equationgirl
Respect my existence or expect my resistance
Yeah, count me inI've just opened a spreadsheet up and I'm gonna start creating some money - does anyone want to borrow a few grand?
Yeah, count me inI've just opened a spreadsheet up and I'm gonna start creating some money - does anyone want to borrow a few grand?
consider we have four high street banks:Its been explained to you. Interbank lending.
Anyone can create money. It's easy. If you have ever written an IOU you have created money (promissory note). The question is, do people believe you can honour your promises?I've just opened a spreadsheet up and I'm gonna start creating some money
You're an idiot.consider we have four high street banks:
Bank A lends Alf £1000
Bank B lends Bert £1000
Bank C lends Charlie £1000
Bank D lends Dan £1000
interbank lending concerning these loans - must be zero! (symmetry)
So either the loans have been created from nothing, or are being 'funded' some other way. What's happening?
Response to LBJ tomorrow.
Alright, I think I get where you're coming from here. The sum total of all the money in the world is zero - subtracting all debts from all credit. Or at least it would be zero without interest. Interest charges complicate matters somewhat by making a debt larger than the deposit it created.consider we have four high street banks:
Bank A lends Alf £1000
Bank B lends Bert £1000
Bank C lends Charlie £1000
Bank D lends Dan £1000
interbank lending concerning these loans - must be zero! (symmetry)
So either the loans have been created from nothing, or are being 'funded' some other way. What's happening?
I'd like to hear LD define 'funding' for himself.
love detective said:money can circulate, creating the loans/obligations/'new money' that it leaves in its trace, without increases in central bank money. this is a very basic fact of the monetary system (something that has also been discussed in detail in the earlier pages of this thread). So to show that empirically the money supply races ahead of (proportionally) existing base central bank money, doesn't prove anything near the assertion that money is created out of thin air by a few taps on the keyboard (as you suggest) - all it proves is the a priori fact that at times of increased circulation/activity the supply of money increases, and that supply is not dependent on central bank money to do so. The regulatory aspect of what or how much reserve needs to be held back is not the important thing here in terms of getting to the fundamentals of how things work - the regulatory aspect can hamper/intervene the fundamentals of how it works but it doesn't create those fundamentals
If there was no requirement to keep any reserves (i.e. the 10% referred to above) this wouldn't magically allow banks to create money out of thin air - all it would mean is that they could lend out £100 for every £100 they got in - if they wanted to lend out £110 for every £100 they got in, then there's no amount of tweaking with regulatory/legal things that could make this happen - no more than you or I could magically lend £10 to someone that we don't have
ymu said:Sorry, but you are simply wrong on this. Here's the written evidence to parliament on how the banks did it:
love detective said:i'm not wrong on this at all i'm afraid
this research only compares one part of a bank's funding streams (customer deposits) to its total extension of credit (loans)
it doesn't take into account, wholesale funding (which makes up a substantial part of a lot of bank's funding - and is really just commercial deposits but is not included in that analysis), central bank funding, equity capital, subordinated debt and all manner of other types of ways that banks fund their balance sheet. For the purposes of this discussion (to simplify terminology) i've lumped all of these into one category and called them deposits because in the wider sense they are all 'deposits' of money with the bank, they are just different in their nature - but what they all have in common is that they all form part of a bank's overall funding which allows it to lend money out. the research which you quote (which is based on an article that the bbc and times wrote) - purely looks at the relationship between bank lending and customer deposits, it excludes these other important components of bank funding)
The 322% figure quoted for Northern Rock shows exactly why it failed - because the bulk of it's lending was funded from wholesale markets and not from straightfoward more stable customer deposits - so when the wholesale market freezed up it was caught totally exposed. This research does not show that Northern Rock created money equivalent to 222% of the money it had lent out - it merely shows what proportion of it's customer lending was funded through wholesale borrowing (which is effectively the same as a deposit as it's a commercial bank 'depositing' money with another bank for a given time at a given rate)
(i'll quite happily walk through a bank's balance sheet with you and talk through the various categories/components and point out which parts are included in that analysis and which aren't - it will be dull as fuck mind, but it will prove the point)
my central point still remains, if a bank wants to lend out £110 but has only got £100 'deposited' with it (deposit in the wider sense, not the sense used in that report - i.e. if it only has funded itself to the tune of £100 through the variety of ways possible i.e., customer deposits, wholesale funding, equity capital, subordinated debt, etc..), the extra £10 can't be magiced into existence or created just because some regulations have changed - it has to be funded from somewhere before it can be circulated onwards - this is what i've been saying from post one on this thread
edit: and in fact looking back at my post you quoted, I didn't even talk about deposits in it, i referred to things like banks only being able to lend out what they got in - the parliament report doesn't contradict this in any way, as it only focuses on one part of what banks 'get in' to enable them to lend
