"Banks create money out of nothing" - Guardian

[ayatollah]

And my own "advice to anyone looking at this debate, who is doing any sort of GCE or any other Commerce or Economics exam soon" is not to quote Wikipedia in any kind of debate because you leave yourself open to pointing and laughing from people who are all too well aware of the limitations of this self-editable source; which have, on occasion, been used to great comic effect.

Though in this particular case the wikipedia entry isn't some malicious spoof , but is essentially identical to each and every "0" or "A " level Commerce or economics textbook entry on Fractional Reserve banking and money supply - so it, the much longer Wikipedia article that is, is actually a sound source for a "correct" exam answer. But then surely you know this cesare ? Have you checked the Wikipedia entry against any economics textbook to see if it is a "spoofed" entry ? Obviously not. Ignorance is bliss.... but makes you seem very lazy and ill-informed.

 

[butchersapron]

Are you an adherent of marixsm or an adherent of gcse economics texts ayatollah?

 

[cesare]

Though in this particular case the wikipedia entry isn't some malicious spoof , but is essentially identical to each and every "0" or "A " level Commerce or economics textbook entry on Fractional Reserve banking and money supply - so it, the much longer Wikipedia article that is, is actually a sound source for a "correct" exam answer. But then surely you know this cesare ? Have you checked the Wikipedia entry against any economics textbook to see if it is a "spoofed" entry ? Obviously not. Ignorance is bliss.... but makes you seem very lazy and ill-informed.

I didn't comment on the accuracy, or not, of this particular Wiki entry. My observation was about the likelihood of the use of quoting Wiki leading to the poster being told they were a knob - you knob.

 

[8ball]

GCSE textbooks only exist to propagate an anti-Semitic conspiracy!!

 

[Bernie Gunther]

this is at the very heart of the disconnect between money & value - but the topic of value is always notable by its absence amongst folk like jazz

and one big difference between marx's time and now is that his fictitious capital (other than things like state debt) actually had some linkage to productive assets, i.e. the railways, canals that he mentions etc. where as now the fictitious capital has went to the nth level, with a large element of it based upon nothing but future promises (which is the same as what the fictitious capital of state debt is). The danger in this discussion however is that Jazz will be along in a minute to misunderstand it and announce he's been right all along - the key thing here however is that a bank can't magic these future promises into existence from nothing, they are still the dependent actor in all this and they still have to fund the lending that is made on the basis of these future promises to repay (i.e. sub prime lending etc..). So nothing has changed with regard to that

i would say an understanding of the crisis has more to do about the squeezing out of profitable opportunities for capital in the traditional productive spheres (profit rate decline due to increasing productivity etc..) so a tendency/movement developed within capital that attempted to detach itself from its 'material' basis (which is value production) and just skip out the production of value altogther and focus on capturing a bigger and bigger slice of previously created value within the sphere of circulation itself. In the mistaken belief that somehow value could not only be captured, but actually produced purely by shifting things around in the sphere of circulation (if only Capital the process/relation could read Capital the book then it would have realised that it can't do that, although even if it did know it couldn't do it, it would be powerless to stop itself trying, such are the contradictions inherent within it)

This was always going to end how it did, as capital may be able to stretch away from it's 'material' base (i.e. value production) for a certain amount of time, but it never can truly decouple and detach itself from the thing that gives it its very life blood (the production of value by appropriated labour) - so like a big unbreakable elastic band, value relations reassert themselves eventually and snap the whole thing back in, destroying the multiple layers of fictitious capital that had been built up in is wake - and crisis did what crisis does - irrationally rationalise an irrational system, so the whole thing can start over again

Thing is though, the traditional Marxist account of this seems to say "and then you have a crisis", where as you put it "the value relations reassert themselves"

Whereas what's happening now seems to be that finance capital has become so dominant, particularly over the political system, that the value relations don't reassert themselves, but rather a new round of primitive accumulation (in the wider sense) is kicked off to cannibalise the commons (e.g. through austerity, privatizations, PFI etc.) in order to preserve that mass of fictitious capital ... or something like that.

