Austrian School: Crap/Not Crap?

[love detective]

Pretty sure no one is claiming it was sustainable?

LBJ was putting forward the case that this is how the current system actually works (which is what this discussion has been about) - trust me if it was like this it would have broke properly a long time ago

 

[love detective]

How is that not functionally equivalent to creating money out of thin air, though?

If you borrow for a year and lend for ten years, that is not funding your loan, is it: it is not matching promises, in other words, as you've promised your borrower money for ten years, but your creditor has only promised you money for a year.

It is taking a gamble at the start of the process that you will be able to fund it for the nine unfunded years by relying on there being future investments - a point Minsky makes. If short-term borrowing by banks is cheaper than long-term borrowing, and long-term lending is more profitable than short-term lending, then it's easy to see where their margin comes from - but it relies at the start of the process on there being nine years' worth of funding in the future that does not yet exist.

if you lend me a tenner for 2 years based on ymu lending you a tenner for one year - have you created a tenner out of thin air, no.

 

[littlebabyjesus]

Because they're not. They're gambling that money - actual money - will be available in the future, at a price they can afford.

Depends how you look at it. If you make a loan of £100 that is repayable in 10 years, someone somewhere is promising to defer £100-worth of consumption for 10 years, but if you've made that loan on the back of someone promising to defer consumption for just one year, then at the end of that first year, when you have to repay that person, you are left with an unfunded 9-year loan of £100 - which you then have to go out and get another loan for.

To my mind, that fits with the endogenous theory of money creation: you've created £100 for ten years, basically, but you've done it on the back of just one year's worth of £100. That loan you've made comes back into the system as a deposit, which is destroyed when the loan is repaid - in 10 years' time.

Seeing money as a promise, you're not matching promises - you're making a bigger promise than you're being given.

 

[littlebabyjesus]

if you lend me a tenner for 2 years based on ymu lending you a tenner for one year - have you created a tenner out of thin air, no.

What happens at the end of the year, though? You have to go out and find yourself a tenner from somewhere to pay ymu. At the end of that first year, you are effectively left with an unfunded loan - where you have to go out and find someone to finance the one-year loan of a tenner that you did not fund at the start, and that you have already made.

 

[ItWillNeverWork]

Right, final post. Here I think is the solution to everyone's problems. From Wikipedia http://en.wikipedia.org/wiki/Monetary_circuit_theory

The key distinction from mainstream economic theories of money creation is that circuitism hold that money is created endogenously by the banking sector, rather than exogenously by the government through central bank lending: that is, the economy creates money itself (endogenously), rather than money being provided by some outside agent (exogenously).

...circuitism rejects, among other things, reserve requirement as a cause of the money multiplier, arguing that money is created by banks lending, which only then pulls in reserves from the central bank, rather than by re-lending money pushed in by the central bank.

In practice, commercial banks extend lines of credit to companies – a promise to make a loan. This promise is not considered money for regulatory purposes, and banks need not hold reserves against it, but when the line is tapped (and a loan extended), then bona fide credit money is created, and reserves must be found to match it. In this case, credit money precedes reserves. In other words making loans pulls reserves in (assuming that the regulatory need for bank reserves exists), instead of reserves being pushed out as loans which is assumed by the mainstream model.

Now to me this seems to combine both the idea of endogenous money with LD's insistence that reserves must be found somewhere. The only disagreement is then on the order of the process, with circuitists claiming that loans precede deposits and not the other way around.

 

[love detective]

What happens at the end of the year, though? You have to go out and find yourself a tenner from somewhere to pay ymu. At the end of that first year, you are effectively left with an unfunded loan - where you have to go out and find someone to finance the one-year loan of a tenner that you did not fund at the start, and that you have already made.

at which point was the money supply expanded?

is that (particular) expansion of the money supply (the original loan) impacted in any way by the refinancing of the loan to finance it?

your orignal assertion was that the money supply could be expanded through the creation of money/credit from banks out of thin air - you have not done anything to back this up yet

at no point in time is the original loan actually unfunded - one form of funding replaces another at various points in time yes, but that's different from saying you have an unfunded loan, you don't - you have liquidity risk and maturity mis-match risk, but at any point in time your loans are funded. You can't say lending in the future is unfunded because the future isn't here yet and when the future arrives, the loan is funded, just like any other point in time. You original assertion was that this creating money out of thin air was the norm as to how things worked - this seizing on the process of how longer term loans are funded through a series of rolled over short term loans while throwing up some important points as to risk at the individual bank level, but it doesn't equate to the creation of money/credit from thin air as you have been suggesting up until now

and in the extreme case where the funding cannot be rolled over, as we have seen the state steps in and bails them out with emergency funding (like what happened to all UK, European and American banks over the last few years - you can see it in the example of Norther Rock's balance sheet above with the 28bn in the 2007 year) to support the lending that is already in place and starts to cut down the expansion of future lending and eventually unwinds the current lending. This point also shows the ludicrious nature of some views that says the monetary system can survive on its own without the state crutch to stand behind it, not only in times of trouble, but even just in normal times

