"Banks create money out of nothing" - Guardian

[love detective]

yep, not quite call money, but it was very short term money (i.e. 3 months duration - as opposed to the payable back on demand which is call money) which is not that far away from call money - given that it was being used to fund long term mortgage lending of 20/25 years

but yes it wasn't call money as such

 

[DotCommunist]

You may well be right, although he had many children. This is the version my Granny sang while driving her ambulance in the Blitz, or so she told me.
Hitler has only got one ball,
The other is in the Albert Hall.
Himmler has something sim'lar
But Goering has no balls at all

it appears there are several variants (in a volkish tune, shock and suprise!) this is the one I always knew:


Hitler has only got one ball,
Göring has two but very small,
Himmler is somewhat sim'lar,
But poor Goebbels has no balls at all.


although these additional verses concerning his mother were unknown to me but have provided a good chuckle





His mother,
the dirty bugger,
Chopped it off when he was small.
She threw it, into the apple tree
The wind blew it into the deep blue sea
Where the fishes
got off their dishes
and ate scallops and bollocks for tea

 

[cesare]

yep, not quite call money, but it was very short term money (i.e. 3 months duration - as opposed to the payable back on demand which is call money) which is not that far away from call money - given that it was being used to fund long term mortgage lending of 20/25 years

but yes it wasn't call money as such

And it wasn't "overnight funding" either. Neither call money or overnight funding were the cause of NR's crisis resulting in them needing to apply to the TA for rescue.

It was their funding model exposed by the sub-prime/credit crunch that was to blame.

 

[DotCommunist]

Hitler: he had but one left ball,
Mussolini: he had none at all,
Stalin: he was three-ballin',
And that's the dictator's rise and fall!


uncle joe three ballin. What a rich cultural legacy that tune leaves us

 

[Jazzz]

everything in that above contradicts what jazz has been arguing for and supports what those arguing against him have been saying - i.e. all it says is that money circulates

i.e. things needs to circulate/flow before a bank can do anything with it - it can't magic that out of nothing

it's not the banks that 'create money' in this process, it's the people and activities and flows that the bank mediates, that creates it - a bank on its own can do none of this, therefore bank's do not create anything out of nothing. As you say, this is not a difficult thing to get to grips with

No, it says that banks create money, and in the example it gives, it prefaces it with the word "simple". The actual truth of the process - that banks most emphatically are not lending out the deposits they receive but are creating fresh 'money' whenever they make a loan - is described by Professor Richard Werner in a previous post of mine, which I note you have not commented on whatsoever.

 

[Mrs Magpie]

a volkish tune

Volkish tune? I think not. Written in 1914 by this chap
http://en.wikipedia.org/wiki/F._J._Ricketts




Better known as the Colonel Bogey march.

 

[Jazzz]

It was actually more a simple case of the later - they funded their long term lending via short term funding which they had expected to be able to roll over continuously each time it came due for repayment - when things froze up they weren't able to roll over that funding and were forced to go to the state for emergency funding (this is what i meant when i mentioned to IWNW about what a bank's obligations are, i.e. they're not what the bank has lent, but what they have borrowed to fund that lending)

I love the way that this attempts to avoid saying that they lent out what they hadn't got by saying that they had made commitments which they weren't able to fulfil, except that it's precisely the same thing.

 

[love detective]

No, it says that banks create money, and in the example it gives, it prefaces it with the word "simple". The actual truth of the process - that banks most emphatically are not lending out the deposits they receive but are creating fresh 'money' whenever they make a loan

Let's take a look at what it says and what you say then

Some of the funds lent out are subsequently deposited with another bank, increasing the fund assets and deposit liabilities at that second bank, and allowing further lending.

....the remaining $900 can be loaned out to a customer who will most likely exchange it with another person for some goods or services. That person will most likely in turn redeposit it in another account within our bank. As only 10% of this new deposit must be held in reserve, the remaining $810 may then be loaned out again and subsequently redeposited, and so on and so forth

Pay attention to the bits in bold - everything above, Jazz, relates to the necessity of circulation for bank's to then play their dependent (not independent) role in the credit creation & money circulation process. i.e. the bank is not the independent actor who can create 'money out of nothing' - they are entirely dependent on the activities of those that they mediate between for this to happen. This is what the article above focuses on.

