No Recession Needed

[balamory]

No, it isn't. Please stop claiming otherwise. The post you responded to was incorrect.  It is not true that banks can lend out more money than they have in deposits [1]. If you disagree then a good way of showing I am mistaken would be to point out factual errors in any of my posts.

Spot on! A balance sheet has to balance, so for every pound out, a pound must come in. The average UK bank has a loan to deposit ratio of about 200% with the remainder funded wholesale (interbank, securitisations, bonds etc).

[balamory]

To put in context, I heard a quote in a financial paper over here (canada) recently that said the UK debt levels are greater than the combined third world debts of Latin America, Africa and the Indian Sub-continent combined. Maybe someone can verify that. It also claimed 70% of that debt was owed by British Subjects as Mortgage loans to banks. Is UK land really worth so much more than land and housing in rest of the world? Is there oil or gold everywhere under the ground? Me confused.

<{POST_SNAPBACK}>

This is true, but my guess is that UK GDP is also greater than all these regions combined. While the quote sounds impressive it is irrelevant.

What is relevant is that the UK has the highest levels of consumer debt (measured as debt / GDP) in E Europe.

[MongerOfDoom]

I agree with your suggestions, abd would add that an increase to reserve requirements would help as well. Perhaps a slow increase in the reserve % from 8% up to......whatever the economy functions well at.

Given that the banking system has grown up with FRB, I think this gradual change would allow observation of the effects of change. I'm not aware that anyone can say with certainty what effect it would have.

Fair enough.

As for interest, it is paid to cover inflation mainly.

No. It is paid to make sure depositors lend the payer their money. It rarely covers inflation after tax nowadays.

A reduce in money supply would reduce inflation (we may even see deflation....) so interest would not be necessary.

Only if they did not want my money.

Banking should be split between savings institutions who you pay a small fee to safeguard your cash. Competition for this basic service would ensure that pricing was reasonable.

Why would anyone use them? It certainly would not be because of greater security. Did you know it is already possible to deposit money risk-free and be paid interest? If not, have a look at NS&I or the gilt market. If there was any demand then such institutions would exist already.

If you want to use your money to lend to others (as we are forced to do currently with our banking system) you could invest in a lending corporation which uses its own capital to make loans. This way you can profit from lending if you so choose.

<{POST_SNAPBACK}>

Can you please explain how this differs from what we currently call banks? Maybe in that it would be less secure?

BTW, no-one forces you to keep your money in an account. You can keep your cash in a safe deposit box if you like (or under the pillow, or wrapped in plastic in the septic tank, the possibilities are just endless). I am still puzzled about what you hope to achieve.

Thanks,

MoD

[Smell the Fear]

This is a common misunderstanding, luckily. The following discussion might explain it if you care. I am afraid I do not know how to get a link to point directly to a post; the link in the top right corner of each post does not seem to work. The thread starts at http://www.housepricecrash.co.uk/forum/ind...howtopic=14860# and I will refer to posts by their numbers (again, shown in top right corner of every post).

#20 Post by Marko I replied to because he appeared to misunderstand how things worked.

#29 My brief reply.

#30 Marko points out he understands things a lot better than most others

#32 My reply (still no explanation of FRB but it shows that his interpretation leads to absurd conclusions)

#47 Marko never replied but STF did, defending him. He posts a reasonable explanation of FRB taken from elsewhere but misunderstands it.

#48 My reply

#50 His reply

#53 My reply, some more explanations

#54 His reply

#58 My reply

#60 His reply, moves topic away from FRB

#66 My reply, so far final

No, it isn't. Please stop claiming otherwise. The post you responded to was incorrect.  It is not true that banks can lend out more money than they have in deposits [1]. If you disagree then a good way of showing I am mistaken would be to point out factual errors in any of my posts.

Thanks,

MoD

[1] Loans can be securitised but that is not relevant when discussing FRB

<{POST_SNAPBACK}>

Full marks for thoroughness, MoD!

I cannot disagree with what you say about deposits exceeding loans. The crucial point is that the original deposit is MULTIPLIED by the banking system. Hence it is called the MULTIPLIER principle.

Your statement glosses over this fact. You treat all money as being money just the same regardless of where it came from. This is the case purely because of the way that the banking system accounts for money.

The fact is that 91.5% of the money comes from the commercial banking system. Hence they have CREATED money.

[MongerOfDoom]

The crucial point is that the original deposit is MULTIPLIED by the banking system. Hence it is called the MULTIPLIER principle.

Your statement glosses over this fact. You treat all money as being money just the same regardless of where it came from. This is the case purely because of the way that the banking system accounts for money.