I've mentioned this many times, but what is important here is flows/movement - i.e. when does the money flow, how is funded at the point in time when it flows, when does the money supply expand etc - your looking at a point in the future which is not a flow and using this to try and retain some credibility for your original assertion that money is created by commercial banks out of thin air (and that this magical process is shielded by complicated financial instruments that you don't even understand), it isn't.

 

[ItWillNeverWork]

I think also that there is a breakdown in communication on this thread due to the way in which the process is being described. Remember that we are talking of a circular flow, or in the language of Marx, a dialectical process. When we say that "the banking sector creates money as loans, and then finds deposits", this is no different from saying "the banking sector finds deposits and then loans them out". The reason is that, ultimately, the loans end up back in the banking sector as deposits. So as long as that money keeps on circulating, the 'creation' of credit can continue, and this credit is backed by reserves.

 

[littlebabyjesus]

It was not an assertion. Why do you keep posting in this confrontational manner about things that I have suggested? I was suggesting that you're not matching promises - so you are not facilitating the exchange of like for like, which fits with what Minsky said about current loans being financed by the expectation of future loans. TBH I'm not clear myself what implications this lack of a match of promises has - but that there is a mismatch is undeniable: the bank is giving bigger promises than it is receiving. Yes, the point at which it can no longer fund its promise is the point at which it goes under, but that's missing the point - the creation of the loan has created a corresponding deposit in the system: the loan creates the means to fund itself, except that reserves are required, meaning that at some point the base supply of money needs to be expanded, a service that central banks unfailingly provide.

As for possible ways that complicated financial instruments could hide a process of endogenous money creation, well, again, I was asking, not telling. And certainly not asserting. You seem very confident that this doesn't happen. I don't quite get where your confidence comes from, given that there appears to be empirical evidence that this process happens - so it must happen through some mechanism or another. You haven't refuted the empirical evidence, such as that there is far more debt than existing money, and that the creation of base money can be shown to come after the creation of credit money (at a time lag of about a year, which is something that could perhaps reflect the time mismatch of promises - I'm not sure myself whether this could be the case, but don't discount it). Is Keen wrong that lines of credit provide such a mechanism?

 

[ymu]

the point about AAA financial instruments in this case is pretty irrelevant to the point being made also - if Northern Rock issued a AAA rated instrument then at the time of it selling it, it would get say the £100 on day 1, the buyer would then own an instrument that in theory was worth £100 and would give it an income stream. Norther Rock gets the £100 on day 1 (i.e it secures the money at that point) and can then do what it wants with this money (lend it on as a mortgage for example) - the risk in this case is not with Northern Rock the issuer of the security, but the buyer who has already given Norther Rock £100 for it. If it goes tits up it's the buyer who loses out not the issuer.

But they didn't sell them all - they kept a load on the books, for apparently nefarious reasons.

While this wholesome-sounding story undoubtedly captures some of what drives
the securitization market, it is also incomplete. It has become apparent in recent years
that another important driver of securitization activity is regulatory arbitrage—a
purposeful attempt by banks to avoid the rules which dictate how much capital they are
required to hold. Particular attention in this regard has focused on the bank-sponsored
SIVs and conduits mentioned above, vehicles which held various types of ABS and
financed these holdings largely with short-term commercial paper. What is striking about
these shadow-banking vehicles is that many of them operated with strong guarantees
from their sponsoring banks. And indeed, when the SIVs and conduits got into trouble,
the banks honored their guarantees, stepping up and absorbing the losses.

This runs directly counter to the spirit of the risk-sharing story, since rather than
widely distributing the risks associated with the ABS they created, in this case the banks
ultimately retained them, albeit in an opaque off-balance-sheet fashion. The most obvious
alternative explanation is that the banks were exploiting a regulatory loophole: if they
held the loans directly on their balance sheets, they faced a regulatory capital requirement
on these loans, but if the loans were securitized and parked in an off-balance-sheet
vehicle (albeit one with essentially full recourse to the banks in the event of trouble) the
regulatory capital requirement was much reduced

http://www.economics.harvard.edu/fa...itizationShadowBankingAndFragilityRevised.pdf [.pdf alert, page 6]

 

[love detective]

It was not an assertion. Why do you keep posting in this confrontational manner about things that I have suggested?

you said

are the new complex financial instruments in fact hiding the truth - which is that the money for the loans was created out of thin air

within the question that you were asking you stated what the 'truth' was - that money for the loans was created out of thin air - i.e. you made an assertion as to what the truth was and the possibility as to how this truth was being hidden. This was the point i intervened to comment on the various bits of misinformation that had been peddled in the previous three posts.

