How the banks create money

[psionl0]

Well, maybe. But there is a phenomenon, the randi skeptic, who is absolutely reverential toward anything the establishment promulgates, and skeptical of everything else. A sort of inverse skepticism. And, there is nothing more establishment than the Fed, and that paragraph is just wrong. So, let's see how the randi skeptics deal with it.

Claiming that information put out by the establishment is not analyzed critically enough does not help your cause. You are not critically analyzing MMM - just contradicting it.

The fact remains that the borrower's demand deposit account is credited and loans outstanding account is debited. Even though the amount a bank can loan is limited by the size of its excess reserves, there is no need to route that transaction via the reserves account - nor any other account for that matter.

 

[tensordyne]

debiting versus crediting

Claiming that information put out by the establishment is not analyzed critically enough does not help your cause. You are not critically analyzing MMM - just contradicting it.

The above is true, but so is saggy's statement about randi skeptics. JREF and assorted do well at debunking Mystics, psychics and Faith Healers, but on other topics that might have a chance of upsetting the establishment view, they suck, imho.

The fact remains that the borrower's demand deposit account is credited and loans outstanding account is debited. Even though the amount a bank can loan is limited by the size of its excess reserves, there is no need to route that transaction via the reserves account - nor any other account for that matter.

Man, I can not believe this thread is still going on. The only evidence on how a bank operates on this thread I have seen when making a loan, vis-a-vis, how the flow of money operates for loans, is the one from Modern Money Mechanics (and in my signature btw). I guess this is quote mining according to some. At face value the quotes does indicate that when a bank makes a loan that loan does not get debited from somewhere else (hence new money is "created" from nothing through book-keeping entry).

Standing back from this tumult over how banks operate though for a moment, I have seen quite a few comments that argue that banks do not create money (creating money meaning in this case that somewhere an account is credited without another one being debited).

This should be a simple question to solve definitively one way or the other one would think! There are tons of laws on how banks operate right (I read the whole US code covering the Federal Reserve Act and could not find any mention to explain how the flow of money flows in a banking loan)? That being the case, maybe someone can find the law refferencing FRB. That is unless banks just do what they do when it comes to loans as a kind of open secret or something.

Screw this place though. Debating with randi-skeptics is just as annoying as arguing with any young earth creationist, the only difference is randi-skeptics are more smug about their position (because they have the establishment on their side, as if the establishment viewpoint hasn't been wrong a ton of times in the past (blacks are inferior, jews are evil, the Earth is flat - but of course this time the establishment viewpoint got everything correct!)). One more thing, this thread is mostly just one person after another saying the other is wrong while offering correction based on nothing more then personal testimony most of the time. That is kind of lame gals and guys (and anyone imbetween if appropriate).

No doubt I will get a bunch of responses from this little diatribe of mine. If I am inclined I will return to this thread and dissect each response for evidence outside of personal testimony restricting myself specifically to bank loan operations. My guess is most posts will be apeals to personal knowledge and testimony, as is the standard for this thread.

Randi-skeptic Viewpoints:

1. Big Bang Cosmology and whatever else is the current scientific concensus is absolutely correct (which shows a lack of a nuanced view of science as an evolving understanding of how things work with the mantra of: just go with the scientists say because they are probably right about everything).

2. Neoliberal Economics is correct (yuck!).

3. Main point, the way things work now is the best way (statism) and any other suggestions for reform, change or advancement, are probably wrong.

4. Psychics, faith-healers and religion is a load of nonsense (agree with the randi-skeptics on this one).

I kind of like this term "randi-skeptic", it fits rather well with what it is meant to describe.

 

[psionl0]

I could name these "randi-skeptics" myself but have avoided playing the "conformist" card because I didn't want to derail this thread.

Understanding the existing system is crucial if we are to have any sensible debate on how to reform the monetary system - or even if monetary reform is desirable.

