Taking on the currency cranks

[Jean-Luc]

Secondly, there's not been $10,000 deposited. There's been $1000 dollars deposited in total in hard currency, but out of this $1,000 of total hard currency that actually exists in all these transactions, the banks have managed to create loans of £9,000 and matching nominal deposits of £9,000, all from just $1000 of actual hard cash.

Of course $10,000 in total has been deposited. The additional $9000 are not "nominal". They result from part of the original (you say cash) deposit of $1000 circulating, as money does. Next you'll be arguing that if I spent a 10-dollar bill to buy something and the shopkeeper then uses it to pay to restock his store, the shopkeeper's purchase is only "nominal".

 

[love detective]

i'm gonna ask my bank today to break down my bank account balance into nominal pounds and real/hard currency pounds - i don't want none of that nominal shit finding it's way in and mixing itself up with any of the hard stuff that may or may not happen to be in there as well

detective free spirit may be required to go in and sort out the wheat from the chaff

 

[free spirit]

i'm gonna ask my bank today to break down my bank account balance into nominal pounds and real/hard currency pounds - i don't want none of that nominal shit finding it's way in and mixing itself up with any of the hard stuff that may or may not happen to be in there as well

detective free spirit may be required to go in and sort out the wheat from the chaff

unless you've got a massive bank balance I doubt they're going to have a problem paying you in cash.

If every customer went in and withdrew their money though they'd not have anything like sufficient reserves to pay out in cash, and would have to attempt to then borrow the hard currency from elsewhere in order to pay out.

If the other banks / sources of finance lose their faith in that banks ability to repay those loans with interest in short order, they're then going to stop lending to that bank, meaning that either the government has to bail it out, or it will fail and those customers will find out exactly how real the numbers on the balance sheets were (or apparently the government will step in and pay out anyway, so it's all hunky dory).

If a similar thing happens to all or most banks though, then there's nobody left to provide the short term lending of hard currency to the banks that needs it, and you get a credit crunch situation that can only be eased via the release / printing of vast quantities of new hard currency just to meet the banks existing liabilities.

 

[love detective]

quantitative easing has nothing to do with 'meeting the banks existing liabilities'

and the credit crunch wasn't caused by people withdrawing money from banks (this can be seen as one of the minor effects of the credit crunch for certain banks, but it certainly was a cause of it)

 

[Jazzz]

Happy to accept the challenge. Here's how an American economist who starts from the same premiss as you (that a bank can make a loan without first having the money) -- but who accepts that if a bank does this it has to cover the loan by the end of the day, literally -- explains what happens:

I confess I was after a short answer to the question I posed, not a long C&P to a different one. I have no problems with the quote you made, which let's note was very much against Krugman, who you quoted earlier in the thread!

So please do have a go. It's not that difficult.

Let me repeat an example which lovedetective failed to comment on before.

Bank A loans Andrew £1000, who draws on it by giving it to Bertie, who has an account in Bank B.

Simultaneously, Bank B lends Bill £1000, who draws on it by giving it to Anthony, who has an account in Bank A.

What has happened? I challenge lovedetective or Jean-Luc to describe the accounting entries in Bank A, Bank B, and the central bank, the change in total money supply, and where it came from.

 

[Jazzz]

If I have understood "full reserve banking" properly, what it would mean that under it banks would only be able to lend from non-instant-access savings accounts ("time-deposits"). This could work (even if the arguments used to justify in are based on a fallacy), but it wouldn't stop what you call "money-creation" by banks. Suppose that customer 1 makes a one-year deposit of £1,000 in Bank A, which bank A lends to customer 2 for one year or less. If any part of this £1,000 finds its way into a time-deposit in another bank, then on your theory money has been created!

No it hasn't. There is only ever £1000 in circulation.

Also, because banks know that not all its outside current account depositors are not going to withdraw all of their money at once, it can treat the "fraction" that they are not likely to withdraw as if it was a time-deposit. To that extent banks already practice "full reserve banking".

I don't really understand what you mean here. If you are saying that the banks can create new loans corresponding to the fraction of (demand) deposits that is not likely to be withdrawn, and get away with it then that is simply fractional-reserve banking.