I was suggesting that you're not matching promises - so you are not facilitating the exchange of like for like

you are matching promises, someone has promised to borrow from you for ten years and you've promised to lend to them for ten years - what you then need to do is to work to make sure that you make good your promise - just like if you promise to be faithful to your wife/partner you can't encapsulate and deliver 100% of the requirements of that promise in the immediate here and now, it's something that you do over a period of time

Yes, the point at which it can no longer fund its promise is the point at which it goes under, but that's missing the point - the creation of the loan has created a corresponding deposit in the system: the loan creates the means to fund itself, except that reserves are required, meaning that at some point the base supply of money needs to be expanded, a service that central banks unfailingly provide.

don't quite understand where you're going with the above to be honest

As for possible ways that complicated financial instruments could hide a process of endogenous money creation, well, again, I was asking, not telling. And certainly not asserting. You seem very confident that this doesn't happen. I don't quite get where your confidence comes from, given that there appears to be empirical evidence that this process happens - so it must happen through some mechanism or another. You haven't refuted the empirical evidence, such as that there is far more debt than existing money, and that the creation of base money can be shown to come after the creation of credit money (at a time lag of about a year, which is something that could perhaps reflect the time mismatch of promises - I'm not sure myself whether this could be the case, but don't discount it). Is Keen wrong that lines of credit provide such a mechanism?

i didn't refute the empirical evidence presented, because I do not believe that that evidence is evidence for the point being claimed - the point being claimed was that money can be created out of thin air by banks and what they lend doesn't need to be funded by the entity doing the lending, it somehow just happens. The evidence presented to back this up was not evidence that actually backed it up - it was merely evidence that in boom times things circulate like hell and that circulation of already existing money/obligations moves out of all proportion to central bank base money. This 'empirical evidence' doesn't show that money can be created out of thin air, it just shows that things circulate very fastly and frantically during such periods - it says nothing as to how that circulation takes place in relation to banks lending money that they don't have to lend

Probably not making myself that clear at this stage as it just seems to be going round in circles

 

[love detective]

But they didn't sell them all - they kept a load on the books, for apparently nefarious reasons.

erm, northern rock created mortgage backed securities and sold them to investors

those securities obligated northern rock to pay back the principal (and interest) at a point in the future (like decades), this obligation is recorded on their books and appears on their balance sheet as a liability (if you look back at that screen shot of northern rocks' balance sheet in 2006/2007 you can see them there on it)

when investors bought the securities from them (for cash) the entry in northern rock's accounts would be to debit the cash account and credit their mortgage security liablilty account - this records the fact that they have an increase in cash from the investors and an increase in liabilities representing their future obligation to pay back the principal

selling mortgage backed securities in this way inherently keeps the liability on their books - this is part and parcel of the transaction

anyway - you've picked up on the smaller/minor point I made in relation to the bigger post - have you had any luck looking into the main topic which you brought up as evidence of me being wrong about the ways bank fund themselves?

 

[ymu]

That is my main point (but I may be confusing concepts in expressing it). They were cooking the books so that they could lend out far more than they were allowed to by the regulatory system, using the shadow-banking system. If you read that extract (second paragraph), the point he is making is that they did not sell them on - they created them for the purposes of regulatory arbitrage, to circumvent capital controls.

 

[laptop]

I've mentioned this many times, but what is important here is flows/movement...

It seems the underlying rhetoric about "fiat money" is grounded on a failure to understand this - the fruitloop end of the argument is founded on "I can't imagine how money could be based on anything I can't drop on my foot."

To which, as so often, the answer is "imagine harder".

 

[love detective]

That is my main point (but I may be confusing concepts in expressing it). They were cooking the books so that they could lend out far more than they were allowed to by the regulatory system, using the shadow-banking system. If you read that extract (second paragraph), the point he is making is that they did not sell them on - they created them for the purposes of regulatory arbitrage, to circumvent capital controls.

i was talking about your post/study which you used to accompany your comment that I was completely wrong on what i had said - this study that you put forward was nothing to do with the off balnce sheeting of risk ask assets to reduce the regulatory capital that they had to hold - it's all part of the wider problems of course, but had nothing to do with the parliamentary thing you quoted originally, to show that i was completely wrong

i.e. the point about northern rock having loans that represented 322% of customer deposits (or 139% industry wide or something like that) - and that you put it forward to prove that banks could lend out more than they 'got in' - i have tried to explain how this shows nothing of the sort - i was just wondering whether you still thought that was the case or not. I thought that was your main point as that was the point you came into the thread at.

