Money creation: who creates money?

Masomnia

Generali wrote: »

You will have > 10% reserve requirement once Basle III comes in properly.

Speaking of deflation... :eek:

debtcutter

Won't the min still be just below 10%.

And that won't be until 2019, and that's only if it still happens. I can see it being quickly forgotten if we get back to the boom times, anywhen soon.

I'm being a bit of a sceptic now though.

Generali

debtcutter wrote: »

Won't the min still be just below 10%.

And that won't be until 2019, and that's only if it still happens. I can see it being quickly forgotten if we get back to the boom times, anywhen soon.

I'm being a bit of a sceptic now though.

Without wishing to over-complicate, the minimum tier 1 risk weighted will be just below 10%.

In effect, banks will be holding well over 10% of their assets in reserve but plenty of those will be 'risk assets' which will be earning them money.

It's not easy, Basle III.

debtcutter

Generali wrote: »

It's not easy, Basle III.

Hahaha!

Thrugelmir

Conrad wrote: »

Your perception is unbalanced.

Not the measured view.

One of the main reasons the economic and financial crisis, which began in 2007,became so severe was that the banking sectors of many countries had built up excessive on and off-balance sheet leverage. This was accompanied by a gradual erosion of the level and quality of the capital base. At the same time, many banks were holding insufficient liquidity buffers. The banking system therefore was not able to absorb the resulting systemic trading and credit losses nor could it cope with the reintermediation of large off-balance sheet exposures that had built up in the shadow banking system. The crisis was further amplified by a procyclical deleveraging process and by the interconnectedness of systemic institutions through an array of complex transactions. During the most severe episode of the crisis, the market lost confidence in the solvency and liquidity of many banking institutions. The weaknesses in the banking sector were rapidly transmitted to the rest of the financial system and the real economy, resulting in a massive contraction of liquidity and credit availability. Ultimately the public sector had to step in with unprecedented injections of liquidity, capital support and guarantees, exposing taxpayers to large losses.

chucky

Thrugelmir wrote: »

Not the measured view.

So it wasn't Gordon Brown's fault then, the economic crisis also happened in other countries or are you blaming Gordon Brown for the US economic crisis too?

Norfolk_Jim

HAMISH_MCTAVISH wrote: »

Under a 10% fractional reserve, £100 of base money can theoretically generate an additional £1900 of credit money.

Under a 20% reserve, £100 of base money can only generate £400 of credit money.

But this only happens when money is redeposited with banks....

If it's placed under a mattress and never spent, the chain stops there and no further money is created.

So this does not mean a bank can lend £1900 for every £100 on deposit. A bank can only lend £90 for every £100 on deposit with a 10% fractional reserve. They require the money to be redeposited if they are to lend a fraction of it again.

They only have to hold 10% of all their credits loaned out so 900 pounds of loans - which are nothing more than numbers they type into your account - is backed up with only 100 of actual money set aside to cover it - presumably at the BOE.

How can a bank generate the ammount of profit they do if they can only lend out 9 pounds for every 10 pounds I deposit?

Most "money" is nothing more than numbers typed into peoples account - theres nothing backing it up other than 10% of the total sum "loaned" held in reserve. All that QE, its just numbers out of thin air, the BOE simply creates it.

It makes me think of the earlier posters idea that you create money as debt on your credit card when you decide to use the card and you countered that idea.

Do you really believe that my 9000 credit limit at MBNA is actual money set aside in case I decide to use? If I go out and buy a 1000 pound TV with my card then all that happens is that numbers are generated against my name on my account and numbers go into the TV shops account to their credit - there is no 1000 pounds at all, its just numbers, accounting, no money exists. When I repay MBNA the 1000 it just vanishes into the nothing it came from - but the interest - thats actual money that they can then count as their profit.

It does not seem too different from the way Lloyds of London works where names get paid for money at risk that the name does not put on deposit up front but instead becomes liable for should it in fact be needed.

