"Banks create money out of nothing" - Guardian

[Blagsta]

Years ago, I was an angry young man too.

Now you're just a senile old twit.

 

[Blagsta]

Oh and anyone who thinks these idiots are merely confined to the internet, well here in the west mids they're not. They organise under the name "Truth Juice" and promote this shit in local pubs.

 

[ViolentPanda]

Yes I did think of that when I posted. I suppose that is the other end of the racist spectrum. You have some people who are racist, and believe themselves to be racist. Then you have those who express racist sentiments, and deny being racist.

Of this latter group, you then have two further branches. Those who's racist sentiments are derived from their version of "common sense". ie. those who think that their country is overcrowded, that they don't like seeing foreign writing around, that they fear their culture is under threat. Let's call them EDL sympathisers. Then you have the whacked out conspiraloons who will, quite frankly, believe any old shit. And as such have been fertile ground for the cyclical revival of the protocols of zion nonsense.

Unfortunately, the former can feed into and/or lead into the latter, especially if you take your "common sense" politics seriously. As soon as you settle for being part of a "movement", you become heir to all the peculiarities, particularities and prejudices of the movement, so I'm not so sure that sympathising with the EDL isn't a "gateway" for some people into a wider racist politics.

Yes, if you want to call them all racists, then let's do that. But I think they come from different places.

They all end up in the same shitpile, though.

 

[ViolentPanda]

They really don't y'know. It's just a new take on the old ZOG stuff.

Which was just a new take on Francis Parker Yockey, which was just a new take on Euro proto-fascism and American rightism, which was just a new take on Russian imperial anti-Semitism, which was.....well, you know how the story goes.

 

[ViolentPanda]

This is my expression when I typed my posts:

You were cumming in a goat's arse?

 

[ViolentPanda]

EDL are semi-literate working class, and usually quite "sociable" in their politics. The ZOG lot are weirdos who live with their grandparents and never leave the house.

If only things were that simple, we could have rolled the lot of them up and swept them away decades ago.

 

[Idaho]

There will always be a fringe. The important things are to keep perspective. These groups (in this country) only seem significant when compared to the size of lefty groups. It's still in sub 1% territory.

 

[phildwyer]

Yes he has, he has argued that this piece and the arguments it makes (an example below) are not anti-semitic.

Where?

But even if he had (which I doubt), that's still different from actually saying anything anti-semitic himself. Reasonable people can differ over whether third parties are anti-semites without being anti-semitic themselves.

Anyway, if Jazzz was an anti-semite, he'd say so. He's not shy about expressing unpopular opinions.

 

[phildwyer]

The concentration on finance capital as the problem was a feature of fascism (as has already been pointed out). Making a big fuss about fractional reserve banking is a feature of anti-semitic conspiracy theories as well as right wing economics (as has already been pointed out).

Anyone who can't see that finance capital is the problem today is blind.

 

[littlebabyjesus]

There is a big discussion to be had about how money is produced and how value is attached to it, imo. IWNW's already outlined one point of view, which essentially considers that fractional reserve lending is in reality merely a convenient fiction - and that money is created instead through demand for loans.

Money is created out of nothing is somewhat trivially true, I would say. Well of course it is - how else would it be created. But it is through circulation that value is attached to it - an agreement between two parties that the money is worth a certain exchange of goods or services. That is one explanation for how QE can have such a negligible effect on the economy - creating money that just sits there not circulating doesn't affect anything. It also explains why banks can't just print money to get themselves out of trouble.

 

[Blagsta]

Surely it is through commodity production and exchange that value is attached? When capital becomes detached from commodity production is when we see a crisis like this one. Loads of claims on money, with no actual value behind it (fictitious capital)?

 

[Jazzz]

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.