Contrast the above now, with what you stated here for example

This 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

What you wrote above directly and 100% contradicts what the article above says

Yet you still claim, with a serious face, that the above article supports what you said above

hatstand

 

[love detective]

I love the way that this attempts to avoid saying that they lent out what they hadn't got by saying that they had made commitments which they weren't able to back up, except that the two are precisely the same thing.

It says no such thing, fool

they lent out what they had got, by borrowing it short term in the money markets

when that borrowing that they had took out came up for repayment, they weren't able to roll it over, they didn't have the cash to repay it, so were fucked - and went cap in hand to the state for an emergency loan

an emergency loan which according to your analysis, they should have never needed - according to you, they should have just done some accounting entries to keep them going

 

[Jazzz]

It says no such thing, fool

they lent out what they had got, by borrowing it short term in the money markets

when that borrowing that they had took out came up for repayment, they weren't able to roll it over, they didn't have the cash to repay it, so were fucked - and went cap in hand to the state for an emergency loan

an emergency loan which according to your analysis, they should have never needed - according to you, they should have just done some accounting entries to keep them going

Still no comment on Professor Richard Werner's explanation. Are you pretending that it doesn't exist?

 

[free spirit]

I'm a little lost about people's positions here, so can I just check if anyone has a problem with this basic outline of the situation...

Effectively there are 2 versions of money -

1 - Money which is lent out by a bank to it's customers, which the bank can effectively just create electronically as it's both a loan to the customer and a deposit in the customer's account, so at this stage it has a neutral impact on the banks overall financial position... or more to the point it has a net positive impact as the loan made is instantly entered into the banks accounts as an asset of the banks that is worth the combination of the initial loan + the total compound interest the bank expects to receive once the loan is repaid. The amount of this form of money they can technically create is pretty much unlimited (unless it's limited by law in relation to deposit values) as long as they retain the confidence of their customers and the wholesale money markets to lend them the 2nd version of money as required...

2 - Money that the banks hold in their central bank reserve accounts, and must use to settle overall debts owed to any other banks once all such transactions are completed at the end of each day. This is the money that a standard bank can't just create, and must borrow from another bank or other such institution if they don't have sufficient central bank reserves to cover their liabilities to the other banks. This form of money is also directly related £ for £ with the actual cash their customer might withdraw from a cash machine / over the counter, which all effectively comes from their central bank reserve account.

Both types of money are related to each other essentially by confidence. As long as the markets are confident in the strength of any banks assets, and its ability to repay them if required, then the bank can continue creating money to loan to its customers at higher interest rates than they're getting charged via the interbank lending for as long as they want to. However, as soon as this confidence level drops and they find they suddenly can't borrow this money, they are then in danger of not being able to cover their overall payment requirements to the other banks or to actually pay out their customers cash withdrawal requirements.... as happened with Northern Rock.

Northern Rock essentially expanded far beyond it's actual deposit base even in fractional banking terms, and basically became entirely reliant on interbank lending in order to cover it's own liabilities to those other banks as there was always a net outflow at the end of the day from it to those other banks due essentially to Northern Rock having a much bigger base of borrowers than depositers, a factor that was massively compounded by their having invested vast amounts of both their reserves and money they'd borrowed into US mortage backed securities that they suddenly found were essentially worthless instead of being worth the billions they'd invested in them.

So essentially it was a massive house of cards all built on confidence, and as soon as the confidence went, the house of cards collapsed and it became obvious that Northern rock was basically insolvent, or at best it was having massive cash flow issues even if it actually might have had the long term assets to cover it's liabilities (I don't think it actually did after the US sub-prime housing market collapse).

so in summary, I reckon both sides of the argument are partially correct in their own way, in that banks both can create money from nothing while they retain the confidence of the money markets, and they also can't create money from nothing when it comes to actually settling up with the other banks / bank of england / their customers demanding their deposits out in cold hard cash.

eta - Somewhere between banks that only lend out the value of their financial reserves, and the neoliberalism on steroids version of Northern Rock, Icesave etc there ought to be a relatively sustainable (in capitalism terms) banking model that facilitates growth in the economy without causing massive expansion bubbles followed by bank runs / bank bail outs and consequent huge depressions. That's what they aimed towards after the 30's depression with all the legislation that got rolled back over the last 30 years, facilitating the almost inevitable 2007-8 massive crash.




