How the banks create money

[drkitten]

At what point in the scenario(s) did the bank lend out more than its cash reserves in a single transaction?

At the point where it approved a $1000 loan to me to build a boat, which created a $1000 draw-down account for me, despite only having $100 cash on hand.

In this scenario, printing and handing out cashier's checks is essentially printing money.

No. There's a fundamental difference; the bank doesn't have to redeem money, but does need to redeem cashier's checks.

At the end of paying back the loans used to build the boat the bank has $100 and owes $1000. Please show me where the bank's spare $200 is.

In deposits of the bank. It received $1200 in deposits from me and used $1000 of them to retire $1000 in liabilities. It also has a total of $1000 in depository receipts and a corresponding liability of $1000. Don't confuse "money" with "currency"; money on deposit in the bank is still money.

 

[psionl0]

Then we're in agreement. Webb is wrong.

Yes. It was just the phrase "entirely wrong" I had a problem with.

 

[webb5]

Is this going to turn into a labor-theory-of-value nonsense?



Well, value is certainly added to it. I can use a picnic table in ways that I prefer to ways that I can use a tree. Since I want a picnic table more than I want a tree, it's more valuable to me. Presumably that's true for you as well, or you wouldn't want the table.

What's a "monetary" value versus any other kind of value in this context?



That's right. Because if you need my picnic table and I need warm blankets, it's much easier for us to trade with money than via barter, especially if you don't have any blankets going spare, but you do have a supply of cheese.




In the same sense that the shoes of this world are by definition manipulated by the cobblers, perhaps. If I need shoes, I go to a cobbler, and I pay him for his time and trouble, because I can't make very good shoes myself. If I need money, I go to a banker, because I can't make very good money myself. But that hardly makes our feet into the stuff of conspiracy.



Perhaps. If I sell the picnic table to a moneylender, almost certainly. That's how he makes his money. If I sell it to a sheepherder, it will come from sheep. If I sell it to a cobbler, it will come from shoes.




I certainly hope not. I try very hard not to "understand" things that are not only dead wrong, but stupidly and ignorantly so.

What a load of drible! You will never understand

 

[Sceptic-PK]

What a load of drible! You will never understand

Oh yes, the last retort of the uneducated and ignorant. You're the one that doesn't understand. Almost everything you've written in this thread is utterly wrong. Go take some economics classes and stop believing every crackpot site you find on the net.

 

[webb5]

Oh yes, the last retort of the uneducated and ignorant. You're the one that doesn't understand. Almost everything you've written in this thread is utterly wrong. Go take some economics classes and stop believing every crackpot site you find on the net.

I think it should be the other way. It's time you woke up. Did you take an economics degree or something? Did you really read all my posts and come out thinking i'm utterly wrong. I think you should re analize what I have written particully on the monopoly bit I used.

The Global financial crises we are now experiencing was caused by the banks.
Fractional reserve banking should be called Fictional Reserve Banking
because that is what it is It's fiction. There is not enough money reserves in the banks. A run on all the banks is a very possible, the Centrol banks can only cover so much.

Clearly the great economists of this world have got it wrong. Let's find the solution do you see it yet? Can we really allow the banks to manipulate our financial system and really believe nothing but good can come from it?

You need to re analyze every thing you have memorized as fact and look for any facts that don't add up.

 

[soylent]

If a bank isn't close to being insolvent it can weather a bank-run. A loan is a revenue generating asset from the perspective of the bank; the bank can borrow with these loans as collateral, or in the worst case convert them to money by selling them.

Banks become insolvent by issuing bad loans. There's nothing inherently insolvent about fractional reserve lending.

Imagine a bank that has £10 in capital, gets £100 in deposits, lends out a £90 to and keeps a tenner in reserve. Absent fraud(see control fraud) the bank wouldn't intentionally make bad loans. The bank makes the loan expecting a return of £90 + interest.

If the loan is good it is worth £90 and the bank can sell it. It still has £110 on the asset side of the ledger after making the loan, it has just converted £90 worth of reserves into £90 worth of loan.

If the loan was prudently made, with collateral and down payment, even if it defaults the bank can recoup enough to money that it doesn't wipe out it's capital.

If the bank keeps making successful loans it can grow its capital from retained earnings and expand its operation. If it keeps making losses it will shrink and eventually be unwound.

To get a spectacular blow-up like the housing bubble requires fraud, such as deliberately making spectactularly bad loans at high rates of interest, recording massive short-term accounting profits and paying yourself out a huge bonus. When cash flow(lack there of) catches up to you the bank may fail, but if you're the CEO you made out like a bandit.

 

[soylent]

Webb, you have this entirely backwards. Fractional reserve requirements are a limitation imposed by governments, not a priviledge. Absent such requirements, what do you think will happen?

Well, we know what will happen; see the free banking system in Scotland, which held ~2% reserves in gold.

