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

[frogwoman]

"There are a thousand hacking at the branches of evil to one who is striking at the root." Henry David Thoreau

​

the root is capitalism, not banks

 

[littlebabyjesus]

But building societies were originally full-reserve institutions.

I don't quite get that. A society gathers together £100k in deposits and lends part of it out. That's fractional reserve. If it wants to keep a full reserve, it can't lend anything out.

Now I can well believe that they were strictly 'deposit-first' lenders. What that means is that they never have to rely on interbank lending to balance their books - they are fully financed by their members. But that's not the same as full-reserve.

 

[Jazzz]

I don't quite get that. A society gathers together £100k in deposits and lends part of it out. That's fractional reserve. If it wants to keep a full reserve, it can't lend anything out.

No, the deposits were time deposits. While they were lent out, the deposits couldn't be withdrawn.

So at any time, the building society had cash reserves to meet its demand liabilities. It was 'solvent'. This is full-reserve. It is what I think everyone thinks happens with banks at the moment.

I am still waiting for love-detective who of course has been strangely unable to explain whether banks need cash reserves to meet one loan, or all their demand liabilities, or something else (I'm giving clues here).

 

[littlebabyjesus]

No, the deposits were time deposits. While they were lent out, the deposits couldn't be withdrawn.

For the whole 25 years? I don't remember any building societies that operated like that. They'd have kids' savings accounts with maybe a week's notice, or others with a month, and probably others that were longer than that. But no, much of their money was only timed for a small fraction of the length of the mortgages.

It's still far lower risk than the likes of Northern Rock, no doubt, but it's not full-reserve lending - in order for the building society to remain financed, those timed deposits need to be replaced by new ones on an ongoing basis.

 

[Jazzz]

For the whole 25 years? I don't remember any building societies that operated like that. They'd have kids' savings accounts with maybe a week's notice, or others with a month, and probably others that were longer than that. But no, much of their money was only timed for a small fraction of the length of the mortgages.

This is going back much further than when we were children LBJ. Originally, building societies were clubs - each member would contribute. One person at a time would withdraw the kitty to buy their house. When everyone had their house, the club would dissolve. They grew from that. I don't know when fractional-reserve kicked in. A sad day, as clearly it was much easier to buy a house before. It didn't take 25 years! It shouldn't take 25 years!

 

[littlebabyjesus]

OK, but was it really easier to buy a house then? Sounds like a system in which you need to put up a sizeable proportion of the cost of a house as your deposit, and that it might still be a few years until you get to buy your house. How do you decide who gets the kitty first? Lots? Meantime everyone else is paying rent waiting their turn.

Such a system is also vulnerable to circumstances. If the borrower finds themselves in changed circumstances - or dies - before they can pay back the loan, then the others all lose. I guess they could evict them and either sell the house or substitute another member in their place, but that doesn't sound any better than what we have now, really.

Actually, that's potentially quite elegant. You have 10 people who all pay 10 pounds a month, say, for 10 months. A house costs 100 pounds. One person can buy straight away, the next can buy a month later, and so on until the last payment, when the last person moves in. Without that system, they would all have had to wait until the end of the 10 months to buy. With it, only one person has to wait that long. And given that you're saving rent, you could pool the renting costs across the period among everyone, so it would have taken any one individual longer than 10 months to save up.

 

[ItWillNeverWork]

Is the following a fair summary? Money isn't created out of thin air; it is pulled into existence by the process of capitalist production.

 

[Jean-Luc]

Is the following a fair summary? Money isn't created out of thin air; it is pulled into existence by the process of capitalist production.

Yes. Purchasing power is initially generated in the course of production in the form of wages and surplus value (the source of profit, rent and interest). As money circulates (the same coin or notes or whatever can be used more than once) the total amount of money in circulation does not have to equal the total amount of purchasing power generated. Banks merely help circulate purchasing power throughout the system. The government, either directly or through the central bank, can create extra nominal purchasing power through introducing more money into the system, but this won't increase the amount of real wealth in existence. It will just change the value of the unit in which it expressed, i.e depreciate it causing inflation.

 

[love detective]

I knew you wouldn't answer. It says much that you resort to insults. I've spent many hours patiently answering and clarifying. If you actually understood this stuff, you'd be at pains too.

Let me repeat the question:

"are you saying that the bank needs cash reserves equal to the value of the loan being made, or that the bank needs cash reserves equal to all its demand liabilities?"

it's very simple.

I notice that this side show is conveniently allowing attention to be taken away from your continued inability to respond to cynicaleconomy and others requests for you to answer the seven questions asked in a previous post. These questions were asked long before you started this little side show, and you have since been pointed to various posts where I explain exactly what you are asking for. That you are unable to now take time to answer the seven questions on a topic you claim you have such a solid grasp of speaks volumes.

