Do People Understand Banking?

[the_austrian]

Id recommend fresh, near boiled water each time...milk first if you please.

Milk first? Barbarian.

[the_austrian]

Oh, it's a magic teabag that never runs out of flavour, lol.

I think we're heading into fantasy land.

That was the original example, nothing magic about it perhaps I should have been more clear.

You have one cup of tea. That gets sold for £1, but then you sell it back, the same cup of tea. Now it is back with the original owner. If you do this same action over and over, the tea can remain back with the original person, you can do it millions of times every second.

[the_austrian]

Milk first? Barbarian.

Or are you a teapot person?

[the_duke_of_hazzard]

That was the original example, nothing magic about it perhaps I should have been more clear.

You have one cup of tea. That gets sold for £1, but then you sell it back, the same cup of tea. Now it is back with the original owner. If you do this same action over and over, the tea can remain back with the original person, you can do it millions of times every second.

So it's a magic cafe?

[the_austrian]

So it's a magic cafe?

Let's start again.

Your friend sells you a cup of tea for £1.

For whatever reason, you decide to sell it back and the friend accepts. The tea is back with the original person, and you still have your £1. The tea has been exchanged an even number of times between you and is back with the original person. You can repeat this as many times as you like, at a high frequency. There is nothing to prevent this trade taking place millions of times. At the end of this adventure prices for tea, and for cash will not be altered, any more than they would have done if there had been only one trade.

[R K]

No, all savers money should be 100% safe the low rates of interest do not cover the risk of loss...the high rates of debit interest charged by lenders covers most of their risk, they also can pick and choose who they lend to ......savers are losing not only the value of their money and also their capital is at risk...there is no promise that the state could or would bail out the savers again...savers money is in the hands of the unprotected.

There is a problem with this though.

Suppose for a moment all deposits were 100% safe and there was a 100% reserve ratio.

What would that look like in practice?

There could be no lending - since no lending is risk free, not even to govts. as we are discovering.

There could be no bank infrastructure to keep the deposits 'safe' - since where would the money come from to pay for it.

There could be no staff - ditto

I think it could only look something like a rather large strongroom (or digital equivalent - not for Injin dollars obviously), with fees/insurance charged on top.

It's why I can't see how banksters can pay for their own fully funded deposit protection scheme - it's bonkers to think they could or why if the govt. pay it the cost of so doing somehow disappears - it can only be displaced.

So, no-one would operate a 'bank' on such a basis simply because it would not be economically viable to do so.

Thus, if people want a bank which they don't lend their 'money' (I know injin) to at varying degrees or risk which they lend on at further varying degrees of risk over mismatched time durations ('cause you might want your money out today but they just lent it to someone for 25 years) then they're going to have to accept that their is risk in that transaction for which they expect to be rewarded or else they're going to have to pay probably prohibitive fees for a 100% protection guarantee - which I suspect isn't possible.

The problem we have is that government have pretended banks liabilites are 100% guaranteed, when they know they cannot give such guarantees in reality and even if they try to those guarantees are always subordinate to their own sovereign solvency. They're lying in essence.

[Authoritarian]

Let's start again.

Your friend sells you a cup of tea for £1.

For whatever reason, you decide to sell it back and the friend accepts. The tea is back with the original person, and you still have your £1. The tea has been exchanged an even number of times between you and is back with the original person. You can repeat this as many times as you like, at a high frequency. There is nothing to prevent this trade taking place millions of times. At the end of this adventure prices for tea, and for cash will not be altered, any more than they would have done if there had been only one trade.

This isn't an accurate reflection of the trading process though. In reality you would only use that teabag once, but in effect you've given yourself an infinite supply of teabags and so you've changed both variables: supply and demand.

If you only change demand (which is my interpretation of an increase in velocity) then it's not unreasonable to expect this surge to increase the price. Like on a basic supply and demand diagram.