In my own little, admittedly simple, world - Money is the coins and banknotes issued by the government of the country. But as you know Hamish, theres far, far less tangible money in the system than there is "Money" in the economy.

The banks are lending out much, much more money than is on deposit with them

IronWolf

Norfolk_Jim wrote: »

They only have to hold 10% of all their credits loaned out so 900 pounds of loans - which are nothing more than numbers they type into your account - is backed up with only 100 of actual money set aside to cover it - presumably at the BOE.

How can a bank generate the ammount of profit they do if they can only lend out 9 pounds for every 10 pounds I deposit?

Most "money" is nothing more than numbers typed into peoples account - theres nothing backing it up other than 10% of the total sum "loaned" held in reserve. All that QE, its just numbers out of thin air, the BOE simply creates it.

It makes me think of the earlier posters idea that you create money as debt on your credit card when you decide to use the card and you countered that idea.

Do you really believe that my 9000 credit limit at MBNA is actual money set aside in case I decide to use? If I go out and buy a 1000 pound TV with my card then all that happens is that numbers are generated against my name on my account and numbers go into the TV shops account to their credit - there is no 1000 pounds at all, its just numbers, accounting, no money exists. When I repay MBNA the 1000 it just vanishes into the nothing it came from - but the interest - thats actual money that they can then count as their profit.

It does not seem too different from the way Lloyds of London works where names get paid for money at risk that the name does not put on deposit up front but instead becomes liable for should it in fact be needed.

In my own little, admittedly simple, world - Money is the coins and banknotes issued by the government of the country. But as you know Hamish, theres far, far less tangible money in the system than there is "Money" in the economy.

The banks are lending out much, much more money than is on deposit with them

This isn't true. How on earth would a bank go bust if they could create money? Think about it.

gagahouse

chucky wrote: »

So it wasn't Gordon Brown's fault then, the economic crisis also happened in other countries or are you blaming Gordon Brown for the US economic crisis too?

The banking system therefore was not able to absorb the resulting systemic trading and credit losses nor could it cope with the reintermediation of large off-balance sheet exposures that had built up in the shadow banking system. The crisis was further amplified by a procyclical deleveraging process and by the interconnectedness of systemic institutions through an array of complex transactions.

In an unwitting way, Gordon Brown was one of the enablers of the US crisis when he created the not fit for purpose 'light touch' FSA. London became the favourite centre of US investment banks from which to circumvent stricter US rules which led to Lehmans Repo 105 scam, AIG Financial Products London writing massive size in CDS it couldn't back and most of all unlimited re-hypothecation collateral chains.

HAMISH_MCTAVISH

Norfolk_Jim wrote: »

They only have to hold 10% of all their credits loaned out so 900 pounds of loans - which are nothing more than numbers they type into your account - is backed up with only 100 of actual money set aside to cover it - presumably at the BOE.

Not quite.

They only have to hold 10% of the loans they have out, so they can re-lend 90% of the money on deposit with them.

How can a bank generate the ammount of profit they do if they can only lend out 9 pounds for every 10 pounds I deposit?

Sorry, was there a part of "banks are now making record margins on lending" you were unclear about the first few dozen times I posted it?

Do you really believe that my 9000 credit limit at MBNA is actual money set aside in case I decide to use?

In your specific account? No. That would be an inefficient way to manage capital.

But do I believe that MBNA has sufficient funds on deposit to cover total lending from their card business? Yes.

The banks are lending out much, much more money than is on deposit with them

No they aren't. They are lending only a percentage of what is on deposit with them.

However as money can be loaned to one person, and then spent and deposited by someone else, and then loaned again, etc, the total effect is the same.

By creating multiple claims on the same money, you are in effect creating more money.

So £1900 of credit money can in theory be created for every £100 of base money at a 10% fractional reserve. But it only ever is in reality if the money is loaned, redeposited, and loaned again, repeating until there is no more fraction left to reserve.