Is this a good way to think of central banking?Submitted by ebb on Sat, 12/01/2012 - 19:06
Let me see if my understanding of the central banking system is correct because I want to begin to explain this to other people. In a free-market banking system small banks establish accounts and receive deposits in which they then lend to borrowers. Now they can't keep all the money in their bank for the same reason their customers don't keep their money in their mattress. It is just to risky for them to do so so they take the money they have and deposit it into a bigger bank which is a bank's bank. That bank has the same problem so they find an even bigger bank to deposit their deposits into. At the same time their competitors have the same problem so the first tier banks all deposit into the next level banks so those banks basically have all the money of first tier banks. The second tier banks take their money and deposit into third tier banks which are even bigger than they are. This continues to climb until you have two or three 'super-banks' that basically hold all the money for all the smaller and mid-level banks. The first tier banks can't possibly keep enough money to maintain their customer's demands for loans and quick cash from their own accounts so they borroy money from their banks in order to satisfy the cash flow needs. The bigger banks do the same thing with banks they deal with until you reach the super-banks now the super banks are at the top so they, in order to protect their own economic interest, develop lending rules for their customers who happen to be lower banks. Those banks do the same with their customers until you reach the first tier banks which establish rules with their own customers which probably are shaped by the rules set out to them by their banks.
Since money in a free-market banking is limited to what is actually deposited the rules are establlished to minimize risk and make sure defaults to ruin each bank's perspective business. They won't lend money to people who can't pay it back which protects each bank on the chain and essentially prevents a banking collapse which is the cause of most modern recessions.
Now, that is what should happen in a free-market banking system but in a central banking system the super-bank is a government institution that is able to set the lending rules for all banks that do business with them just as the private super bank did in the free-market. This central bank (who is able to work in complete secrecy) single handily decides the lending policies of a nation through its chain of banks that go all the way down to the mom and pop bank on the corner. This should sound better in that it gives some security to depositers but the central bank controls a very key component of our economy which gives it power over it. It can lend to much or not enough. It can also make deals with foreign central banks that have a similar power over their own countries economies. Each of these central banks have set itself up as the primary lender for their perspective governments which give them some influence over the government's decisions. Should they go to war? Should they enact a trade embargo? Should their country enact a foreign policy that affects their friends who manage another central bank? Etc Etc.
The network of central banks across the world seem to behave as a single organization influencing the decisions of all governments across the world. A shadow world government of government banks that, if not decide everything, have a great deal of influence over political decisions.
The central banks can simply print more money so they don't have to worry about massive defaults since they can get free money from the government. There is no incentive in these systems for banks to make good decisions since they never suffer the consequences of their bad lending decisions.