 

[drkitten]

I think it should be the other way. It's time you woke up. Did you take an economics degree or something? Did you really read all my posts and come out thinking i'm utterly wrong.

One of the sure signs of the crackpot -- when you consider it a handicap to true understanding of your theory for someone to know something of the subject of the theory.

If my physics theory makes sense to everyone except trained physicists, that's a marker of a stupid theory, not of a conspiracy among physics departments.

 

[The_Animus]

In deposits of the bank. It received $1200 in deposits from me and used $1000 of them to retire $1000 in liabilities. It also has a total of $1000 in depository receipts and a corresponding liability of $1000. Don't confuse "money" with "currency"; money on deposit in the bank is still money.

The bank has $100 and owes $1000. You did not specifically point out where the $200 of 'created wealth' exists.

It received $1200 from you and used it to buy $1200 of fish. It did not retire the $1000 in liabilities which is why it still owes $1000 to SC1 through SC10 and yet only has the original $100.

Or if you'd like we can say that it retired the $1000 in liabilities only to spend $1200 on fish for itself. In this case it used $200 of its own money from interest and $1000 of other peoples money. As a result the bank is now in debt and can only repay what it owes if it can charge more interest on future transactions.

The only way this scenario ends up without debt or someone getting screwed is if there is uniform and unilateral buying among the participants. By this I mean since you purchased $100 of labor from SC1, SC1 would purchase $100 from you in fish. This includes indirect methods of uniform purchasing such as if SC1 purchased a table from SC2 for $100 and then SC2 bought $200 of fish from you.

This is the only way in the scenario to achieve a no debt balance where no one gets screwed and yet new wealth in the form of boats or fish is created.

 

[The_Animus]

One of the sure signs of the crackpot -- when you consider it a handicap to true understanding of your theory for someone to know something of the subject of the theory.

If my physics theory makes sense to everyone except trained physicists, that's a marker of a stupid theory, not of a conspiracy among physics departments.

Generally this is true, but to be fair there is a difference between concepts in physics and concepts in economics. Physics theories are based upon immutable laws of the universe, whereas economic theories/laws/workings are made up dependent upon human behavior and the systems which make up our current society. For example, if we found an intelligent civilization on a planet far far away, their economic theories/laws/workings could be completely different from our own. Their physics however, not so much.

 

[Sceptic-PK]

Did you take an economics degree or something?

No, but I dabble in the basics (the basics you get repeatedly wrong).

Did you really read all my posts and come out thinking i'm utterly wrong.

Yes.

The Global financial crises we are now experiencing was caused by the banks.

Wrong. The crisis had a number of important causes, none of which necessarily more important than the other. This is why it has been referred to as “the perfect storm”. The fact you think it was all down to the banks just shows how little you understand about the topic you’re preaching about.

Fractional reserve banking should be called Fictional Reserve Banking
because that is what it is It's fiction. There is not enough money reserves in the banks. A run on all the banks is a very possible, the Centrol banks can only cover so much.

Yawn.

Clearly the great economists of this world have got it wrong. Let's find the solution do you see it yet? Can we really allow the banks to manipulate our financial system and really believe nothing but good can come from it?

They don’t “manipulate” anything; they provide credit to those who ask for it. If you have a problem with banks, don’t use them.

You need to re analyze every thing you have memorized as fact and look for any facts that don't add up.

You need to go to school and stop wasting everyone’s time with your adolescent nonsense.

 

[The_Animus]

If you have a problem with banks, don’t use them.

As if you can just not use them. Good luck paying your electric bill by mailing them cash.

 

[Sceptic-PK]

As if you can just not use them. Good luck paying your electric bill by mailing them cash.

Don’t use them for borrowing if they’re so evil and manipulative I meant.

 

[marplots]

As if you can just not use them. Good luck paying your electric bill by mailing them cash.

Legal tender for all debts public and private. Cash works.

 

[webb5]

If a bank isn't close to being insolvent it can weather a bank-run. A loan is a revenue generating asset from the perspective of the bank; the bank can borrow with these loans as collateral, or in the worst case convert them to money by selling them.

Banks become insolvent by issuing bad loans. There's nothing inherently insolvent about fractional reserve lending
Only full reserve is solvent

Imagine a bank that has £10 in capital, gets £100 in deposits, lends out a £90 to and keeps a tenner in reserve. Absent fraud(see control fraud) the bank wouldn't intentionally make bad loans. The bank makes the loan expecting a return of £90 + interest.