Absolute nonsense

This one comment makes it patently clear you don't understand circulation, nor have a clue what you're talking about

Your desire to see something that isn't there overrides any ability to understand that thing

There's plenty much to criticise about the finance system/capitalist social relations, and there have been plenty of threads that do this from the basis of understanding what is being criticised. You just skip the understanding part however as you don't seem to see that as being an important part of any critique, and go straight to the jumping up & down screaming & shouting like you've had a Eureka moment and making a tit of yourself

Why do you think I am wrong? I completely disagree. I feel my understanding is much clearer than yours.

I invite you to clarify exactly what you think happens when a bank makes a loan, showing how the the ledger entries and the cash reserves might change (since those are all the figures that we need be concerned about). Then perhaps we can see which of us hasn't got it.

 

[Blagsta]

Disagree. I feel my understanding is much clearer than yours.

I invite you to clarify exactly what you think happens when a bank makes a loan, showing how the the ledger entries and the cash reserves might change (since those are all the figures that we need be concerned about). Then we can see where you might be going wrong.

this should be good

 

[butchersapron]

Got a feeling that ld has got more sense than to bother.

 

[Dr Jon]

Just spotted this interesting piece by Ron Morrison:

When a fractional reserve bank loses even 3% of its loans it is in trouble; if it loses 10% it is insolvent and all its loans would collapse. That in turn would force the collapse of all the other fractional reserve banks. That is why governments feel forced to step in and bail banks out with taxpayers’ money. This guarantee of being bailed out is their life support system. With a full reserve bank such a loss is unpleasant and upsets the equilibrium, but it does not start a chain reaction and is soon absorbed.

 

[Blagsta]

Just spotted this interesting piece by Ron Morrison:

Be interesting to know how Ron thinks full reserve banks would make a profit.

 

[love detective]

Why do you think I am wrong? I completely disagree. I feel my understanding is much clearer than yours.

I invite you to clarify exactly what you think happens when a bank makes a loan, showing how the the ledger entries and the cash reserves might change (since those are all the figures that we need be concerned about). Then perhaps we can see which of us hasn't got it.

If you had paid any attention to any of the threads that has actually discussed this you would be familiar with how this happens

I have contributed to many threads on this at length where the detail has went into to a very detailed level

The bulk of this thread (from about post 8 onwards) focussed on it - including dispelling the myth (for the hundredth time) that fractional reserve lending is creating money out of thin air

Also this, this, this, this and this are also examples of where it's been discussed in depth before

But you are lazy, and have no intention or interest in actually engaging with these as they don't offer the sensationalist buzz you desire. You're also not interested in understanding things in order to then constructively critique them from a position of understanding/knowledge that can't be rebutted as easily as the nonsense you come out with. Therefore I also have no desire to spend any time typing out anything which you will ignore, so this post here of mine on this thread sets out exactly what you ask for above, so will have to do. I'll even copy out the relevant part of it for you here (for context it was in response to a post which was initially arguing something similar to you, and the first two paragraphs are more context setting for that original post, what follows is what you asked for in your post above)

Had a quick skim through that lecture, and got to say I think it's horribly/poorly explained in terms of the bit that you refer to above. He seems to be conflating the internal accounting transactions that a bank will make in relation to the loan account being formally set up (but not drawn on) with the actual flow/movement of money that happens in reality when the loan is drawn upon (which is ironic as he's always going on about the importance of the flow over the static). These are two very different things, with only the later actually relating to the flow & movement of money between two parties.

What he is referring to above (and not sure why he puts that much focus on it as it's not really the relevant part) is the 'internal' accounting transaction that happens prior to any loan physically being paid out to the borrower. He's technically right in what he says, but this doesn't actually explain the flows that happen once the loan is actually drawn upon/used.