 

[ngc6205]

Man, I can not believe this thread is still going on. The only evidence on how a bank operates on this thread I have seen when making a loan, vis-a-vis, how the flow of money operates for loans, is the one from Modern Money Mechanics (and in my signature btw). I guess this is quote mining according to some. At face value the quotes does indicate that when a bank makes a loan that loan does not get debited from somewhere else (hence new money is "created" from nothing through book-keeping entry).

Standing back from this tumult over how banks operate though for a moment, I have seen quite a few comments that argue that banks do not create money (creating money meaning in this case that somewhere an account is credited without another one being debited).

This should be a simple question to solve definitively one way or the other one would think! There are tons of laws on how banks operate right (I read the whole US code covering the Federal Reserve Act and could not find any mention to explain how the flow of money flows in a banking loan)? That being the case, maybe someone can find the law refferencing FRB. That is unless banks just do what they do when it comes to loans as a kind of open secret or something.

Nope, accounting rules for banks, including how reserves, loans, and deposits work, isn't a secret. You just have to know where to look. Not every action or activity is written into a law passed by Congress or state legislature. Regulations that a bank has to follow is derived from many places: Board of Governors; FDIC; Office of the Comptroller of the Currency; state laws (for state chartered banks); and state regulatory agencies. I have probably left a few off that list.

Banks keep accounting records and prepare their Consolidated Reports of Condition and Income (financial statements) using generally accepted accounting principles (GAAP) and regulatory requirements. The GAAP standards can be read at the Financial Accounting Standards Board website at http://asc.fasb.org/ It is all there if you can find it in the ASC. You will have to register. Basic view is free. I am certain that you won't want to pay what professionals do for all of the gory details.

 

[tensordyne]

so far

Nope, accounting rules for banks, including how reserves, loans, and deposits work, isn't a secret. You just have to know where to look. Not every action or activity is written into a law passed by Congress or state legislature. Regulations that a bank has to follow is derived from many places: Board of Governors; FDIC; Office of the Comptroller of the Currency; state laws (for state chartered banks); and state regulatory agencies. I have probably left a few off that list.

Banks keep accounting records and prepare their Consolidated Reports of Condition and Income (financial statements) using generally accepted accounting principles (GAAP) and regulatory requirements. The GAAP standards can be read at the Financial Accounting Standards Board website at http://asc.fasb.org/ It is all there if you can find it in the ASC. You will have to register. Basic view is free. I am certain that you won't want to pay what professionals do for all of the gory details.

I got the basic view - no dice. Unless you can tell me the number of the regulation for banks, I do not see the information on http://asc... as being useful or relevant (I have looked, although I admit I might not have missed something somewhere). You get points from me ngc6205 for at least trying to provide an outside refference though.

The posts so far are fine as concerns lack of appeals to personal authority on the matter of how bank loans operate. The main randi-skeptic and one that drives me up the wall with constant appeals to personal authority on all matters Economical is lomiller. I hate the picture of a "used car salesman"-sheister-"con artist" that lomiller has as well for an avatar.

I also see this repeating idea on this thread that banks follow all the same accounting rules as any other business. This idea does not sound very plausible to me on several accounts.

First off, if banks followed exactly the same rules of accounting as any other business, then any old business should be able to operate as a bank and make "loans" in the same way a bank does -- they do not though. Banks are highly regulated by the government, and for a good reason, part of a bank's business is not like a normal business in that if you add some money in from one place, you have to take away a corresponding amount from somewhere else!

The point I am getting at is that at least some part of how a bank (FRB commercial one) operates is NOT what an accountant would consider normal accounting procedure. The rest of a bank's operations would of course then have to be according to fasb and so on. Accountant types on the thread, you are not seeing the whole picture if this is what you argue.

Oh well, I do not know why I come back here, it just increases my blood pressure. By the way, the last couple of paragraphs are all appeals to my own authority with some argumentative logic thrown in. Just thought I should be fair.

 

[tensordyne]

Oh yeah, I never said how banks operate is a secret, I said it might be an open secret, or something.

"That is unless banks just do what they do when it comes to loans as a kind of open secret or something."