[the_austrian]

This isn't an accurate reflection of the trading process though. In reality you would only use that teabag once, but in effect you've given yourself an infinite supply of teabags and so you've changed both variables: supply and demand.

If you only change demand (which is my interpretation of an increase in velocity) then it's not unreasonable to expect this surge to increase the price. Like on a basic supply and demand diagram.

Let's say it's a banana. The teabags being reused was not meant to provide any detail, it's just about the single tea drink.

If a banana is sold back and forwards, to the same person, an even number of times, so that everything is as it was originally, there would be no reason for prices to change. We can't know that millions of exchanges like this are not taking place all the time. A fresh pound, straight from the mint costs the same as one that has been around the block.

[Authoritarian]

Let's say it's a banana. The teabags being reused was not meant to provide any detail, it's just about the single tea drink.

If a banana is sold back and forwards, to the same person, an even number of times, so that everything is as it was originally, there would be no reason for prices to change. We can't know that millions of exchanges like this are not taking place all the time. A fresh pound, straight from the mint costs the same as one that has been around the block.

That's not trade. lol

Imagine if there were 10 people queing up to buy that banana, they all had money burning a hole in their pocket and they were really hungry, what do you think would happen to the price?

[the_austrian]

That's not trade. lol

Imagine if there were 10 people queing up to buy that banana, they all had money burning a hole in their pocket and they were really hungry, what do you think would happen to the price?

I'm talking about velocity which is to do with transactions, whether or not anything productive has occurred is a question for the protagonists.

The price of the banana would rise, so in that sense money would fall and there would be inflation of prices. So the price is altered by demand. This doesn't alter my position about velocity being of no consequence to prices. If anything, it establishes it.

[Authoritarian]

I'm talking about velocity which is to do with transactions, whether or not anything productive has occurred is a question for the protagonists.

The price of the banana would rise, so in that sense money would fall and there would be inflation of prices. So the price is altered by demand. This doesn't alter my position about velocity being of no consequence to prices. If anything, it establishes it.

Yes I'm talking about transactions too, if the number of transactions (in a meaningful sense) rose within an economy, this would be the equivalent of saying that there has been an increase in demand. All else being equal, i.e no magic supplies of teabags or banana's then I would expect prices to rise.

So velocity does have an impact on prices.

[the_austrian]

Yes I'm talking about transactions too, if the number of transactions (in a meaningful sense) rose within an economy, this would be the equivalent of saying that there has been an increase in demand. All else being equal, i.e no magic supplies of teabags or banana's then I would expect prices to rise.

So velocity does have an impact on prices.

An increase in transactions doesn't mean more demand. Isn't inflation a decrease in demand for currency? Transactions can happen for any reason, there is no reason to assume it relates to demand in any particular way, either greater demand or less.

[Authoritarian]

An increase in transactions doesn't mean more demand. Isn't inflation a decrease in demand for currency? Transactions can happen for any reason, there is no reason to assume it relates to demand in any particular way, either greater demand or less.

Sure, an increase in turnover may indicate a decrease in price. But as we were talking about velocity of money, I've jumped to the conclusion that we were purely discussing demand.

Perhaps I cocked up.

Edited June 15, 2010 by Chef

[erranta]

<br />It's not debatable at all - 'cash in the bank' is nothing more than a bank debt to you. The bank would be utterly unable to pony up enough physical cash on demand should all their depositors want their money out at the same time for the simple fact that their total assets (excluding loans that it has made) are going to be much less than the money held on deposit. <br /><br />When people in general talk about money, they mean <b>cash</b>. Tangible bits of paper with the Queen's head on, that they can exchange for goods and services. They trust that a bank balance actually means 'cash' held for them in the banking system and don't understand the notion of bank credit and leverage.<br />

<br /><br /><br />

Exactly!

This was shown and proved to you in plain sight recently (a tear in their illusion veil) >>>

As soon as there were "bank runs" (sounds like an authoritarian bankers 'shit-streak')

THEY ARE OUT OF MONEY within a couple of days!