You also are unable to address the recent posts by LBJ in relation Northern Rock and also about banks having to fund loans that they make. Because you are either ignorant of the facts or even worse you are aware of them, but know they fly in the face of your loon theories, so therefore your only course of action is to ignore them completely. Nice way of getting to the truth that

And once again, you don't even know what a cash reserve is (if you do explain it now), your usage of the phrase cash reserve in the context of backing up a loan shows that you are conflating cash reserves with capital reserves (two completely different things), and confirms to me that you don't understand either of these things. As Jim pointed out earlier you don't actually understand your own questions, let alone the answers provided to them. The only thing I don't understand in all of this is why I keep replying to you.

 

[8ball]

I liked the example with promising to lend a mate a tenner <and mentally recording that we're actually a tenner down this week> as opposed to needing the tenner when he comes round - thanks for that LD, it's really useful as an explanatory aid.

Jazzz - why did Northern Rock get into trouble?

 

[Idris2002]

interestingly* the little receptacles are twice the size of the communion ones you get at church. The church ones are just shy of a single measure shotglass, whereas the pesach ones we drank from the other night are double that, so two swigs worth rather than a swigsworth.

*to me

I used to know a Liberation Theology priest who'd been in a parish halfway up the Amazon. His church was a tin shed with intermittent electricity. One day it goes off just as he realises he's missed the communion wine. He sent one of the altar boys off to get a replacement. Five minutes later the lad is back with a bottle, which he couldn't identify in the dark. Only when he raised the chalice to his lips did he realise it was . . . whiskey.

 

[yield]

No, the deposits were time deposits. While they were lent out, the deposits couldn't be withdrawn.

So at any time, the building society had cash reserves to meet its demand liabilities. It was 'solvent'. This is full-reserve. It is what I think everyone thinks happens with banks at the moment.

I am still waiting for love-detective who of course has been strangely unable to explain whether banks need cash reserves to meet one loan, or all their demand liabilities, or something else (I'm giving clues here).

Haven't you see the documentary "It's a wonderful life" starring Jimmy Stewart.

. . . you're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house, right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can.

 

[Jazzz]

I notice that this side show is conveniently allowing attention to be taken away from your continued inability to respond to cynicaleconomy and others requests for you to answer the seven questions asked in a previous post. These questions were asked long before you started this little side show, and you have since been pointed to various posts where I explain exactly what you are asking for. That you are unable to now take time to answer the seven questions on a topic you claim you have such a solid grasp of speaks volumes.

You also are unable to address the recent posts by LBJ in relation Northern Rock and also about banks having to fund loans that they make. Because you are either ignorant of the facts or even worse you are aware of them, but know they fly in the face of your loon theories, so therefore your only course of action is to ignore them completely. Nice way of getting to the truth that

And once again, you don't even know what a cash reserve is (if you do explain it now), your usage of the phrase cash reserve in the context of backing up a loan shows that you are conflating cash reserves with capital reserves (two completely different things), and confirms to me that you don't understand either of these things. As Jim pointed out earlier you don't actually understand your own questions, let alone the answers provided to them. The only thing I don't understand in all of this is why I keep replying to you.

This is just evasive waffle again. Yet again you have failed to answer.

What do you mean by "fund the loan position at the point of loan creation"?

This is meaningless.

When I say 'cash reserve', I mean money held in cash (notes) or in account at the bank of england. If there is any confusion, you are free to specify what you mean.

 

[littlebabyjesus]

Yes. Purchasing power is initially generated in the course of production in the form of wages and surplus value (the source of profit, rent and interest). As money circulates (the same coin or notes or whatever can be used more than once) the total amount of money in circulation does not have to equal the total amount of purchasing power generated. Banks merely help circulate purchasing power throughout the system. The government, either directly or through the central bank, can create extra nominal purchasing power through introducing more money into the system, but this won't increase the amount of real wealth in existence. It will just change the value of the unit in which it expressed, i.e depreciate it causing inflation.

I would add that demand for loans is also a major driver in the creation of new money. The madness of asset bubbles is that they create new debts/deposits without any change in the real value of the economy. Then when the bubble bursts, people strive to pay down their debts. It leaves an odd situation where there is 300 or 400 percent gdp debt in a country, meaning that there are lots of deposits of money, but the country staggers from one deflationary pressure to the next and there is a shortage of demand.

What appears to me to matter more than the quantity of money in an economy wrt inflation is whether or not that quantity is going up or going down. So Japan can have 400 percent gdp debt, yet still suffer from deflation - because private debt (household and business) is in fact edging down.

 

[littlebabyjesus]

This is just evasive waffle again. Yet again you have failed to answer.

What do you mean by "fund the loan position at the point of loan creation"?

This is meaningless.

