Where Did The 'money' Come From ...... That Pushed House Prices Ever Higher

[Traktion]

This is a very orthodox view of how the banking system works, however I've yet to see any actual evidence that the system functions this way. There is however evidence that the system operates in the opposite direction ie Banks extend credit thus creating a deposit in the banking system then acquire deposits to comply with reserve requirements. Read the Roving Cavaliers of Credit by Steve Keen.

Roving Cavaliers of Credit

The standard money multiplier model’s assumption that banks wait passively for deposits before starting to lend is false. Rather than bankers sitting back passively, waiting for depositors to give them excess reserves that they can then on-lend,

“In the real world, banks extend credit, creating deposits in the process, and look for reserves later”.[5]

Thus loans come first—simultaneously creating deposits—and at a later stage the reserves are found.

Or not, as the case may be!

Then the governments bail them out for their bad speculation of reserves being there in the future. It looks like a ponzi scheme to me.

[Blue Peter]

No bank creates money out of thin air - they may adjust their liquidity ratios down or up but that's not the same thing. If they could create their own money out of thin air they would and there would be no possibility of them ever going bust. Northern Rock of Soc Gen would simply create more deposits themselves.

It's baffling this myth persists given it's so simplisitically disprovable.

I blame silly memes like printy printy.

I wonder if it's not a conflation of the fact that money per se comes out of thin air - where else could it come from? just like ever human symbolic construction (Law/justice, logic, manners) we just make it up. But that doesn't mean that we don't also make up rules about how to play the game, and those rules clearly don't allow people to "just add a few noughts" whenever they like it (though with things such as QE, one wonders if some of the players of the game aren't allowed to break the rules just occasionally),

Peter.

[Injin]

I wonder if it's not a conflation of the fact that money per se comes out of thin air - where else could it come from? just like ever human symbolic construction (Law/justice, logic, manners) we just make it up. But that doesn't mean that we don't also make up rules about how to play the game, and those rules clearly don't allow people to "just add a few noughts" whenever they like it (though with things such as QE, one wonders if some of the players of the game aren't allowed to break the rules just occasionally),

Peter.

It's much more to do with the fact that a bank is an empty building, apparently full of money.

Either the building isn't empty, or the bank doesn't actually have any money.

I've just realised why people pick the "full of money" side as well. Damn.

[R K]

I wonder if it's not a conflation of the fact that money per se comes out of thin air - where else could it come from? just like ever human symbolic construction (Law/justice, logic, manners) we just make it up. But that doesn't mean that we don't also make up rules about how to play the game, and those rules clearly don't allow people to "just add a few noughts" whenever they like it (though with things such as QE, one wonders if some of the players of the game aren't allowed to break the rules just occasionally),

Peter.

I think it's probably a failure of govt/central banks to explain the process in simple terms which then results in silly videos and silly memes like 'printy printy' and so on.

Since people exchange their labour for 'money', spend the 'money', save with the 'money', borrow 'money' from other people and so on it seems to be taken for granted that there is no need to explain where it comes from, how its value is influenced, what inflation is all about etc etc.

Instead people put up home made videos say 'printy printy' and there's no counter argument.

So I blame primarily the Bank of England.

Perhaps it will give Mervyn something to do now that he won't be raising interest rates for the rest of his tenure.

[Injin]

I think it's probably a failure of govt/central banks to explain the process in simple terms

They can't or it won't work.

[Nationalist]

The key to the growth in the money supply since 1997 is inter-bank lending and the LIBOR market.

Large banks can create money out of thin air just by tapping on a keyboard. They then loan that money out for interest, and provided it just moves around from account to account in the same bank they're laughing. If the money ever leaves the bank they just borrow it back: paying the other bank the LIBOR rate but charging you a retail rate so making a profit - on money they invented out of nowhere!

When the loan is repaid the magic money disappears again. Of course that's not good for profits so they try to pump out some more loans.

The con only works because each bank effectively has a deal going with every other bank in the world that any money they invent will be lent back to them on demand. Since money basically lives in the banking system, even if you buy gold the seller will probably just deposit the cash you give him in his bank account, they never have to worry about the fact they've lent more money than they've got.

It's the sweetest deal ever - I should have been a banker.

[Traktion]

The key to the growth in the money supply since 1997 is inter-bank lending and the LIBOR market.

Large banks can create money out of thin air just by tapping on a keyboard. They then loan that money out for interest, and provided it just moves around from account to account in the same bank they're laughing. If the money ever leaves the bank they just borrow it back: paying the other bank the LIBOR rate but charging you a retail rate so making a profit - on money they invented out of nowhere!

When the loan is repaid the magic money disappears again. Of course that's not good for profits so they try to pump out some more loans.

The con only works because each bank effectively has a deal going with every other bank in the world that any money they invent will be lent back to them on demand. Since money basically lives in the banking system, even if you buy gold the seller will probably just deposit the cash you give him in his bank account, they never have to worry about the fact they've lent more money than they've got.