If they are to treat the deposits as time-deposits, that means that they will not allow the original depositor to withdraw his money on demand. In which case, if the original depositor made a demand deposit, the bank is in dishonour; if he made a time-deposit, this is full-reserve banking.

Not allowing banks to lend money from current accounts would indeed restrict the amount of bank lending, probably to below what the capitalist economy needs to function properly. So, "full reserve banking" could make things worse.

It would certainly restrict high-street bank lending (money created as debt) and I say that would be a extremely good thing. There is no reason why we cannot create the money we need another and far better way.

IMF working paper supports full reserve banking

 

[Jazzz]

i'm gonna ask my bank today to break down my bank account balance into nominal pounds and real/hard currency pounds - i don't want none of that nominal shit finding it's way in and mixing itself up with any of the hard stuff that may or may not happen to be in there as well

detective free spirit may be required to go in and sort out the wheat from the chaff

Your bank account balance is simply a book-keeping entry.

 

[free spirit]

quantitative easing has nothing to do with 'meeting the banks existing liabilities'

really. So it's not been partly used by the banks to build up their capital reserves to meet the government's new requirements for the proportion of capital reserves to liabilities the banks must hold in order to ensure they can meet a greater proportion of their existing liabilities?

no, obviously it's all been used just as the bank of england say it should be used to boost lending to businesses, as there's loads of evidence of that level of cash injection into the business sector having happened

It's just bailing the banks out by the back door instead of the front door really, though technically you're right that it's not actually been needed to meet the banks existing liabilities as any potential run on the banks has been diverted and confidence restored as the banks have taken the increased liquidity supplied by QE, and added it to their balance sheets, in the process giving their investment arms a huge pot of new money to play with in the commodities market where they've managed to inflate another huge speculative bubble that'll burst at some point in the not too distant future, plunging the financial sector back into chaos... but it's helped to fund another round of short term profit taking and bonuses for the bankers, so it's all good really, and they now know they're seen as being too big to fail, so why wouldn't they wrecklessly use it to build up another bubble?

and the credit crunch wasn't caused by people withdrawing money from banks (this can be seen as one of the minor effects of the credit crunch for certain banks, but it certainly was a cause of it)

I didn't actually say that it was, I was merely following on from your statement, to say that if we all did it then it could cause a similar situation to the credit crunch if it happened to an extent that it impacted on market confidence in the bank (or banks) and the market then stopped lending to those banks to finance their liabilities to their customers.

I'm not entirely sure it's accurate to describe it as just being an effect of the credit crunch though. It's more complex than that, as it's effectively a feed back loop interconnected with general confidence levels in that bank / the banking system in general, so the markets get spooked about a bank and stop lending to it, then the public get spooked and start trying to pull their money out as happened with Northern Rock, and at this point the government has to step in or the bank went bust because it can't finance its liabilities in the event that the bank run continues. And once you've had one bank run, the market gets spooked and start to be even more wary about lending money to any of the other banks, leading to the system ending up on the brink of systemic collapse without government intervention. At the end of the day, it's all a confidence trick anyway, so as soon as confidence goes in the banks from both the markets and the public, they're screwed.

 

[love detective]

really. So it's not been partly used by the banks to build up their capital reserves to meet the government's new requirements for the proportion of capital reserves to liabilities the banks must hold in order to ensure they can meet a greater proportion of their existing liabilities?

Sorry to be blunt but the above could only be written by someone who doesn't understand what quantitative easing is nor how it is transmitted (not to mention no understanding whatsoever as to how requirements for capital reserves work)

I'm guessing you think that quantative easing involves the central bank printing/creating money and just giving it to banks, therefore the net asset position of the banks are increased as a result of this. This is simply wrong. QE involves the creation of money which is then used to buy (usually govt) existing owned debt securities from the banks. The net impact on a bank of QE is that they have swapped one highly liquid asset (govt securities) for another (money). It's essentially about liquidity, not solvency/capital/reserves as you seem to suggest in your quote above.

The net impact does not change the bank's liability, asset or net asset/reserve position one bit - it merely shifts around the constituent parts of its assets (i.e. it has more cash and less highly liquid govt securities - the hope then that they do something 'productive' with that cash, which is of course nonsense but that's another matter). Therefore your assertion that QE is used by banks to "build up their capital reserves to meet the government's new requirements for the proportion of capital reserves to liabilities the banks must hold in order to ensure they can meet a greater proportion of their existing liabilities" is utter nonsense. No offence but the combination of phrases used in that sentence could only be used by someone who doesn't understand what they mean.

