Understanding the Players in Banking


COMMENT: Mr. Armstrong;

You have explained what others seem to create a mess out of. It is the Fed who can create the money out of thin air not the bankers. The banks create money as a multiple of deposits. Only the Fed can create money at will. These people seem to take a bit from one and spin it around and apply it the whole and really confuse people. You are correct. If we do not understand the problem, then this type of analysis will be pro-government and then we hand more power to the very people who corrupt the entire system.

Thank you for clearing this up.


REPLY: I confess I do not read these explanations that seem to be circulating around. I can see now that this creation of money out of thin air idea is mixing the unique power of the Fed with the idea of leveraging the economy through loans. They are two distinct separate issues entirely. If a commercial bank could just create money out of think air, then hell, apply for a banking license. If that were ever true, then just follow the logic. No bank would ever fail if they could just create new money to satisfy people in a panic. TARP would not be required and they would never need a bailout. So how can these people spin such a story – it is totally illogical. They are mixing and matching apples and oranges.

The Fed did NOT simply buy debt, they created money to buy the debt. This is monetization. The Fed cannot control the money supply because the biggest chunk is created by Congress with issuing debt. That is the Treasury not the Fed. The central bank of Japan owns 70% of the national debt. There have been auctions with not enough bid in Germany. The central bank bought the paper the government could not sell. This is the difference between a central bank and commercial banks.