$100 deposit $10 as a reserve requirement $90 of new money froudently created out of thin air! $90 becomes debt when lent out to customer. Customer uses $90 to purchase a product. Seller of product puts $90 in bank and fractional reserve process continues

This Bank now has $90 in deposit
$90 deposit $9 as a reserve requirement $81 of new money froudently created out of thin air

If the loan is good it is worth £90 and the bank can sell it. It still has £110 on the asset side of the ledger after making the loan, it has just converted £90 worth of reserves into £90 worth of loan.
froudently

If the loan was prudently made, with collateral and down payment, even if it defaults the bank can recoup enough to money that it doesn't wipe out it's capital.
The bank will use your assets as collateral and if you the borrower fails, they will sell them to cover your debt that the bank created out of nothing

If the bank keeps making successful loans it can grow its capital from retained earnings and expand its operation. If it keeps making losses it will shrink and eventually be unwound.

To get a spectacular blow-up like the housing bubble requires fraud, such as deliberately making spectactularly bad loans at high rates of interest, recording massive short-term accounting profits and paying yourself out a huge bonus. When cash flow(lack there of) catches up to you the bank may fail, but if you're the CEO you made out like a bandit.

The CEO new about this but continued to promote it

 

[webb5]

Webb, you have this entirely backwards. Fractional reserve requirements are a limitation imposed by governments, not a priviledge. Absent such requirements, what do you think will happen?

Well, we know what will happen; see the free banking system in Scotland, which held ~2% reserves in gold.

Wow! Being allowed to create new money out of fractional reserve banking is not a priviledge. You must be kidding! AT 10% rate the banks can create $900 out of thin air using the limitation imposed by our governments from a $1,000 deposit.

 

[Sceptic-PK]

froudently

I think you should sue your english teacher(s) for froud.

 

[drkitten]

Wow! Being allowed to create new money out of fractional reserve banking is not a priviledge.

That's right.

You yourself can create new money out of thin air by simply writing an IOU.

The difference is that you can, legally, write an IOU for any amount you choose; banks are legally limited to writing IOUs for less than the amount they have on deposit.

 

[drkitten]

The only way this scenario ends up without debt or someone getting screwed is if there is uniform and unilateral buying among the participants. By this I mean since you purchased $100 of labor from SC1, SC1 would purchase $100 from you in fish. This includes indirect methods of uniform purchasing such as if SC1 purchased a table from SC2 for $100 and then SC2 bought $200 of fish from you.

Well, that's the general idea behind wealth creation, yes. I'm going to continue to sell fish into the general economy for as long as the boat exists and the fish exists. By creating the boat, I've created a new and valuable good -- wealth -- that I can continue to harvest indefinitely, to the general benefit of everyone in society.

But that's true for almost all investments; the blacksmith gets a similar benefit when he invests in a new forge that lets him shoe horses twice as fast, making horseshoes cheaper and everyone better off for the rest of time. The cleaner's new vacuum allows everyone to spend less time on housekeeping and more time doing other things, increasing the supply of "other things" done.

Since debt is inherently limited (you need only pay back what you borrowed plus the agreed-upon interest) but new wealth is limitless, there's no problem.

This is the only way in the scenario to achieve a no debt balance where no one gets screwed and yet new wealth in the form of boats or fish is created.

Yes. But since that's both the designed and the most likely end, this is hardly a problem.

 

[CORed]

No. Economic growth is an increase in the amount of wealth produced, which is entirely different from the amount of money. Again, economic growth is deflationary, because if I find a way to make twice as much bread from the same amount of ingredients, that increases the supply of bread and lowers the price.

You get inflation when the supply of money increases faster than the economy grows. (Or when production shrinks and the supply of money doesn't, as in the 1970s.) Left to itself, a fixed money supply will almost always be deflationary because the general tendency of the economy is to grow; deflation will also end up restricting economic growth because it retards the investment that drives economic growth.

Which is why a sensible government tries to increase the money supply to keep up with growth. The easiest and safest way to do this is via the banks, because the banks that supply investment capital can also supply new money to keep the two quantities roughly in-line. The alternative would be to have a bunch of out-of-touch research economists at the Mint decide how much to increase the money supply.....

Which, as I understand it, is how Social Credit is supposed to work. The role of creating new money is assigned to the government. I'm a little hazy on the details, but IIRC, the government is supposed to pay new money out to the people in a dividend or something. I don't know whether it's really a viable system or not, as it's never actually been implemented. In this regard, the social credit people aren't quite as bad as the Austrian School, who think that the money supply should be constant and think a completely free market allowing prices and wages to fall will cope with deflation. I think with contracts for future goods at a set price, it would be nearly impossible to make a fixed money supply with falling prices work.

IMO, fractional reserve banking is the engine that drives all modern economies. It is not fraudulent at all. However, it does have an element of risk: If too many people default on loans, an economic crash can happen (as has happened recently with the US housing bubble, and as happened in the early '30's after the stock market crash). If the money supply is allowed to expand faster than the economy grows, inflation can result. It is the function of the Federal Reserve, and other central banks to try to manage the money supply so that neither of these things happen. Sometimes they aren't successful.