Just a few quick comments, at random, because I'm making lasagna...Micheal Corleone wrote: Just when I thought I was out... they pull me back in
A Note, promissory note, mortgage note, etc....
The borrower "creates" the note in the sense that they sign and agree to the terms of it, and the bank (or whatever) agrees to accept it based upon the conditions that the borrower has said he would abide by.
The bank (or whatever) then puts money somewhere, usually as a check to someone the borrower is paying money to, like a car dealer, home builder, drug dealer (or whatever). In theory, the lender could open the drawer and hand out hundreds for the amount, although almost always that's one of the conditions in the note, for instance, legal language that in effect means "we're not gonna pay this to you personally in silver coins, we're gonna send a check to the car dealer" , but hey, if you can get a bank (or whatever) to agree to give you cash money, have at it. They're still gonna want a car title, warranty deed or something in exchange that helps them secure the collateral.
Now, since on any given day they might in fact lend out more money than they have real live capital in the bank, they need something to back up that check they sent to the car dealer, because they don't (contrary to sovidget mythology just magic money into existence, if they don't do something that check will bounce just like yours or mine if we don't have the money in the account), so they take that note and hopefully its written in such a way that its a "negotiable instrument", meaning that first, it meets the requirements of both federal an state regulations for how the thing is written, and second, the terms, including the characteristics of the borrower meet certain conditions. Anyhow, if its up to snuff as a negotiable instrument, it can be easily sold in what's called the secondary market. That is a group of money things (mutual funds, other banks, insurance companies and rich guys, oh, and Hedge Funds....can't forget the hedge funds) that BUY these negotiable instruments, usually as pools of more than one, but often just individually. Some buyers buy them one at a time and then package groups of them as CBO Bonds and such which also sell on the secondary market but if you think about it that should be called the thirdendary market
.So, the bank (or whatever) sells the note that the borrower created and gets their cash back, and the buyer gets to collect the payments the borrower has to make. The "Note" might be sold more than once, and, especially in Mortgages and municipal bonds, they actually split the cash flow where one end buyer might have the right to only the interest portion of the payments received and someone else gets the repayment of principal (and if the borrower wins the lottery and pays off the mortgage early they get a lump sum and are done)
Ah, but young padawan, there was indeed some money created here. Money created on more than one level, and somewhere in all those notes and checks and CBOs and Hedge Funds the actual money supply, the amount of money the Federal Reserve has issued notes and credits and electrons for, has increased.
The Borrower has, by creating the note, agreed to create the amount of money that is new wealth generated by the transaction, over the course of the agreement. And this is important, the money is only created WHEN THE MONEY BORROWED AND THE INTEREST is repaid to the entity that holds the rights of the notes obligation. That bit means that you, Sovidgit, cannot declare that you created the money and therefore, by some logical dance don't have to pay it back, are wrong.
When you buy a house, say, and to simplify it this is a new house (existing homes do the same thing but the mechanics are more complicated for reasons not relevant to this discussion) and you pay, say $200K for it, a lot of money was created, by a lot of people and or companies etc... Unless you have a few years, just trust me on this concept but the end result is that money was created by all those people paying off their own mortgages or car loans or investing their savings...whatever they do with the coin they earn. You didn't create that money, they did and for all intents and purposes that money came into existence when that check the bank (or whatever) wrote based upon your note was cashed. But like I said, that is not the money you created, its the money they created, it just gets born when they get paid for creating it. And not all they they are paid is the new money, in fact, most of it is just a relocation of the existing money supply, but the things they did that made the economy larger than it was is in fact new money. Now since the money they are being paid isn't located anywhere yet, someone, somewhere, needs to fire up the printing press and make some Benjamins cause eventually all those electrons and account credits and debits and checks and such are gonna be reduced to someone wanting to buy a pack or Lucky Strikes at a place that doesn't take credit cards or checks.
Enter the all encompassing evil empire local Federal Reserve Bank. Not to be confused with the Federal Reserve Board, which is a government entity (search my posts for a good description of the difference, I've explained it before and like I said, I'm in a bit of a rush here)
I have to break this up here, continued in next post....