As I understand it at least (and yes, it's obviously more complex than this, which is why I called it a basic outline of the situation).

 

[love detective]

Still no comment on Professor Richard Werner's explanation. Are you pretending that it doesn't exist?

Are you pretending post 518 doesn't exist?

btw, this person you rely on sounds even more bonkers bruno than you

i mean, this:-

The moment you get your loan contract signed, the bank can put this one the asset side as an asset, and then it has to invent the liability for the balance sheet to balance

is patent nonsense - absolute unmitigated nonsense - 'invent the liabilty'

i mean jesus, so all those liabilities that the bank's couldn't meet when the funding market froze up, were just 'invented'? they weren't realy? in which case why did they either go under or go cap in hand to the state for emergency funding? why didn't they just magic them out of existence in the same way that they magiced them into existence

honestly, that goes beyond the joke, utter hatstand

 

[Jazzz]

Are you pretending post 518 doesn't exist?

Fair enough, I accept your explanation of what you meant, without of course any acceptance that "they lent out what they had got" describes the truth of fractional reserve lending, which I welcome that free spirit has grasped. [I think your description is excellent free spirit]

Your turn.

 

[love detective]

so you admit you were wrong - bank's can't just magic that stuff out of nothing, they are instead entirely reliant on circulation doing its thing, just as the article says. So now, you've even admited that what is asserted in the thread title is total bollocks

see above for my turn

 

[cesare]

Jazzz is this all about what Werner says should be done re QE?

 

[free spirit]

Jazzz is this all about what Werner says should be done re QE?

will I regret asking what that is?

 

[love detective]

I'm a little lost about people's positions here, so can I just check if anyone has a problem with this basic outline of the situation...

Effectively there are 2 versions of money -

1 - Money which is lent out by a bank to it's customers, which the bank can effectively just create electronically as it's both a loan to the customer and a deposit in the customer's account, so at this stage it has a neutral impact on the banks overall financial position... or more to the point it has a net positive impact as the loan made is instantly entered into the banks accounts as an asset of the banks that is worth the combination of the initial loan + the total compound interest the bank expects to receive once the loan is repaid. The amount of this form of money they can technically create is pretty much unlimited (unless it's limited by law in relation to deposit values) as long as they retain the confidence of their customers and the wholesale money markets to lend them the 2nd version of money as required...

completely wrong i'm afraid

it's not a question of the constraints being due to law (or external reporting of numbers as suggested earlier) - the constraints are from within the sphere of circulation itself. A bank can only take part in the circulation of credit & money if it first circulates to it and then away from it.

And the wholesale markets don't lend the '2nd version' of money to banks, any more than banks lend the '2nd version' of money to customers

Northern Rock essentially expanded far beyond it's actual deposit base even in fractional banking terms, and basically became entirely reliant on interbank lending in order to cover it's own liabilities to those other banks as there was always a net outflow at the end of the day from it to those other banks due essentially to Northern Rock having a much bigger base of borrowers than depositers, a factor that was massively compounded by their having invested vast amounts of both their reserves and money they'd borrowed into US mortage backed securities that they suddenly found were essentially worthless instead of being worth the billions they'd invested in them.

Again, fairly wrong i'm afraid

All bank's extend beyond their customer deposit base and rely on a mixture of customer deposits, wholesale funding and various other forms of subordinated debt and capital to fund their overall lending book. Northern rock just had a bigger percentage of its lending funded by one source (wholesale lending) than others, so it didn't have diversification benefits that other banks had in terms of sources of funding, and also didn't have the diversification of maturity profile of funding within those wholesale markets (i.e. it was very reliant on being able to continually roll over very short term funding to fund its longer term lending, i.e. a maturity mismatch)

Also Northern Rock's problems had nothing to do with it investing in US mortgage backed securities. The mortgage loan book of Northern Rock (i.e. the loans it made to allow people to buy houses) was actually pretty good quality. It wasn't a case of their assets suddenly being worth much less than they had originally thought (i.e. a solvency/capital problem) it was a case of the bank being solvent in net asset terms, but not being able to fund it's lending book due to liquidity problems, i.e. the one source that it had relied upon to fund its lending completely dried up and it was left with a huge gap that had to be filled by the state in terms of emergency loans. All this didn't mean that the assets the bank had in terms of its assets were worth any less, just that they were not in a position anymore to fund those loans, as the rug was pulled away from beneath its feet when the wholesale lending market froze up, so in stepped the state

 

[cesare]

will I regret asking what that is?

