Taking on the currency cranks

[love detective]

I beg to differ btw.

You quoted part of a sentence out of context, the rest of which made it clear that the point I was making was different to the point you were saying I was making, and I'd just explained the point I was making again in the post you were replying to.

I did nothing of the sort - your initial assertion was that QE was about enabling the banks to meet their liabiliites (I replied that it wasn't and you replied that it was. You didn't say anything at the time about your posts being misrepresented or quoted out of context so seems odd to start now)

which is and was nonsense, and as previously stated shows a fairly poor understanding of what QE is and how bank's work

 

[love detective]

do you also believe in the tooth fairy?

eta - well ok, as I think I already acknowledged, this was one part of it, but it's a particularly inefficient means of achieving this, with only 40% of it making it back out of the banks as increased business loans, so I'd contend it'd be naive to say that this was the only, or even main reason for QE, even if it was the public justification used.

ah so i get accused of believing in the tooth fairy for saying it but then you claim you've already acknowledged/said it, presumably you believed what you said?

and who said it was the main reason for doing QE? I've specifically stated it's the main stated reason for doing it and i've also pointed out what is the main unstated reasons for doing it - none of which have anything to do with helping banks 'meet their liabilities'. Although I notice you make no comment on what I say is the main unstated reasons for doing it (although to be fair you make little comment on the majority of things said in reply to you, other than to come out with your tooth fairy shite)

 

[Jazzz]

In this case, the pattern of value being transacted is as follows: Andrew buys 1000-worth of value from Bertie. Bill buys 1000-worth of value from Anthony. So Bertie and Anthony now have 1000 credits for future buying. Andrew and Anthony now have 1000 credits of debt that they have to pay back at some point. That's what money does - it allows some to consume now, and others to consume later; it allows you to do something for someone today, then have someone else do something for you tomorrow in return, and vice versa...

Quite, except there is one important catch. Bill and Andrew are not merely obliged to pay back 1000 credits each: they have to pay it back with interest. So they may have to pay 1100 credits each. Now, this is going to be difficult for our small society to repay 2200 credits to the banks when only 2000 were created. Now, if we have more money coming into circulation through new loans than is being destroyed (as the loans are repaid), then this is possible. However when the bubble bursts there are going to be big problems.

 

[free spirit]

some numbers

In January 2006, total Cash reserves of all UK banks were £8.2 billion.

Total UK sight liabilities, repayable on demand (excluding other banks) was £629 billion

Total of all bank liabilities was £2.5 trillion

So the UK banks in total were operating on a cash ratio of 1.3% to UK sight liabilities, or 0.3% to all liabilties.

The banks were reliant on being able to bolster this cash reserve if required via either selling of their 'ready for sale securities', or by interbank lending against those assets.

The problem when the credit crunch came was that a large proportion of those assets suddenly went from being AAA rated to being toxic to the point where nobody wanted to touch them as they didn't trust the rating, plus there's likely to be limited market appetite / funds for buying serious quantities of these assets from multiple banks at the same time, and at the same time all the banks realised they needed to hoard their cash themselve, and not lend it to the other banks.... plus the fact that there was only £8.2 billion cash held in total between all the banks vs £629 billion total sight liabilities, so there wasn't enough within the entire banking system to stave off even a run on a relatively minor bank such as Northern Rock.

Saying that the government intervention preceded the bank run, and therefore the bank run wasn't the problem is idiotic. The bank run was coming with or without boe intervention, because the markets were clear that northern rock had severe problems, and the public would have picked up on this via the papers and the run would have happened. The bank of england intervention prior to it happening was a last gasp desperate attempt to prop the system up before the run really got going, but the reason for it was that the run was already virtually guaranteed to be starting the next day (or they'd have been very lucky to have escaped a run at some point in the next few days).


Page 204 of this link http://www.scribd.com/doc/75401866/...uidity-the-run-up-to-the-Northern-Rock-crisis

 

[free spirit]

what do you think a cash liability is?

From reading the document I've just linked to, the correct technical term would seem to be 'sight liabilities' or liabilities that are payable in cash on demand.

I may not have used exactly the correct technical term, but it was pretty obvious what I meant.

 

[littlebabyjesus]

Quite, except there is one important catch. Bill and Andrew are not merely obliged to pay back 1000 credits each: they have to pay it back with interest. So they may have to pay 1100 credits each. Now, this is going to be difficult for our small society to repay 2200 credits to the banks when only 2000 were created. Now, if we have more money coming into circulation through new loans than is being destroyed (as the loans are repaid), then this is possible. However when the bubble bursts there are going to be big problems.