No offence, but your jumping around quite a bit with the things that you are quoting from elsehwere (i get the impression of frantic googling for everything and anything), and they are all not directly related to each other (except in the most widest of widest contexts) - you started off quoting studies related to on balance sheet stuff which supposedly proved i'm wrong about something, but now are talking about stuff that was moved off balance sheet as though they are one and the same things, they are not - there is quite a lot of stuff being conflated here, i was trying to stick to the things you quoted in your original post when you entered this discussion, and focus on explaining why it didn't prove what you thought it proved - ideally we could nut that one out before moving on to other things, no?

 

[ymu]

I am quite happy to accept that I misunderstood that point. It relates to liquidity, not to the amount of money that a bank can create. I think I'm getting confused between reserves and capital requirements.

Ignoring capital requirements allows them to lend more on the same assets - but they still have to cover it with risky loans from other banks, right? The effect is to increase the amount of money being lent out, but it's not creating money out of thin air so much as creating money out of something that might very easily collapse into thin air.

 

[love detective]

it doesn't so much relate to liquidity as such - it relates to the structural funding of a bank's activities which in turn may or may not create liquidity risk depending on the terms of the various funding that is in place - i.e. even if all customer loans were funded by customer deposits, there is still liquidity risk in that the maturity profile of deposits may not match exactly that of customer loans (i.e. the type of thing being discussed by LBJ and myself above)

edit - just noticed that you edited some more stuff into that last paragraph after i had replied to it, so briefly

Ignoring capital requirements allows them to lend more on the same assets

ignoring capital requirements (or finding ways round them through regulatory arbitrage etc..) allows them to lend more on the same capital base

but they still have to cover it with risky loans from other banks, right?

well yes, but more correctly this and any lending has to be funded by something from some source - whether it is funded by customer deposits (the focus of that parliament report you quoted), funding in the wholesale markets, share capital, subordinated debt or whatever, all of these methods of funding have varying degrees of differing risks & benefits attached to them - not just between those categories but within them as well

The effect is to increase the amount of money being lent out, but it's not creating money out of thin air

yes, it can make it easier for banks to lend out more if they offload lending from their own balance sheets into off-balance vehicles as this removes the lending from their balance sheet and therefore removes that lending from the capital requirements that it would otherwise have to comply with (but again bank's can't take partake in lending unless the conditions are right, i.e. they need people who want to borrow and they have to fund that lending from somewhere - so the regulatory aspect is one of the necessary variables but it's not sufficient in and off itself - this is what i was trying to get at earlier by saying it's not the legal/regulatory aspect that is really the fundamental thing here

so much as creating money out of something that might very easily collapse into thin air.

yeah - the whole flurry of circulation that leaves a trail of obligations in its path can just as quickly unwind itself when the music stops - but i still dont' like to talk about thin air for some reason

 

[romeo2001]

love detective you deserve a medal - explained it really well and very patiently.

One of the problems I have with the whole marxist thing is that most people have the same knowledge of marx as they do smith ie random quotes and other peoples interpretations following their own agendas. Its hardly the best foundations to revolutionise the populace

 

[littlebabyjesus]

A point about this 'creating money out of thin air idea. If I understand it correctly, the circuitists say that both the loan and the deposit are created. In other words the sum total is zero. It's a little like a vacuum generating a particle and its antiparticle. This would explain why there is no value at all to a bank creating money on its own to make itself solvent - the creation of credit is only of value if that credit is used to do something, to circulate in some way as it makes its way back into the banking system as a deposit. The individual banks in the system will then rely among other things on interbank lending to balance their books, but in a smoothly functioning system where the banks have confidence in each other, there's no reason to suppose that this balancing process cannot take place very quickly.

Also, with a money supply that is constantly growing, I could imagine that the process might be disguised, with the system as a whole gradually sliding away from its reserve obligations (and hiding this fact through various ruses) only to be periodically righted by injection of more base money.