An open secret is something that is not really secret but something you still do not want everyone knowing or understanding about. Just kvetching because of the "nope," response part.

 

[ngc6205]

Oh yeah, I never said how banks operate is a secret, I said it might be an open secret, or something.

"That is unless banks just do what they do when it comes to loans as a kind of open secret or something."

An open secret is something that is not really secret but something you still do not want everyone knowing or understanding about. Just kvetching because of the "nope," response part.

Then the "nope" still stands. It isn't a secret. It isn't an "open secret" either. Just because a topic is complicated, doesn't mean that someone or some organization doesn't want people knowing about it.

There is no way for me to know your level of understanding about accounting. Without knowing that, it is impossible for me to explain it all on a forum like this one. In fact, even if I knew your level of accounting knowledge, the explanation might be too broad for a discussion on a forum. Unless you want to ask questions and respond to my answers for the next year or so.

Accounting for banks starts with the basic principles of accounting. If you do not understand those or know what they are, there are plenty of books and college courses that describe and teach them. Principles of Accounting books will usually be about 700 or so pages. The college course in financial accounting is usually a semester. Managerial accounting is another semester. From there, you can continue with more complex topics in accounting by reading an intermediate accounting textbook or taking college courses in intermediate accounting. Usually, those textbooks will be about 1,200 to 1,500 pages and some principles of accounting topics will be reviewed. Colleges usually breakdown intermediate accounting into two or more semester length courses. After that, there is advanced accounting and again, there are books and college courses. That is another 900 to 1,000 page book and another semester long course. By then, you should have a good grasp on how assets, liabilities, equity and how banks record these in their books and financial statements.

As for the ASC, banks operate just like most other businesses. For every transaction, there is a matching debit and credit. Deposits are liabilities and loans to businesses and individuals are assets. Recognition of liabilities and assets are covered in their respective areas within the ASC. For some specific transactions regarding banks, there is a specific portion of the ASC in categories 940 through 950.

If you disagree with my necessarily simplified explanation of the accounting for a loan and deposits in a bank, I encourage anyone to learn accounting and to read the standards and regulations for themselves. However, I am not going to point out every possible regulation and/or standard. There are simply too many to list in a forum post. If you don't like it, sorry.

 

[Tippit]

The posts so far are fine as concerns lack of appeals to personal authority on the matter of how bank loans operate. The main randi-skeptic and one that drives me up the wall with constant appeals to personal authority on all matters Economical is lomiller. I hate the picture of a "used car salesman"-sheister-"con artist" that lomiller has as well for an avatar.

His avatar and signature are from the video game Fallout. I think the problem with him is that he interprets any argument that he doesn't like as necessarily a fallacy - he can't possibly be wrong about anything.

 

[psionl0]

Iomiller might not know the difference between "vault cash in depository institutions" and cash in the hands of the public but I wouldn't have considered that grounds to single him out.

There are some far more obnoxious posters on this forum.

(Actually I thought tensordyne was just having a bad day).

 

[Aber]

I also see this repeating idea on this thread that banks follow all the same accounting rules as any other business. This idea does not sound very plausible to me on several accounts.

First off, if banks followed exactly the same rules of accounting as any other business, then any old business should be able to operate as a bank and make "loans" in the same way a bank does -- they do not though. Banks are highly regulated by the government, and for a good reason, part of a bank's business is not like a normal business in that if you add some money in from one place, you have to take away a corresponding amount from somewhere else!

ALL banks DO use double-entry bookkeeping (ie a matching debit and credit for every transaction), even central banks.

The defining feature of a bank is not the ability to make loans - any business can do that - but the ability to take deposits from the general public. The purpose of banking regulation is to protect the deposits from the public.

 

[Blue Mountain]

ALL banks DO use double-entry bookkeeping (ie a matching debit and credit for every transaction), even central banks.

The defining feature of a bank is not the ability to make loans - any business can do that - but the ability to take deposits from the general public. The purpose of banking regulation is to protect the deposits from the public.

Actually, the purpose of the regulations is to protect the public's deposits from the bank's owners.