So what he's saying is that when the loan is approved, the bank creates an internal accounting entry which creates an asset (representing the money owed to the bank by the borrower) and a liability (representing the money of the loan which has not yet been drawn on by the borrower, i.e. it's effectively on deposit at the bank by the borrower). So at this point in time, nothing has happened in terms of flows of money between the two parties, nor has their overall debtor & creditor relationship changed. All we have is an equal and opposite asset and a liability for the same amount between two parties that cancel out to zero. So the borrower's net position with the bank (and the bank's net position with the borrower) hasn't changed one bit. Previously he had a net position of zero with the bank, now he has an asset of 100 representing money the bank 'owes' to him (i.e. his deposit account) and a liability of 100 representing the money he owes to the bank. Overall representing a net zero relationship between the two parties. No money has flowed and the debtor & creditor relationship between the two parties remain exactly the same as they were prior to this accounting entry that Keen focuses on.

Once the borrower actually wants to use this money however (to buy something, pay someone etc..) - the bank has to be able to fund this and if they can't, regardless of the digits of a 100 in the deposit account of the potential borrower, the borrower can't get at the money (in reality though, the bank will have funded the loan position at the point of creating the internal accounting entry to ensure it's covered, however this funding of the loan is a completely different & separate thing to the internal accounting entry being discussed). So only at the point in time when the borrower draws on the loan does the original position of a net zero change, to then reflect a net liability on the part of the borrower to the bank of a 100 and a net asset on the part of the bank from the borrower of a 100. So it's at this stage that actually reflects a flow/movement of money - resulting in the creation of net debtor and creditor relationship between the bank and the borrower.

I've probably confused things even more now - so to strip it down a bit to more meaningful stuff:-

If you asked me to lend you a tenner on the phone and I said yes - this point in time is the equivalent of the internal accounting entry that Keen is talking about. i.e. it creates a (contingent) obligation between two parties but doesn't involve anything actually happening (in terms of flows of money). If the next day you come round my place to physically get the tenner, I need to have a tenner to give you. And regardless of whatever internal accounting entries I may have made the previous night, if I can't get my hands on a tenner to give you, then no amount of focus on the internal accounting entries in my ledger is going to magic the tenner into existence to pass on to you.

 

[butchersapron]

You know the difference between accounting and money right jazzz?

 

[redsquirrel]

I guess one of the reasons this shit gets on my nerves so much is that it completely ruined any chance of Occupy Birmingham doing anything useful. Instead it was overrun with conspiraloons, of which there is some crossover with the EDL.

Indeed this is why this shit be challenged whenever it comes up. There are (at least) two fuckwits on here which have explicitly said that they want to encourage links between conspiraloons and "the left". If we don't want this vile filth to infect campaign after campaign we need to make sure that these pricks do not feel comfortable spreading their shit.

 

[Jazzz]

If you had paid any attention to any of the threads that has actually discussed this you would be familiar with how this happens

I have contributed to many threads on this at length where the detail has went into to a very detailed level

lovedetective, you have not discussed the topic many times with me. You are hanging onto the idea that only cash (or M0 money let's say) is the actual money. You have not yet grasped that the accounting entries are money. This is obviously the case, because only a small fraction of the money supply is considered to be cash, the vast majority being bank-created accounting entries.


It is quite unfair to suggest that I am 'lazy' or cannot be bothered to engage properly. On this topic more than any other I will passionately endeavour to engage - as I see it as the number one thing we all have to get our heads around.

So again, I suggest you that you take us through the numbers of what happens inside a bank when it makes a loan. I'm not accepting excuses here, if you will not, I suggest that is because you don't actually understand what is going on.

To prove that I will engage with you, here is a critique of what you have written.

 

[Jazzz]

So what he's saying is that when the loan is approved, the bank creates an internal accounting entry which creates an asset (representing the money owed to the bank by the borrower) and a liability (representing the money of the loan which has not yet been drawn on by the borrower, i.e. it's effectively on deposit at the bank by the borrower). So at this point in time, nothing has happened in terms of flows of money between the two parties, nor has their overall debtor & creditor relationship changed

Not correct. Money has been created. The loan account is indeed a liability of the bank to the borrower, and the total sum to be repaid is an asset to the bank. If you wish to subtract one from the other, you will find that the bank has surely become the net creditor, because of the interest which is due. But that is not the important thing. The important thing is the £1000 that sits in the borrower's account is functional money. It wasn't there before - it is now. The borrower can trade with it either by transferring it or withdrawing cash.

