Money creation: who creates money?

chucky

gagahouse wrote: »

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.

I just don't do Gordon Brown is the reason for the financial crisis. Not a valid a argument. You would argue that the light touch of the financial markets was started previously to that though.

But... I do see that the reason London became the global centre for CDS trading came from the welcoming of entities of banks to trade in London by the Labour government. That cannot be denied.

gagahouse

chucky wrote: »

I just don't do Gordon Brown is the reason for the financial crisis. Not a valid a argument. You would argue that the light touch of the financial markets was started previously to that though.

But... I do see that the reason London became the global centre for CDS trading came from the welcoming of entities of banks to trade in London by the Labour government. That cannot be denied.

I don't think we disagree, Brown is clearly not the singular reason, just one of many actors that played a small but significant part in a sequence of events that led to the crisis. I would agree the deregulation was a process that began long before Gordon, he just carried it on.

debtcutter

I can't think of another industry that has a theoretical ROI which is basically infinite.

zagfles

DannyRadclif wrote: »

Its not the banks who create the currency out of thin air its the person.

Every time someone buys something with a credit card, or borrows any currency at all (mortgage) the currency springs into existence the moment you swipe your card. That currency did not come from anywhere, it was just created by the person who swiped their card and the bank gets to charge you interest on the currency you just created and added to the supply.

The thing is with outstanding revolving credit, when the person receiving the currency just created on the credit card puts into into their bank account, this new bank can not tell the difference between base money and the outstanding revolving credit supply.

Please tell me if this is wrong and which bit and I will be happy to admit it if it is wrong, it does take a bit to get your head round where each unit of currency around the world comes from.

No currency is created at all. All that happens is the numbers on the banks computers (account balances) change.

If you have a Barclays credit card and buy something for £100 from a shops that also banks with Barclays, your balance will go £100 more negative and the shop's balance will go £100 more positive, net result is Barclays balance sheet stays the same, but the numbers change on your account and the shop's. (in realtity the shop would only get maybe £98 as Barclays & VISA would get about £2 for processing the transaction).

Banks & individuals don't create currency (ie real money - M0), they can only create IOU's. Which is all account balances (positive or nagative) really are.

Norfolk_Jim

I appreciate you taking the time to try and explain to me Hamish.

If I'm not very much mistaken you are describing a "Multiple deposit creation" system being in place

But banks are lending more than they have on deposit. Look at their loan to deposit ratios

in 2007 UK banks had a loan to deposit ration of 137% (Source, Morgan Stanley) on average. So for every 100 deposited with your typical bank, 137 was being loaned out as credits in peoples accounts

In the case of Northern Rock the ratio was 322% hence a really small run on the bank caused a total collapse. For every 322 a depositor wanted to withdraw, that bank only had 100 in real money in reserve = utter disaster for Northern Rock

Now equate that kind of deposit to loan ratio to todays situation where the more prudent banks are still at 137% and others have gone way beyond that - with multiple deposit money creation as described by you and you will arrive at a situation closer to what I think is happening out there. I think some big name banks are at 170% ratio but I'd need to go look it up to name which ones.

Norfolk_Jim

zagfles wrote: »

No currency is created at all. All that happens is the numbers on the banks computers (account balances) change.

If you have a Barclays credit card and buy something for £100 from a shops that also banks with Barclays, your balance will go £100 more negative and the shop's balance will go £100 more positive, net result is Barclays balance sheet stays the same, but the numbers change on your account and the shop's. (in realtity the shop would only get maybe £98 as Barclays & VISA would get about £2 for processing the transaction).

Banks & individuals don't create currency (ie real money - M0), they can only create IOU's. Which is all account balances (positive or nagative) really are.

Spot on.

The disagreement here as I see it is that there a different opinions on if banks are in fact issuing IOU's backed by very little other than faith and 10% in reserve or just recycling deposits within the system

or both

IronWolf

Norfolk_Jim wrote: »

I appreciate you taking the time to try and explain to me Hamish.

