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rp08

Can Anyone Please Explain How Bank Credits And Money Creation Work?

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so I somewhat understand, banks create money out of thin air, by loaning money that doesnt exit, right?

well how does this work?

i'm led to believe when a bank makes a loan, all it does is put add an asset and a liability to its books, say, for the sum of 100,000...

now that this credit is in the customer account, and he transfers this 'money' to a different bank... what happens? is all that happens that bank A tells bank B to add this asset/liability to their books, while bank A nullifies them?

so all that takes place is a shift of numbers from one balance sheet to another?

just seems strange to me.. what is to stop a fraudulent bank sending a billion dollars to an account with another bank, without having made any adjustments on their books, and things like this... really seems like an easy way to become a billionaire???

or is there something more to the transfer of money than just trusting that the other bank has adjusted their figures appropriately?

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Yes.

But you won't find anyone agreeing with each other.

As the Bank of England and the Bank of International Settlements don't agree, I doubt there is much hope for the rest of us.

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so I somewhat understand, banks create money out of thin air, by loaning money that doesnt exit, right?

well how does this work?

Please don't take this the wrong way, but if you search the HPC archives there are about a zillion long and tortured discussions on this topic. There is no quick answer, because it's difficult to even agree on what the question is.

I have personally changed my view on this topic more than once. Here's a link which may help to get you thinking about what the real questions are.

Discuss economics

Not saying it has the answer but it's a start.

JR

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private banks create no money whatsoever. money's even got the owners name on it....Bank Of England.

private banks lend money and invoice you for it. thats the credit they create. but if they have no account with a positive balance then they cant lend. they need to get that from savers or borrow it from elsewhere.

simples.

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so I somewhat understand, banks create money out of thin air, by loaning money that doesnt exit, right?

well how does this work?

i'm led to believe when a bank makes a loan, all it does is put add an asset and a liability to its books, say, for the sum of 100,000...

now that this credit is in the customer account, and he transfers this 'money' to a different bank... what happens? is all that happens that bank A tells bank B to add this asset/liability to their books, while bank A nullifies them?

so all that takes place is a shift of numbers from one balance sheet to another?

just seems strange to me.. what is to stop a fraudulent bank sending a billion dollars to an account with another bank, without having made any adjustments on their books, and things like this... really seems like an easy way to become a billionaire???

or is there something more to the transfer of money than just trusting that the other bank has adjusted their figures appropriately?

Here is how it works:

I deposit £100 in a bank. The bank keeps £5 of it aside as a reserve and lends you £95. You use this £95 to buy some stuff off me. I deposit this £95 in the bank, and now have £195 of deposits with the bank out of the original £100 cash. The bank keeps £4.75 aside as a reserve, and lends you £90.25, which you use to buy more stuff of me, and which I deposit back in the bank.

This keeps going on until the bank has kept aside the whole £100 as a reserve, I have £2000 deposited with the bank, and you owe the bank £1900.

If the bank has lent on an asset such as a house or business equipment, what it has effectively done is turn an illiquid asset into spendable money in much the same way that the stockmarket turns it into tradeable shares. If you have just wasted the money, have nothing to show for it, and no means of paying it back, I have just lost £1900 that never really existed in the first place.

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Here is how it works: I deposit £100 in a bank. The bank keeps £5 of it aside as a reserve and lends you £95. You use this £95 to buy some stuff off me. I deposit this £95 in the bank, and now have £195 of deposits with the bank out of the original £100 cash. The bank keeps £4.75 aside as a reserve, and lends you £90.25, which you use to buy more stuff of me, and which I deposit back in the bank. This keeps going on until the bank has kept aside the whole £100 as a reserve, I have £2000 deposited with the bank, and you owe the bank £1900. If the bank has lent on an asset such as a house or business equipment, what it has effectively done is turn an illiquid asset into spendable money in much the same way that the stockmarket turns it into tradeable shares. If you have just wasted the money, have nothing to show for it, and no means of paying it back, I have just lost £1900 that never really existed in the first place.

Only it is the bank that has lost the money, not you.

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Here is how it works:

I deposit £100 in a bank. The bank keeps £5 of it aside as a reserve and lends you £95. You use this £95 to buy some stuff off me. I deposit this £95 in the bank, and now have £195 of deposits with the bank out of the original £100 cash. The bank keeps £4.75 aside as a reserve, and lends you £90.25, which you use to buy more stuff of me, and which I deposit back in the bank.

This keeps going on until the bank has kept aside the whole £100 as a reserve, I have £2000 deposited with the bank, and you owe the bank £1900.

If the bank has lent on an asset such as a house or business equipment, what it has effectively done is turn an illiquid asset into spendable money in much the same way that the stockmarket turns it into tradeable shares. If you have just wasted the money, have nothing to show for it, and no means of paying it back, I have just lost £1900 that never really existed in the first place.

Err what about your liquidity requirements??

Also not many regulators allow banks to maintain capital of just 5% (I presume you are attempting to show that banks are required to hold capital even though there is no capital in your exmple).

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Err what about your liquidity requirements??

Also not many regulators allow banks to maintain capital of just 5% (I presume you are attempting to show that banks are required to hold capital even though there is no capital in your exmple).

no, i think Citi was levered 41 times...thats just over 2%.

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In 1971 Richard Nixon closed the Gold Window, meaning that State liabilities could no longer be redeemed for anything of material value. Ever since that date legal tender has been no more valuable than bank credit, since they are both an IOU of the State.

Neither one is valuable so banks don't create anything of value. But money doesn't have value in today's world.

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no, i think Citi was levered 41 times...thats just over 2%.

The "leverage ratio" looks at unweighted assets compared to capital. These means that government securities etc are included at 100% (i.e. no risk weighting).

Regulators look at risk weighted assets (i.e. you need more capital the riskier the assets).

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The "leverage ratio" looks at unweighted assets compared to capital. These means that government securities etc are included at 100% (i.e. no risk weighting).

Regulators look at risk weighted assets (i.e. you need more capital the riskier the assets).

might have been Bank of America.

lets hope they havent included dollar gilts as 100% secure.

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No, no. There are different ways of measuring leverage. The column highlighted uses the 'strict' tangible common equity which became fashionable (because of all sorts of dubious capital had been chucked into banks balance sheets). I'm sure someone can come up with a 41x figure. There was this one too I found....which had Citi down as 11.7x and Deutsche Bank at 52x.

http://valtenbergs.com/archives/601

EDIT: Here's another...Barc shareholders look away now....

barr_EUROBANKS_graphic.gif

Bank of Enron only 11:1.....quelle surpreese....nothing hiding in their declarations...and Lehmans.....overvaluing things a tad maybe?

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