All we have is an equal and opposite asset and a liability for the same amount between two parties that cancel out to zero. So the borrower's net position with the bank (and the bank's net position with the borrower) hasn't changed one bit. Previously he had a net position of zero with the bank, now he has an asset of 100 representing money the bank 'owes' to him (i.e. his deposit account) and a liability of 100 representing the money he owes to the bank. Overall representing a net zero relationship between the two parties. No money has flowed and the debtor & creditor relationship between the two parties remain exactly the same as they were prior to this accounting entry that Keen focuses on.

Again no, as above with interest, and we have new money. It's like a bathtub which holds promises. I fill it up with my water (promises), then you can slosh that water around as you see fit. As you pay back the loan, the water (/promises/money) goes down the plughole, and vanishes.

Once the borrower actually wants to use this money however (to buy something, pay someone etc..) - the bank has to be able to fund this and if they can't, regardless of the digits of a 100 in the deposit account of the potential borrower, the borrower can't get at the money (in reality though, the bank will have funded the loan position at the point of creating the internal accounting entry to ensure it's covered, however this funding of the loan is a completely different & separate thing to the internal accounting entry being discussed).

I consider this nonsensical. Please explain exactly what you mean by 'fund the loan position at the point of creation of accounting entry'. Because nothing else changes. If you think that cash is put aside for it, that is simply not true, you would be describing full-reserve banking, not fractional.

So only at the point in time when the borrower draws on the loan does the original position of a net zero change, to then reflect a net liability on the part of the borrower to the bank of a 100 and a net asset on the part of the bank from the borrower of a 100. So it's at this stage that actually reflects a flow/movement of money - resulting in the creation of net debtor and creditor relationship between the bank and the borrower.

The new money was already created.

I've probably confused things even more now - so to strip it down a bit to more meaningful stuff:-

If you asked me to lend you a tenner on the phone and I said yes - this point in time is the equivalent of the internal accounting entry that Keen is talking about. i.e. it creates a (contingent) obligation between two parties but doesn't involve anything actually happening (in terms of flows of money).

A verbal promise is not the same as a paper promise (cash is of course, "promissory notes") or statement of account. You can't pass it on to anyone else. I don't think you can call it 'money'. The accounting entry you can.

If the next day you come round my place to physically get the tenner, I need to have a tenner to give you. And regardless of whatever internal accounting entries I may have made the previous night, if I can't get my hands on a tenner to give you, then no amount of focus on the internal accounting entries in my ledger is going to magic the tenner into existence to pass on to you.

And this is precisely why banks are perpetually in fear of "The Run". The hard cash is simply not there. If only 5% of depositors went to withdraw their money in cash at any one time, the banks go down.

 

[love detective]

sorry jazz, but your hamfisted attempts at engaging with the topic above was completely farcical

your engagement consists of quoting a block of text, then spouting a lot of crap which does not even engage with point quoted, let alone understand it

you're not worth any serious engagement with, to talk of 'passing on' accounting entries shows the levels of nonsense that you are prepared to stoop to, and that you think that the act of an internal accounting entry in a ledger system in a bank is the point that money is created shows how little you understand about the whole process and the dependencies & conditionalities inherent in the circulation process. Bank's are not the independent actor in the process of money circulation, they can't make this process happen on their own, they are the dependent actor, they can only make it happen if all the conditions & dependencies for it, which are external to them, are in place. This is what people mean when they say bank's can't create money out of nothing. i.e. there is a material set of activities that need to be in place for money to circulate, and no amount of bank's tapping away on their keyboards or posting journal entries to their accounting system is going to magic that process into existence if it doesn't already exist

you demanded in your initial post that I talk through the flows and accounting entries that happen when a loan is created, I did so, your attempts to engage with the various parts of these was woeful to be honest.