 

[love detective]

value relations have reasserted themselves (to an extent at least) and destroyed a substantial amount of capital (in value terms and in physical terms)

any ongoing accumulation by dispossession/primitive accumulation is not being done to preserve a mass of fictitious capital (that no longer exists) - but instead is a new round of accumulation which is once again attempting to (in part) subvert the circuit of capital as it does so

edit: that's all from me on this thread for a couple of weeks, off on holiday now

 

[Bernie Gunther]

value relations have reasserted themselves (to an extent at least) and destroyed a substantial amount of capital (in value terms and in physical terms)

any ongoing accumulation by dispossession/primitive accumulation is not being done to preserve a mass of fictitious capital (that no longer exists) - but instead is a new round of accumulation which is once again attempting to (in part) subvert the circuit of capital as it does so

How can you tell?

I mean, what do you see as evidence for the one case over the other?

 

[8ball]

edit: that's all from me on this thread for a couple of weeks, off on holiday now

And you can't at least take a laptop?

Fucking part-timers...

 

[love detective]

How can you tell?

I mean, what do you see as evidence for the one case over the other?

Because a significant amount of 'value' has been destroyed (along with substantial amounts of physical capital as well)

The market value of banks and other financial institutions (plus the 'value' of countless CDO's in the shadow banking system) are significantly lower now than they were 5 years ago - that's what happens in a crisis and that's what happened in this one

Anyway, that's definitely it from me now, see you in a couple of weeks

 

[Meltingpot]

It is all the rational choice theory based econometrics stuff (which was everything that was taught).
Basically the assumptions they make are so far away from the real world that any conclusions they draw are neccesarily wrong... for instance, they assume that everyone is a rational, utility maximising consumer who has perfect knowledge (ie: knows all of the sellers in the marketplace and what price they sell at, and have equal access to all the sellers) and makes choices based purely on a cost-benefit analysis of price.
So stuff like the effect of advertising, the fact that no-one has perfect knowledge or is completely rational are totally ignored. There's no real interest in talking to psychologists about how people actually behave, because they have their assumption and all theories are built from that.

Then there are things they say that stem from the above, like every economic transaction that takes place is a positive sum gain and maximises the utility for both actors, on the basis that a rational consumer will only take part in a transaction that maximises their utility and so whatever takes place must maximise the utility for both parties, or they'd do something else with their money/product/time.
This extends for instance to employment whereby they think if I take poverty line wages because it's all that is on offer that somehow maximises utility for both me (because my only other option is to starve, clearly worse) and the employer (who gets to pay me fuck all). Completely ignores power relationships and the obvious factor that in the real world people make choices that they are effectively forced to make, not freely.
This then leads to the (logical, given the axioms) conclusion that in order to make the world the best place possible we should make sure there are as many transactions taking place as we can, since every transaction maximises utility. Usually this means taking away regulations. Total ignorance of how power relationships work.

Another example of this kind of thing is "perfect competition" which is something that cannot take place in the real world because of the conditions that are required for it - no barriers to entry for new businesses for instance, impossible, you can make barriers small but never take them away completely, every business needs some start up capital either in the form of cash or time at the very least. Also says that there are enough buyers and sellers in the market place that no-one has the power to set prices like in a monopoly, and that all buyers and sellers have perfect knowledge.
Now as an intellectual exercise thinking about different types of market that is fine, but for some reason they seem to think that perfect competition could actually exist, mostly if it wasn;'t for that damn government placing regulations on business (never mind that business tends towards cartels & monopolies when you look at the actual real world, because the theory of competition means that it should go towards perfect competition, even if it never quite gets there).

Should say that the above stuff does not constitute "economics", it's just one paradigm of economics - but it's totally dominant, especially in the realm of public policy.

Thanks, I'm going to have a good read of this.