On this point I agree with you. At any one moment, the total amount owed is more than the total amount that has been created through loans, because of interest. It cannot be otherwise. And yes, this has to mean that we are locked in a spiral of ever-growing loans.

 

[free spirit]

for liquidity purposes, cash is king after all in an uncertain environment, bird in the hand is worth two in the bush etc. etc.. - northern rock for example didn't go under because it was insolvent, it went under because it didn't have enough liquidity to fund itself and its ongoing operations. so an increased yield on an asset in the future is no use if you don't have the cash flow to fund yourself today

hold up, this is exactly the point I'm making, but then you have a go at me for arguing that the government buying hundreds of billions worth of government securities from the banks for cash is largely aimed at resolving this situation for the banks.

If a similar thing happens to all or most banks though, then there's nobody left to provide the short term lending of hard currency to the banks that needs it, and you get a credit crunch situation that can only be eased via the release / printing of vast quantities of new hard currency just to meet the banks existing liabilities.

This seems to be the original post you objected to, and ok I should probably have qualified the liabilities as being 'sight liabilities' or on demand liabilities, but I thought that it was obvious enough what I meant, and you go on to say largely the same thing in other words a few posts later.

 

[yield]

On this point I agree with you. At any one moment, the total amount owed is more than the total amount that has been created through loans, because of interest. It cannot be otherwise. And yes, this has to mean that we are locked in a spiral of ever-growing loans.

Not always if you account for inflation/depreciation/devaluation.

 

[Riklet]

You should write a book about this love detective.

I'm not kidding, i'd buy it. Shit, I bet even Jazz would.

 

[JimW]

You should write a book about this love detective.

I'm not kidding, i'd buy it. Shit, I bet even Jazz would.

Then mine it for quotes to say something else entirely

 

[free spirit]

no it wasn't - the credit crunch was, as its name suggests, a crunch on the ability of banks to fund their lending (see Northern Rock, HBOS, etc.) - hence a contraction on lending activity by banks, which in turn caused a contraction in economic activity which in turn turned the financial crisis into an economic and sovereign crisis as tax revenues plummeted while things like unemployment benefit soared due to the doubling of unemployment etc.

The term credit crunch may have ended up popularly meaning this now, but when it was first coined it referred specifically to the seizing up of the interbank lending, and wholesale money market lending facilities the banks themselves relied on.

This then did lead on to the loss of credit facilities to business and consumers downstream of the banks, as you say, but it also led to the serious potential for a run on the banks to cause them to actually run out of hard cash as I said, which then necessitated multiple injections of cash into the banking system by a variety of means, as well as government guarantees of bank deposits etc all aimed at preventing an actual serious run on the banks.

The reference to a "crunch" is the refusal of banks to lend to each other

[Guardian]

 

[love detective]

hold up, this is exactly the point I'm making, but then you have a go at me for arguing that the government buying hundreds of billions worth of government securities from the banks for cash is largely aimed at resolving this situation for the banks.

No, your point was that the threat of a customer bank run, withdrawing their deposits was both a major cause of the credit crunch (wrong) and the reason that QE was implemented was so that the banks could meet those withdrawls in hard cash should they so require (wrong)

That banks had a demand for cash, was not the motivating factor behind QE - i've already explained what I see as being the main stated and unstated factors for the state doing QE. That the banks were willing to be the other side of the QE transaction and benefited from it in terms of additional access to liquidity is without doubt, this doesn't mean it was the motivating factor for doing so. As i've already explained, there are countless other state schemes in operation both then and now, which were directly aimed at ensuring banks were propped up with the liquidity that they needed, QE wasn't one of them

My point about NR was that it wasn't a customer bank run, or threat of a bank run that caused NR problems, it was its inability to roll over its short term funding in the money markets that it had been dependent on to fund its long term lending. When they, along with all other banks, were shut out of the money markets in September 2007, the state had to step in as the lender of last resort and put in something like £30bn to replace the funding that it had lost from the markets. Only at this point did customer bank run take place which resulted in a couple of billion being withdrawn from NR (and indirectly placed directly back with it, as that money withdrawn flowed into other banks, who at the time were shit scared to lend it to anyone, so they placed it on deposit with the central banks, who in turn had to increase their funding to NR to make up the shortfall - so in that sense bank runs on individual banks where a central bank exists, are self funding)

So can you tell me which number is bigger free spirit the £30bn of lost funding that NR suffered due to the money markets freezing up or the £2bn of lost funding that NR suffered due to customer withdrawls?

