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How Banks Create Money


Setantii
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If you want to know the real problem with banking it;s this -

They can print banknotes and demand them in payment.

You aren't allowed to.

It's hypocrisy backed by violence and you may as well be in big fat iron chains.

I am afraid Injin that you are incorrect.

There seems to be some confusion as to how money is created.

Money is not just invented, it represents the value of an asset.

A person gets a job and goes to work, they get a salary of £50,000 per year for doing that job. The value of the asset in this case is your contribution in order for the company to make a profit or in the case of the public service. The value of service you provide to the community.

When you get a loan for a car say £20,000 then the bank lend you money based on the promise that you will repay the loan plus interest. The money year earn from your job is paid to the bank and money is transferred from your employer to you to the bank.

The bank takes this money and lends it to other customers and repay the source of the loan. The source of loan could be a saver, who get paid an interest rate for keeping money in that bank or it could be from another bank, such as an investment bank.

The investment bank or saver get the promise from your loan bank/company that they will repay that money. Interest is paid to the investment bank.

Around and around it goes. Until you get to where we are now, where investment banks wont lend retail banks money because they are not confident the promise to repay will be honoured, so they charge more interest to retail banks which in turn because of the extra cost are very choosy who they lend to.

Money isnt just created, it has to be secured by an asset or it just paper.

The Bank of England have talked about "Quantitive Easing", this is where money is printed by the bank for which it has to buy assets from a retail bank say RBS. These assets are so far in the form of shares.

When more assests are created (debt), then more money comes into circulation. Debt is an asset to a bank while a saver is a liability.

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The secret is:

Debit: loan owed by bank customer

Credit: deposit account owed to customer

That's how they account for any loan or credit. The entries do not touch the banks 'cash' at all hence they are not directly constrained in the number of loans they can make by the 'cash' they hold. The deposits are created as and when the credit agreements are signed.

You have to remember that a banks set of accounts is a mirror of what is 'normal' for a business. Customer deposits are credit balances i.e. they owe their customers the money (check you bank statement).

My asset is the banks liability. My liability is the banks asset.

Thats all there is to it.

If this is true, then why couldnt Northern Rock, simply just invent money and lend it out ?

It is because money has to represent an asset. The asset has to a value or it is worthless. Northern Rock had lot of assets but could not realise the value of these assets (Toxic debt), so no body wanted to exchange loans based on these assets that is why they had to go to the BoE.

Edited by pinbacker
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I am afraid Injin that you are incorrect.

There seems to be some confusion as to how money is created.

Money is not just invented, it represents the value of an asset.

You need to consider that the 'money' inside a bank flowing between a banks own customers is not really money but rather numbers and accounting.

Only when the numbers leave the banks own economy and flow outwards do they require real money.

10% fractional reserve enables 90% of loans to be created from "bank money" that exists inside the bank economy or bank computer

Injin is correct and incorrect in my view.

And you are also correct and incorrect.

The fact is that 'bank money' is created money and this money inflates the prices of assetts.

Real money is not tied to assets as you currently believe. 'Bank money' or created money supports the price in some manner related to the amount of 'bank money' used to buy assetts between the banks customers.

Edited by aliveandkicking
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They could.

But no one has to accept it., which is where it all goes wrong.

A bank cannot lend money it does have any more than you can. It can however borrow money from elsewhere to lend to you. Dont confuse interest with loans.

A bank can invent interest, the same way a house can appreciate. It is merely the value of asset that has increased or decreased, which is where money comes from. They dont just put figures in your account and it magically becomes legal tender.

The Youtube videos /Google videos oversimplify a point but are way off the mark.

If you have a car outside and I offer you £100,000 for it. You have invented the money, it represents the value of an asset that someone (say me) is willing to pay.

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If this is true, then why couldnt Northern Rock, simply just invent money and lend it out ?

As far I understand, NR was not a full clearing bank but more like an enhanced building society.

Unlike traditional building societies it could borrow (pre-existent) money from the wholesale money markets as well as take deposits.

But unlike a full clearing bank it could not make loans by simply expanding its balance sheet (within Basel limits).

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You need to consider that the 'money' inside a bank flowing between a banks own customers is not really money but rather numbers and accounting.

Only when the numbers leave the banks own economy and flow outwards do they require real money.