The whole UK ELITE political, banking and media apparatus swung into overdrive to cover this up and restore things to the 'illusionary', chock full of tangibles, everyday, empty bank scenario!

Remember, Nazi elitist Dr GoeBBals 'Reich Minister of Propaganda'

- called the BBc the "finest propaganda machine on earth"!

[the_austrian]

Sure, an increase in turnover may indicate a decrease in price. But as we we're talking about velocity of money, I've jumped to the conclusion that we were purely talking about demand.

Perhaps I cocked up.

I think a conclusion must have been jumped to by one of us, since the concepts are kind of unarguable if there is no magic teabags.

Economics and money seems uniquely ill equipped in terms of language and definitions to be easily understood.

But when I talk about transactions, I mean nothing more than that, a simple exchange of property between two entities. Unless supply or demand is altered, I see no reason why a simple transaction should influence anything else. If something else, be it increased efficiency or more effective use of resources is considered to be implicit and necessarily part of all transactions, that is an assumption I do not make and for me, would require explanation. It might be a null transaction of a type I have described with the repeated exchange of tea or bananas.

Economic activity usually improves our environment, which is a deflation of a kind, because prices fall, but not necessarily.

[Authoritarian]

I think a conclusion must have been jumped to by one of us, since the concepts are kind of unarguable if there is no magic teabags.

Economics and money seems uniquely ill equipped in terms of language and definitions to be easily understood.

But when I talk about transactions, I mean nothing more than that, a simple exchange of property between two entities. Unless supply or demand is altered, I see no reason why a simple transaction should influence anything else. If something else, be it increased efficiency or more effective use of resources is considered to be implicit and necessarily part of all transactions, that is an assumption I do not make and for me, would require explanation. It might be a null transaction of a type I have described with the repeated exchange of tea or bananas.

Economic activity usually improves our environment, which is a deflation of a kind, because prices fall, but not necessarily.

Yep, even basic terms like inflation cause all sorts of hoo hars. A 'proper' economist might argue that broadly speaking there are two types of inflation, cost push, and demand pull, but inevitably it gets centered around the money supply so the distinctions get blurred.

If we ran a proper economy perhaps 90% of economic knowledge would go in the dustbin to and we'd just be left with the useful stuff. It would make life a bit easier.

Edited June 15, 2010 by Chef

[Traktion]

I think a conclusion must have been jumped to by one of us, since the concepts are kind of unarguable if there is no magic teabags.

Economics and money seems uniquely ill equipped in terms of language and definitions to be easily understood.

But when I talk about transactions, I mean nothing more than that, a simple exchange of property between two entities. Unless supply or demand is altered, I see no reason why a simple transaction should influence anything else. If something else, be it increased efficiency or more effective use of resources is considered to be implicit and necessarily part of all transactions, that is an assumption I do not make and for me, would require explanation. It might be a null transaction of a type I have described with the repeated exchange of tea or bananas.

Economic activity usually improves our environment, which is a deflation of a kind, because prices fall, but not necessarily.

Thanks for posting nik21 - it's actually counter intuitive, until you think about it properly.

[JonoP]

Your memory is faulty, they put it into practice. Twas the KKYY man or whatever he was called.

I fear your imagination may be faulty. Proof please. After all, if it were true, it would vindicate your stance on the monetary system.

[Traktion]

I agree that there is no easy way out of this, but I disagree over the cause of our current predicament. They only thing I would change about the current system would be the Stalinist style central bank rate, apart from that I don't see how money reform even acknowledges what the problem is, so stands little chance of tackling it head on.

I think we'll just have to agree to disagree.

If you remove the central bank interference, then you risk the chance of bank runs (A in the previous question). As we've all read, this was the original reason why central banks became the norm in the first place - to ensure everyone gets their money. While removing the central bank from the equation removes the moral hazard, we are then back to square one - bank runs could become more common again, albeit only effecting those who bank with the failing institution.