That you continually refer to the £2bn figure as being the reason for the downfall in light of all this is getting into Jazz like absurdity

Even the link that you provided says exactly this

With hindsight, Northern Rock’s business model and particularly its reliance on wholesale funding have been deemed imprudent or even irresponsible....

...A fair comment is that by this stage Northern Rock’s management hoped to meet any funding problem by the issue of further securities.

 

[love detective]

The term credit crunch may have ended up popularly meaning this now, but when it was first coined it referred specifically to the seizing up of the interbank lending, and wholesale money market lending facilities the banks themselves relied on.

The reference to a "crunch" is the refusal of banks to lend to each other

[Guardian]

That's exactly what I said, i.e:-

the credit crunch was, as its name suggests, a crunch on the ability of banks to fund their lending

The banks were no longer able to fund their lending activities in the money markets

This is in stark contrast to your characterisation of the credit crunch to which my post above was a response to, i.e.:-

the credit crunch was largely about lack of access to actual hard currency, both partly caused by the risk of, and at risk of fuelling the potential for a run on the banks of sufficient size for them to actually run out of the means to pay out in cash on request

So your description of a credit crunch was the banks lack of access to what you call 'actual hard currency' (presumably hard cash/bank of england issued money) and the risk of a customer bank run on them

Bank's borrowings in the money markets is not borrowing 'actual hard currency'

i'm not sure you actually know what you mean when you use the phrase 'actual hard currency' either

 

[love detective]

Saying that the government intervention preceded the bank run, and therefore the bank run wasn't the problem is idiotic. The bank run was coming with or without boe intervention, because the markets were clear that northern rock had severe problems, and the public would have picked up on this via the papers and the run would have happened. The bank of england intervention prior to it happening was a last gasp desperate attempt to prop the system up before the run really got going, but the reason for it was that the run was already virtually guaranteed to be starting the next day (or they'd have been very lucky to have escaped a run at some point in the next few days).

Look, before you found out that you had the order of events completely arse about tit - you were confidently telling us that it was the bank run that meant the state had to step in, and therefore the customer bank run was the reason NR went under.

Now you claim that it doesn't matter, which is absurd. You say that the bank run was coming with or without boe intervention, this is actually not true either. Without boe intervention NR would have been closed completely, there would be no bank left for it to have a run against. It was only the stepping in of the state to keep NR open and funded, that enabled the bank run to actually take place. You also say that the markets were clear that NR had severe problems. This is also incorrect, the money markets didn't just freeze up to NR, they froze up to everyone, the market was not there in effect. The money markets didn't stop lending to NR specifically because they knew it had severe problems, the money markets stopped lending to everyone which caused NR severe problems. Once again, you have the cause & effect arse about tit

The amount of liabilities that NR had in terms of money market funding dwarved that which they had in relation to customer deposits. So for you to continue to assert that it was the threat of the loss of its small deposit base rather than it's huge money market funding base is absurd

You continually seem to be suggesting that £2bn is a bigger figure than £30bn

This is one of the major reasons that NR got caught short at the time, because unlike most other banks it did not have a well diversified source of funding, and relied far too heavily on short term money market funding (as opposed to having a better balance of funding between customer deposits, short term market funding, long term market funding, loan notes, subordinated debt, share capital etc..)

 

[Jean-Luc]

i'd rather take my chances with the state than the 'spontaneous operation of economic forces'!

(cue pictures of wheel barrows of cash in zimbabwe & weimar germany etc. etc..)

Surely, it was the state central bank in Zimbabwe and Weimar Germany that printed all that money that fuelled the runaway inflation? Not that we have to decide what's the best way for capitalism to deal with monetary questions.

I don't think that "full reserve banking" does imply a command economy (even if a command economy would be practising a form of "full reserve banking"). Most of its supporters are "free marketeers". It would still allow personal loans and mortgages from private banks as now, except that these would have to come from a smaller pool of "time deposits". Those of its supporters who recognise that this pool might be smaller than the economy requires advocate that the shortfall should be made up by the government/central bank issuing more "basic" money, mainly in the first instance to the government (which they say the government can use to reduce taxes, their preference, or, if they are demagogic, to improve benefits). They try to build in various safeguards against the government abusing this (one is to leave the decision as to how much extra basic money to create to the Monetary Policy Committee of the Bank of England), but history suggests that this won't prove effective. But it could, in theory.