You also are thoroughly confused about things like 'hard cash' and M0 - and that you bring them into parts of the discussion where they are not relevant to that discussion speaks further about how you have little desire to analysis what you are critiquing and instead just shoe horn in irrelevant crap in its place

You mentioned that I have not engaged with you on these topics on the past - that was not the point I was making previously. The point was these topics have been discussed in depth/detail in a calm and considered manner in many threads here over the last few years. That you choose to take no part in these kind of discussions and instead stick to your sensationalist misunderstandings shows where your real interest/motivations lie

I've copied a few posts from previous threads below, which you are going to have to make do with

Tapping a few numbers into a computer is clearly one thing that is required in the overall process of lending from a bank to another party - but mistaking this for the only thing that's required, and positing this tapping on the keyboard as both necessary and sufficient stands in the way of a proper understanding of what actually happens, and therefore any chances of a proper critique of it

This is not an exact analogy, but what you're saying is similar to saying that pressing the lever on a petrol pump at a petrol station creates petrol

If a bank wants to lend to someone it must be able to fund that lending, and whether this funding is sourced through customer retail deposits, commercial bank borrowing in the money markets, asset sales, central bank financing or any other method, it doesn't change the simple fact that you can't lend what you haven't funded

Fractional reserve banking can only happen if money circulates - it's not about just creating loans out of thin air through the tapping on a keyboard within a commercial bank. If you are a bank and want to take part in the circulation of money/credit, you can't do it unless you either already hold money or someone deposits it with you (through any of the forms I mentioned in the last post) - then you can lend it on and it turn through circulation it may end up back with you (through further deposits) which you can lend on again. There's nothing magical or conspiratorial about fractional reserve lending, it's just money circulating, and for you as bank to take part in that onward circulation of money/loans/deposits it has to first circulate to you before any of that can happen.

If you look at a balance sheet of any bank in it's financial accounts, unsurprisingly the balance sheet adds up to zero - i.e. total assets equals total liabilities - this shows that every asset a bank has is funded by an equivalent liability - i.e. you can't create an asset out of thin air, it has to be funded by something, if you don't have the funding/liability you can't extend the loan/asset

So just like if someone has a tenner and uses that tenner to buy something from someone else and the person they bought that thing from buys something from someone else and so on, which means a single bit of money can effect the purchase and sale of a much higher amount than it represents off and in itself. Likewise if instead of purchases & sales, that tenner is lent and borrowed lots of times (i.e. effectively fractional reserve lending with zero reserve requirements), all that happens is that same bit of money leaves in its trace a string of deposits and loans within the system. All of these in the widest sense/definition represents the money supply.

However for that string of circulation to happen (and to be mediated by the banks) a whole load of things have to happen external to the banks doing the mediating (i.e. money & value has to be successfully completing the circuit of capital). Banks are not the independent actor in all of this, they are the dependent one (obviously they can also put a hold on circulation, so they are not wholly dependent, but they are not wholly independent either)

You just need to look at what's going on around us at the moment to see this demonstrated - the circulation process is seizing up meaning banks can't fund themselves (and therefore extend loans) through the normal processes and instead have to rely on copious amounts of central bank funding to keep going. If banks were the independent actor in all this as is commonly suggested they wouldn't need any of this support, they would just magic the money into existence through copious amounts of keyboard tapping, but they can't, so they don't

 

[cesare]

Jazzz - do you mean that if I add a couple of hundred quid into my accounting Excel spreadsheet, that I'll have created some money? If so, EXCELLENT. That's where I've been going wrong

 

[love detective]

Do you have any accounting entries that I could borrow of you cesare?