 

[Jazzz]

I am surprised that some are still unsure of whether private banks create money. From the Chief Economics Commentator for the FT, recently:

"It is the normal monetary system, in which the “printing” of money is delegated to commercial banks, that needs defending. This delegates a core public function – the creation of money – to a private and often irresponsible commercial oligopoly"
Martin Wolf
from The case for truly bold monetary policy Financial Times, June 28 2012

 

[binka]

I am surprised that some are still unsure of whether private banks create money. From the Chief Economics Commentator for the FT, recently:

"It is the normal monetary system, in which the “printing” of money is delegated to commercial banks, that needs defending. This delegates a core public function – the creation of money – to a private and often irresponsible commercial oligopoly"
Martin Wolf
from The case for truly bold monetary policy Financial Times, June 28 2012

do you always believe everything the media tells you?

 

[littlebabyjesus]

It's a good point. One of the reasons monetarism was such a complete failure as a policy was because it was based on the false premise that governments/central banks control the money supply. They clearly don't. Money is created at the other end, in response to demand for loans. The contention of Keen and other proponents of the theory of the endogenous creation of money is that central banks only act afterwards in response to the amount of loans being granted, to expand the base money. It's a powerful theory, I think, and it actually says something even more radical, which is that fractional reserve lending is itself a fiction. A loan creates an equal and opposite deposit. In a functioning system, banks can grant loans and cover them with overnight borrowing from other banks, and the system as a whole at all times contains balancing deposits and loans. Banks gradually break their reserve requirement obligations, and central banks respond to this by dutifully expanding the base money supply.

Jazzz's analysis is pretty accurate, I think, but the bit he misses out, which is the bit love detective gets annoyed about, is the attaching of value to that money. That does involve real things in the real world - namely, two parties agreeing on a transaction in which they both agree on the monetary value of a particular real good or service.

But I agree with him completely that as important a social function as the creation of money should not be in private hands.

 

[binka]

i don't think jazz's analysis of anything could ever be described as 'pretty accurate'

 

[littlebabyjesus]

i don't think jazz's analysis of anything could ever be described as 'pretty accurate'

What, specifically, is he wrong about? As I said, I think the bit missed out - and it's clearly an important bit - is the attaching of value to the money. Banks can only create money in response to demand for loans, which in turn come from 'real' things, which might include misguided things such as overpriced housing, but nonetheless require two sides in a transaction to agree on the monetary value of something. (Again, as ld has pointed out, that's a reason why qe has had such a negligible effect on the economy - money that has been created but hasn't circulated, through this process of two sides in a transaction agreeing a price for a real thing, represents no value. It just sits there affecting nothing.) Also, banks do have to cover their loans with deposits/borrowing.

I think what Jazzz is saying is incomplete, because it leaves out this bit of the process, but you shouldn't dismiss what he's saying just because of who he is. ld gets annoyed with him, but I don't thing what he and ld are saying are all that far apart from each other, tbh - it's just that Jazzz is leaving this aspect out. Personally, I disagree with ld because I favour the endogenous theory of money creation - it just makes sense to me: a 'deposit first' system can't work because it begs the question 'where did the deposit come from?'

 

[binka]

sorry ive got no interest in actually discussing the content of jazz's posts. i only came here to point out how interesting it is that he is more than happy to quote from the main stream media when it suits him. all i'll say is that history tells us that jazz is always wrong when it comes time for him to explain how the world really works - i see no reason to believe it would be any different now.

 

[8ball]

What, specifically, is he wrong about? .... banks do have to cover their loans with deposits/borrowing.

Bit of a clue in the question, there.

 

[BigTom]

What, specifically, is he wrong about? As I said, I think the bit missed out - and it's clearly an important bit - is the attaching of value to the money. Banks can only create money in response to demand for loans, which in turn come from 'real' things, which might include misguided things such as overpriced housing, but nonetheless require two sides in a transaction to agree on the monetary value of something. (Again, as ld has pointed out, that's a reason why qe has had such a negligible effect on the economy - money that has been created but hasn't circulated, through this process of two sides in a transaction agreeing a price for a real thing, represents no value. It just sits there affecting nothing.) Also, banks do have to cover their loans with deposits/borrowing.

