Debt amnesty. Could this work?

theEnd

I would have preferred it if the central banks did nothing. QE is a form of debt amnesty. Without it, the collapse would have been worse, but (mostly) the correct people would have taken most of the pain and we'd probably be in a better position by now.

By bailing everyone out, which is what we've done
- bad banks
- bad bankers
- speculators (especially in housing)
we've created an even more unequal society (both class and demographics), but more concerning, once the economy does actually recover, there's nothing to hold people back as we've now shown there is no risk, only reward.

Capitalism can only really work if there's risk. The badly run banks and companies should be gone. Even depositors would 'risked' their money in badly run banks for a larger return should have lost some. The chancer with 100 BTL flats at 100% LTV should be wiped out and those properties available cheaper for the next generation.

A normal depression would have led to a new, brighter future.

CLAPTON

theEnd wrote: »

A bank will always have deposits. The loans don't really go anywhere, they're just zero sum numbers across many banks, all of which ultimately have a current account with the central bank.

As a loan is created, a deposit is also created. If I move/spend that money, the deposit is simply moved to another account (possibly even in the same bank).

I'm not sure the point your are trying to make

Can a bank become bankrupt?

theEnd

CLAPTON wrote: »

I'm not sure the point your are trying to make

Can a bank become bankrupt?

Yes. In that respect it's no different to the old fractional reserve banking model. They need to maintain a capital reserve ratio, which limits the total lending and they still need to cover any defaults, so they need to be careful who they lend to.

In reality, it's way, way more complicated.

My point is that at the time of lending the money, they do not need the matching deposit and to an extent it is created out of thin air (although with a matching deposit created at the same time).

CLAPTON

theEnd wrote: »

Yes. In that respect it's no different to the old fractional reserve banking model. They need to maintain a capital reserve ratio, which limits the total lending and they still need to cover any defaults, so they need to be careful who they lend to.

In reality, it's way, way more complicated.

My point is that at the time of lending the money, they do not need the matching deposit and to an extent it is created out of thin air (although with a matching deposit created at the same time).

at the point of lending the money it comes from their reserves : no reserves no loan

to that extent is isn't created out of thin air but is real money.

princeofpounds

They simply credit my account with £1m. Then by month end they need to up their capital adequacy to cover a proportion of that amount. But the money will just be deposited in another account in BankB, who then need to reduce their capital adequacy by the same amount, so there's a simple switch.

Huh? Nope...

Capital adequacy is the amount of capital - principally equity, money supplied by shareholders - required to acquire assets (like making loans) using liabilities (like customer deposits).

It forms the buffer for the depositor, and is what helps to make banks safe places to put your money.

If the loan goes bad and make a loss, it gets deducted from capital first. The bank's shareholders are forced to put their own money at risk for anything the bank does with your deposits.

But if the loan makes a profit in excess of the cost of the deposit, the owners of the capital - the shareholders - get the profit.

More risk, more reward, which is why a bank might make a return on equity of, say, 9%, and you get 1% in your savings account.

If you extend a loan, you will need to use more capital. But if you get a deposit, you do NOT reduce your capital.

(Edit to add)

I should also mention that the way that equity is calculated in an accounting sense, and the way capital is calculated according to regulations, are actually slightly different.

The main difference is that regulators will 'risk-weight' assets, such as saying that government bonds are so safe you can put money in there without using your own capital. Personally I think the whole concept of risk-weighting is silly, but that's a complication for another time.

It is very similar to having one set of books for accounting purposes, and another set for tax accounting which obeys slightly different rules.

But for simpicity's sake, you can ignore the difference to understand the concept.

chewmylegoff

You're all wrong. What happens is that every month a shape shifting lizard man gets off his throne built entirely from melted down silver maples and slithers to the bank vault and takes all of the deposits made at the bank that month down to their associated investment banking casino and puts the lot on 00 on roulette. If 00 comes up all the money is used to pay enormous bonuses to the bankers. If any other number comes up all the money is used to pay enormous bonuses to the bankers.

Just google "factually inaccurate youtube video posted by a clueless moron" if you want to know more.

Thrugelmir

CLAPTON wrote: »

I'm not sure the point your are trying to make

Can a bank become bankrupt?

If there are insufficient reserves held then yes.

Generali

theEnd wrote: »

Yes. In that respect it's no different to the old fractional reserve banking model. They need to maintain a capital reserve ratio, which limits the total lending and they still need to cover any defaults, so they need to be careful who they lend to.

In reality, it's way, way more complicated.

My point is that at the time of lending the money, they do not need the matching deposit and to an extent it is created out of thin air (although with a matching deposit created at the same time).

Your point is wrong.

purch

theEnd wrote: »

deposited in another account in BankB,

There used to be a Bank called Bank B.............not sure there was ever one called Bank A though.

purch

theEnd wrote: »

the old fractional reserve banking model.

Are you under the mistaken impression that there was a time when Banks could create money out of "thin air" without the need for any reserves ?