Furthermore capital requirements legislate that banks have to hold a certain amount of capital in relation to the (risk adjusted) assets of the bank, not their liabilities.

I don't mean to be rude here, but you are throwing around terms and processes here that you simply don't understand. There's nothing wrong with not understanding what these things are or how they work, but you cross a line when you start making daft assertions that are grounded on that misunderstanding

There's been a lot written on here about QE over the last few years - have a look at this thread which goes into the details of how it works

edit: just to add, just because i criticise your portrayal of what QE is and what you think it does, this doesn't mean I am in anyway supportive of it or those who carry it out, or that I think it has a hope in hells chance of doing what those who carry it out think it will do. And your comments about a by-product of it it fuelling other bubbles elsewhere i agree with. I've been writing about this and criticising the hopelessness & base logic of these kind of monetary policy tools since the first round of QE started in the UK nearly 4 years ago

so the markets get spooked about a bank and stop lending to it, then the public get spooked and start trying to pull their money out as happened with Northern Rock, and at this point the government has to step in or the bank went bust because it can't finance its liabilities in the event that the bank run continues.

Are you aware that the customer/public bank run on Northern Rock was a result of the announcement that the state had stepped in with an emergency loan of £30 odd billion, not its cause? It became public knowledge that the state was stepping in with emergency funding for NR on the evening of September 13 2007, the run started the following day on September 14 2007. So the order of events is actually the opposite to what you assert above.

The impact of the money market funding route freezing up on NR was many many many times the multiple of the impact of customers transferring a couple of billion in money held with northern rock to another bank within the system. The public withdrawl was something like 1-2 billion, the markets refusing to lend any more to NR (something that Jazz laughably claims doesn't have to happen at all) which was the thing that triggered their downfall, was something like £30bn

 

[SpineyNorman]

No it hasn't. There is only ever £1000 in circulation.

You need to explain yourself there Jazzz. Jean-Luc has made a perfectly logical and coherent case for the opposite to what you're arguing. You can't just assert that he's wrong without explaining why. Well I guess you can but don't be surprised if this results in yet another round of laughing and pointing.

 

[gosub]

Bad day? I don't think fs was that far off.
Equity ratios are how much assets a bank can make off its liabilites. Its not just a government think, its global (Basel accords -UK rep Merv King) and while it is an entirely separate to QE lowering the ratios at the same as QE pretty much negated it.

Save your ire for Jazz and his suicidal ideas for 100% reserve banking

 

[love detective]

Bad day? I don't think fs was that far off.
Equity ratios are how much assets a bank can make off its liabilites. Its not just a government think, its global (Basel accords -UK rep Merv King) and while it is an entirely separate to QE lowering the ratios at the same as QE pretty much negated it.

Save your ire for Jazz and his suicidal ideas for 100% reserve banking

you could do with re-reading your posts before you post them - the above is almost incomprehensible

this however:-

Equity ratios are how much assets a bank can make off its liabilites.

is nonsense

basel type capital ratios dictate how much capital a bank must hold in relation to their (risk adjusted) assets. If their core/tier 1 capital is below that level they have to either raise more capital (increase the numerator) or decrease/shed some of their assets (decrease the denominator). the later can be done either by actually physically disposing of certain assets, or doing some regulatory arbitrage to reduce the risk adjusted level of those assets, even though the underlying assets themselves still remain on the bank's balance sheet. Either way, capital ratios are everything to do with bank's (risk adjusted) assets, not liabilities.

to say equity ratios 'are how much assets a bank can make off its liabilities' is absurd, they say nothing about 'how much assets a bank can make' (whatever that actually means)

 

[gosub]

definitely a bad day,

The liabilities are unlikely to change (where are all the extra depositors to come from?) so you have to reduce the number assets which is what they did, though instead of foreclosing on loans to individuals and companies the Government paid off some its loans using QE

 

[love detective]

is english your first language?

either way, and regardless as to how you express it, you're all over the place

the govt did not pay off 'some its loans using QE' (the ownership of that debt merely changed hands, through a transfer in the secondary market, the debt itself still exists)) and anyway why are you talking about govt loans when capital ratios apply not to government borrowing/liabilities but to bank lending/assets?

your post above is totally meaningless - you don't appear to understand the first thing about capital adequacy regulations

 

[gosub]

I'd love to here your explanation as to where all the QE money went


CUNT!