10% fractional reserve enables 90% of loans to be created from "bank money" that exists inside the bank economy or bank computer

Injin is correct and incorrect in my view.

And you are also correct and incorrect.

The fact is that 'bank money' is created money and this money inflates the prices of assetts.

Real money is not tied to assets as you currently believe. 'Bank money' or created money supports the price in some manner related to the amount of 'bank money' used to buy assetts between the banks customers.

We do not use fractional reserve banking in the UK, US or Europe. A bank has no legal obligation to hold any liabilities (savings) in which to lend money since the deregulation by Thatcher.

You are correct when you only when numbers leave the bank does real cash have to be involved. But few people lend money without taking out of the bank, so the money has to come from somewhere, that is the essence of the credit crunch. It has become expensive for retail banks to lend money. So they have effective restoring their balance sheets.

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We do not use fractional reserve banking in the UK, US or Europe. A bank has no legal obligation to hold any liabilities (savings) in which to lend money since the deregulation by Thatcher.

I thought northern rock had a problem with the FSA over Tier 1

In August the Government agreed to convert £3bn of its remaining £14.5bn loan into equity to strengthen Northern Rock's fragile balance sheet after its core tier one capital ratio fell to an unsustainable 2.9pc. To allow the bank to continue trading, the FSA waived its rules until the recapitalisation was complete or until December 31 – "whichever is earlier", the bank said at the time.

http://www.telegraph.co.uk/finance/newsbys...nt-dithers.html

I think the original RNS statements had info on the deal, but I can't remember it.

http://www.londonstockexchange.com/en-gb/p...ews/marketnews/

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As far I understand, NR was not a full clearing bank but more like an enhanced building society.

Unlike traditional building societies it could borrow (pre-existent) money from the wholesale money markets as well as take deposits.

But unlike a full clearing bank it could not make loans by simply expanding its balance sheet (within Basel limits).

You are correct in your first point, it was a deregulated building society.

A clearing bank cannot expand its balance sheet, it still has to have 3 columns. Savers (liabilities), Capital (The banks money) and Assets (Loans). However a clearing bank can lend money to governments bolds (gilts) and other financial instuments like credit card processing, cheque processing. Where as a normal bank cannot.

If you google (clearing banks UK) you will find a list of the main clearing banks in the UK.

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A bank cannot lend money it does have any more than you can.

What do you understand by fractional reserve banking?

That is where to begin.

You also need to read up on "excess reserves"

Everything you are saying is true if bank has "excess reserves"

But it can still lend without "excess reserves" up to the amount of the fractional reserve ratio relative to the reserves it currently holds and even then it has flexibility if it can believe it will get future reserves to cover todays insufficiency of reserves.

Edited by aliveandkicking
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A bank cannot lend money it does have any more than you can. It can however borrow money from elsewhere to lend to you. Dont confuse interest with loans.

A bank can invent interest, the same way a house can appreciate. It is merely the value of asset that has increased or decreased, which is where money comes from. They dont just put figures in your account and it magically becomes legal tender.

The Youtube videos /Google videos oversimplify a point but are way off the mark.

If you have a car outside and I offer you £100,000 for it. You have invented the money, it represents the value of an asset that someone (say me) is willing to pay.

Does the "borrower" know thsi version of events?

Can you say "contract fraud"?

The money is created by the bank by recording the promise to pay as an asset.

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I thought northern rock had a problem with the FSA over Tier 1

In August the Government agreed to convert £3bn of its remaining £14.5bn loan into equity to strengthen Northern Rock's fragile balance sheet after its core tier one capital ratio fell to an unsustainable 2.9pc. To allow the bank to continue trading, the FSA waived its rules until the recapitalisation was complete or until December 31 – "whichever is earlier", the bank said at the time.

http://www.telegraph.co.uk/finance/newsbys...nt-dithers.html

I think the original RNS statements had info on the deal, but I can't remember it.

http://www.londonstockexchange.com/en-gb/p...ews/marketnews/

This would be because it cannot use depositors money to pay for the business operations the bank. It has to use its capital to do this.

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Does the "borrower" know thsi version of events?

Can you say "contract fraud"?

The money is created by the bank by recording the promise to pay as an asset.

How is this contract fraud ?