(Your comment was understandable, but was worded in such a way that I couldn't pass this up.)

 

[Aber]

Thanks for the clarification

 

[se7ensnakes]

The Randy Establishment is NWO

The Randy Establishment support NWO.
The same people support the same idea.
The Randy Establishment argue against:
1) The illegality of the Income Tax. Even though they cannot name an indictment that addresses the subject of the income.
2) That The Federal Reserve, and Fractional Reserve Banking are fleecing the American Public. They argue that: Without a central bank, we had nothing but boom, bust, and sorrow — but since the creation of the Fed, it's been nothing but sunshine and lollipops.
3) 9/11 being a false flag operation. They argue that building 7 came down because of fire. Need I say more?
Its the same people, saying the same stupid jokes, name calling, and the same stupid logic.

 

[Stylesjl]

Don't forget eating babies. The Randy Establishment loves their deep fried baby

 

[tensordyne]

fat history

The last entry has a hanging sentence. I say make it

... deep fried baby fat.

Seriously though, se7eneyes is kind of correct I suppose. The problem is you have establishment types who are useful idiots (randi-skeptics) and on the other end you have people like se7eneyes who actually think returning to some god fearing, gold based economy makes sense. They are both wrong and correct about some things.

Plug for people who I think are closer to the truth: Stephen Zarlenga, Bill Still, Henry George and Ellen Brown. Especially look up Michael Hudson, he really knows the score (se7eneyes, I especially implore you to read those authors since you already have an appreciation for what is wrong with the current system you will have a better chance of understanding what they have to say then most people here on the forum, plus Bill Still sells his books and appears on Infowars, and I am relatively sure you know about Infowars).

The most enslaved are those who think they are free. I can understand if you have not heard those names before, but if you do not look them up and at least try and see what they have to say, you are less informed then you could be. Henry George is very interesting in this regard. Plus, since I have pointed them out as third way thinkers, it is intellectually dishonest not to see what they have to say in this day and age of instant web based searches.

The Tea Party Types (before they got taken over by the Koch brothers mostly) think that if we just had a gold standard again (abolish the Fed and Frac. Res. Banking too is the mantra, I agree, but then, replace them with what?) everything would be fine. Zarlenga's "Lost Science of Money" shows that this is a bunch of nonsense. Basically, his analysis shows that Fiat debt based money is good as long everything balances out, "money created" = "money destroyed", which is not the case with FRB (fractional reserve banking where money gets sucked up by the super-rich in trickle up economics).

On the other hand, in FRB you have a Ponzi scheme operating. It is a mathematically unsound, let alone unjust system, this FRB. The Alex Jones / Ron Paul / Austrian Economics (se7eneyes) always have the refrain of debt based money is bad. Not so, the debt in the debt based money system (excluding the mathematically unsound interest put on top) is if you follow the flow of money, to society as a whole. That is right boys and girls, debt based money is a debt to society. That is how it works and that part makes sense. I could try and prove it, but I give up on most of the people in this forum. Most of the randi-skeptics think they know how money works even if they have not investigated it ever to test their supposed knowledge on such matters (lomiller comes especially to mind on that point).

In short, se7eneyes has a clearer picture of how the current Economy works and fails, but the solutions he advocates (that can be cut and pasted from any Austrian Econ. website or Ron Paul speech) are wrong. Basing your money on gold or any other commodity is bad. History shows this (freaking read Zarlenga!).

If history is any guide, the best system is one like the tally sticks of England, the banking system of Philadelphia, the Greenbacks of Lincoln or the many local currencies working across the US right now. Have not heard about them? Get informed then because those are the facts. FRB creates money from nothing and expects it all back, plus some (interest). What FRB creates from nothing also gets destroyed, but the interest is not created making a need for more loans to comply with the loan contract... to infinity and beyond! That is also a fact. That is how the world works, and the sooner people realise it, the better off we all will be. Go and read some of the books from above and you will find out for yourself too that this is the case.

To put names on the camps involved so far, here goes.