<{POST_SNAPBACK}>

Money is money, as they say :-) It is no easier to earn money to repay a loan than it is to earn it for any other purpose.

Let me put it another way. The extra money is created not because the bank says so, but because someone promises to earn it later and pay it back. If that person can be trusted then that money is as real as if you held it in your hand in banknotes. It might be worth a little less because you have to wait for it but it exists nevertheless.

Thanks,

MoD

[Smell the Fear]

Money is money, as they say :-) It is no easier to earn money to repay a loan than it is to earn it for any other purpose.

Let me put it another way. The extra money is created not because the bank says so, but because someone promises to earn it later and pay it back. If that person can be trusted then that money is as real as if you held it in your hand in banknotes. It might be worth a little less because you have to wait for it but it exists nevertheless.

Thanks,

MoD

<{POST_SNAPBACK}>

There was a time when money was more than a promise - it was backed by an asset. I am not advocating a return to that situation. My concern lies with the fact that banks are the appointed risk managers of this system. Their interests and actions are not always perfectly aligned with those of the currency. They are prone to overextending goodwill to their borrowers in pursuit of profits. The depositors of cash are mostly ignorant of the true nature of the situation.

At the moment the promise to earn and repay is looking increasingly shaky.

As I mentioned on another post, perhaps the function of taking deposits and lending money should be separated so that the truth of the situation can be more transparent to everyone.

Less lending would negate inflation and the need for payment of interest on bank accounts. Holding money in a secure place is a service, albeit a relatively simple one. The charges for this would be very low in a competitive market.

[Elizabeth]

I blame fractional reserve banking (or something like that)…

The idea that banks can take your savings and lend it out to the first 12.5 people who walk in the door.  This is effectively printing money (up to 11.5x more money in the economy?) and forces up the price of anything that can be purchased with a loan (i.e. a house).

If banks needed deposits to match their loans they would all be competing for savers by offering higher savings rates (and other incentives).  Under the current system the saver gets screwed to benefit the borrower.  This allows the banks to get rich collecting interest payments and charging for bogus loan insurance.

All the while creating a situation where normal people need to borrow greater amounts of money, i.e. asset inflation.  :angry:

<{POST_SNAPBACK}>

Sorry, but please explain. I thought (obviously naively) that they did actually have to have a balance of holdings to lendings. Is this not the case? Probably very basic, but this undermines everything I understood to be concrete reality. Where does this virtual money come from? I am not really getting a fix from the strings above.

Edited September 8, 2005 by Elizabeth

[verolution]

Sorry, but please explain.  I thought (obviously naively) that they did actually have to have a balance of holdings to lendings.  Is this not the case?  Probably very basic, but this undermines everything I understood to be concrete reality.  Where does this virtual money come from?

<{POST_SNAPBACK}>

say i deposit 100 squid in the bank in my savings account, technically i could withdraw that money whenever i like. However the bank assumes i wont so they lend $90 out, i still 'have' my deposited $100 and the borrower now has $90 too.

the $10 the bank keeps is the reserve, the buffer that covers withdrawals. for an idea of what happens when FRB fails - look at argentina!

[Guest Charlie The Tramp]

Sorry, but please explain.  I thought (obviously naively) that they did actually have to have a balance of holdings to lendings.  Is this not the case?  Probably very basic, but this undermines everything I understood to be concrete reality.  Where does this virtual money come from? I am not really getting a fix from the strings above.

<{POST_SNAPBACK}>

HON. RON PAUL OF TEXAS

IN THE HOUSE OF REPRESENTATIVES

September 5, 2003

All great republics throughout history cherished sound money. This meant that the monetary unit was a commodity of honest weight and purity. When money was sound, civilizations were found to be more prosperous and freedom thrived. The less free a society becomes, the greater the likelihood its money is being debased and the economic well-being of its citizens diminished.

Fiat Money

The fact is that 91.5% of the money comes from the commercial banking system. Hence they have CREATED money.

Would I be correct in saying that Saver`s deposits become a part of their reserves.

[Smell the Fear]

Sorry, but please explain.  I thought (obviously naively) that they did actually have to have a balance of holdings to lendings.  Is this not the case?  Probably very basic, but this undermines everything I understood to be concrete reality.  Where does this virtual money come from? I am not really getting a fix from the strings above.

<{POST_SNAPBACK}>

Elizabeth - read the explanation in the link for a good explanation.

Money multiplier

[MongerOfDoom]

There was a time when money was more than a promise - it was backed by an asset. I am not advocating a return to that situation.

The ability to earn money is a perfectly good asset for which there already exists a large market.