It's the sweetest deal ever - I should have been a banker.

Not when their confidence in the banking system disappears.

There is nothing to stop everyone removing their money from the banks at any time the wish. The bank says 'we promise to repay' and you say 'show me the money'. Either they find the money or they are bankrupted. That is, unless their government lapdogs print more up instead, but then you have every reason to change their paper for something which can't be printed.

The whole banking system relies on blissful ignorance (or fraud) and confidence tricksters. When the ignorant become educated and the confidence tricksters are found out, the system collapses. We must be pretty near to that point now... you can almost smell the fear.

[northwestsmith2]

Although it may be thin air, look what happens when people remove just their retail deposits (those paying interest) from a bank like Northern Rock or decide the return is too low for the risk, or the risk is too high for the return they want.

NR sold on the mortgages backed by the physical asset and peoples willingness to pay, some people would lend northern rock money expecting a high interest to be paid and in return if the person stopped paying their mortgage they would lose out first, then some wanted security and less interest so they would be last to lose out.

Then the retail customers decided the risk to their own capital was too great so withdrew it, and in theory they the ordianry people were after a low risk low return strategy, yet they invested with northern rock who were taking a high risk high internal return , but low retrun for customers.

In theory the bank was attacked from two sides, those lending them money on a commercial basis decided to leave, and then those unaware of the risks up until that point decided to leave.

Yet hundreds of thousands of people were only the same as one major lender, who in turn was probably getting their money from hundreds of smaller groups who got their money from tens of rich people.

My point being if the system didn't include a bail out of infinite level then the retail deposts were covered and the people buying Mortgage backed securites would be wiped out starting witht he highest risk and probably not even reaching the lowest tier.

It may be thin air but a bank wouldn't last very long or make very much money by just taking retail deposits to provide mortgages, each customer needed circa £200,000 on zero deposit and would only pay 5% or so coupon. You would need to pay someone holding £200K in retail deposits 4% at least making it not even worth the risk. One side has solid gold return, the other is badgering a homeowner to pay their mortgage each month

The problem must be that the system works but the external influences such as QE123 protected those taking the biggest risk the same as those wanting a safe haven that paid about inflations worth of interest.

Edited September 23, 2011 by northwestsmith2

[Lepista]

Not when their confidence in the banking system disappears.

There is nothing to stop everyone removing their money from the banks at any time the wish. The bank says 'we promise to repay' and you say 'show me the money'. Either they find the money or they are bankrupted. That is, unless their government lapdogs print more up instead, but then you have every reason to change their paper for something which can't be printed.

The whole banking system relies on blissful ignorance (or fraud) and confidence tricksters. When the ignorant become educated and the confidence tricksters are found out, the system collapses. We must be pretty near to that point now... you can almost smell the fear.

What do you mean "unless"

I think you meant "when".

[Traktion]

What do you mean "unless"

I think you meant "when".

If they keep doing that, you then spend your money on hard assets, preferably useful ones. If you don't need anything, then non-useful ones will have to suffice.

If everyone does the same, hyperinflation is a certainty. Cash will be held like hot potatoes, so demand for it will plummet, resulting in its price collapsing... rinse and repeat.

[Setantii]

I despair.

Can a bank just lend money from nothing?

Why then do banks have funding or 'liquidity' problems.? Why would it matter if there is a 'run on a bank' if they could just magic it out of thin air. Why on earth do they take deposits or failing that, the money markets where surplus countries are recycling their surpluses....yes, we're getting closer to an answer aren't we.

Come on guys...utter b*llocks. Just concentrate and get your thinking caps on!

To quote the Fed - "Banks actually create money when they lend it."

http://dallasfed.org/educate/everyday/ev9.html#how

[Setantii]

I know all that.

If they do not have funds, they have to go and find the readies to balance their books overnight or sometimes during the course of the day.

They might need an initial deposit to perform this financial alchemy but that does not take away from the fact that banks create brand new money when they give you a loan.

I'm pretty sure 99% of the population assumes that banks use other peoples savings when they make a loan and most would be outraged if they fully understood how the banking system really worked.

[Injin]

I know all that. It is somewhat of a moot point. To all intents and purposes it is more helpful for people's understanding to realise a bank cannot actually lend money it doesn't have.

If they do not have funds, they have to go and find the readies to balance their books overnight or sometimes during the course of the day.

Your third sentence contradicts the first two.

Just sayin'

[the_austrian]

In the present system of banking... it is the government, not the banks, which creates new money when banks issue loans.

Government credit is money because it can be used to settle a debt of taxes.

When a bank issues a loan, new government credit is created to replace the bank credit which previously matched the cash in the bank. The cash (held by the bank) is now free to be loaned into the economy... it is no longer required to provide full reserves.

This process is equivalent to the creation of money because government credit has been created (out of nowhere) to replace the bank credit, which can no longer be backed at the bank by physical cash.