 

[love detective]

so boiled down (and avoiding a drawn out discussion on the mechanics of circuit theory which was touched upon much earlier in the thread), what you are saying is that:-

'money' created out of thin air isn't really money at all

i.e. the money supply can only be increased if things happen outside of (and outside the control of) the bank tapping away on the keyboard - i.e. the bank is not the independent factor in all this but a dependent one

which is what i've been saying since the very first post on this thread

monetary circuit theory and endogenous monetary theory are pretty much one and the same thing - the key thing about them being that money supply is increased (or decreased) through the combined 'natural' activity of actors within the monetary system - this same thing is also a large part of what exogenous monetary theory says as well though (i.e. activity within the monetary circuit hugely increase the small amount of central bank base money that is injected into the system from outside)

pure endogenous theory is useful at looking at the material conditions required for expansion of money supply, but it doesn't capture the political dimension that results in exogenous factors like the state having to always be on hand to pick up and dust the thing down when it falls over or becomes dysfunctional.

Also the specifics of circuit theory are much clearer when applied to the moving around of money within the system in relation to purchases & sales i.e. person A buys something from person B and the bank as the third party (ultimately) decreases the balance on person A's account and increased the balance person B's account - i.e. effectively just shifting things around.

But when it comes to credit (where the same basic principle as above still applies), they do seem to gloss over the requirement that banks have to fund their lending to others by finding that funding from somewhere, i.e. in an example of a loan, if Person B's account is increased (reflecting the money given to them by the loan) there needs to be an equal & opposite decrease elsewhere in the system, and this decrease is a reflection of the sourcing of the funding to fund the proposed loan to Person B - i.e. there has to be a person/entity A somewhere that has or will ensure the flows are in place to enable the bank to complete the loan - i.e. money has to circulate).

In short endogenous/circuit theory merely reasserts (in a somewhat muddled way) the fact that in order for a bank to make a loan (and create money) two things external to that bank needs to be in place,

i) an entity wanting to borrow, and
ii) a source of funds that is available to the bank to lend

If both these things are not in place then no amount of thin air can help - and the lack of activity that results in (ii) above not happening is the reason that european banks borrowed over a trillion euros, exogenously, from the ECB in the last couple of months

 

[ItWillNeverWork]

You haven't refuted the empirical evidence ... that the creation of base money can be shown to come after the creation of credit money (at a time lag of about a year, which is something that could perhaps reflect the time mismatch of promises - I'm not sure myself whether this could be the case, but don't discount it). Is Keen wrong that lines of credit provide such a mechanism?

Is 'base money' the same as 'money held by banks as a funding source for their loan activity'? If not, then just because credit money expands prior to base money, it does not necessarily follow that banks grant loans prior to having enough deposits, does it?

I mean, Imagine Bank A has a reserve of £5000 and lends this to a firm. The firm then transfers this to Bank B. Bank B then has enough reserves to lend out £5000 to someone else, no? In this scenario, there is £10000 worth of money lent out, all of which is fully backed by reserves in banks, but only £5000 of original 'base' money (not sure I'm using the terminology correctly here).

At the point which the debtors wish to withdraw their money as cash, the banks will just call on the central bank to print up the necessary coins etc. Credit has expanded prior to base money, but even so, all the banks have found funding for their loan activity prior to lending anything out.

Am I getting anything wrong here? It feels as if I might be.

 

[love detective]

Is 'base money' the same as 'money held by banks as a funding source for their loan activity'? If not, then just because credit money expands prior to base money, it does not necessarily follow that banks grant loans prior to having enough deposits, does it?

This was the point I made a few posts up to LBJ that the 'empirical evidence' presented to back up his claim had nothing actually to do with said claim

 

[ItWillNeverWork]

This was the point I made a few posts up to LBJ that the 'empirical evidence' presented to back up his claim had nothing actually to do with said claim

So is it true to say that expanded production cannot take place without the money supply expanding also?

I mean, if a trillion pounds is created as base money, and that trillion is lent to firms who use it to create 2 trillion worth of value, where does the new money come from to represent that newly created value? Who decides to expand the supply of money?

 

[love detective]

So is it true to say that expanded production cannot take place without the money supply expanding also?

Theoretically and conceptually not necessarily no - the creation of money is not the same thing as the creation of value

In practice though, as new value is created the money supply will expand to keep up with it (or expand in anticipation of yet to be created value, i.e. claims on future value production)

If you're familiar with the basic marxian circuit of capital as below:-

The M in that represents money and the above shows the M' at the end has expanded due to the production (during the P...C' stage) and realisation of surplus value (during the C' - M' stage) - so that M' > M and this increased M' is then thrown back into the circuit bringing about expanded reproduction

however (and theoretically) there's nothing to stop the money part being taken out of it and the resultant commodities that are produced in the production process (C') being exchanged directly for the commodites (MP) & (LP) that are required to begin the production process again (either at the same, i.e. simple production or enlarged, i.e. expanded reproduction). So on that basis expanded reproduction is not theoretically/conceptually wedded to an increase in the money supply

The existence of Money and the increasing supply of it helps the process (of both simple production & expanded reproduction) along though as it mediates the step between turning the outputs of the production process into new inputs to the production process. However, the creation of value is not necessarily dependent on the existence of money. I mean the whole point (and means) of the valorisation of capital is not just to end up with more money, but to continually complete at an increasingly faster speed the circuit of capital, this is what brings about the ongoing valorisation of capital (and not just clinging on to your increased money, but throwing it back into the circuit)- which means the quicker value progresses from one of its forms (Money Capital, Productive Capital or Commodity Capital) to an other (Productive Capital, Commodity Capital or Money Capital) the more value can be produced & realised.