When I say 'cash reserve', I mean money held in cash (notes) or in account at the bank of england. If there is any confusion, you are free to specify what you mean.

You should answer the question on Northern Rock, though, Jazzz. How about you answer that, and then ask others to answer your questions. Because many people now have said that they do not believe that you understand why Northern Rock went bust. You have the chance to disabuse them of this belief.

 

[love detective]

This is just evasive waffle again. Yet again you have failed to answer.

What do you mean by "fund the loan position at the point of loan creation"?

This is meaningless.

When I say 'cash reserve', I mean money held in cash (notes) or in account at the bank of england. If there is any confusion, you are free to specify what you mean.

Christ your thick - funding a loan means exactly what it says

In the analogy I gave earlier about agreeing to lend a tenner to a mate - at the point the promise is made (and the relevant accounting entries passed) the bank has to either have funding in place, or ensure funding will be in place to ensure that the obligations created by the accounting entry can actually be met in reality. Of course you think that there is no difference between Accounting Entries and Reality. You think that Accounting Entries and Reality are one in the same (given rise to the bizarre implication that a dog hammering in random digits to a ledger system is creating reality), rather than accounting entries (in this instance) being a record of future obligations due to and from parties.

You said earlier that only LBJ grasps this topic as well as you do. Well he's said explicitly that you are wrong in regards to loans not having to be funded. I will take this as an admittance that you are wrong in regards to your bat shit notion that based on a deposit of £1,000 banks can then lend out £30,000 'straight off the bat' without the need for any circulation or funding of those loan position to take place.

To recap what was said:-

The bank does need to fund its loan, though, Jazz. Whether through pre-existing deposits or through a swift accounting procedure that can take the deposit created by the loan and use that to fund it. Banks have to balance their books. As soon as they can't they're fucked. You would agree with that, no?

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.

Well yes, that's plain wrong. The need for circulation seems to be the bit Jazzz is missing.

So hopefully you've learned now about how banks have to, and how they actually do, fund the loans that they make

Now, i've answered plenty of your cretinous questions. If you want to take part in any further discussion, it is time for you to respond to the 7 questions asked by yield and cynicaleconomy, a request that was made long before you started off on this current distraction. You have already stated that you understand this so well and it is all so simple, so come on hotshot, respond to these 7 questions before we move on any further.

 

[love detective]

You should answer the question on Northern Rock, though, Jazzz. How about you answer that, and then ask others to answer your questions. Because many people now have said that they do not believe that you understand why Northern Rock went bust. You have the chance to disabuse them of this belief.

The 7 questions asked by yield & cynicaleconomy were posed to Jazzz on this thread long before questions about Northern Rock, he's avoided answering them on previous threads, so it's only fair these are dealt with first before Jazzz bedazzles us with his strong grasp of what happeend at Northern Rock.

To make it easier for him - i'll link to the post again and list them below

and if they can create cash out of thin air why is it possible for bank's to even make losses in the first place

why do they have to go to the state for money when they can just conjure it up

how can a bank run out of something it can create from nothing out of thin air

why do interbank & wholesale lending markets exist if bank's can just create the money they need out of nothing

why can a bank get into a position where it cannot settle its liabilities when those liabilities are just invented in the first place, they don't really exist apparently

why would the state lend a bank £30bn in emergency funding so that it could meet its liabilities/obligations when those liabilities apparently aren't real and were just invented

why do bank's bother lending in the first place if they can just magic the money out of nothing - surely be much easier to just magic your money out of thin air than going to all that trouble of lending & borrowing

and finally, if according to jazz the accounting entries are the reality - this surely means that it is impossible for a bank's financial statements to not reflect reality. Why then are hundreds of millions of pounds spent each year by banks auditing their financial statements to ensure they reflect reality. Why do bank's continually have to retrospectively restate their accounts to correct them. If they are reality then surely it would be impossible for a bank's financial statements to not reflect reality, because they are reality - so there can be no disconnect according to Jazz. So even if a dog was made chief accountant in a bank and hammered all manner of nonsense into its ledger with its mucky paws, the accounts wouldn't be wrong, because the accounts are reality

and so on and so on......

Both yield, cynicaleconomy, myself and no doubt many others have been waiting sometime now for Jazz to deal with these questions - his silence on them has been deafening.

So Jazz, don't bother coming back with any more of your cretinous questions until you've attempted to answer the backlog of questions that have been posed to you. You seem to think that discussion can consist of a repeated avoidance by you of tricky questions while asking others stuff you don't even understand yourself. So enough's enough, until you learn some manners and respond to this and the Northern Rock questions you'll be getting no more responses from me.