A retailer buys stock at one price and sells it at a higher price, the difference is profit. If a retailer sells a product say on ebay at £2000 before he buys a product from his supplier at £1000 this is consider normal business practice. Its could only be consider fraud if the goods are not provided usually within 30 days.

I do understand your point and where you are coming from on this.

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How is this contract fraud ?

A retailer buys stock at one price and sells it at a higher price, the difference is profit. If a retailer sells a product say on ebay at £2000 before he buys a product from his supplier at £1000 this is consider normal business practice. Its could only be consider fraud if the goods are not provided usually within 30 days.

I do understand your point and where you are coming from on this.

Pinbacker

If you want to confuse yourself and confuse everybody else talk to Injin.

If you want to learn talk to 'The Spaniard'

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Nothing to do with the bank run then?

The bank run was created by a lack of confidence in the bank, due to media reporting that the bank had approached the BoE for funding to recapitalise it. This led to its savers (liabilities) withdrawing all their deposits which had been lent out with money from the wholesale market.

The capital that remain was too low to repay its liabilities to the savers all at once forcing the BoE to take over the bank to prevent in going insolvent.

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How is this contract fraud ?

A retailer buys stock at one price and sells it at a higher price, the difference is profit. If a retailer sells a product say on ebay at £2000 before he buys a product from his supplier at £1000 this is consider normal business practice. Its could only be consider fraud if the goods are not provided usually within 30 days.

I do understand your point and where you are coming from on this.

I ask the bank to borrow £100,000 of it'sexisting money.

It takes the form I sign and chooses to record this as an asset worth £100,000

Then it returns that to me.

At no point does any "borrowing" take place. It's a flat like for like trade and the bank is lying about it.

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Pinbacker

If you want to confuse yourself and confuse everybody else talk to Injin.

If you want to learn talk to 'The Spaniard'

I am pretty new here, but I have a pretty good understanding of the banking system used to work. :lol:

I am however happy to learn.

There are some videos around though that are misleading, I am merely trying to point out that as long as a bank has to have money to lend and that it is not invented, it is essence reliant on the value of the asset rather than just plucked out of thin air.

Anyway my head hurts and my bed is warm and waiting. Night all.

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I am pretty new here, but I have a pretty good understanding of the banking system used to work. :lol:

I am however happy to learn.

There are some videos around though that are misleading, I am merely trying to point out that as long as a bank has to have money to lend and that it is not invented, it is essence reliant on the value of the asset rather than just plucked out of thin air.

Anyway my head hurts and my bed is warm and waiting. Night all.

What you are saying is true if there are "excess reserves"

If there are "excess reserves" all loans are fully funded by deposits but fractional reserve banking allows for a large portion of loans to not be fully funded when they exist inside the banks own accounting systems.

A bank cannot create money that exists outside of the bank. But can if it exists inside the bank.

The goldsmith created money as claim notes that existed outside of the bank. I dont think a modern bank has that ability though. Unless we begin to see that the bank money as mortgages or auction rate securities is then traded as money...............even so they still represent goldsmiths claim notes and presumably are still subject to regulation .

The problem though is the lack of clear regulation as i understand this current mess.

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The thing is the governments lie, cheat and generally make a bloody mess of things the only reason it sounds so complicated to create money is because well if it was easy everyone would be doing it. This is how the few control the many "With a medium" such as money.

Think about, Really think about it. Since when does the worker need money to work??? The worker works to earn money so he can feed his children, get them clothes and put a roof overhead now if everyone helped everyone build their houses make clothes etc. Give each other food not trade but just give, as it does not cost anything to grow. As for the particle accelerator example you could in theory build ANYTHING with no money. Look at the Egyptian pyramids, Stone henge etc. etc. I'm guessing these things were not built with cash yet they are almighty buildings that have lasted thousands of years. Do you really see most of our current "modern" buildings lasting as long as the ancient pyramids?? I don't!

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I am pretty new here, but I have a pretty good understanding of the banking system used to work. :lol:

I am however happy to learn.

There are some videos around though that are misleading, I am merely trying to point out that as long as a bank has to have money to lend and that it is not invented, it is essence reliant on the value of the asset rather than just plucked out of thin air.

Anyway my head hurts and my bed is warm and waiting. Night all.

Does bank lending affect the price of money?

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