My concern lies with the fact that banks are the appointed risk managers of this system. Their interests and actions are not always perfectly aligned with those of the currency. They are prone to overextending goodwill to their borrowers in pursuit of profits. The depositors of cash are mostly ignorant of the true nature of the situation.

I agree, although I would still trust banks not to press the 'self destruct button' more than I would the politicians who probably have an even better ability to cause catastrophic outcomes. Having said that, I would not expect either to necessarily posses a great deal of foresight. My (entirely unsubstantiated) guess is that if there is a systemic failure of the banking system then it will not be caused primarily by excessive lending to individuals.

Any other guesses, anyone? I would be particularly interested if someone could offer an insight into the situation of the banking sector in Japan.

At the moment the promise to earn and repay is looking increasingly shaky.

Agreed, although that may be priced in. Any effects will depend on who ends up holding the smelly parcel but misallocation of resources is never much to cheer about.

As I mentioned on another post, perhaps the function of taking deposits and lending money should be separated so that the truth of the situation can be more transparent to everyone.

Less lending would negate inflation and the need for payment of interest on bank accounts. Holding money in a secure place is a service, albeit a relatively simple one. The charges for this would be very low in a competitive market.

<{POST_SNAPBACK}>

I think this suggestion is unworkable. I explained why in post #28 in this thread.

Thanks,

MoD

[IPOD]

The ability to earn money is a perfectly good asset

Not really; it can easily be impaired by ill-health, changes in the marketplace, skillsets becoming out of date etc.

I would be particularly interested if someone could offer an insight into the situation of the banking sector in Japan.

http://japan.usembassy.gov/e/p/tp-ec0346.html

For one reason, the size of Japan's problem is larger. U.S. problem loans were only about 5 percent of GDP. Some estimate the magnitude of Japan's problem loans to be 20-30 percent of GDP.

http://www.washingtonpost.com/wp-srv/busin...evive011398.htm

Japan's Finance Ministry, meanwhile, in a bid to boost its own credibility with the markets, announced that the nation's banks had a total of more than $575 billion in bad or questionable loans on their books, according to Bloomberg News. That's nearly three times the total the ministry had previously reported and is equal to about 16 percent of Japan's gross domestic product.

http://www.atimes.com/japan-econ/DC28Dh02.html

What has not changed is the serious nature of the banking crisis that Japan faces. Roughly defined, the crisis is a still-expanding amount of bad loans that will not be recovered. This figure amounted to more than 36 trillion yen (about $272 billion) as of last September. The growth of the bad loans swamping banks continues unabated, as major sources of collateral backing loans (mainly property) continue to erode in value.

http://www.atimes.com/japan-econ/DC29Dh01.html

http://www.atimes.com/japan-econ/DC30Dh02.html

http://news.ft.com/cms/s/c2a76cc8-cd44-11d...000e2511c8.html

Japan's bad-loan crisis is over, says banking regulator

[MongerOfDoom]

Not really; it can easily be impaired by ill-health, changes in the marketplace, skillsets becoming out of date etc.

Assets need not be indestructible. Ill-health and skillsets becoming out of date are risks that can be diversified away. Changes in the marketplace can be hedged against but some investors might want to be exposed to those (e.g. you might want an asset that will rise in line with the cost of hiring a nurse to care for you in old age).

MoD

PS: Thanks for the links.

[Algie]

(Do you really want a bank to ask you to prove where your deposit came from? I find it can be annoying even to have to prove my identity using two of an arbitrary list of documents. When I wanted to open a new account recently, I had to do it at an old address because I could only prove that I lived there :-( Can you imagine what a nightmare it would be if the jobsworths in banks got told to verify the origin of your money?)

ACTUALLY ITS NOT THE BANKS THAT REQUIRE THE PROOF OF ID ETC. ITS THEM FOLLOWING THE REQUIREMENTS OF THE DATA PROTECTION ACT. ALSO THEY DO IT TO STOP BAD PEOPLE USING GOOD PEOPLE'S ADDRESSES TO GET MONEY

THE WHOLE MORTGAGE DEBT SITUATION IS NOT DOWN TO THE BANKS EITHER ITS DOWN TO THE ESTATE AGENTS WHO PUSHED UP THE PRICES BASED ON THEIR OWN GREED. THE SOONER THEY START TO REALISE THAT THE ONLY WAY TO RETAIN THEIR MARGINS IS TO START PUSHING PRICES DOWN TO GET THIS FLAT MARKET GOING THE BETTER.......

[Smell the Fear]

No. It is paid to make sure depositors lend the payer their money. It rarely covers inflation after tax nowadays.