Somewhere in volume 2 of Capital Marx actually mentions (or hints) that conceptually the most efficient form of capitalism would be where money didn't play a part in the above circuit and instead the outputs of the production process were exchanged directly for the inputs to the next production process - this skips out the step to transform commodity capital into money capital and then money capital into productive capital - and turns commodity capital straight back into productive capital. While this is conceptually true, and results in an increased traversing of the circuit of capital by value (allowing for a more efficient valorisation process), the reality is that barter on that scale would never reach the levels of efficiency required so money steps in to mediate those necessary transformations from one type of capital to another

edit: also in the reproduction schema in volume 2 of capital - Marx goes through the social reproduction process of both simple and expanded reproduction without actually bringing money into the picture, this is done to remove the peripheral noise that money brings and allows a focus to be made on the core/fundamentals of the underlying process

 

[camouflage]

In what way(s) are they similar?

In what ways are money and human ingenuity similar? In no ways... my point is that the one is the product of the other. Consider the humble prison-fag.... Actually I hear these days, in Mexican prisons they trade cans of sardines now. Fungible.

Paper is no different, the central banks slap down a reserve requirement so as to try an control the economy, and the private banks cook-up a plethora of complicated new confetti to lend out and make profits on anyway. People exchange these liquidly and use them to avoid all sorts of government rules, regulations and taxes. This is called 'financial innovation'. The more positive everyone feels about the future, the more vigorously they splash the new liquids around.

Gold-fetishist libertards are basically control freaks, they want the government to 'back gold' (by fiat one presumes) so effectively all they're really saying is that they want money to be controlled, strictly, and in favor of the creditors. Regulation by gold makes some things harder, but it's no magic bullet by far, it's juts another form of regulation and control. I suspect the simple truth is that humanity is by nature, inflationary and likes to spend its time confounding restrictions. Likewise our language and likewise our money (language and money serve similar functions actually).

Note that this is coming from a self-confessed bitcoin obsessive (recovering).

 

[binka]

love detective you deserve a medal - explained it really well and very patiently.

One of the problems I have with the whole marxist thing is that most people have the same knowledge of marx as they do smith ie random quotes and other peoples interpretations following their own agendas. Its hardly the best foundations to revolutionise the populace

this definitely. just finished reading this topic and love detective has made certain things a lot clearer and clearly shown some things i thought to be true to be wrong.

 

[articul8]

love detective you deserve a medal - explained it really well and very patiently.

Aha - with your ability to patiently explain you'll go far

 

[littlebabyjesus]

In short endogenous/circuit theory merely reasserts (in a somewhat muddled way) the fact that in order for a bank to make a loan (and create money) two things external to that bank needs to be in place,

i) an entity wanting to borrow, and
ii) a source of funds that is available to the bank to lend

If both these things are not in place then no amount of thin air can help - and the lack of activity that results in (ii) above not happening is the reason that european banks borrowed over a trillion euros, exogenously, from the ECB in the last couple of months

I think they are saying a little more than that. Your subsequent post touches on this - that money needs to circulate in order for real value to be attached to it. Otherwise it has no value. So, a bank 'creates' a £100 credit and a £100 deposit on its books. All fine - adds up to zero on its balance sheet - but worth nothing. It's a closed circuit that can't do anything. That needs to be lent out to a real person to do a real thing in the economy to buy something of real value. It will then be deposited back into the system by the person who accepted the money for the good, expanding the money supply until such a time as the borrower pays back the loan, with that value attached to it: £100 buys 10 pigs, or whatever. Not until the deposit has been made has any value been attached to the money.

But I think the endogenous theory's position is this: I go to the bank and ask to borrow £10k to buy myself a car. The bank decides that yes, that seems reasonable, making a judgement in advance of whether or not someone will accept £10k for that car, whether or not £10k is worth that car's amount of value. They may even have the car owner's prior agreement that yes, they will accept the £10k. Where car dealers themselves offer finance, that is clearly the case. So the transaction can go ahead on the promise that £10k will immediately enter the system as a deposit with the value 'that car' attached to it. This doesn't require a prior deposit. Indeed, if both sides in the agreement use the same bank, the bank can carry out the whole process itself - it has found a real person to take on the debt and a real person to take on the deposit, in a loop that includes 'that car' as its value. In a smoothly running banking system where banks trust each other to do good business, the deposit enters the system as a whole and the bank creating the credit can go to the system and instantly take on an interbank loan to cover it.