 

[Jazzz]

Christ your thick - funding a loan means exactly what it says

In the analogy I gave earlier about agreeing to lend a tenner to a mate - at the point the promise is made (and the relevant accounting entries passed) the bank has to either have funding in place, or ensure funding will be in place to ensure that the obligations created by the accounting entry can actually be met in reality. Of course you think that there is no difference between Accounting Entries and Reality. You think that Accounting Entries and Reality are one in the same (given rise to the bizarre implication that a dog hammering in random digits to a ledger system is creating reality), rather than accounting entries (in this instance) being a record of future obligations due to and from parties.

What is 'funding'?

Cash reserves?

We are talking about the nuts and bolts of money and money creation. What do you mean man? If you think I am 'thick', then make it clear for me. As you are supposedly the expert, and I the simpleton, it's of course ridiculous for you to expect me to answer several questions rather than you explain one.

I say that you have no idea what you are talking about.

You said earlier that only LBJ grasps this topic as well as you do.

No, I said that he was the only person on the thread that I considered had a grasp of it.

 

[FabricLiveBaby!]

why the rollyeyes?

 

[Blagsta]

What is 'funding'?

Cash reserves?

We are talking about the nuts and bolts of money and money creation. What do you mean man? If you think I am 'thick', then make it clear for me.

I say that you have no idea what you are talking about.



No, I said that he was the only person on the thread that I considered had a grasp of it.

Its been explained to you. Interbank lending.

 

[Jazzz]

Its been explained to you. Interbank lending.

Well interbank lending takes the form of increasing the cash reserves of the destination bank, doesn't it?

I'd like to hear LD define 'funding' for himself.

 

[Blagsta]

Well interbank lending takes the form of increasing the cash reserves of the destination bank, doesn't it?

I'd like to hear LD define 'funding' for himself.

He already has. You're being completely dishonest.

 

[SpineyNorman]

Ignorant, thick, dishonest, anti-society, impolite, disrespectful and antisemitic - does Jazzz have any more character flaws to add to this list?

He keeps claiming he's the only one that understands this, yet is completely unwilling to answer perfectly reasonable questions that have been put to him. The only logical conclusion is that he doesn't really have a clue, and takes the loon analysis of banking as an article of faith because to do otherwise is to undermine his ultra-conservative, paranoid, antisocial, antisemitic world view.

I really don't know why anyone is bothering with him now - the only sensible responses to his posts, until he answers the questions put to him, are personal insults.

I suggest that from now on every one of his posts should be responded to with a c&p of the questions he has failed to answer and the words, 'answer these, cunt.'

 

[Jazzz]

He already has. You're being completely dishonest.

No he hasn't.

If he did say 'interbank lending', well that would omit the rest of the bank's cash, either notes or credits in the bank's bank of england account, wouldn't it?

What constitutes 'funding'?



This can't be complicated.

 

[Blagsta]

No he hasn't.

If he did say 'interbank lending', well that would omit the rest of the bank's cash, either notes or credits in the bank's bank of england account, wouldn't it?

Learn to read.

 

[equationgirl]

I knew you wouldn't answer. It says much that you resort to insults. I've spent many hours patiently answering and clarifying. If you actually understood this stuff, you'd be at pains too.

Let me repeat the question:

"are you saying that the bank needs cash reserves equal to the value of the loan being made, or that the bank needs cash reserves equal to all its demand liabilities?"

it's very simple.

ooh you've got some nerve. You resort to insults at the drop of a hat AND you don't answer questions put to you. If you want others to behave this way, start doing answering questions yourself.

 

[littlebabyjesus]

Well interbank lending takes the form of increasing the cash reserves of the destination bank, doesn't it?

I'd like to hear LD define 'funding' for himself.

I may be wrong here, but I don't think so. As I understand it, interbank lending takes the form of digits on computers, allowing banks to balance their books overnight. That makes borrowing from another bank overnight a liability, not a cash reserve, because the loan has to be repaid. Money on deposit at the Bank of England might be considered a cash reserve, perhaps.

 

[littlebabyjesus]

What constitutes 'funding'?

Cash plus money on deposit at the BofE plus liabilities in the form of deposits from savers and loans from other banks.

And all assets (loans made by the bank) must be fully matched by the sum of the above. If the bank fails to do this, it's dead. To repeat, this is what happened to Northern Rock, which was heavily reliant on borrowing from money markets and had been taking massive risks by borrowing too short in an attempt to make even more money. Interesting reading about the culture at NR. Employees who warned that they were borrowing too short were marginalised. Large bonuses were on offer for those who boosted short-term profits through very short borrowing.

 

[SpineyNorman]

I've just opened a spreadsheet up and I'm gonna start creating some money - does anyone want to borrow a few grand?

 

[frogwoman]

I think the spreadsheet will only be able to create money if you put on a skullcap and a shawl and recite a few hebrew prayers before typing numbers and formulas into it. Don't forget the candles and the wine either.

Once you've done that you're ready to go, create as much money as you want!