If you lend me 2 double entry accounting entries so I can use them to buy some food, I'll pay you them back at the end of the week, plus another half an entry for your trouble. So a tidy wee profit in terms of interest on accounting entries you'll be making there. That's assuming though that my wages are paid in double entry accounting journals of course, if not and I end up with money instead I'll have to see if I can use that money to buy the accounting entries of someone else before passing them on to you

(or I could just make those entries, plus the interest on those entries, myself and give you them)

 

[cesare]

Do you have any accounting entries that I could borrow of you cesare?

If you lend me 2 double entry accounting entries so I can use them to buy some food, I'll pay you them back at the end of the week, plus another half an entry for your trouble. So a tidy wee profit in terms of interest on accounting entries you'll be making there. That's assuming though that my wages are paid in double entry accounting journals of course, if not and I end up with money instead I'll have to see if I can use that money to buy the accounting entries of someone else before passing them on to you

(or I could just make those entries, plus the interest on those entries, myself and give you them)

I'll lend you 2 double entry accounting entries to buy some food, as long as you give me 2 double entry accounting entries back next week so that I can buy some food. I don't believe in usury, so you can have them for free, I'll do the key tapping in my teabreak.

I've been granted a second stage exemption by the AAT for this complicated shit

 

[love detective]

On a more serious note, the post below from that Austrian thread was a response to a similiar claim to jazz's that the creation of accounting entries was synonymous with the creation of money

You can revalue your assets upwards to your hearts desire but in and off itself (just like IWNW's banks hammering away on their keyboards) it won't create a bean of money (try it now and see what happens)

If however you have an asset, and then for whatever reason (and due to circumstances, at least in part, external to you) the future income stream from that asset is expected to be more than previously expected, then you may be able to use the increased value of the asset as collateral to obtain credit. But only at that stage is credit money 'created' - and in turn whoever extends that credit to you has to do more than just tap away on their keyboard, they have to first agree with your valuation of the asset pledged as collateral and secondly be able to fund the extension of credit to you (alternatively, instead of borrowing against the value of the asset, you could just sell the asset outright to someone but the same conditions still apply - the other party has to source the funds from somewhere and need to agree with your valuation).

But for any of this to happen, the trigger is not one just revaluing one's assets upwards. Revaluing your assets upwards (just like the tapping away on the keyboard at the bank to transmit credit to a customer) is an activity which requires a 'material' basis for it to happen - it's a reflection of something that has happened elsewhere, it's the dependent not independent variable in the process, it's the consequence of an event not its cause.

So you can't just arbitrarily revalue an asset upwards and this in and off itself 'creates money'. Even if the revaluation of the asset is an accurate reflection of an actual increase in its worth (i.e. an increase in the future discounted cash flows expected from it) - this still doesn't lead to the 'creation of money' - only if that increased asset value can be used to effect a credit transaction with another party who can fund the lending, is credit money then actually 'created'

 

[love detective]

I'll lend you 2 double entry accounting entries to buy some food, as long as you give me 2 double entry accounting entries back next week so that I can buy some food. I don't believe in usury, so you can have them for free, I'll do the key tapping in my teabreak.

I've been granted a second stage exemption by the AAT for this complicated shit

Cool, now do you know if Tesco accepts loaned out double entry accounting journals?

And do we get club card points on them?

 

[cesare]

Cool, now do you know if Tesco accepts loaned out double entry accounting journals?

And do we get club card points on them?

Tesco don't But I'm fairly sure that if I tell Button that you'll pay me back my 2 double entry accounting entries next week, that he'll pop down to Lewisham Market, pick up some veg and drop them off to you in return for ½ a double entry accounting entry for his bus fare.

 

[love detective]

'12 avacodos for half a double entry'

 

[cesare]

'12 avacodos for half a double entry'

"c'mon dahling, 2 scoops of tommyatoes, end of the day, just 'alf a double entry"