /><br />Don't yet move on to the bank lending the money, Get through this step first - as this is the issue you have raised.<br /><br />"...what right does the bank have to call the loan because of their bad management?"<br /><br />Then the bankruptcy judge will award the mortgages to the remaining creditors.<br /><br />You don't know much about either accounting or bankruptcy, do you. <br /><br />bionic mosquitohttps://www.blogger.com/profile/12002548958078731031noreply@blogger.comtag:blogger.com,1999:blog-648884752216444797.post-87655605237353756502014-01-30T14:28:09.492-08:002014-01-30T14:28:09.492-08:00How is it nonsense that the liabilities of the ban...How is it nonsense that the liabilities of the banks exceed their assets? That is what FRB means.<br /><br />In practice, I'm sure that the banks create made up money so they can book made up assets, but the whole question is whether or not this constitutes cooking the books.<br /><br />"Even assuming your example were possible,"<br /><br />Easily possible: each of the 100 people buy themselves a McMansion, and the sellers bank elsewhere, and the other banks demands transfer of assets.<br /><br />"the bank (or the bankruptcy judge) will demand repayment of the loan."<br /><br />An irrelevant demand, since the money may have already been spent. Also, not necessarily a legal demand. If I made a contract with the bank to take a $1mil, 30 year mortgage, what right does the bank have to call the loan because of their bad management?<br /><br />You appeal (fairly, I might add) to the terms of the depositor agreement. Loan agreements are just as binding and valid. If the bank agrees to be repaid in 30 years, then over 30 years is when they get their money.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-648884752216444797.post-1605747399300470472014-01-29T19:15:39.385-08:002014-01-29T19:15:39.385-08:00"It records an asset and 10x that many liabil..."It records an asset and 10x that many liabilities on its books."<br /><br />If you are a CPA that regularly audits banks, I will listen to your explanation of this wonder. Else, it is just nonsense.<br /><br />"100 people immediately withdraw their accounts for cash."<br /><br />Even assuming your example were possible, the bank (or the bankruptcy judge) will demand repayment of the loan.<br /><br />Please do better.bionic mosquitohttps://www.blogger.com/profile/12002548958078731031noreply@blogger.comtag:blogger.com,1999:blog-648884752216444797.post-71709903133212837682014-01-29T17:20:42.097-08:002014-01-29T17:20:42.097-08:00"the depositor is an unsecured creditor, to b..."the depositor is an unsecured creditor, to be satisfied after senior, secured creditors"<br /><br />But what if there are no other creditors? For example, let us say that I start a small town bank in a town of 10,000 people. Everyone in town makes a checking account deposit of $10,000. I now have $100,000,000. I turn around and loan those same 10,000 people $1,000,000 each, which they all turn around and redeposit in their checking accounts. I still have only $100 million in the bank, but 10,000 people each have $1.01 million in their accounts. 100 people immediately withdraw their accounts for cash. The other 9,900 people eat it. What priority was there other than "got there first"?<br /><br />"When it takes a deposit, it records both an asset and liability on its books"<br /><br />But that is not true. It records an asset and 10x that many liabilities on its books.<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-648884752216444797.post-4429498811064479022014-01-09T15:25:32.452-08:002014-01-09T15:25:32.452-08:00“If someone represents that they are doing somethi...“If someone represents that they are doing something that is impossible to do…”<br /><br />The contract does not state that the bank will do the impossible. <br /><br />“Firstly, there is no actual contractual priority in banking deposits.”<br /><br />There is a priority in normal operations – the deposit is the bank’s liability, recorded on the bank’s balance sheet. Think about the ramifications of this. There is a priority in bankruptcy – the depositor is an unsecured creditor, to be satisfied after senior, secured creditors.<br /><br />“Secondly, I don't believe that simple subordination of a debt resolves the debtor of the moral and legal obligation to not be immediately insolvent.”<br /><br />The bank is not immediately insolvent. When it takes a deposit, it records both an asset and liability on its books. There is no insolvency (separate from illiquidity) if assets are at least equal to liabilities. <br /><br />The bank is also not immediately illiquid – to pre-empt your next comment. It is liquid so long as its calculations of prudent reserve requirements prove true. Like every entrepreneur, bankers must make estimations about the future. Also, like every entrepreneur, sometimes bankers are right, sometimes wrong. <br /><br />“…can you really argue that no fraud was perpetrated against the subordinated lenders simply because "hey, they knew they held junior debt"?”<br /><br />I have not made only this one assertion. Without repeating the thousands of words I have written on this subject, I will give you two reasons that are not this one: there is no fraud because, a) the contract doesn’t promise that the bank will hold your deposit – it is not a bailment, no matter how much supporters of FRB-is-fraud insist to treat is as such, and b) poor business judgment (via miscalculating future reserve requirements) is not evidence of fraud.<br /><br />The system is messed up due to the monopoly, not due to FRB. <br />bionic mosquitohttps://www.blogger.com/profile/12002548958078731031noreply@blogger.comtag:blogger.com,1999:blog-648884752216444797.post-29258810488022201652014-01-09T14:35:59.351-08:002014-01-09T14:35:59.351-08:00But isn't that impossibility precisely the poi...But isn't that impossibility precisely the point? If someone represents that they are doing something that is impossible to do, isn't that why 100% reservists call it "fraud"?<br /><br />As for priority, I'm not sure that solves the issue. Firstly, there is no actual contractual priority in banking deposits. It is simply "first come, first served" (whence bank runs).<br /><br />Secondly, I don't believe that simple subordination of a debt resolves the debtor of the moral and legal obligation to not be immediately insolvent. For example, compare two scenarios: if a debtor issued some 10 year notes, everyone accepts that the ability to pay principle in 10 years is unpredictable, so if some debt is senior to others, it is upfront and fair.<br /><br />However, let us say the debtor issues a number of notes such that they cannot even pay the first coupon in full to all notes, but hopes it won't come up since the issue has some sort of reinvestment option. The debtor then pays their executives big bonuses on the tremendous haul from the sale of notes, and then defaults the notes, can you really argue that no fraud was perpetrated against the subordinated lenders simply because "hey, they knew they held junior debt"?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-648884752216444797.post-394007927475719802014-01-07T10:58:29.634-08:002014-01-07T10:58:29.634-08:00Salerno opened my eyes on this - it is impossible ...Salerno opened my eyes on this - it is impossible to contract the exact same right to the same property at the same time to two different parties.<br /><br />The right to exchange is divisible by priority. bionic mosquitohttps://www.blogger.com/profile/12002548958078731031noreply@blogger.comtag:blogger.com,1999:blog-648884752216444797.post-61851034709979650362014-01-07T09:34:56.626-08:002014-01-07T09:34:56.626-08:00For rights to be divisible, shouldn't one be a...For rights to be divisible, shouldn't one be able to enumerate the rights in question? For example, if A rents a car to B, then the utility right in the car has been transfered to B, the exchange right has not (B can drive the car, but not sell it). But in FRB, it would seem precisely the same exchange right that is being claimed by both the depositor and the bank.Anonymousnoreply@blogger.com