<{POST_SNAPBACK}>

So you effectively already pay the bank to safeguard your cash. Why not separate savings from loans and be sure that your assets are safe rather than being fed into the magic money multiplier machine?

Why would anyone use them? It certainly would not be because of greater security. Did you know it is already possible to deposit money risk-free and be paid interest? If not, have a look at NS&I or the gilt market. If there was any demand then such institutions would exist already.

<{POST_SNAPBACK}>

You have great faith in the power of markets. You seem to believe that everything is as it should be in the world, otherwise everything would be different!

Banks have a powerful grip on the national psyche and there are few (if any) alternatives to using them for managing money, particularly current accounts. Most savings products are also offered by banks. As I have mentioned several times, the vast majority of the population are unaware of the reality of banking and of what happens to their money. Many people are naturally cautious and would prefer greater security. They would not be comfortable with the concept of banking, regardless of how allegedly reliable your methods are in managing the risk created. I have worked intimately with these processes and have little faith in their completeness and accuracy. Many banks are in an appalling disarray of financial incompetence beneath the surface.

Can you please explain how this differs from what we currently call banks? Maybe in that it would be less secure?

<{POST_SNAPBACK}>

The separation of loans and savings gives total transparency to the currency holder and allows him to make better decisions about what he does with his money.

Investing in loans institutions, if that is what you desire to do, allows you to profit from lending if the institution can do it successfully. I am not suggesting that individuals should deposit money in these institutions. The institution should lend its own money to borrowers. If you want to profit from this, contribute to the share capital or buy shares on the open market. If they want to gear up, they can borrow money from those willing to buy their corporate bonds. Again, the risk would be clear to those who choose to invest.

This would allow lending to occur in a transparent manner, rather than being created by the exploitation of savers as occurs presently. The lenders could be judged by the market on their own merits, and would make profits or losses accordingly.

MoD - thank you for your disciplined debate and polite manner!

Regards

STF

[MongerOfDoom]

(Do you really want a bank to ask you to prove where your deposit came from? I find it can be annoying even to have to prove my identity using two of an arbitrary list of documents. When I wanted to open a new account recently, I had to do it at an old address because I could only prove that I lived there :-( Can you imagine what a nightmare it would be if the jobsworths in banks got told to verify the origin of your money?)

ACTUALLY ITS NOT THE BANKS THAT REQUIRE THE PROOF OF ID ETC. ITS THEM FOLLOWING THE REQUIREMENTS OF THE DATA PROTECTION ACT.

Please don't shout.

I believe it is nothing at all to do with the DPA as that was brought in long before the mad rules that currently cover identity checks. My understanding is that the DPA is about protecting existing data, not about any obligation to gather it. Anyway, I never commented on why banks did it (and no, it is not because they think it's useful).

ALSO THEY DO IT TO STOP BAD PEOPLE USING GOOD PEOPLE'S ADDRESSES TO GET MONEY

That would be why they get fined if they cannot prove that they did the checks :-) More to the point, why do you say this and why in this thread?

THE WHOLE MORTGAGE DEBT SITUATION IS NOT DOWN TO THE BANKS EITHER ITS DOWN TO THE ESTATE AGENTS WHO PUSHED UP THE PRICES BASED ON THEIR OWN GREED.

Whatever next. Tesco pushing up their prices 'based on their own greed'?

THE SOONER THEY START TO REALISE THAT THE ONLY WAY TO RETAIN THEIR MARGINS IS TO START PUSHING PRICES DOWN TO GET THIS FLAT MARKET GOING THE BETTER.......

<{POST_SNAPBACK}>

Yes. I doubt they have all that much influence over prices though.

MoD

[MongerOfDoom]

So you effectively already pay the bank to safeguard your cash.

Yes. It is a cheap service.

Why not separate savings from loans and be sure that your assets are safe rather than being fed into the magic money multiplier machine?

Because then I would not get any interest. If I wanted perfect security I would use my cash to buy short-term gilts or deposit it with NS&I. There would be no risk and I would not have to rely on any company with a thoroughly dubious business plan. The safeguarding of people's cash for payment certainly would qualify as such given the non-existence of any demand. Anyone worried about cash deposited in a bank - protection scheme or not - would be unlikely to trust the government not to devalue or confiscate their cash, and so would probably keep any savings in other assets (e.g. gold seems popular among some investors, AKA goldbugs).

You have great faith in the power of markets. You seem to believe that everything is as it should be in the world, otherwise everything would be different!