Not really. It's a lot more interesting than taking 18 pages of bollocks about double entry book-keeping.

http://www.guardian.co.uk/commentisfree/2012/feb/10/qe-banks-green-projects

 

[Jazzz]

Are you pretending post 518 doesn't exist?

btw, this person you rely on sounds even more bonkers bruno than you

i mean, this:-



is patent nonsense - absolute unmitigated nonsense - 'invent the liabilty'

i mean jesus, so all those liabilities that the bank's couldn't meet when the funding market froze up, were just 'invented'? they weren't realy? in which case why did they either go under or go cap in hand to the state for emergency funding? why didn't they just magic them out of existence in the same way that they magiced them into existence

honestly, that goes beyond the joke, utter hatstand

I didn't say it wasn't hatstand. Nevertheless, it is the truth - the money is invented at the point a bank makes a loan. Similarly it is destroyed when the loan is repaid. That is how it works.

Here are the honours for our "bonkers bruno". Just possibly you are one who hasn't the clue?

Jazzz is this all about what Werner says should be done re QE?

No, it's about the thread title and how money is created. Public information thread.

 

[love detective]

lol, so your man has received the same 'honour' as Tony Blair, Bono and the neo liberal finance minister of south africa

must believe everything he says then!

and Dwyer is a Professor, doesn't stop him talking a crock of shite

 

[Jazzz]

lol, so your man has received the same 'honour' as Tony Blair, Bono and the neo liberal finance minister of south africa

must believe everything he says then!

and Dwyer is a Professor, doesn't stop him talking a crock of shite

Sorry, should have said CV/qualifications/whatnot...

Except it's not just Professor Richard Werner, or me. It's also Ralph Hawtrey, former Treasury Secretary. Or John Kenneth Galbraith, former Harvard Professor of Economics. Or H W White, Chairman of the Associated Banks of New Zealand 1955, all of whom I have quoted on this thread. I guess they are all completely bonkers too.



lovedetective you really have no idea about this. You cannot see the wood for the trees. This is nothing to be ashamed of, it is remarkably well disguised. but it is better to admit it to yourself rather than keep blustering.

 

[TruXta]

Central banks control the base rate, and of course this is a factor in the decision of a bank to lend. But it's not the only factor, surely? At the end of the day, it's the private banking system that grants the loans.

Velocity, not amount.

 

[redsquirrel]

No, I was saying that a board persona can give an entirely false impression.....and grumpy fucker is a bit of a twee term for something that really could be construed as bullying.

So calling out anti-semites on their shit is bullying.

Pathetic, particularly coming from someone who's been fooled by these twats before.

 

[Blagsta]

Well, you consistently come over as a bully on here, but having met you I don't regard your board persona as being really you. I've met Jazzz too and I don't equate his postings as being wholly who he is. I find it hard to marry them with the person I know as sensitive, kind and musically gifted, just as I know you aren't a rigid dogmatic bully.


eta I think he picks out the bits he likes and has a sort of blindness to the rest.
eta2 In general I think people who believe in conspiracy theories feel they have no control of their lives and the idea that 'they' control and pull strings is somehow comforting as it denies that the world is a swirling chaotic jumble that includes massive cock-ups and incompetence by those who wield power.

There's a difference between how one expresses opinions and the substance of those opinions. It's the substance of Jazzz's opinions I'm on about.

 

[Blagsta]

Hitler loved his mum

I've met affable rapists and kind sensitive street robbers. Funny old world.

 

[Blagsta]

Which is why I think Blagsta, training as an MH nurse, looks like a bully (although he does wade in on anyone who doesn't agree with him) which could also be regarded as inexcusable.

I think you come across as a bitter old drunk, but hey, funny old world innit.

Fuck urban, I'm out.

 

[free spirit]

completely wrong i'm afraid

it's not a question of the constraints being due to law (or external reporting of numbers as suggested earlier) - the constraints are from within the sphere of circulation itself. A bank can only take part in the circulation of credit & money if it first circulates to it and then away from it.

repeat in english, and show how what you're saying contradicts my point please.

If you're saying that there should be natural systemic constraints within the banking sector that prevent banks lending excessively compared to their reserves, then I'd agree, there should be, but such logical constraints as there were were widely ignored in the build up to the financial crisis, hence the crisis.

