Money creation: who creates money?

Norfolk_Jim

IronWolf wrote: »

I'm no expert in fractional reserve banking, but I can't believe what you're saying actually happens, because it doesn't seem logical. And if something doesn't make sense then it isnt true.

If a bank can create money to loan out, why would it care about the credit worthiness of the person it's lending to? Why wouldn't it just lend out huge sums of money to everyone, if people didn't pay it back it doesn't matter because it was never real money to begin with.

While I dont believe banks transfer physical money around all the time, they do expect the bank transferring to them to actually have the money and be able to pay on demand. Why would they just willingly accept digital numbers from another bank?


The truth is that the current system, whereby banks only loan out to people that have a chance of paying back, only makes sense if they're loaning out "real" money (which I mean is backed up by a cash or an IOU for cash) rather than money they have literally just created on a computer.

Never ending growth & consumption without compounding derailing the gravy train is equally illogical but we've been on that route since at least the 70's - Hence the obsession with not going into recession - but the ability to grow cant be maintained forever because the base from which to grow keeps growing with it - The only way out is total collapse, which I dread to think of - the main factor being not if but when

Did you not notice? The banks have been lending money to people who cant pay and probably never could pay at both a personal and international level - have a look at the Euro Zone. Greece comes to mind.
Every day banks thrust money at me (I've never defaulted a payment in my life but I live on the Debt free Wanabee board), Barclays just texted me to practically beg me to borrow 9000 more - and thats in the tough times.

Look, if you have 1,000,000 on deposit for which you are paying 1% and then lending out 900,000 at say 4%, at the end of the year you will have earnt roughly 3% or 30,000 from which you'll need to deduct running costs, taxes, fat cat pay, PPI repayments, bad loans and bubbly for the shareholders.

Now tell me how you can generate the profits the banks make from the deposits they take? They leverage. If they give 2 people 1,000,000 loans backed by that same 100,000 they get in a year 6% or 60,000 instead - and it works fine so long as the depositor does not ask for it all back at once and both creditors pay it all back with interest.

Gross oversimplification

But Western banking looks like a giant Ponzi scheme to me now compared to when I was young and VISA was a twinkle in its creators eye. Banks INVESTED the money and bank managers KNEW their customers

But it all ran out of control like a runaway train once we started taking the waiting out of wanting and the banks saw a new way to make profit out of underwriting IOUs

IronWolf

Norfolk_Jim wrote: »

Never ending growth & consumption without compounding derailing the gravy train is equally illogical but we've been on that route since at least the 70's - Hence the obsession with not going into recession - but the ability to grow cant be maintained forever because the base from which to grow keeps growing with it - The only way out is total collapse, which I dread to think of - the main factor being not if but when

Did you not notice? The banks have been lending money to people who cant pay and probably never could pay at both a personal and international level - have a look at the Euro Zone. Greece comes to mind.
Every day banks thrust money at me (I've never defaulted a payment in my life but I live on the Debt free Wanabee board), Barclays just texted me to practically beg me to borrow 9000 more - and thats in the tough times.

Look, if you have 1,000,000 on deposit for which you are paying 1% and then lending out 900,000 at say 4%, at the end of the year you will have earnt roughly 3% or 30,000 from which you'll need to deduct running costs, taxes, fat cat pay, PPI repayments, bad loans and bubbly for the shareholders.

Now tell me how you can generate the profits the banks make from the deposits they take? They leverage. If they give 2 people 1,000,000 loans backed by that same 100,000 they get in a year 6% or 60,000 instead - and it works fine so long as the depositor does not ask for it all back at once and both creditors pay it all back with interest.

Gross oversimplification

But Western banking looks like a giant Ponzi scheme to me now compared to when I was young and VISA was a twinkle in its creators eye. Banks INVESTED the money and bank managers KNEW their customers

But it all ran out of control like a runaway train once we started taking the waiting out of wanting and the banks saw a new way to make profit out of underwriting IOUs

Yes banks were too lax with lending, which led to a crisis. There wouldn't be a crisis if all they were losing was invented money.

Norfolk_Jim

If what they were losing was actual deposited money they'd go under faster than anyone could imagine.

If anyones interested in where a lot of this kind of debate comes from they could look at "Money as Debt", an animated documentary by Paul Grignon about the money system as he sees it practiced through modern banking.The film presents Grignon's view of the process of money creation by banks and its historical background and has been much critiqued. It reflects similar views to my own and readers might find it interesting in as much as it would give an understand of one of the arguments.

That its not what you think is the case needn't prevent its use to get a handle on thinking like mine.

Needless to say its popular with the precious metal rampers of which I am not one. To me, metals are for making things with and are only of whatever value people choose to give them - much like everything else

zagfles

Norfolk_Jim wrote: »

Originally Posted by zagfles
That was what Northern Rock thought. They used their "assets" ie mortgages as security for loans from the money markets. But when the money markets started drying up, they became unstuck. Assets are only as good as the security that backs them, in the case of mortgages, house prices. If house prices go down, then their assets become less secure, and less people will accept them as security, or want higher rates of return for them.