This is one of the key reasons for my support of LPB - there would be no bank runs. If each share in a mutual fund can be traded on an open market, there is no small pool of money to spread around everyone, there are just people with shares in mutual funds, which can be traded. While the value of the shares may fall, if there is less demand for them, this effects all participants - while timing may mean you get out early or hold on until recovery, there is no danger of being left with nothing. In this respect, mutual fund shares are more counter cyclic, as there isn't a rush for the exits.

Instead of first come, first serve, for the full amount invested (leaving the rest waiting with fingers crossed, during the liquidation process), everyone could sell out of their share at a time and a price which suited their situation, distributing the hair cut on their investment. It is a proper open market process, with all participants deciding their timing, with the prices dictated by supply/demand.

There are many other arguments over the benefits, but the above is a compelling one. Factor in giving people a control of their risk levels (how much in cash storage, how much in risky loans etc), no need for deposit guarantees, no centrally set base rates, insurance reforms (remember AIG insuring financial toxic waste?) and direct intervention into specific markets by the government/central bank (moral hazard considered - it's there as an option anyway).

If people all wanted their money upfront then banking would have to adapt to the new environment. It's like going into a gastro pub and ordering the same thing for 300 years but then everyone suddenly decides that they want a 3 michelin starred meal. Well they can't have it, not straight away anyway. It takes time to switch over to the new risk free/michelin starred marketplace.

But if people wanted everything upfront then it would render banking obsolete (I guess this is the point?). One of the advatages of banking is that it allows people access to the value of their future production now, if people started demanding future production upfront then many of the trades that take place wouldn't be able to happen.

It seems a little silly to stop this beneficial state of affairs because of ideological niggles, it sounds a bit coercive too.

The problem is, people only realise their need to limit their exposure to risk (ie. have all their money up front) when it's too late. FRB seems like such a great option in the good times, that people pile in, forgetting about the risks - the herd mentality kicks in. Then, when disaster hits suddenly, everyone wants to make sure they can get hold of their money. Then you end up with the A/B dilemma from the previous post. Take a look at this article here and particularly the report itself, which discusses the point more fully. IMO, the paper reaches the wrong conclusions (as this point is mentioned several times, but scarcely resolved by their solution), but the analysis is good.

On the most part, LPB draws the lines down clearly - it defines what is risk free and what is subject to the price of the open market. Maybe everyone would put aside just 3% of their money in risk free accounts anyway, but the point is, the risk is directly allocated to those involved. I would also imagine that poor people would keep most of their money in safe accounts (interest of deposit accounts is usually rubbish anyway, especially on the small amounts of cash many people have), but the rich may keep the majority in risky accounts. The latter can more afford to lose some of it too.

If people keep some of their money in safe accounts, it could be considered that there is less money to lend on. I would imagine most people would put excess money in risk baring investments though, which would mean the total amount of credit available wouldn't be hugely changed. In addition, as the mutual fund shares could be traded on an open market, they are arguably more liquid than current closed end savings accounts (where redemption fees are present and delays to access funds).

FRB doesn't mean automatic bailouts for the masses. We could have FRB without the bailouts quite easily so those externalities are avoidable, but the government has decided that you should pay so you will.

The banking system isn't at fault here, the gov't is.

But then we have the A problem again. First come, first serve on inevitable failure. The video on the OP suggested that about 15% wanted a deposit account for safety, 65% wanted it for easy access (ATM, cheques, BACS, e-Banking etc), 15% for interest, and 5% don't know. Giving people the option to withdraw their money, isn't really what they want - they mostly just want safety and, above all, easy access.

Edited June 15, 2010 by Traktion

[huw]

It's not because of a lack of bank lending that prices haven't changed, lending makes no difference to prices. They aren't lending when they issue mortgages, they are making new credit, which does influence prices. I also doubt people are paying down their debts to any great extent.