love detective said:YMU - here's a snapshot of Northern Rock's balance sheet prior to it's crash (this is a very summarised/condensed down version of it)
If you look at the 2006 year - you will see that loans to customers (the 87) is 322% of customer deposits (27) - this is what the parliament report refers to
All this shows is that the differences between customer lending and customer deposits, is funded by means other than customer deposits - i.e. other kind of funding that the bank has obtained, in this case mortgage securities which represented money that they had borrowed from the wholesale markets which was secured/collaterised on future income streams from their mortgage book and other borrowings plus a little bit of equity capital. It's nothing to do with the bank creating money out of thin air or lending out more than it has got in
While on the topic of this, balance sheets always balance, i.e. total assets equals total liabilities (something that was also discussed earlier on this thread) - anyone who claims that banks can create money out of the thin air would see a situation where the banks assets increase but not their liabilities. This is just absurd really - every asset on that balance sheet above, is funded by a liability for the exact same amount. So in 2006 northern rock had assets of 101bn which in turn were funded by liabiliites of 101bn - the component part of that 101bn that is made up of customer deposits is important from a point of view about how the bank funds it's operations (i.e. it's over reliance on a particular stream/type of funding), but just because customer deposits in this case doesn't equal 101bn, it doesn't mean the bank has created money out of nothing, or lent out more than it has 'got in'.
edit: also if you look at the end of year 2007 position - the reduction in customer deposits represents the run on the bank, meaning it's overall assets were even less funded from customer deposits and things like the state funding from the bank of england begin to take it's place - again this is just funding from different sources, it's not them creating money out of thin air or magicing it into existence
ymu said:AFAIK the problem was that some of the things that they counted as equivalent to cash deposits for the purposes of lending were nothing like cash deposits in practice.
love detective said:the problem was what i referred to above - that northern rock depended upon the wholesale funding markets far too much in relation to its customer lending - this got it into trouble then those markets froze up and as such a big component of its lending was funded in this way, along with the run on the bank which removed another slice of its funding in the shape of reduced customer deposits , leading first to emergency state funding and then it going down the pan
littlebabyjesus said:I think I can see what ymu's getting at. If you make a loan which will be repaid in 10 years' time, say, and fund that loan with a 'deposit' that you have to repay in 1 year's time, these are not equivalent. You have not funded your 10-year loan at the start of the process, merely a small part of it: ie the idea that the size of a loan is money plus time.
love detective said:yes, but that's completely different from saying you can create money out of thin air or you can lend out more than you have already borrowed
you can only lend out that original loan for ten years, if you have the money in the first place to pass on to the borrower - so it has to be funded initially, and then over the course of the loan, refinanced if the borrowing to fund it didn't exactly match the maturity profile of the loan itself. This is exactly what got Northern Rock into trouble, it borrowed short term on the wholesale markets and lent long term in the mortgage markets - so when the wholesale markets froze up it was left with a huge financing gap when it's shorter term borrowing came up for payment and it wasn't able to renew it and it also wasn't able to liquidise its assets as they were tied up in long term mortgage deals
this is liquidity risk (and was the cause of a lot of the bank's failures), and it's important to bank's survivial - but it doesn't change the simple fact that if you want to lend something, you have to first fund it - this was the central point being contested earlier - and one which both of you suggested I was wrong about - i'm 100% right on this i'm afraid
Jazzz said:circulation is simply not necessary. To give a simple example, if someone deposits £1000 hard cash, the bank doesn't have to pass that £1000 around with other banks or itself making loans that eventually add to credit creation of maybe 30 times. It can simply make thirty loans of £1000 straight off the bat.
Well he's right, I think, that the sum total of interbank lending must equal zero
Anyone can create money. It's easy. If you have ever written an IOU you have created money (promissory note). The question is, do people believe you can honour your promises?
The process of how banks have to fund their loans have been done hundreds of times on threads like these, you've been pointed to the threads, you've been pointed to the posts and you have been unable to counter them. I've explained it you. LBJ has explained it you (and it's worth noting that a year or two ago he had a fairly similar position to you on this, but unlike you he is actually genuinely interested in finding out how things do work and over the last couple of years has changed his outlook on this quite considerably, largely I would say as a result of discussions had on here about it), yet you are unable to engage with these, and instead just keeping repeating the same questions that you don't even realise you've had the answers to, as you don't understand them
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I may be wrong here, but I don't think so. As I understand it, interbank lending takes the form of digits on computers, allowing banks to balance their books overnight. That makes borrowing from another bank overnight a liability, not a cash reserve, because the loan has to be repaid. Money on deposit at the Bank of England might be considered a cash reserve, perhaps.