 

[love detective]

Banks sold govt debt that they were holding to the bank of england in the secondary markets and received in exchange for this, money that the bank of england created

Some of this money was then used by banks to speculate on commodites and other high risk assets, a tiny dribble probably went towards new customer lending although the bulk has not circulated to anything like what the central bank thought it might, which is why the bulk of it is sat back on deposit with the central bank, stimulating nothing

So on that narrow basis alone, the banks swapped one asset category of their books (govt debt) that was paying a yield of around 3-4% for another asset (cash) that pays a yield of around 0.5% - hence the fact that central banks who have been engaged in QE over the last few years have made huge profits as a result (UK and US for example) - as the central bank gets the flip side to this, they get an asset (govt debt) that pays them a yield of 3-4% but only have to pay out around 0.5% on the money that was created to buy this with

Feel free to actually try and address some of my points above though, instead of just posting random unrelated and barely comprehensible nonsense

 

[happie chappie]

Some of this money was then used by banks to speculate on commodites and other high risk assets, a tiny dribble probably went towards new customer lending although the bulk has not circulated to anything like what the central bank thought it might, which is why the bulk of it is sat back on deposit with the central bank, stimulating nothing

If this is right (and I’m not saying it isn’t btw, just a genuine question) why would a bank swap an asset (ie Govt debt) paying 3-4% for money from the BoE created under QE, and then send the money back to the BoE to earn a minimal amount of interest?

If the banks had “spare” money (ie, money created under QE but either not being lent out, or speculated with) wouldn’t it make more sense to buy back from the BoE the assets they had originally exchanged for cash?

I fully accept your point about liquidity, but wouldn’t it make more sense for banks to simply have the facility (ie the option) to swap Govt debt for cash created by the BoE under QE, but not actually draw on it unless absolutely necessary.

I recognise that this may not necessarily be in the BoE’s interest if it earns 3-4% on the assets it’s acquired but only pay 0.5% on the money sent back to it from the banks, but why would the banks agree to swap assets on this basis, but then not swap them back as soon as they were in a position to do so?

Hope this makes sense - my brain is hurting at the moment!

 

[love detective]

If this is right (and I’m not saying it isn’t btw, just a genuine question) why would a bank swap an asset (ie Govt debt) paying 3-4% for money from the BoE created under QE, and then send the money back to the BoE to earn a minimal amount of interest?

for liquidity purposes, cash is king after all in an uncertain environment, bird in the hand is worth two in the bush etc. etc.. - northern rock for example didn't go under because it was insolvent, it went under because it didn't have enough liquidity to fund itself and its ongoing operations. so an increased yield on an asset in the future is no use if you don't have the cash flow to fund yourself today

it's exactly the same as when banks get financing from central banks - the central bank doesn't just give the money to banks on an unsecured basis, the bank has to provide collateral for the loan, and the most common form of this collateral is govt debt or reasonably low risk corporate debt, the yield on these are always going to be more than straight cash would give - so the bank gives up the yield on a slightly less liquid asset in order to gain access to a slightly higher liquid asset - the rational for doing so is that liquidity in these kind of situations trumps yield (meaning that the number one priority is to ensure sufficient liquidity to survive, then only once that is ensured do they focus on the yield)

If the banks had “spare” money (ie, money created under QE but either not being lent out, or speculated with) wouldn’t it make more sense to buy back from the BoE the assets they had originally exchanged for cash?

a lot of the banks who were holding govt debt were able to make a capital gain on the price that the central bank bought the securities from them - the whole point (or at least one of them) of QE is to force interest rates in general down by being a deep pocketed buyer of govt debt securities in particular (as lots of interest rates are linked, either directly or indirectly, to the yield on govt debt which goes down as its price goes up). So while they lose out on the income stream in terms of holding a lower yielding asset, they did make a bit of a capital gain on the price. So the inflated price of govt debt now (maintained by the central bank's continuing QE program) would cancel out most of the benefits from the increased yield it offers. However that's probably incidental to the main reason for not buying them back, which is in times of uncertainty and when banks don't know if they will be able to raise cash/fund themselves in the market, having a lower yielding cash asset is preferable to having a higher yielding less liquid asset.