The endogenous theory's position, as I understand it, is that this is what happens in reality. Of course, that doesn't create reserves, and reduces the percentage of existing reserves to total loans. But the likes of Keen argue that this is exactly what happens, and that it requires central banks to periodically make up that shortfall, otherwise the system seizes up.

It's a position that says that fractional reserve lending is essentially a fiction. Deposits do not precede loans, and if they did, then central banks would be in control of the size of the money supply in a way that reality shows us that they are not. In reality, according to Keen, the size of the money supply is purely limited by the willingness of people to borrow and the willingness of banks to lend.

As I understand it, monetarism was based on the idea that money is lent out via fractional reserve lending, so via the money multiplier effect, the reserve requirement creates a strict upper limit to the amount of money that can be created from a particular amount of central bank seed money. That their model failed in reality when it was tried shows that the system cannot have been operating to those rules. Either banks were breaking the rules and lending out more than they were supposed to or the system simply doesn't work like that at all. The latter is the position of the endogenous theory.

 

[laptop]

That [the monetarist] model failed in reality when it was tried shows that the system cannot have been operating to those rules. Either banks were breaking the rules and lending out more than they were supposed to or the system simply doesn't work like that at all.

From epistemology, rather than economics: not necessarily.

We always have to bear in mind that there is an uncountably large set of theories capable of fitting any set of empirical data

Failed in what sense?

If in the narrow sense that central bank decisions did not have the predicted effect on money in circulation, then that's a moderately tight constraint on the applicability of the the theory.

If, as I suspect, it was failure by some other measure (inflation?) then it says rather little about the theory.

 

[love detective]

I think they are saying a little more than that. Your subsequent post touches on this

No, they are not - the concept/necessity of circulation is inherent in both of the two points I made that endogenous theory reasserts (i.e. a requirement of someone wanting to borrow entails the circulation of that money once borrowed, and the requirement of the bank having to fund that lending from somewhere entails the circulation of funds through the bank to fund it)

that money needs to circulate in order for real value to be attached to it. Otherwise it has no value.

this is way off the mark i'm afraid. Just because circulation needs to happen for the money supply to be expanded (i.e. the point i've been making since post 1 of this thread) - it does not follow that an increase in the money supply/circulation produces value. Circulation does not produce value. The circulation/increase in money supply (using the example of the car below) merely facilitates the change in ownership of a commodity and leaves a trail of obligations in its wake. The purchase and sale of an item using credit adds nothing of value, it just changes ownership. This myth/idea that circulation can be produced within the sphere of circulation was something that was dominant in 16th/17th century mercantilism theory, but from the physiocrats and adam smith onwards this notion was shown to be untrue, and that value at the social level can only be produced within the sphere of production. Part of the reason we are in such a mess at the moment, is this idea that value could be produced by bypassing production, and that it could be achieved purely within the sphere of circulation. this led to huge amounts of capital being sucked into the financial system looking to capture value, but no actual increase in value being produced at the social level, so eventually crisis intervenes and destroys/devalues that excess capital

So, a bank 'creates' a £100 credit and a £100 deposit on its books. All fine - adds up to zero on its balance sheet - but worth nothing. It's a closed circuit that can't do anything. That needs to be lent out...

Sorry but you can't lend out an accounting entry

Not until the deposit has been made has any value been attached to the money.

again, this is just bonkers - you're mixing up all kinds of concepts here

But I think the endogenous theory's position is this: I go to the bank and ask to borrow £10k to buy myself a car. The bank decides that yes, that seems reasonable, making a judgement in advance of whether or not someone will accept £10k for that car, whether or not £10k is worth that car's amount of value........So the transaction can go ahead on the promise that £10k will immediately enter the system as a deposit with the value 'that car' attached to it. This doesn't require a prior deposit.

First off, the bank does not approve an application for a car loan of £10k on the basis of whether it thinks 'someone will accept 10k for the car'. they approve the loan if the borrower has sufficient income to pay the loan back and/or collateral to act as security should the borrowers income stream stop - if you have these things the bank doesn't care whether you burn the money given as they are reasonably assured of a repayment stream giving a profit on the deal and their original loan repaid. it's pretty daft to say that the bank approves the loan based on whether they think 'someone will accept' £10k for the car - if the car is only worth £7k i'm sure the seller would accept £10k for it, so this is a fairly bizarre thing to state as the thing that determines whether a loan is given or not.