Cash plus money on deposit at the BofE plus liabilities in the form of deposits from savers and loans from other banks.
And all assets (loans made by the bank) must be fully matched by the sum of the above. If the bank fails to do this, it's dead. To repeat, this is what happened to Northern Rock, which was heavily reliant on borrowing from money markets and had been taking massive risks by borrowing too short in an attempt to make even more money. Interesting reading about the culture at NR. Employees who warned that they were borrowing too short were marginalised. Large bonuses were on offer for those who boosted short-term profits through very short borrowing.
Just like if I write out an IOU to you, you can't spend it if I don't have the money to give to you.
Because that's their business - making loans. I agree with you that the making of a loan is the creation of money. But the money they create in that process has two parts - the asset and the liability. A bank holds only a fraction of its demand liabilities in cash, and holds the rest of it in the form of assets - its loans.Generally banks hold 3% of their demand liabilities in cash. That means that the other 97% has been created by them when they make loans. They make the money out of thin air!
I can't quite believe I've read this. It's grade A nonsense. Assets are things you have, or are owed to you. Liabilities are what you owe to others. ['equity' is the difference].love-detective said:This is just absurd really - every asset on that balance sheet above, is funded by a liability for the exact same amount
It's true, though. That asset cannot exist without a liability or cash to back it up - precisely because the bank itself created the asset. I think I'm right in saying that any bank attempting to create assets without backing them with liabilities/cash would be committing criminal fraud.I can't quite believe I've read this. It's grade A nonsense. Assets are things you have, or are owed to you. Liabilities are what you owe to others. ['equity' is the difference].
Saying that liabilities 'fund' assets is bizarre.
Well I think I nearly agree. Most importantly, fractional reserve banks only get to create money (increasing the amount in circulation) because the practise is not outlawed. Were we to require them to be solvent like any other business - i.e. have reserves to meet their demand liabilities at any time, i.e. full-reserve banking, then they could be said to be simply lending money that they already had. And thus the madness well described in the rest of your post would not be possible.Because that's their business - making loans. I agree with you that the making of a loan is the creation of money. But the money they create in that process has two parts - the asset and the liability. A bank holds only a fraction of its demand liabilities in cash, and holds the rest of it in the form of assets - its loans.
Well this isn't entirely incorrect but I think muddled.It's true, though. That asset cannot exist without a liability or cash to back it up - precisely because the bank itself created the asset. I think I'm right in saying that any bank attempting to create assets without backing them with liabilities/cash would be committing criminal fraud.
That's the thing with creating money out of nothing. In order for it to remain a net 'nothing', there have to be two parts that add up to zero. Just as a vacuum can temporarily create a virtual pair of particles - particle and antiparticle - 'out of nothing' - in reality it is simply another way of expressing nothing. Like the two sides of the equation '4 - 4 = 0' are equal. To create the '4' from 0, you also have to create '-4'. When a bank creates money from nothing, it has to be able to account for both the 'money' and the 'antimoney'. The liability is the 'antimoney'.
LD, you've put up HUGE posts of absolute waffle.
I'm looking for the simple answer. What is the form of 'funding' which bank uses for loans, if they aren't creating them out of thin air?
A mathematical description please.
love detective said:This is just absurd really - every asset on that balance sheet above, is funded by a liability for the exact same amount
I can't quite believe I've read this. It's grade A nonsense. Assets are things you have, or are owed to you. Liabilities are what you owe to others. ['equity' is the difference].
Saying that liabilities 'fund' assets is bizarre.
I think you're getting confused here between cash, the creation of credit and the velocity of money?Yes when a loan is taken out, it takes the form of an asset and a liability on the bank's books. But what happens is that the asset, representing the repayments to come, is just an accounting entry, it doesn't really do much except vanish as the loan is repaid: however, the liability - first taking the form of digits in the customer's account - circulates. Let me say again that this what 97% of our money is: it's a credit in a liability account of the bank.
Jazzz is attempting to look at banks in isolation from the rest of the economy. Which is why i called him an idiot.
consider we have four high street banks:
Bank A lends Alf £1000
Bank B lends Bert £1000
Bank C lends Charlie £1000
Bank D lends Dan £1000
interbank lending concerning these loans - must be zero! (symmetry)
So either the loans have been created from nothing, or are being 'funded' some other way. What's happening?
Response to LBJ tomorrow.
Why is it that gold-bug types always try to explain themselves using Enid Blyton characters?