 

[love detective]

well that was why i said 'cue pictures of zimbabwe and weimar germany' as i knew as soon as i said i'd rather take my chances with the state, that someone would be along to say what about zimbabwe and weimar germany

so yes of course it was the state, but my point is that there's nothing inherently more inflationary about a state trying to increase the money supply through printing/creating money than there is with an internal system creating price inflation due to the huge increase in the money supply brought about by the frantic circulation of money within it. Central banks can create/print vast quantities of money without it being inflationary and likewise the 'spontaneous operation of economic forces' can drive up the money supply to create huge inflationary pressures in relation to credit fuelled property price bubbles etc

so my point is that the defining factor isn't so much where the increase in money supply comes from or is generated from, it's about the underlying reasons for that increase - that is the key thing (for example if the money supply was expanding to keep up with the underlying production of value in the economy, then this wouldn't be inflationary, regardless if that increase came from a state/central bank controlled system or our hypothetical exiting in theory only 'free market' system

 

[Jean-Luc]

Quite, except there is one important catch. Bill and Andrew are not merely obliged to pay back 1000 credits each: they have to pay it back with interest. So they may have to pay 1100 credits each. Now, this is going to be difficult for our small society to repay 2200 credits to the banks when only 2000 were created. Now, if we have more money coming into circulation through new loans than is being destroyed (as the loans are repaid), then this is possible. However when the bubble bursts there are going to be big problems.

This is another currency crank fallacy. Interest on loans comes out of future production, either from the profits businesses make by using the loan or, in the case of personal loans, out of wages earned by working.

Some advocates of "full reserve banking" recognise this. For instancve Michael Reiss in his book What Went Wrong with Economics:

But what about the interest?

The question remains around the lending and repayment of money: what about the interest payments? The answer is that when a loan is paid back, the original money created by the loan disappears, but the bank is allowed to keep the interest repayments. This is how banks get their income.

Some people, when presented with this information about how the banking system works, become concerned about where the supply of money for interest payments could possibly come from. They say things like: "If the total size of the money supply was fixed then there is no possible source of money for paying interest." This may be followed by: "So this proves that the money supply is forced to increase forever, otherwise borrowers could never pay the money buck." They suspect that a proportion of borrowers must on aggregate, almost by definition, be unable to repay the interest. This view is however, mistaken. Indeed Professor Steve Keen of the University of Western Sydney has recently produced computer simulations to prove it. The key thing to note is that the interest paid does not simply accumulate at the bank. The interest is shared between bank owners, employees and savers, all of whom will be spending their earned interest back into the economy. This flow of money is a source of money for the interest payments.

The supposed impossibility of repaying interest is bit like the following dilemma. Imagine two people on a desert island: Mary and Sue. Sue owes Mary $20 but there are only $10 in existence and this is currently in the hands of Mary. At first glance it appears that the debt could never be repaid but this apparent impasse is easily solved. All that has to happen is for Sue to sell Mary some good or service. Say, for example, Sue spends some hours catching fish. She could sell the fish to Mary for $10. This $10 could then immediately be given back to Mary as part payment for the debt. Now simply repeat the process one more time and the debt is cleared. The total amount of money that can be paid by Person A to Person B is not limited by the total amount of money that exists in an economy.

Sadly Steve Keen's proof of the repayability of interest is not widely known and it is all too common for both economists and politicians to assume that it is essential for the money supply to continuously grow in order for an economy to function.

The fact that there is no in-built mathematical paradox to avoid when paying back interest does not necessarily guarantee that all loans will be paid back; far from it. If someone borrows a large a sum on the basis that they expect healthy future income to repay the interest there is always scope for things to go wrong. They may lose their job, or they may become ill; perhaps their business plan was flawed and the product they are making proves unpopular. Any of these problems may lead to a situation where the loan repayments are larger than the borrower can ever reasonably pay back. This is possible even if the loan was interest free.

In conclusion we can now see that it is not essential for the money supply to grow in order for interest payments to be made on loans without default. There are a variety of problems caused by fractional reserve banking, some of them severe (as we shall see later), but inherently unpayable interest is not one of them. (pages 18-20)

I leave you to settle this with your fellow full reserve banker.

