Basic Economic Questions

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    Hello everyone,

    I have a few very basic economic questions. If you have time to answer any of the 4, it would be very much appreciated. Also, if you know of any books that might be able to help me understand this topic better, it would be very much appreciated. I’ve read End the Fed (Ron Paul), The Case Against the Fed (Murray Rothbard), Economics in One Lesson (Henry Hazlitt), and I’m currently plowing through The Creature from Jekyll Island (GE Griffin).

    1. Why do banks care if loans are defaulted since the Fed can just print money out of thin air? Is it because they write it off of their assets and liabilities? Since they only keep 10% of deposits on file, there is a higher possibility that a bank run will occur? Even so, isn’t this something that only smaller banks need to worry about (since larger banks will most likely get bailed out)?

    2. I know that banks and countries are able to roll over and reschedule payments, but can individual people do this as well? I know there is something similar like this set up for student loans (correct me if I’m wrong, of course).

    3. Can you please explain to me how government guaranteed future returns work? Is it the same as a bailout? know it’s when Congress puts the bank losses on the taxpayers, but how do they do this? By increasing taxes? Why don’t they just get the Fed to print up more money (wouldn’t the American people prefer a hidden tax over a visible one)? Do they do this because they fear that if the loans are continuously rescheduled, a company will be discouraged by the interest payments piling up and will thus default?

    4. I’m sure this is a terrible question, but how do banks get to become “big banks?” Don’t all of them have to make the giant leap and risk everything to start getting a lot of deposits? When they have a lot of cash in their reserves ,can’t any bank become a ‘big bank?’

    Thank you so much for your help!



    1. If a bank is holding a loan on which the borrower defaults, then the bank’s equity is reduced. If enough of its loans are bad, then the bank becomes insolvent. This alone, separate from the bad loan problem inspiring bank runs (which it doesn’t seem to do in the age of government deposit insurance), can bankrupt a bank. You are correct that smaller banks tend to be more prudent than large banks and larger banks more prudent than the largest-politically-connected banks because only the latter have an implicit government bailout.

    2. In principle, it’s possible for anyone to roll over debt and reschedule payments. Mortgage refinancing is a big market. Credit card debts can be shifted from higher to lower interest cards. And so on.

    3. Whether the government puts the bailout funds into its budget or has the Federal Reserve issue new money, command over resources is shifted away from producers and toward the government and bailout recipients. Since the financial collapse in 2008, the bailout funds in the budget were paid for by debt, not taxes. This means that private investment was displaced instead of reducing taxpayer incomes. Monetary inflation by the Fed transfers income from later recipients of the new money toward early recipients of the new money.

    4. In the unhampered market, an enterprise gets larger by satisfying the preferences of more customers better than other enterprises. In our hampered market economy, an enterprise can also take the political route to success, satisfying the desires of state officials and obtaining in return political privileges over its rivals.

    Take a look at Murray Rothbard’s book, A History of Money and Banking in the U.S.:


    Thanks for your help! Once I finish reading The Creature from Jekyll Island, I’ll definitely check out that Rothbard book.

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