I think what Jazzz is saying is incomplete, because it leaves out this bit of the process, but you shouldn't dismiss what he's saying just because of who he is. ld gets annoyed with him, but I don't thing what he and ld are saying are all that far apart from each other, tbh - it's just that Jazzz is leaving this aspect out. Personally, I disagree with ld because I favour the endogenous theory of money creation - it just makes sense to me: a 'deposit first' system can't work because it begs the question 'where did the deposit come from?'

The deposits come from the money created from the central bank in the first place, originally from the gold + silver that was mined and made the coins the became promises of payment that became paper currency that became electronic currency.
Or in the case of a new currency being setup eg Germany after wwII, from the simple printing of money (or whatever you'd call the electronic version of printing) by the central bank.

In the real world the vast majority of deposits come from money that has been lent by banks, but they all start from the central bank and get passed around.
I can't say that I understand the endogenous theory of money creation, I think it's a relatively new idea, I certainly didn't hear about it when I studied economics 10-15 years ago , and I haven't had the time to really learn about it (and tbh I struggle once they start moving to the mathematical proofs of the theory).
But unless I'm really missing something about what you are saying, I think that their is a perfectly suitable answer for where deposits come from in the first place in the exogenous (is that the right term?) theory of money creation.

 

[camouflage]

i don't think jazz's analysis of anything could ever be described as 'pretty accurate'

Anti-Jazzzist!

 

[camouflage]

The deposits come from the money created from the central bank in the first place, originally from the gold + silver that was mined and made the coins the became promises of payment that became paper currency that became electronic currency.
Or in the case of a new currency being setup eg Germany after wwII, from the simple printing of money (or whatever you'd call the electronic version of printing) by the central bank.

In the real world the vast majority of deposits come from money that has been lent by banks, but they all start from the central bank and get passed around.
I can't say that I understand the endogenous theory of money creation, I think it's a relatively new idea, I certainly didn't hear about it when I studied economics 10-15 years ago , and I haven't had the time to really learn about it (and tbh I struggle once they start moving to the mathematical proofs of the theory).
But unless I'm really missing something about what you are saying, I think that their is a perfectly suitable answer for where deposits come from in the first place in the exogenous (is that the right term?) theory of money creation.

I think that part of this is that all sorts of silly bits of paper can be passed around ad used as money. It occurs to me that money has always been primarily produced outside of government. Sure M1, 2 and 3 might be relatively easy for states and central banks to control or measure... actually I wander, can a Painting be considered money? The art-market is as susceptable to bubbles as the property market isn't it? If during good-imes a Piccaso can reliably be exchanged for a number of US iou's, does that make a Piccaso also a form of money?

Money is difficult to control by anyone, I beleive gold-freaks for instance are obsessed wth the idea of controlling money as if they are aristocrats obsessed with maintaining control of land and title.

 

[butchersapron]

No. Money is the universal equivalent (i.e it can be act as the medium of exchange for pretty much everything) - if it wasn't there would be no such thing as money as all things would be money. Having a value (in the everyday sense of value) does not mean something is money.

 

[camouflage]

No. Money is the universal equivalent (i.e it can be act as the medium of exchange for pretty much everything) - if it wasn't there would be no such thing as money as all things would be money. Having a value (in the everyday sense of value) does not mean something is money.

So money is a transparent veil? I don't beleive it is, money carries it's own inefficiencies, its own stickyness.

Besides having 'value' means that money can be derived of a thing. If I own a chunk of farmland that pushes out wheat or something, what's to stop me writing an iou and using that to exchange with others as a form of money?

 

[butchersapron]

So money is a transparent veil? I don't beleive it is, money carries it's own inefficiencies, its own stickyness. Having 'value' means that money can be derived of a thing. If I own a chunk of farmland that pushes out wheat or something, what's to stop me writing an iou and using that to exchange with others as a form of money?

