critique of loon theories around banking/money creation/the federal reserve

[ItWillNeverWork]

The answer is no because it requires competitive destruction not destruction by decree -which even to attempt would require the overcoming of competition and thus one of the sriving forces of capital accumulation (not to mention its encouragement of reckless consequence free investment).

Why would this require the overcoming of competition? In effect it would be a form of quantitative easing, except that the money goes direct to firms and consumers, with a legal requirement for them to pay off any debts. Any money left over would be available to spend, therefore injecting some demand into the economy. Firms that were previously finding their profit margins squeezed by the servicing costs on investments would see their margins restored.

 

[SpineyNorman]

What's wrong with that, though?

And it's not quite 'out of thin air'. First, they need to find someone willing to take on the debt - the money supply expanding in response to demand for money. Once created, the money represents an obligation - and repaying the debt fulfils the obligation, destroying the deposit the loan had created.

I don't see the need to go 'whooa, evil' about this process in and of itself. Carried out by, for instance, a system of mutual societies, it can in principle perform a valuable social function in which nobody is fooled or exploited at all.

ETA:

Where else do you think money could come from? On the other hand, the value that is attached to that money comes from the transaction of real things that the money was created to represent in the first place. No use creating equal and opposite + and - on a balance sheet if that money hasn't circulated in the real economy to represent value. Those figures on the page have no value without it.

It also isn't really 'created out of thin air' in the way Jazzz claims it is anyway. It's only created on paper - if the banks don't have it in current accounts etc they can't pay it out - otherwise the very idea of a financial crisis makes no sense whatsoever - if these loans actually 'created' money in the way Jazzz claims they did there wouldn't be a black hole that required bailouts to fill (and even then not successfully).

 

[phildwyer]

Well yes, we keep those promises that it suits us to keep and break those that it suits us to break. And sometimes, a system of promises has been made that cannot all be kept. Personally, I'd like to see promises made to pensioners, the unemployed, children, etc kept first. All that money does in the end is represent a promise. But as I said, without others willing to be party to that promise, banks can't just create money on their own.

The banks have never found it difficult to create "parties" to their "promises" when they really want to do so. You make it sound like a voluntary contract between equals. That's not what it is.

 

[Pickman's model]

It also isn't really 'created out of thin air' in the way Jazzz claims it is anyway. It's only created on paper - if the banks don't have it in current accounts etc they can't pay it out - otherwise the very idea of a financial crisis makes no sense whatsoever - if these loans actually 'created' money in the way Jazzz claims they did there wouldn't be a black hole that required bailouts to fill (and even then not successfully).

exactly.

 

[phildwyer]

It also isn't really 'created out of thin air' in the way Jazzz claims it is anyway. It's only created on paper - if the banks don't have it in current accounts etc they can't pay it out - otherwise the very idea of a financial crisis makes no sense whatsoever - if these loans actually 'created' money in the way Jazzz claims they did there wouldn't be a black hole that required bailouts to fill (and even then not successfully).

Heh.

In what sense exactly do banks "have" money "in" current accounts?

Do you mean physically? Or what?

 

[butchersapron]

Why would this require the overcoming of competition? In effect it would be a form of quantitative easing, except that the money goes direct to firms and consumers, with a legal requirement for them to pay off any debts. Any money left over would be available to spend, therefore injecting some demand into the economy. Firms that were previously finding their profit margins squeezed by the servicing costs on investments would see their margins restored.

Because that is how capital works. The creative destruction of capital in order to re-stablish the conditions of accumulation, not a gentleman's agreement to all go back to an equal start point. And you're now not on about capital destruction - you're on about something else. And there are problems with this suggestion as to where the tax from the productive sectors of the economy is going to come from when they aren't even investing due to the low rate of profit. I think you need to seperate the different part of what you're suggesting out.

 

[Pickman's model]

50 quid to whoever gets me a picture of Professor and Pickmans in a heated embrace.

you're fairly new round here: so you'll excuse me when i point out that if everyone had taken the attitude to dwyer i've taken for a long, long time now - one of unremitting opposition - then perhaps urban would be a better place.

you've been too kind to the prof for the past five years. so if anyone's more likely to end up in a clinch with dwyer, out of the two of us it's you.