But putting that aside, your claim (which i don't really agree with, but if we follow the logic through) still depends upon the 'promise' of a deposit coming back into the system to make that loan possible - which is odd as this is supposedly you making an argument that loans create deposits, where in this case it's the 'promise' of a deposit that enables, and in your own words, 'the transaction [to] go ahead. So even in the version that you put forward (again which i don't go along with) you're pretty much using an example of the necessity of a promise of a deposit to enable the loan to be made - so even in this the deposit (and the necessity of it) comes first, i.e. before the loan.

Indeed, if both sides in the agreement use the same bank, the bank can carry out the whole process itself - it has found a real person to take on the debt and a real person to take on the deposit, in a loop that includes 'that car' as its value. In a smoothly running banking system where banks trust each other to do good business, the deposit enters the system as a whole and the bank creating the credit can go to the system and instantly take on an interbank loan to cover it.

If both sides use the same bank, then the banks loan to the person buying the car has effectively been funded by the seller of the car depositing the proceeds at the bank (and in reality these two things would probably happen at the same time) - if they don't use the same bank, then the bank making the loan, as you say, has to be able to fund that loan from somewhere, either the interbank loan market or in times of stress the lender of last resort, the central bank. So what you've argued here (in a roundabout way) is what i've said multiple posts above - that a bank can't make a loan unless it funds that loan from somewhere (i.e. a deposit of some sort, either form a customer, another bank, or a central bank). This argument I was making was against those who either argued that money was created by banks out of thin air (yourself included) or that banks could somehow lend out more than they got in (what ymu originally put forward). In reality each day a bank will forecast their transactions for a day, if it looks like they are planning to lent out more than they had scheduled to get in, they borrow in the interbank market to fund it (or central bank in times of stress). So taking it back to the part of my post that you quoted, this is exactly what i said - it reasserts that for a bank to make a loan they need someone wanting to borrow and a way of funding that loan.

The endogenous theory's position, as I understand it, is that this is what happens in reality. Of course, that doesn't create reserves, and reduces the percentage of existing reserves to total loans. But the likes of Keen argue that this is exactly what happens, and that it requires central banks to periodically make up that shortfall, otherwise the system seizes up.

you've got this part wrong/mixed up - why would the smooth circulating of loans and deposits in the system cause the system to seize up? the reserve requirement is a regulatory requirement to try and make sure that lending does not get out of control, the existence of those reserves or not would not cause the system to seize up. the system seizes up when this kind of circulation doesn't happen.

It's a position that says that fractional reserve lending is essentially a fiction. Deposits do not precede loans....

You've argued above in your own post that loans are only created as long as the 'promise' of a deposit exists, so even taking your version of events (which i don't agree with) you've shown the necessity of deposits in order for loans to be made - i.e. the promise of a deposit is required in order for a loan to be made - ergo deposits do precede loans. Just to clarify though, I don't agree with the way you set it out, but was just following your logic through. Will continue on this point in the bit below.

Deposits do not precede loans...and if they did, then central banks would be in control of the size of the money supply in a way that reality shows us that they are not.

again your mixing lots of things up here - both myself and IWNW have picked up on this false conflation you've made a few posts back. There is no connection between:-

i) 'deposits creating loans' AND the central bank being in control of the size of the money supply, or
ii) 'loans creating deposits' AND banks being in control of the money supply

i.e. you seem to think that if you can prove that loans create deposits then that means you've proved that central banks are not in control of the size of the money supply. there's no necessary connection between these things though - for example i argue that deposits create loans and that central banks alone are not in control of the money supply. You're conflating two things that you seem to think are associated/dependent when they are not. In reality the money supply and what happens to it is controlled by a mixture of things, banks, people, the activity of capital and central banks - each part can have differing influences at different points in time and in different situations and to differing degrees of success

In reality, according to Keen, the size of the money supply is purely limited by the willingness of people to borrow and the willingness of banks to lend.

I partly agree with this, adding though that it's not just a willingness of banks to lend, but their ability to do so (and that the impact of regulatory/capital adequacy restrictions do in reality place an upper limit restriction on what banks can lend, which they can only exceed if they raise more core capital or find ways of regulatory arbitrage to get round it).

In short though, this is what i've been saying since my first post on this thread, and arguing against those who claim that banks can create money out of thin air or can lend out more than they get in.

 

[littlebabyjesus]

I can't address all your points at the moment. But I would like to address just one for now. I did not say that circulation produces value. I said that circulation attaches value to money. There is an important difference there.