If I'm not very much mistaken you are describing a "Multiple deposit creation" system being in place

But banks are lending more than they have on deposit. Look at their loan to deposit ratios

in 2007 UK banks had a loan to deposit ration of 137% (Source, Morgan Stanley) on average. So for every 100 deposited with your typical bank, 137 was being loaned out as credits in peoples accounts

In the case of Northern Rock the ratio was 322% hence a really small run on the bank caused a total collapse. For every 322 a depositor wanted to withdraw, that bank only had 100 in real money in reserve = utter disaster for Northern Rock

Now equate that kind of deposit to loan ratio to todays situation where the more prudent banks are still at 137% and others have gone way beyond that - with multiple deposit money creation as described by you and you will arrive at a situation closer to what I think is happening out there. I think some big name banks are at 170% ratio but I'd need to go look it up to name which ones.

That can't be true, where is this 'Morgan Stanley' research? On average the banking industry will have a LTD ratio well below 100%. Even in the US on average in 2007 it was more like 80%.

Individual banks can get greater than 100% by borrowing wholesale from other banks, which doesn't count as a deposit, but they have still had to actually receive 'money' in order to loan it out, they cant just invent money. In order for them all to get over 100% they'd have to be borrowing and loaning from each other wholesale multiple times over which doesn't make any sense as the interest rate is LIBOR for them all.

zagfles

Norfolk_Jim wrote: »

Spot on.

The disagreement here as I see it is that there a different opinions on if banks are in fact issuing IOU's backed by very little other than faith and 10% in reserve or just recycling deposits within the system

or both

Both. But there's nothing deceptive or underhand about any of it, it still comes down to banks lending a percentage of what's deposited. The recycling issue is no big deal, it just means more positive and negative balances, but the sum of deposits minus lending still equals the amount on reserve.

Norfolk_Jim

Well as untrustworthy as wikipedia is, if you can believe that, you can see here that http://en.wikipedia.org/wiki/HSBC_Bank_(Europe) HSBC is the only UK bank with with a loans to deposit ratio under 100%
or you could look here
http://gregpytel.blogspot.co.uk/2009/09/loan-to-deposit-ratio-and-banks_02.html
Though I cant claim to know how reliable that is either.
Perhaps more reliable is the FT,
http://ftalphaville.ft.com/blog/2011/06/06/585896/whoops-ring-fencing-retail-banks-could-backfire/
Quote "the stated loan deposit ratio of the UK retail operation at Barclays is 123%"

Banks are not keen on people finding out that their loan came out of thin air. Its all IOU's and accounting and has been for a very long time.

Imagine how comforting it would be to know that going bankrupt on your loan wouldn't hurt some poor granny but just vanish like the oozelum bird

Credit unions work the way its described here but banks are in a world of their own - Its amazing Governments ever let them take over de facto money creation

I was hoping to give a link to Morgan Stanleys report but as it came out in 2007, if indeed it ever did and I not find myself perpetuating some urban myth! But going through Google returns its oft referred to - so If I'm wrong on that at least I wont be the only one. Will keep looking

zagfles

Norfolk_Jim wrote: »

Well as untrustworthy as wikipedia is, if you can believe that, you can see here that http://en.wikipedia.org/wiki/HSBC_Bank_(Europe) HSBC is the only UK bank with with a loans to deposit ratio under 100%
or you could look here
http://gregpytel.blogspot.co.uk/2009/09/loan-to-deposit-ratio-and-banks_02.html
Though I cant claim to know how reliable that is either.
Perhaps more reliable is the FT,
http://ftalphaville.ft.com/blog/2011/06/06/585896/whoops-ring-fencing-retail-banks-could-backfire/
Quote "the stated loan deposit ratio of the UK retail operation at Barclays is 123%"

Banks are not keen on people finding out that their loan came out of thin air. Its all IO's and accounting and has been for a very long time.

Credit unions work the way its described here but banks are in a world of their own - Its amazing Governments ever let them take over de facto money creation

That just means they've borrowed from other banks/money markets to lend out, not that they've created money out of thin air!

That's what happened at Northern Rock - they were lending money raised from the money markets, not raised from depositors. Then suddenly the money markets started drying up & becoming more expensive, so they were doomed.