 

[littlebabyjesus]

It also isn't really 'created out of thin air' in the way Jazzz claims it is anyway. It's only created on paper - if the banks don't have it in current accounts etc they can't pay it out - otherwise the very idea of a financial crisis makes no sense whatsoever - if these loans actually 'created' money in the way Jazzz claims they did there wouldn't be a black hole that required bailouts to fill (and even then not successfully).

Banks borrow short and lend long - that's their business. And that's where they can come unstuck. A promise has both an amount and a time duration. I borrow £10 for 10 years. But the bank generally finances that loan with an initial deposit of £10 for 1 year, then repays this and refinances at the end of the period. That's what fucked Northern Rock - confidence in their loans collapsed so they could no longer refinance their 'borrow short, lend long' business.

It is also disputed that the deposit comes first. Endogenous theorists claim that it doesn't - and that the system of overnight interbank lending provides cover for this - as long as the system is functioning, the 'loan-first' nature of the business can be obscured.

 

[SpineyNorman]

Heh.

In what sense exactly do banks "have" money "in" current accounts?

Do you mean physically? Or what?

Doesn't have to be physically, no. But without the deposits in there it cannot be lent out. The kind of 'creation' Jazzz is referring to cannot be done by anyone other than the central bank.

And I'm not getting into a stupid, irrelevant debate with you over banks having/not having deposits in hard cash - because it doesn't matter.

 

[littlebabyjesus]

I make that 8 o'clock. Who won the 'when will dwyer be banned today' sweep?

 

[SpineyNorman]

Banks borrow short and lend long - that's their business. And that's where they can come unstuck. A promise has both an amount and a time duration. I borrow £10 for 10 years. But the bank generally finances that loan with an initial deposit of £10 for 1 year, then repays this and refinances at the end of the period. That's what fucked Northern Rock - confidence in their loans collapsed so they could no longer refinance their 'borrow short, lend long' business.

It is also disputed that the deposit comes first. Endogenous theorists claim that it doesn't - and that the system of overnight interbank lending provides cover for this - as long as the system is functioning, the 'loan-first' nature of the business can be obscured.

Yes, not being an idiot I already knew that. But in order to make yourself look clever you're confusing things unnecessarily and offering Jazz and dwyer ammunition in the form of theories and concepts neither of them understands. Because even Keen and Minsky don't think money is created in that way either. Even according to the endogenous theory of money creation the currency still has to be created by the central bank, it's just that the need to do this is created by private banks.

 

[littlebabyjesus]

Yes, not being an idiot I already knew that. But in order to make yourself look clever you're confusing things unnecessarily and offering Jazz and dwyer ammunition in the form of theories and concepts neither of them understands. Because even Keen and Minsky don't think money is created in that way either. Even according to the endogenous theory of money creation the currency still has to be created by the central bank, it's just that the need to do this is created by private banks.

No need for rudeness, is there? According to Keen, the base money is created by the central bank after the loans have been made in order to prevent banks from breaking their rules on reserves. He illustrates this in quite a bit of detail.

According to this view, the conventional account of fractional reserve lending and the money multiplier is false.

If you're discussing a critique of loon theories, I think it's relevant to look at something that isn't a loon theory but that often seems to be misused or misunderstood as such.

 

[ItWillNeverWork]

I make that 8 o'clock. Who won the 'when will dwyer be banned today' sweep?

He's been banned?

 

[Jazzz]

What's wrong with that, though?

And it's not quite 'out of thin air'. First, they need to find someone willing to take on the debt - the money supply expanding in response to demand for money. Once created, the money represents an obligation - and repaying the debt fulfils the obligation, destroying the deposit the loan had created.

Well from the OP:

I've had quite a lot of people telling me lately about how banks "create money out of nothing", how the federal reserve is a "Ponzi scheme" and other such nonsense. Now I know this is a load of bollocks but I don't really know enough about the way modern banking works to debunk them and explain what's really going on.

Of course your description is accurate, but it really is 'creating money out of nothing'. There is no money that gets deducted from anyone else's account, or made unavailable to them, when a new loan is made. Perhaps with this established we can then get more on to the question of whether it is a good thing or not.

 

[Mrs Magpie]

dwyer on a temp ban. This isn't the only thread he's chucking about the insults and he caused 80% of the current reported posts.

 

[SpineyNorman]

Yes, not being an idiot I already knew that. But in order to make yourself look clever you're confusing things unnecessarily and offering Jazz and dwyer ammunition in the form of theories and concepts neither of them understands. Because even Keen and Minsky don't think money is created in that way either. Even according to the endogenous theory of money creation the currency still has to be created by the central bank, it's just that the need to do this is created by private banks.