Me: Greenbacker Advocate
se7eneyes: Austrian Economy Advocate
lomiller: Randi-skeptic Monatorist (useful idiot)
everyone else: whatever they may be.

 

[psionl0]

That is right boys and girls, debt based money is a debt to society.

You will get an Iomiller style reputation making claims like that!

Debt based money is owed to the banks although government debt (bonds) may be held by non-banking types.

 

[Sceptic-PK]

Seriously though, se7eneyes is kind of correct I suppose. The problem is you have establishment types who are useful idiots (randi-skeptics) and on the other end you have people like se7eneyes who actually think returning to some god fearing, gold based economy makes sense. They are both wrong and correct about some things.

Plug for people who I think are closer to the truth: Stephen Zarlenga, Bill Still, Henry George and Ellen Brown. Especially look up Michael Hudson, he really knows the score (se7eneyes, I especially implore you to read those authors since you already have an appreciation for what is wrong with the current system you will have a better chance of understanding what they have to say then most people here on the forum, plus Bill Still sells his books and appears on Infowars, and I am relatively sure you know about Infowars).

The most enslaved are those who think they are free. I can understand if you have not heard those names before, but if you do not look them up and at least try and see what they have to say, you are less informed then you could be. Henry George is very interesting in this regard. Plus, since I have pointed them out as third way thinkers, it is intellectually dishonest not to see what they have to say in this day and age of instant web based searches.

The Tea Party Types (before they got taken over by the Koch brothers mostly) think that if we just had a gold standard again (abolish the Fed and Frac. Res. Banking too is the mantra, I agree, but then, replace them with what?) everything would be fine. Zarlenga's "Lost Science of Money" shows that this is a bunch of nonsense. Basically, his analysis shows that Fiat debt based money is good as long everything balances out, "money created" = "money destroyed", which is not the case with FRB (fractional reserve banking where money gets sucked up by the super-rich in trickle up economics).

On the other hand, in FRB you have a Ponzi scheme operating. It is a mathematically unsound, let alone unjust system, this FRB. The Alex Jones / Ron Paul / Austrian Economics (se7eneyes) always have the refrain of debt based money is bad. Not so, the debt in the debt based money system (excluding the mathematically unsound interest put on top) is if you follow the flow of money, to society as a whole. That is right boys and girls, debt based money is a debt to society. That is how it works and that part makes sense. I could try and prove it, but I give up on most of the people in this forum. Most of the randi-skeptics think they know how money works even if they have not investigated it ever to test their supposed knowledge on such matters (lomiller comes especially to mind on that point).

In short, se7eneyes has a clearer picture of how the current Economy works and fails, but the solutions he advocates (that can be cut and pasted from any Austrian Econ. website or Ron Paul speech) are wrong. Basing your money on gold or any other commodity is bad. History shows this (freaking read Zarlenga!).

se7ensnakes is a conspiracy theorist who doesn’t grasp anything related to the topics he’s obsessed with. He is your clichéd under-educated muppet who has never met a conspiracy he didn’t like. Discussions with him are impossible because his standards of evidence are so low to be non-existent. He certainly doesn’t banking.

:
FRB creates money from nothing and expects it all back, plus some (interest). What FRB creates from nothing also gets destroyed, but the interest is not created making a need for more loans to comply with the loan contract... to infinity and beyond! That is also a fact. That is how the world works, and the sooner people realise it, the better off we all will be. Go and read some of the books from above and you will find out for yourself too that this is the case.

It never ceases to amaze me how many people believe this complete and utter nonsense. It is demonstrably wrong: What do you think happens to the interest that is paid to a lender? Does the lender just burn that money? Of course not. It goes to paying shareholders, staff, rent, and a million other business expenses. The interest paid is money that remains circulating in the economy. This idea that FRB means that we must continually borrow to pay back interest is pure fantasy, and only subscribed to by those a little soft in the head.