A painting can only be exchanged with someone who wants the painting - as can wheat. That is not the case with money - that's one of the characteristics of money. Try and pay for your beer tonight with something you think has equivalent value and see how far you go.

 

[ViolentPanda]

I like how they are all giving it the biggun except one bloke who just looks like he wants to fuck off for a pint

Yeah, but he's got a spiderweb tattoo'd on his elbow and forearm, so he's obviously a killer ( at tattoo lore), and therefore way too cool to give it the biggun.

 

[ViolentPanda]

Hitler loved his mum

TBF, loads of blokes loved Hitler's mum.

 

[littlebabyjesus]

Besides having 'value' means that money can be derived of a thing. If I own a chunk of farmland that pushes out wheat or something, what's to stop me writing an iou and using that to exchange with others as a form of money?

Yes, but in that case, the money is the iou, not the farmland. That's the point, I think, that Jazzz is perhaps missing - that money's value is derived from the real things whose exchange the money represents. In that sense, all money is is a promise - "I promise to pay the bearer...'. That promise is quantified using currency that can have a number attached to it, but in the end, what is a 'pound' or a 'dollar'? It is a unit of abstracted 'value', whose value in the world of real things is determined by a whole series of agreements between sellers and buyers.

 

[camouflage]

Yes, but in that case, the money is the iou, not the farmland. That's the point, I think, that Jazzz is perhaps missing - that money's value is derived from the real things whose exchange the money represents. In that sense, all money is is a promise - "I promise to pay the bearer...'. That promise is quantified using currency that can have a number attached to it, but in the end, what is a 'pound' or a 'dollar'? It is a unit of abstracted 'value', whose value in the world of real things is determined by a whole series of agreements between sellers and buyers.

Yes, that is indeed my first assumption, that money is a no more than a "promise", and that there's nothing wrong with that even though in a feverish economy promises get thrown about with increasingly wild abandon, leading to a huge stack of deranged promises, lost touch with the reality of what is actually available. Reality doesn't stay a stranger for long I suppose.

 

[camouflage]

A painting can only be exchanged with someone who wants the painting - as can wheat. That is not the case with money - that's one of the characteristics of money. Try and pay for your beer tonight with something you think has equivalent value and see how far you go.

Don't you see though, in an economy where farmers iou's are being used as money (coz everybodies gotta eat and wheat is assumed the regulating staple in the world of my example) wheat has become the universal equivalent... except it's not because an abstraction is pretending to be wheat (or people are pretending an abstraction is the same as wheat, or the same as future-wheat).

I suspect it's no different than gold, or t-bills.

 

[butchersapron]

Don't you see though, in an economy where farmers iou's are being used as money (coz everybodies gotta eat and wheat is assumed the regulating staple in the world of my example) wheat has become the universal equivalent... except it's not because an abstraction is pretending to be wheat (or people are pretending an abstraction is the same as wheat, or the same as future-wheat).

I suspect it's no different than gold, or t-bills.

You have switched from talking about a picasso operating as money to IOUs operating as money. They're two very different things. And no wheat has not become the universal equivalent in your example - it's become a component part of one exchange. Exchange with money implies a chain of others transactions centring on money - that cannot happen with wheat, the idea is ludicrous.

Your problem seem to be that you do not understand that money is the money-form of value - and so has certain properties peculiar to it (i.e that it acts as the universal equivalent). Wheat or paintings are the commodity-form of value - and these have their own properties (i.e that they contain more value then went into their production) that are different from the money-form of value. Something having value does not make it money.

 

[ayatollah]

I didn't comment on the accuracy, or not, of this particular Wiki entry. My observation was about the likelihood of the use of quoting Wiki leading to the poster being told they were a knob - you knob.

Hurrah and Greebo, how many times have you both been told not to encourage little cesare when his "little difficulty" with reading and writing gets him all riled up and he feels the need to use naughty words, like "knob" , "cunt" , "poo"", or "gove". Just ignore him and eventually he'll grow out of it.