Then why did they need to package up the mortgages into RBMSs, to sell on to third parties? Why do they carry loans from bondholders and others (the kind of loans that brought NR down, when it couldn't roll them over?). And why do they sometimes have to scramble at the end of the day to balance their books, maybe borrowing actual money from the Central Bank as a last resort?

The fact that securitisation was done on a scale that destabilised the global financial system strongly suggests that the increase in mortgage credit (and thus prices) came largely, probably overwhelmingly, from this source, i.e. banks providing credit to the mortgagor and selling the corresponding debt to some investor (pension fund? SWF? who knows). In which case they were engines of credit-creation, but they had to find consumers for the stuff too -- for both sides of the transaction.

[the_austrian]

Then why did they need to package up the mortgages into RBMSs, to sell on to third parties? Why do they carry loans from bondholders and others (the kind of loans that brought NR down, when it couldn't roll them over?). And why do they sometimes have to scramble at the end of the day to balance their books, maybe borrowing actual money from the Central Bank as a last resort?

The fact that securitisation was done on a scale that destabilised the global financial system strongly suggests that the increase in mortgage credit (and thus prices) came largely, probably overwhelmingly, from this source, i.e. banks providing credit to the mortgagor and selling the corresponding debt to some investor (pension fund? SWF? who knows). In which case they were engines of credit-creation, but they had to find consumers for the stuff too -- for both sides of the transaction.

I'm not intimate with Northern Rock, but from my understanding they failed to get even enough regular deposit accounts to fund their operations which is why they went to the credit markets.

A bank doesn't need to go to the credit markets, but it can if other banks want to make a quick profit on their deposit accounts.

Securitisation only means that the risks are shifted around, it doesn't change the underlying dynamic.

[huw]

It might be a null transaction of a type I have described with the repeated exchange of tea or bananas.

istm that there's a qualitative difference between that type of transaction (where you are counting "roll-backs" and "re-dos" as multiple transactions; I suppose you could do the same thing with fewer steps by swapping one apple for another identical apple). Real transactions that don't net-off in that way, they cause ownership changes in the real world.

[the_austrian]

istm that there's a qualitative difference between that type of transaction (where you are counting "roll-backs" and "re-dos" as multiple transactions; I suppose you could do the same thing with fewer steps by swapping one apple for another identical apple). Real transactions that don't net-off in that way, they cause ownership changes in the real world.

Yes.

This is the point I'm driving at, it is apparently a given for people that when there is a transaction there is economic advantage for both participants and that it is economically significant. This I don't argue with but I'm only pointing out that it isn't the transaction in itself which creates the changes. Two identical apples transposed will not make any difference in the outside world.

Money circulating doesn't, in itself do very much but it's the economic changes which it signifies which are to our advantage.

[Stars]

Securitisation only means that the risks are shifted around, it doesn't change the underlying dynamic.

I stand in awe

well said..

[huw]

I'm not intimate with Northern Rock, but from my understanding they failed to get even enough regular deposit accounts to fund their operations which is why they went to the credit markets.

Which would have been normal practice for them as they chose to grow their business faster than their deposit base; the question is: why did they need either deposits or loans, if they could create the product they were selling out of thin air, by creating ledger entries purely within their own books? This seems to me to be the Achilles heel of the "banks create credit out of thin air" argument (but I am ready to listen to any counter-argument).

A bank doesn't need to go to the credit markets, but it can if other banks want to make a quick profit on their deposit accounts.

Same question applies: why would banker A need to borrow banker B's deposits, if not to cover the credit he's been busy creating that day?

Securitisation only means that the risks are shifted around, it doesn't change the underlying dynamic.

I think it enabled vastly more leverage (i.e. more credit creation) by getting the mortgages off the banks' balance sheets -- you don't need to attract deposits, or borrow someone else's, if you've already sold the loan. And I guess that you can do more lending while remaining within your capital adequacy requirements, too.

TBH I'm still struggling to understand all this, though