A run will always cause a problem, as people want cash, which the bank doesn't have as they've lent most of it out. They can't say to someone demanding their £100,000 deposit out - "here, take Mr Smith's mortgage".

Thats right, they dont have enough cash to pay out the depositors. But if liabilites are less than deposits they can turn to the BOE as lender of last resort who would prop them up. Of course if liabilities are more than deposits the BOE would be less willing to prop them up because it would be throwing money into a bottomless pit - sound familiar?

You've become confused - deposits are the bank's liabilities. The assets are the mortgages (and other loans).

If the bank takes £100,000 in deposits and lends £90,000 to someone as a mortgage, and keeps £10,000 in it's coffers, then it has £100,000 of liabilites backed by £10,000 of cash and £90,000 in loan assets.

But if the person who borrowed the £90,000 gets into debt and can't repay, and at the same time the value of his house plummets so it's worth less than £90,000, then the "asset" loses its value. If he goes bankrupt and the bank forces a sale of the house and it only raises £60,000, the bank has just lost £30,000 of its assets. So it has £100k of liabilities but only £70k of assets.

That's pretty much what happened in the US, complicated by the fact the banks also securitised the mortgages and sold them on as AAA rated investments!

NR did similar, instead of raising money from depositors they raised money by borrowing against their assets, ie mortgages. When their assets looked less safe, as above, the source of their funds dried up and they were hung out to dry.

Norfolk_Jim

Theres a nice illustration here
http://www.moneyasdebt.org/content/fractional-reserve-banking
That illustrates fractional reserve banking in the way Hamish and others have explained it.
Unfortunately I cant copy it here but its worth a look at. Maybe someone else can

Norfolk_Jim

It was from this publication that I got the idea that 10,000 of deposit results in 100,000 of credit out there.
http://www.moneyasdebt.org/sites/moneyasdebt.org/files/Modern_Money_Mechanics.pdf

Is this an unreliable / discredited publication?
I would not know if it was, it's not something I've studied in any serious depth other than to be convinced the current system just can't last as it is

Not intending to be chicken little doom monger, just looks like something I will have to face sometime in my lifetime.

Anyone know any good books on how Hyperinflation worked through in Germany and Hungary - not too scholarly please, something for the layman

zagfles

Norfolk_Jim wrote: »

It was from this publication that I got the idea that 10,000 of deposit results in 100,000 of credit out there.
http://www.moneyasdebt.org/sites/moneyasdebt.org/files/Modern_Money_Mechanics.pdf

Is this an unreliable / discredited publication?
I would not know if it was, it's not something I've studied in any serious depth other than to be convinced the current system just can't last as it is

Not intending to be chicken little doom monger, just looks like something I will have to face sometime in my lifetime.

Anyone know any good books on how Hyperinflation worked through in Germany and Hungary - not too scholarly please, something for the layman

The central bank (who can create money) created too much of it. Simples!

Norfolk_Jim

zagfles wrote: »

The central bank (who can create money) created too much of it. Simples!

yeah, but that doesn't contain any interesting historical anecdotes about taking your wages home in a basket only for the wages to be tipped out and the basket stolen.

Theres not much about how it affected people in ordinary life either, other than needing to shop 2-3 times a day

What did it do to mortgages?

How was it resolved?

I thought that would be an interesting read worth more than a single sentence.:embarasse

IronWolf

Yes that diagram is correct, but the creation of all that money is because of duplication through banks, that doesn't mean a bank can loan out more than it has on deposit, its because the initial deposit can be counted many times. That $90 loaned out counts as a deposit in the second bank.

Also banks don't really do this intentially to somehow play the system, its just a result of how the system works.

debtcutter

Wow, this thread got pretty interesting.

Banks expand the money supply. I think that's one point most have agreed on.

There seems to be a big divide in whether or not that in itself is a good or a bad thing.

Giving the fact the increase in money supply reduces the purchasing power of every £ in circulation (more money to buy the same number of goods/services), I find it hard to see it as anything but bad.

The fact that bank runs can even happen is IMO a symptom that something's wrong.

Just follow FRB back to it's origins. How is what the banks are doing now, any different to what the vault owners did back then?

Someone on the last page said "It doesn't seem logical, so it can't be true" That's literally the reason that it's accepted. It seems too simply brilliant to be true.

Here are the thoughts of some bankers, politicians and others
http://www.themoneymasters.com/the-money-masters/famous-quotations-on-banking/

My favourite being from Henry Ford:
“It is well enough that people of the nation do not understand our banking and money system, for if they did, I believe there would be a revolution before tomorrow morning.”

Anyway, that's me done in this thread.

Thanks to all that have contributed. It's been a great read this afternoon!