 

[love detective]

This is another currency crank fallacy. Interest on loans comes out of future production, either from the profits businesses make by using the loan or, in the case of personal loans, out of wages earned by working.

yep - and this is why the currency cranks & money first freaks are never able to see the wider framework - they have zero interest in things like underlying value production and surplus vale extraction, which need to be taken into account to have any chance of getting a handle on how the monetary system which sits above, and is an expression of, it works

they treat the symptom of something as its underlying cause, and can't see past money, starting at the wrong end of the analysis chain and never moving one inch from it. they spend all day reassuring themselves that those cows in the distance really are small, and that's all they need to know

 

[littlebabyjesus]

Ta for that, J-L. That's just cleared up an ongoing problem I've had with thinking about this.

 

[littlebabyjesus]

yep - and this is why the currency cranks & money first freaks are never able to see the wider framework - they have zero interest in things like underlying value production and surplus vale extraction, which need to be taken into account to have any chance of getting a handle on how the monetary system which sits above, and is an expression of, it works

they treat the symptom of something as its underlying cause, and can't see past money, starting at the wrong end of the analysis chain and never moving one inch from it. they spend all day reassuring themselves that those cows in the distance really are small, and that's all they need to know

Actually, they might just be making an honest mistake.

 

[love detective]

Ta for that, J-L. That's just cleared up an ongoing problem I've had with thinking about this.

I was saying exactly the same thing to you LBJ over the previous years when you were making the same assertions as Dr Jazz

I constantly pointed out that you can't just look at money and the interest on it and say omgz how can it happen - i've been consistently saying you need to look at this in conjunction with underlying activity in the economy, value production in other words if you want to get a better handle on how the money system works

edit: and i've also been constantly pointing out that to look at the money suplply as a static stock, like the £10 in the island example, is not a useful way of understanding money, you have to look at it as flows, movement, circulation - i've been going on about both these things for years now on here

 

[littlebabyjesus]

I was saying exactly the same thing to you LBJ over the previous years when you were making the same assertions as Dr Jazz

I constantly pointed out that you can't just look at money and the interest on it and say omgz how can it happen - i've been consistently saying you need to look at this in conjunction with underlying activity in the economy, value production in other words if you want to get a better handle on how the money system works

Yes, you were. And I didn't understand your point. You get annoyed when people don't get you. But it isn't being done on purpose. Sometimes it just takes someone else to explain it using different words.

 

[love detective]

yep fair enough, that's a fair point

 

[love detective]

Actually, they might just be making an honest mistake.

like the medical researcher or scientist who refuses to look beyond the symptoms of a cancer, but claims they can understand everything about those symptoms including how to get rid of them? possibly a stupid honest mistake, but a very stupid one and one which makes their work next to useless in understanding what they are supposedly investigating

 

[littlebabyjesus]

What do you want me to say?

You were right. I didn't understand your explanation for why you were right. I do now. I was wrong.

What else is there to say?

 

[love detective]

i wasn't asking you to say anything, i acknowledged that you made a fair point in your post and that was that

 

[littlebabyjesus]

Fair enough. I guess I took your post personally.

 

[Monkeygrinder's Organ]

You should write a book about this love detective.

I'm not kidding, i'd buy it. Shit, I bet even Jazz would.

Yes, some excellent posts on this and the last thread about this, I've found it really interesting.

Anyway assuming the book isn't in the offing is there one you would recommend to read up on this stuff?

 

[Jean-Luc]

Yes, some excellent posts on this and the last thread about this, I've found it really interesting.

Anyway assuming the book isn't in the offing is there one you would recommend to read up on this stuff?

There's this classic statement from 1921 of the case against banks having the power to create credit from nothing: http://theoryandpractice.org.uk/library/meaning-bank-deposits-edwin-cannan-1921

This pamphlet, from 1935, deals with "money bugs" and puts money and banking in the context of production: http://www.marxists.org/archive/keracher/1935/economics-for-beginners.htm

So does this one: http://www.worldsocialism.org/spgb/socialist-standard/1930s/1933/no-345-may-1933/douglas-scheme-pt1

Sorry, I can't think of anything more modern in that these are out-of-date being written when the currency was still tied to gold (even though that made it is easier to see what was going on) and before the "Keynesian revolution". Which goes to show the need for a pamphlet or book on the subject taking into account subsequent developments, especially managed currencies, inconvertible paper money and the redefinition of money by Keynes and economists generally.

 

[free spirit]

.