I fully accept your point about liquidity, but wouldn’t it make more sense for banks to simply have the facility (ie the option) to swap Govt debt for cash created by the BoE under QE, but not actually draw on it unless absolutely necessary.

they pretty much do have this as well - the bank of england for example has pre-approved various types of assets that banks can use as collateral to borrow from the central bank against. the recent £80bn 'funding for lending' scheme that was announced is also along these lines. the point is though that when a central bank enters the market wanting to buy, the deepness of its pockets (along with the uncertainity element in holding govt debt which could start to tank at some point due to 'market vigilantism' etc) means that the central bank can offer prices that allow banks to make a quick capital gain on selling, even though they give up the right to the future income stream that holding onto that asset would have brought


another reason is that relying purely on a undrawn govt facility brings more attention and reputational damage to banks who are forced to draw on it to get them out of sticky situations, as that kind of thing can be monitored and used to judge which banks are fairing worse when times are bad, which in turn puts downwards pressure on share price etc - so the benefit of having the cash 'in hand' so to speak, ready to draw on as and when its required is a big advantage to banks. Also they all seem to genuinely think that an upturn is just around the corner and when it happens they want to be ready to start another credit fueled bubble

I recognise that this may not necessarily be in the BoE’s interest if it earns 3-4% on the assets it’s acquired but only pay 0.5% on the money sent back to it from the banks, but why would the banks agree to swap assets on this basis, but then not swap them back as soon as they were in a position to do so?

this has pretty much been covered in the responses above - but if you look at the two links I put in the post above about extraordinary profits being made at central banks as a result of this, you will see that it is actually happening.

also the 1 trillion euros that the ECB has dished out between November last year and February this year was done on exactly the same basis - the banks themselves go access to guaranteed long term funding at cheap rates, but they still had to pledge collateral in order to get that funding - and the yield they would have 'earned' on that collateral will be given up in order to access that funding.

 

[happie chappie]

for liquidity purposes, cash is king after all in an uncertain environment, bird in the hand is worth two in the bush etc. etc.. - northern rock for example didn't go under because it was insolvent, it went under because it didn't have enough liquidity to fund itself and its ongoing operations. so an increased yield on an asset in the future is no use if you don't have the cash flow to fund yourself today

it's exactly the same as when banks get financing from central banks - the central bank doesn't just give the money to banks on an unsecured basis, the bank has to provide collateral for the loan, and the most common form of this collateral is govt debt or reasonably low risk corporate debt, the yield on these are always going to be more than straight cash would give - so the bank gives up the yield on a slightly less liquid asset in order to gain access to a slightly higher liquid asset - the rational for doing so is that liquidity in these kind of situations trumps yield (meaning that the number one priority is to ensure sufficient liquidity to survive, then only once that is ensured do they focus on the yield)

a lot of the banks who were holding govt debt were able to make a capital gain on the price that the central bank bought the securities from them - the whole point (or at least one of them) of QE is to force interest rates in general down by being a deep pocketed buyer of govt debt securities in particular (as lots of interest rates are linked, either directly or indirectly, to the yield on govt debt which goes down as its price goes up). So while they lose out on the income stream in terms of holding a lower yielding asset, they did make a bit of a capital gain on the price. So the inflated price of govt debt now (maintained by the central bank's continuing QE program) would cancel out most of the benefits from the increased yield it offers. However that's probably incidental to the main reason for not buying them back, which is in times of uncertainty and when banks don't know if they will be able to raise cash/fund themselves in the market, having a lower yielding cash asset is preferable to having a higher yielding less liquid asset.


they pretty much do have this as well - the bank of england for example has pre-approved various types of assets that banks can use as collateral to borrow from the central bank against. the recent £80bn 'funding for lending' scheme that was announced is also along these lines. the point is though that when a central bank enters the market wanting to buy, the deepness of its pockets (along with the uncertainity element in holding govt debt which could start to tank at some point due to 'market vigilantism' etc) means that the central bank can offer prices that allow banks to make a quick capital gain on selling, even though they give up the right to the future income stream that holding onto that asset would have brought



this has pretty much been covered in the responses above - but if you look at the two links I put in the post above about extraordinary profits being made at central banks as a result of this, you will see that it is actually happening

Thanks for that - really helpful.