I don't see how anything you're saying refutes the central point though that a bank doesn't need to fully fund it's loans at the point that it makes them, and that at a macro level the banks usually only need to fully fund a small proportion of the total volume of loans they've made at any one time. ie they can service all loan and deposit cash requirements from a relatively small proportion of their nominal value in actual reserves as they only actually need to fund the balance of all transactions in and out that involves money actually leaving the bank entirely as opposed to shifting from one account to another within the bank.

And the wholesale markets don't lend the '2nd version' of money to banks, any more than banks lend the '2nd version' of money to customers

The term 'money market' covers the vast network of deals involving the lending and borrowing of cash in a range of currencies, generally between financial institutions such as banks, as well as manufacturers and the government.​

​

'Wholesale' means funds borrowed or lent by those financial institutions in large quantities, rather than the smaller amounts dealt in by private individuals.​

​

[source]

Again, fairly wrong i'm afraid

All bank's extend beyond their customer deposit base and rely on a mixture of customer deposits, wholesale funding and various other forms of subordinated debt and capital to fund their overall lending book. Northern rock just had a bigger percentage of its lending funded by one source (wholesale lending) than others, so it didn't have diversification benefits that other banks had in terms of sources of funding, and also didn't have the diversification of maturity profile of funding within those wholesale markets (i.e. it was very reliant on being able to continually roll over very short term funding to fund its longer term lending, i.e. a maturity mismatch)

again, I don't see how this actually contradicts what I was saying, although I take your point below about them mainly raising this finance by packaging these mortgages up and flogging them on, and the CDO crisis from US sub prime not being a major direct contributory factor - I think I must have got mixed up between the different banks on the latter bit, though I could have sworn it was a factor I may have misremembered, it's been a while since I even thought about this.

Also Northern Rock's problems had nothing to do with it investing in US mortgage backed securities. The mortgage loan book of Northern Rock (i.e. the loans it made to allow people to buy houses) was actually pretty good quality. It wasn't a case of their assets suddenly being worth much less than they had originally thought (i.e. a solvency/capital problem) it was a case of the bank being solvent in net asset terms, but not being able to fund it's lending book due to liquidity problems, i.e. the one source that it had relied upon to fund its lending completely dried up and it was left with a huge gap that had to be filled by the state in terms of emergency loans. All this didn't mean that the assets the bank had in terms of its assets were worth any less, just that they were not in a position anymore to fund those loans, as the rug was pulled away from beneath its feet when the wholesale lending market froze up, so in stepped the state

But a significant part of the reason that the markets stopped wanting to buy the Northern Rock CDO's was due to the suspicion that they shouldn't actually have been given AAA ratings, and did contain significantly higher risks of UK sub prime type mortgages due to Northern Rock's very risky lending strategies (125% mortages etc)... This suspicion being fueled as a knock on effect from the US sub prime market collapse, once bitten twice shy.

 

[free spirit]

I think you come across as a bitter old drunk, but hey, funny old world innit.

Fuck urban, I'm out.

temporarily I hope.

 

[TruXta]

Buck up fuckers, this is hardly a thread to flounce over.

 

[Jazzz]

Last Updated: Saturday, 15 September 2007, 20:37 GMT 21:37 UK

Rush on Northern Rock continues

Customers have been withdrawing money despite appeals for calm
The rush of customers taking money out of Northern Rock continued for a second day on Saturday, amid concerns over its emergency Bank of England loan.

Northern Rock's business and capital base themselves have been judged to be sound by the Financial Services Authority, which reiterated on Saturday that deposits and withdrawals could still be made.
It described the long queues at branches and difficulties with the bank's website as "entirely logistical and are in no way related to the bank's solvency or its underlying ability to deliver funds to savers who wish to withdraw".
"To be absolutely clear, if we believed that Northern Rock was not solvent, we would not have allowed it to remain open for business," FSA chairman Callum McCarthy said.
The chancellor also sought to reassure the public, telling the BBC he authorised the Bank of England loan "because I believe it's important that people should have confidence in the stability of the banking system".

This is what killed Northern Rock - customers withdrawing their cash, which wasn't there. It was a "run on the bank". The point is, every single bank is vulnerable to the run.


http://news.bbc.co.uk/1/hi/6996136.stm