I have more faith in the markets than in people who propose to make things better through excessive regulation. I am not against regulation in principle, and indeed think it is *much* better to have it than not to. However, it is not necessarily obvious what new regulations would help and what any unintended costs would be. I do not believe capitalism is efficient but neither do I think there is an easy way of fixing it, especially not one known exclusively to people posting on this board ;-)

BTW, did you have a look at the book i referred to in a reply to another of your posts? It is a bit long-winded and (despite claiming otherwise) is not specific to the British system but I certainly don't regret the time spent reading it. http://www.amazon.co.uk/exec/obidos/ASIN/0...8420268-8840613

Banks have a powerful grip on the national psyche and there are few (if any) alternatives to using them for managing money, particularly current accounts.

That may be because it just works. Why would you object to the way current accounts work? You don't need to keep a large balance there.

Most savings products are also offered by banks.

Who else would you trust to hold your money?

As I have mentioned several times, the vast majority of the population are unaware of the reality of banking and of what happens to their money. Many people are naturally cautious and would prefer greater security. They would not be comfortable with the concept of banking, regardless of how allegedly reliable your methods are in managing the risk created. I have worked intimately with these processes and have little faith in their completeness and accuracy. Many banks are in an appalling disarray of financial incompetence beneath the surface.

I said this in another post: I am not convinced. [Depositors] know how much interest they get, and they know that they will get most of their money back if things go wrong. At least some staggeringly high proportion of the UK population who have less than 35k odd in savings do. Surely no-one thinks that the bank pays them interest just for the hell of it?

The risk of the banking system collapsing cannot necessarily be avoided by holding cash. If it does then the value of cash may not be preserved.

Some banks are known to employ incopetent people and to have systems that even competent employees cannot deal with (in my experience that applies to Abbey now, and used to apply to Egg). However, the banking ombudsman works well in any case where the bank does not put matters right afterwards. I have certainly received lots more in compensation (>UKP200) for cockups than I lost as a result (thanks, Egg).

The separation of loans and savings gives total transparency to the currency holder and allows him to make better decisions about what he does with his money.

How could it improve his decision? It gives him no option he does not have currently.

Investing in loans institutions, if that is what you desire to do, allows you to profit from lending if the institution can do it successfully. I am not suggesting that individuals should deposit money in these institutions. The institution should lend its own money to borrowers. If you want to profit from this, contribute to the share capital or buy shares on the open market. If they want to gear up, they can borrow money from those willing to buy their corporate bonds. Again, the risk would be clear to those who choose to invest.

This does not sound right.The risk inherent in a corporate bond is very hard to understand. The best the average investor could do would be to see what the risk premium was. The suggestion that the market can price corporate bonds accurately may be news to those who invested in bonds issued by Worldcom, Enron, Parmalat as well as others :-)

This would allow lending to occur in a transparent manner, rather than being created by the exploitation of savers as occurs presently. The lenders could be judged by the market on their own merits, and would make profits or losses accordingly.

I am afraid I cannot see how this would be better. We have a regulated banking system with proper supervision, investor protection scheme, an ombudsman, as well as a high level of competition and resulting low charges. This is not something that should be abandoned lightly.

More to the point. If bonds issued by a 'lender' trade at a low risk premium then they will issue more of them. This will be the same as if they took additional deposits. Exactly the same multiplier effect will then take place after they lend out the money they raised.

MoD - thank you for your disciplined debate and polite manner!

You are most welcome, except maybe if there is a slight hint of sarcasm :-) I am afraid my style is a little on the abbrasive side. I don't notice myself but others tell me :-)

[Smell the Fear]

You are most welcome, except maybe if there is a slight hint of sarcasm :-) I am afraid my style is a little on the abbrasive side. I don't notice myself but others tell me :-)

<{POST_SNAPBACK}>

No sarcasm intended.

However, you seem determined to win this argument by sheer force of words. Quite frankly I feel nauseous reading your replies.

You are clearly not an individual, but a PR department of a major UK bank.

I have made my points, and do not intend to waste the rest of my life fighting against your mighty PR machine.

Goodnight, VIenna.

[MongerOfDoom]

However, you seem determined to win this argument by sheer force of words. Quite frankly I feel nauseous reading your replies.

<{POST_SNAPBACK}>

You can always pick just the part of my post with the worst mistakes, and we can argue about that. So far it seems you prefer not to answer any of my fairly concise objections to your suggestions. It's as if your position is "but banks make money, surely there *must* be something illicit happening"

You are clearly not an individual, but a PR department of a major UK bank.

I have made my points, and do not intend to waste the rest of my life fighting against your mighty PR machine.

<{POST_SNAPBACK}>

I'll take that as a compliment

Thanks,

DM