 

[love detective]

i edited a couple of more bits in after you replied - typed in a bit of a rush, but hopefully some of it made sense to you

 

[happie chappie]

i edited a couple of more bits in after you replied - typed in a bit of a rush, but hopefully some of it made sense to you

Yes - all makes sense and your edit clarifies the position, especially relating to reputational damage, which did occur to me as one of the reasons no individual bank would want to be the first (or indeed any) financial institution drawing on a facility.

 

[Jazzz]

You need to explain yourself there Jazzz. Jean-Luc has made a perfectly logical and coherent case for the opposite to what you're arguing. You can't just assert that he's wrong without explaining why. Well I guess you can but don't be surprised if this results in yet another round of laughing and pointing.

I did explain why - no money has been created because there is still only £1000 in circulation. If you think that is mistaken, show me where and how the additional money exists and I will be happy to discuss that with you.

 

[Jazzz]

Are you aware that the customer/public bank run on Northern Rock was a result of the announcement that the state had stepped in with an emergency loan of £30 odd billion, not its cause? It became public knowledge that the state was stepping in with emergency funding for NR on the evening of September 13 2007, the run started the following day on September 14 2007. So the order of events is actually the opposite to what you assert above.

The impact of the money market funding route freezing up on NR was many many many times the multiple of the impact of customers transferring a couple of billion in money held with northern rock to another bank within the system. The public withdrawl was something like 1-2 billion, the markets refusing to lend any more to NR (something that Jazz laughably claims doesn't have to happen at all) which was the thing that triggered their downfall, was something like £30bn

See again you are picking up on the trees and missing the wood. It doesn't really matter that the bank run was triggered by the emergency loan from the BofE and not the other way around - in fact, it completely negates your explanation that it was the failure of Northern Rock to get the loan they needed. They got the loan they needed: however, they also got a bank run, and that killed them, because like all other fractional reserve banks they were trading whilst insolvent. The only fuel a bank run needs to break the bank is a belief amongst depositors that it may occur.

"something that Jazz laughably claims doesn't happen at all" - please stop putting words into my mouth.

Are you not going to have a crack at my problem? It's really not too complicated.

Let me repeat an example which lovedetective failed to comment on before. Bank A loans Andrew £1000, who draws on it by giving it to Bertie, who has an account in Bank B. Simultaneously, Bank B lends Bill £1000, who draws on it by giving it to Anthony, who has an account in Bank A. What has happened? I challenge lovedetective or Jean-Luc to describe the accounting entries in Bank A, Bank B, and the central bank, the change in total money supply, and where it came from.

 

[Jazzz]

Save your ire for Jazz and his suicidal ideas for 100% reserve banking

What's wrong with it gosub?

 

[littlebabyjesus]

In this case, the pattern of value being transacted is as follows: Andrew buys 1000-worth of value from Bertie. Bill buys 1000-worth of value from Anthony. So Bertie and Anthony now have 1000 credits for future buying. Andrew and Anthony now have 1000 credits of debt that they have to pay back at some point. That's what money does - it allows some to consume now, and others to consume later; it allows you to do something for someone today, then have someone else do something for you tomorrow in return, and vice versa.

But that's all money is - the creation of promises, the creation of debts and credits. So you've created two sets of 1000 debts and two sets of 1000 credits. And by circulating, the money finds itself attached to real value - Andrew paid Bertie 1000 to paint his wall; Bill paid Anthony 1000 to fix his car. Money allows equivalences to be drawn between different commodities: painting the wall equals fixing the car, and both are worth 1000. And of course, it's an ongoing process - the reason both parties agree to the price is that they have an idea of what money is worth from past transactions and confidence that similar future transactions will be able to take place.