[eric pebble]

In the present system of banking... it is the government, not the banks, which creates new money when banks issue loans.

Government credit is money because it can be used to settle a debt of taxes.

When a bank issues a loan, new government credit is created to replace the bank credit which previously matched the cash in the bank. The cash (held by the bank) is now free to be loaned into the economy... it is no longer required to provide full reserves.

This process is equivalent to the creation of money because government credit has been created (out of nowhere) to replace the bank credit, which can no longer be backed at the bank by physical cash.

Blimey - I'm dizzy...

[easy2012]

Not the sort of question Sibley would ask, I know..... but where did the money come from exactly? .....or even approximately will do.

Banks depositors? China? thin air? .......

Also, what would the average house price today if the printing (creating) of 'money' had been a hanging offence?

ta.

Transaction at the margin. The house prices cannot be all realised at one and (edit to add: make believe) prices are determined by the very few that are transacted.

Edited September 24, 2011 by easybetman

[eric pebble]

Transaction at the margin. The house prices cannot be all realised at one and (edit to add: make believe) prices are determined by the very few that are transacted.

Yup -- and by the amount of "money" advanced by the Mortgage Co:/Moneylenders....... THAT IS THE KEY THING THAT DICTATES HOUSE PRICES: THE MONEY LENT TO BUYERS.

[Injin]

Think of it this way. Something perhaps closer to your experience ().

You're working at MacDonalds serving burgers all day taking payment from customers. Then, and only then, at the end of your stint you have to tally the till. You find you are 63p out. You look high and low for it but can't find it...then you have tell your Manager and ask him to put through a balancing transaction so that you go home and eat your tea (a 63p burger that you stole).

This isn't what you said.

You said they loan without having any money to lend, but make it okay later in the day.

Lying for the length of a day is still lying.

I understand this concept might be hard for you to follow, but lying to make money is fraud. Perhaps this might be closer to your experience. Your father has told you a lot of lies and imposed a lot of inconsitent rules upon you but he's more physically powerful than you and you cannot do anything about it. In order to not feel quite as humilated, you decide to pretend he's special and doesn't have to follow the usual rules of interaction or stick to anything he agreed with you. Any errors are your fault and he's always right.

This is great, except once you've got this thinking process in place, people will take the piss out of you for the rest of your life until you sort it out.

For example, bankers.

[Injin]

Let's face it you've constructed this eccentric Injin world view because you borrowed a lot of money from the bank and couldn't pay it back despite having given your word, your honour.

To get over the appalling cognitive dissonance with your own self view, you've constructed a theory where you can point to the bank and say they lied that they had the money to lend to you in the first place.

Say it isn't true. And I won't believe your answer anyway.

Not at all.

I offered to pay, in full, in cash.

All I asked for before I did so was proof. Cash on the table, no proof provided. Told me everything I needed to know.

Edit : You might notice I never say to take my word for it, nor do I send people to look up some academic text or similar. I always say "go and check for yourself." And I do so confident that the result of the experiment will be the same for whoever performs it.

Edited September 24, 2011 by Injin

[eric pebble]

Transaction at the margin. The house prices cannot be all realised at one and (edit to add: make believe) prices are determined by the very few that are transacted.

i.e. it is a very hazy & untested market place out there...

[mrpleasant]

What's the role of the carry trade in all this? I always understood the UK was the recipient of billions in Asian savings looking for a better return. UK banks took full advantage of deregulation to pump it into the economy, chasing returns of their own in mortgage interest.

[aa3]

What's the role of the carry trade in all this? I always understood the UK was the recipient of billions in Asian savings looking for a better return. UK banks took full advantage of deregulation to pump it into the economy, chasing returns of their own in mortgage interest.

Hard to say. We had to create the pounds internally in order to give them to the Asians. The thought is it pushes rates lower than otherwise and causes assets to go up in price.

Probably because of a quirk in the way we measure inflation.. by not counting asset prices, this supression of costs for consumer goods, and appreciation of assets allows for more money creation than otherwise. For one appreciating asset prices gives people more 'equity' than otherwise, allowing further borrowing.

[eric pebble]

---. For one appreciating asset prices gives people more 'equity' than otherwise, allowing further borrowing.

Ponzi/Pyramid Scam...

[eric pebble]

What's the role of the carry trade in all this? I always understood the UK was the recipient of billions in Asian savings looking for a better return. .../..

They're sinking they're [often ill-gotten] funds into central London pwoperty - MASSIVELY - I am realiably told.....

And they don't really care if it goes down 10-25% -- 'cos it's bloody dodgy anyway - and they're willing to hang about for years planting this dodgy dosh all over London ---

All VERY open to serious debate about the morals of the govt. sitting back and letting this happen imho..... There is something deeply and palpably unfair about how this is affecting the average Londoner [and further afield too] - struggling to get by on measly incomes whilst the housing market is UTTERLY skewed by lumps of dodgy foreign cash..... :angry:

[MrPin]

The money came from the future, like PFI schemes.