 

[tensordyne]

Since you asked: I think the interest goes to the board members, pays the janitors and so on, and does not change a freaking thing I said. I said the principal gets created and destroyed (assuming the "loan" is paid off), but the interest does not get created (or subsequently destroyed), but is nonetheless still owed. Is there some part of this you don't get or is unclear Sceptic-PK? It IS how FRB works. Read the books by the people I quoted and get back to me, otherwise you are an just an uninformed sceptic Skeptic-PK.

Maybe you should cease to be amazed by people who know more then you and tell you interesting data. Banks make money.., that is part of how they work. Get over it.

 

[Sceptic-PK]

Since you asked: I think the interest goes to the board members, pays the janitors and so on, and does not change a freaking thing I said. I said the principal gets created and destroyed (assuming the "loan" is paid off), but the interest does not get created (or subsequently destroyed), but is nonetheless still owed.

I’ll try and spell it out a little simpler for you since you obviously don’t get it.

As I pay back my loan the interest that I pay goes to the bank. The bank then pays a portion of my interest payments to the janitor. The janitor then pays me rent for the house he is renting from me, which I in turn pay back to the bank. The money required for interest doesn’t disappear into the ether never to be seen again. It circulates just like any other money, and doesn’t need to be “created”.

FYI Not all money in any economic system is created via loans or FRB. Any government can print new money if it sees fit and pay itself the interest.

Is there some part of this you don't get or is unclear Sceptic-PK? It IS how FRB works.

I am unclear why misguided fools keep repeating complete falsehoods when accurate information is so easy to obtain and relatively simple to understand.

Read the books by the people I quoted and get back to me, otherwise you are an just an uninformed sceptic Skeptic-PK.

I don’t need to read more BS from other idiots on a subject I am very well aware of. If anybody is telling you that we have to continually create more money to pay the interest due to FRB, then they’re flat out wrong and a monkey economist. My own country paid off its entire national debt, mostly just by cutting spending and possibly a tax increase or two. According to you this is impossible without borrowing more money, lol!

Maybe you should cease to be amazed by people who know more then you and tell you interesting data. Banks make money.., that is part of how they work. Get over it.

Being an encyclopaedia of nonsense doesn’t mean you any more knowledgeable, it just makes you look immature.

 

[tensordyne]

debt based money

You will get an Iomiller style reputation making claims like that!

Debt based money is owed to the banks although government debt (bonds) may be held by non-banking types.

hahahah, love the lomiller ref. No, seriously, have you ever heard of the parable of the counterfeiter who rides into town with a shiny new $100 bill? I will make my own version of the parable because I do not remember the exacting details of the one I heard/read, but remember the gist of the story all the same.

Con the counterfeiter walks into town with a $100 bill and uses it to pay off a debt to Sherman the Sheriff lest he get arrested for something else Con did previously (not counterfeiting, maybe something like a horse speeding ticket or something). Sherman uses it to get his horse horseshoed with Bill the Blacksmith. This goes on and on with Gary the Grocer getting the bill finally before Con gets the $100 bill back for doing some work for Gary. By the time Con gets it though the $100 bill is worthless because it has changed so many hands that no one will accept it. The bill did allow for goods and services to flow, which is a positive thing. If you look at the situation, the outcome is equitable for all involved.

Now, this is how FRB kind of works in essence (without getting into how FRB relates to central banking), except in FRB, interest on top of the principal ($100 in this case) is owed. Like in FRB, after everything is said and done in the story, the principal is extinguished. In this story, and unlike in FRB though, the money gets balanced out.

There are two problems in FRB as it relates to society as a whole.

1. The banks have the power to not give out loans, thus starving the system of needed liquidity. Banks can also give out huge sums of loans. The overall effect of loans with interest is that the general interest rate, say 3%, will also be the same percentage of people who go bankrupt. It is almost a mathematical certainty. Plus it sets into effect the so called Business Cycle.

2. Since the interest is contractually owed but is not ever created (or for that matter ever destroyed) FRB is very much like a Ponzi scheme. New loans have to get created just to cover previous ones in an ever spiralling amount of debt. Money comes from debt (read my signature).

Hope that helps.