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Beware The Imaginative Bean Counter

Or 'Perverting The Fractional Reserve Banking System'

Once upon a time, not so very long ago, bean counting was considered boring; Bean Counters themselves were, by very definition, boring, and known for their lack of imagination.

Sure there was more to it than just counting beans; people with beans could lend beans to people who had no beans so that they could plant these beans, thereby growing additional beans, enabling the borrower to pay back the lender the original beans plus some extra beans in payment for the loan of the beans.

The remaining beans now belonged to the borrower and he could either plant them himself or lend them to someone else. Everything was calculated in beans and the system, known as the Bean Standard worked pretty well. The major problem was that sometimes people who wanted to grow beans couldn't get hold of any to plant so the rate of economic growth slowed or even receded.

After one particularly nasty recession, known as the Great Bean Depression, the Bean System was abandoned, and a system known as Fractional Reserve Banking was introduced. This meant that you could put your beans in a bank which would lend out up to 80% of those beans to people who wanted to borrow them. The beans lent out could be deposited in another Bank which could then lend out up to 80% of those beans etc etc. (see table below).


Fractional-Reserve Lending Cycled 10 times with a 20 percent reserve rate (sources: The Principle of Multiple Deposit Creation, Federal Reserve Bank of New York, Bank for International Settlements)

individual bank

amount deposited

amount lent out

reserves


A

100

80

20


B

80

64

16


C

64

51.20

12.80


D

51.20

40.96

10.24


E

40.96

32.77

8.19


F

32.77

26.21

6.55


G

26.21

20.97

5.24


H

20.97

16.78

4.19


I

16.78

13.42

3.36


J

13.42

10.74

2.68


K

10.74







total reserves:





89.26



total amount deposited:

total amount lent out:

total reserves + last amount deposited:



457.05

357.05

100








commercial bank money created + central bank money:

commercial bank money created:

central bank money:



457.05

357.05

100



As you can see from the table, for every 100 beans that were originally in existence, the banks were able to create an additional 357 virtual 'might beans', that when planted, nurtured and harvested would produce new real beans.

This new supply of might beans heralded an era of unprecedented economic growth as many people were able to borrow these might beans that did not exist in reality, and turn them into real beans. Standards of living shot up, as did standards of education and health care, people even started to live longer than they ever had before, all because the Fractional Reserve Banking system created so many extra might beans that could be made into real beans.

Life was good.

The bean economy had its ups and downs but nothing too dramatic. The old generation of Bean Counters from the time before might beans passed away to be replaced by the Bean Counters they had trained, who in turn passed away making room for the new generation of Bean Counters, but somehow in the process of passing down the knowledge of the Bean Counter, an important distinction was lost between real beans and the virtual might beans.

Now for a time this did not matter. The vast majority of might beans still got planted, nurtured and harvested, admittedly in vastly different ways, but they still produced real beans at the end of the process.

It all started to go wrong when one Bean Counter inexplicably grew an imagination.

This particular bean counter realized that some people would like to borrow might beans and instead of planting them to grow real beans, just pretend to. The Bean Counter created a market where other Bean Counters could use might beans to pretend to grow real beans. Now obviously no-one would invest if the growth rate was arbitrary, so he decided that they would derive the prices of these imaginary real beans from the price of actual beans grown in the real world. These deals became known as derivatives. Because by now everyone had forgotten that there was a difference between real beans and might beans, there was a significant advantage to be gained as by betting his 357 virtual beans against 100 real beans a bean counter had a major advantage. If the real beans got a 10% return he only got 10 beans, but our imaginative Bean Counter would get almost 36 extra beans from a 10% return.  Because no actual might beans or real beans were spent on building plant, paying wages, or buying stock, it was possible to take a position for a fraction of the price of the equivalent position in the real world. However because the returns were based on the equivalent real world position the profits were enormously more than a genuine investment that led to the creation of more real beans. Many Bean Counters became unimaginably wealthy, earning millions of might beans every year, creating Hedge Funds worth Billions of might beans, all of which could be put back into the Fractional Reserve Banking System which could once again multiply 100 might beans into 357 extra might beans. As the returns grew and the strangeness of this idea dissipated, more and more Bean Counters, and ordinary people got in on the act. Why actually go out and work when you derive beans from virtual activity?

For a while nothing happened, the amount of might beans invested remained proportionately small, and just as an economy can sustain a number of idle rich, provided the proportion stays below a certain threshold, not too much damage will be done.


More and more bean counters grew imaginations, and their imaginations became more and more complicated, and the proportion of might beans that got planted diminished, resulting in fewer real beans being produced. At the same time more and more might beans were being bet against other might beans, creating vast fortunes of might beans, that could still, technically, be planted and produce real beans. But then it happened.

Some Bean Counters persuaded some people to borrow might beans to buy houses whose value could only go up, so that the people borrowing would DEFINITELY be able to pay back the loans with more might beans. Unfortunately the value of the houses did not go up and many of these people did not have enough real beans to pay back the might beans that they had borrowed, and they were unable to borrow more might beans to postpone the day of reckoning. This created THE PROBLEM.

THE PROBLEM got worse because some other bean counters who had grown imaginations packaged up the loans and sold them on for more might beans. They then used these might beans that they got from the sale to buy other might bean based investments.

Some bean counters who hadn't grown imaginations began to ask annoying questions, dredging up ancient wisdom regarding the difference between might beans and real beans. Who will take the hit? they asked. They were told not to be so boring and that after a few write-downs everything would be OK. Well a few write-downs occurred, and then a few more. Then a lot more. Then one of the Major Imaginative Bean Counter Company's nearly failed and had to be bailed out by the Fed and sold to another company, then the two largest mortgage backers, Freddie and Fannie, had to be bailed out by the Fed. Soon after another Major Company of Imaginative Bean Counters declared bankruptcy, and another sold itself to a bank that focused on lending to customers who turned might bean into real beans.

Shortly after an American Insurance Giant was effectively nationalized by the Fed as its demise would have caused a tsunami of business failures, and two other major firms of imaginative bean counters were facing extremely uncertain futures. Why were these companies failing? Because all of a sudden all the other bean counters started to remember that a might bean is not a real bean until and unless it is used to make more real beans. If not used a might bean becomes a might've bean, and these, unfortunately. are as empty dreams; completely without value.

The search for might've beans masquerading as might beans and might beans masquerading as real beans continues.

Once the search is complete, and the worthless beans are removed from the system there will be critics of the Fractional Reserve Banking who will try to blame it for the woes that we will suffer. That will be unhelpful and will slow the recovery. There will be some that will seek to close the casinos, again unhelpful; although we do need to ensure they only accept real beans as stakes. We also need to ensure that the banks that loan might beans only do so for purposes that will create real beans rather than to gamble them against other people's might beans.

But the single biggest lesson we must learn from this: BEWARE THE IMAGINATIVE BEAN COUNTER.

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