Actually, that was a bit unfair - this is a reasonable debate to have. But with the two trolls on the thread it's impossible to have it sensibly.

 

[Mrs Magpie]

...and the reported posts reached a critical mass.

 

[SpineyNorman]

No need for rudeness, is there? According to Keen, the base money is created by the central bank after the loans have been made in order to prevent banks from breaking their rules on reserves. He illustrates this in quite a bit of detail.

According to this view, the conventional account of fractional reserve lending and the money multiplier is false.

If you're discussing a critique of loon theories, I think it's relevant to look at something that isn't a loon theory but that often seems to be misused or misunderstood as such.

Yeah I agree - apologies. I don't agree with Keen but it is a serious theory. But as I said, we can't really have this discussion with Dwyer and Jazzz on the thread.

 

[Blagsta]

Well from the OP:



Of course your description is accurate, but it really is 'creating money out of nothing'. There is no money that gets deducted from anyone else's account, or made unavailable to them, when a new loan is made. Perhaps with this established we can then get more on to the question of whether it is a good thing or not.

Yes, this is called circulation. In the same way that one £10 note can transact more than £10 worth of goods.

 

[SpineyNorman]

Of course your description is accurate, but it really is 'creating money out of nothing'. There is no money that gets deducted from anyone else's account, or made unavailable to them, when a new loan is made. Perhaps with this established we can then get more on to the question of whether it is a good thing or not.

It's essential for the proper functioning of the capitalist economy.

 

[Pickman's model]

dwyer on a temp ban. This isn't the only thread he's chucking about the insults and he caused 80% of the current reported posts.

how long's a temp ban in this instance?

 

[SpineyNorman]

how long's a temp ban in this instance?

And how many temp bans are required before it becomes clear that someone is only here to disrupt and a permanent ban, or at least a ban that is only lifted when certain assurances are made, becomes appropriate?

 

[TruXta]

you're fairly new round here: so you'll excuse me when i point out that if everyone had taken the attitude to dwyer i've taken for a long, long time now - one of unremitting opposition - then perhaps urban would be a better place.

you've been too kind to the prof for the past five years. so if anyone's more likely to end up in a clinch with dwyer, out of the two of us it's you.

Gods that is a grim outlook.

 

[TruXta]

Oh, he's banned? Jazzz too?

 

[Pickman's model]

And how many temp bans are required before it becomes clear that someone is only here to disrupt and a permanent ban, or at least a ban that is only lifted when certain assurances are made, becomes appropriate?

How many roads most a man walk down
Before you call him a man ?
How many seas must a white dove sail
Before she sleeps in the sand ?
Yes, how many times must the cannon balls fly
Before they're forever banned ?
The answer my friend is blowin' in the wind
The answer is blowin' in the wind.

Yes, how many years can a mountain exist
Before it's washed to the sea ?
Yes, how many years can some people exist
Before they're allowed to be free ?
Yes, how many times can a man turn his head
Pretending he just doesn't see ?
The answer my friend is blowin' in the wind
The answer is blowin' in the wind.

Yes, how many times must a man look up
Before he can see the sky ?
Yes, how many ears must one man have
Before he can hear people cry ?
Yes, how many bans will it take till dwyer knows
That he's been posting too long ?
The answer my friend is blowin' in the wind
The answer is blowin' in the wind.

 

[butchersapron]

Oh, he's banned? Jazzz too?

Nope. Phil called someone a nazi - jazz just supported nazi stuff.

 

[8ball]

Oh, he's banned? Jazzz too?

First rule of ban club is 'do not talk about ban club'.

 

[Mrs Magpie]

how long's a temp ban in this instance?

Till the 6th. It would have been a week but I've got a headache. It's never a good idea to piss me off when I'm not in a fluffy frame of mind and the way he was generating reported posts (and not just in P&P which has a higher insult threshold) pissed me off.

 

[SpineyNorman]

Nope. Phil called someone a nazi - jazz just supported nazi stuff.

Come on, that's not fair - he might be spamming the boards with antisemitic propaganda but apparently he's a cracking pianist.

 

[J Ed]

Come on, that's not fair - he might be spamming the boards with antisemitic propaganda but apparently he's a cracking pianist.

I can think of a saxophonist he might like to do a duet with...