The endogenous theory of money creation would say that this is how it works - the loans are made and the banks lend to each other before the end of the accounting period so that their books all balance - each loan creates a deposit somewhere else to balance it, and interbank loaning sorts this out. Theoretically, this system could work without a central bank at all. Basically, the money supply is a reflection of demand for loans. But demand for loans can only come when you introduce real value. People will get into debt only if they are getting something real for that debt. In this case, you have two sets of 1000 loan/deposit on the banks' books, and they have only been able to appear because two sets of 1000-worth real things have changed hands. Without those real things, there would have been no demand for debt in the first place.

 

[littlebabyjesus]

What's wrong with it gosub?

If the loan-first model is right, fractional reserve lending is a fiction anyway. 100% reserve lending would not move, not in the way you describe it. There could be no loans or deposits. The whole thing would just sit still. There is nowhere for that first deposit to come from, basically.

 

[gosub]

What's wrong with it gosub?

100% reserve is command lead economies, the closest we got to that in the last 100 years was the communist systems of the soviets and China (not current China). What tech development did they contribute to sustainting a population above an arbitary figure of say 4 bil.They didn't. all development, be it agricutualaral, medical, engineering grew out of speculative captialism. It will be hard enough sustaining current population levels without abandoning the only framework that has helped keep Malthus in check?


eta yes the satelitte but even that that got souped up through speculative capitalism

 

[gosub]

Banks sold govt debt that they were holding to the bank of england in the secondary markets and received in exchange for this, money that the bank of england created

Some of this money was then used by banks to speculate on commodites and other high risk assets, a tiny dribble probably went towards new customer lending although the bulk has not circulated to anything like what the central bank thought it might, which is why the bulk of it is sat back on deposit with the central bank, stimulating nothing

So on that narrow basis alone, the banks swapped one asset category of their books (govt debt) that was paying a yield of around 3-4% for another asset (cash) that pays a yield of around 0.5% - hence the fact that central banks who have been engaged in QE over the last few years have made huge profits as a result (UK and US for example) - as the central bank gets the flip side to this, they get an asset (govt debt) that pays them a yield of 3-4% but only have to pay out around 0.5% on the money that was created to buy this with

Feel free to actually try and address some of my points above though, instead of just posting random unrelated and barely comprehensible nonsense

How does cash pay anything as an investment? Its not doing anything and is going down in relative value due to inflation ( made worse by central banks printing more of the stuff). They hold cash cos its a legal requirement. And the amounts they held help in their increased obligtions to meet their liabilites. And not holding goventment debts on their assest sheet also helped lower the ratio.

 

[Jazzz]

100% reserve is command lead economies...

The baby is not the bathwater.

Have a look at positive money's list of famous economists in favour of full-reserve banking.

It is not to be sneezed at, taking in (if I have counted correctly) no less than five Nobel prize winners, including Irving Fischer, James Tobin, Milton Friedman, also including a former senior economist at the World Bank, and the latest support coming from our own guv'nor Mervyn King.

I don't think those guys were/are advocating planned economies.

LBJ - central banks/governments could create those deposits, they do already create the monetary base, there is no reason why they cannot create all the money the economy needs, and there are all kinds of ways it could be introduced.

 

[free spirit]

Sorry to be blunt but the above could only be written by someone who doesn't understand what quantitative easing is nor how it is transmitted (not to mention no understanding whatsoever as to how requirements for capital reserves work)

I'm guessing you think that quantative easing involves the central bank printing/creating money and just giving it to banks, therefore the net asset position of the banks are increased as a result of this.

no, I thought it meant exactly what you say it means

QE involves the creation of money which is then used to buy (usually govt) existing owned debt securities from the banks.

The net impact on a bank of QE is that they have swapped one highly liquid asset (govt securities) for another (money). It's essentially about liquidity, not solvency/capital/reserves as you seem to suggest in your quote above.

Actually, you're right about this, I meant to say cash reserve requirements, not the capital reserves.

eg in 2010 'banks told to double their cash reserves', then low and behold, the bank of england steps in and swaps hundreds of billions of pounds of cash with the banks in exchange for government gilts.

The point still stands though, in that if the banks hadn't been lending cash they didn't have then they'd not be needing to swap gilts for vast quantities of cash in order to build market confidence in their ability to meet any likely level of cash payments on demand, which essentially is what this was about.