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Deposits At The Central Bank Can Only Be Held By Banks, Thus They Are Never Lent "out" Of The Banking System

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http://www.cnbc.com/id/100943810

Here's Peter Stellar explaining the new reality very clearly:

Bank reserves, or deposits at the central bank, have a singular role, to facilitate management of the payments system. They are used to settle transactions among banks and never leave the possession of the banking system. Indeed, in most systems, deposits at the central bank can only be held by banks, thus they are never lent "out" of the banking system. Consequently the notion that the quantity of bank reserves somehow constrains lending in a fiat money world is completely erroneous. Even in systems where legal reserve requirements are imposed on certain bank liabilities, all modern central banks allow the quantity of reserves to be demand driven in normal times. Consequently, monetary policy actually has little to do with money. It is more accurately thought of as the control of precisely the interest rate at which the central bank provides the reserves (over which it has a monopoly of creation) that are demanded by banks. A corollary of this fact is that the money "multiplier" is nothing of the sort. Bank reserves are not "multiplied" by the banking system nor is such a multiplication necessary for the expansion of bank credit and monetary liabilities. If there is a single fact that illustrates this point it is that total commercial bank deposits at the Federal Reserve in 1951 ($20 billion) were larger—in nominal terms—than at end 2006 ($19 billion) while total US credit market assets rose by over 10,000 percent in nominal terms during the same time period.

An interesting fact. Is this view incorrect?

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http://www.cnbc.com/id/100943810

An interesting fact. Is this view incorrect?

yup.

bank deposits belong to the depositors

it is not the property of the bank.they are merely holding it in trust.

...and frankly,that element of trust is wearing a bit thin at present.

if other parties arrive on the scent that can prove they are a more efficient deployer of capital/more ethical in their dealings, then the aforementioned banks must and will succumb to the new mantra.

adapt or die.

there has been of late, way too much centralisation...these guys need a dose of good,honest,old fashioned competition .for their own good.

.......monopolies have a habit of metastacising and not giving people the best deal around.

the banks are quite happy to harp on about this in every other industry apart from their own, but now it is time to put this particular profession and its cohorts under the microscope.

Edited by oracle

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Totally agree with the article, glad it seems to back up my understanding,

The commercial banks just operate by accounting rules not real money, the central bank deposits are used to settle transactions between banks, but they only transfer between each commercial banks deposit in the central banks.

As I understand it, banks also borrow deposits from other banks to ensure they themselves have enough on deposit.

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Further, when you get money in your account, you rarely pay in cash over the counter.

Mostly it goes in by electronic transfer from another bank.

So the bank just changes its balance sheet relative to other banks, they don't actually get anything.

So money doesn't exist just changes in balance sheet results.

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yup.

bank deposits belong to the depositors

it is not the property of the bank.they are merely holding it in trust.

...and frankly,that element of trust is wearing a bit thin at present.

if other parties arrive on the scent that can prove they are a more efficient deployer of capital/more ethical in their dealings, then the aforementioned banks must and will succumb to the new mantra.

adapt or die.

there has been of late, way too much centralisation...these guys need a dose of good,honest,old fashioned competition .for their own good.

.......monopolies have a habit of metastacising and not giving people the best deal around.

the banks are quite happy to harp on about this in every other industry apart from their own, but now it is time to put this particular profession and its cohorts under the microscope.

Apparently now, according to this court ruling [below], money you deposit

in a bank no longer belongs to you any more Effectively turning

all depositors into shareholders in the institutions where they deposit their

money.

According to a federal appeals court ruling, Bank of New York

Mellon’s secured loan will be put ahead of customer segregated accounts held

by Sentinel—a landmark ruling that turns individual segregated accounts

into the property of a third party under circumstances of duress.

In other words, if a financial institution fails, clients, depositors and pension funds

may not get some or all of their money back in a bankruptcy.

http://dl.dropbox.com/u/32961642/SentinelRuling.pdf

Edited by weaker

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I can't quite believe after all this time you are asking this.

The interbank money or is 'base money' is M0. It is basically used to settle at a total net level the transactions of customers at the 'clearing' banks.

I personally believe that the only way to restore capitalism and 'normalise' rates, we need to have a far greater proportion of our money supply as base money rather than credit money. This means more QE and then raise rates to constrain any incipient inflation rather than soaking up the QE.

I'm asking is the figure correct that in all this time the deposits at the fed havent altered in 50 odd years? Or has something else grown as "bank" deposits which would shrink the 10000% growth down.

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Further, when you get money in your account, you rarely pay in cash over the counter.

Mostly it goes in by electronic transfer from another bank.

So the bank just changes its balance sheet relative to other banks, they don't actually get anything.

So money doesn't exist just changes in balance sheet results.

It's not as if bank notes are any more or less 'real money' than numbers on balance sheets.

The paper is just a token.

For what, is a moot point.

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I can't quite believe after all this time you are asking this.

The interbank money or is 'base money' is M0. It is basically used to settle at a total net level the transactions of customers at the 'clearing' banks.

I personally believe that the only way to restore capitalism and 'normalise' rates, we need to have a far greater proportion of our money supply as base money rather than credit money. This means more QE and then raise rates to constrain any incipient inflation rather than soaking up the QE.

M0 also includes notes and coins in circulation. However, it is not the case that these balances are used for inter-bank settlement. This element is actually quite small compared to total reserves. They are principally emergency reserves in the event of a stress. The UK's system makes little distinction as to whether these are held in gilts or BOE reserves.

Banks' lending to the economy is constrained by capital requirements, not central bank reserve requirements. Requiring higher deposits will make no difference.

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M0 also includes notes and coins in circulation. However, it is not the case that these balances are used for inter-bank settlement. This element is actually quite small compared to total reserves. They are principally emergency reserves in the event of a stress. The UK's system makes little distinction as to whether these are held in gilts or BOE reserves.

Banks' lending to the economy is constrained by capital requirements, not central bank reserve requirements. Requiring higher deposits will make no difference.

Well, this is news to me, and since you work in banking (as I understand it) and I don't, I'd be grateful if you could give some more info on this.

As a starter, this is from the BoE website, on its section on the sterling monetary framework relating to reserves accounts:

"Reserves accounts are effectively sterling current accounts for commercial banks - they are

among the safest assets a bank can hold and are the ultimate means of payment between banks.

Whenever payments are made between the accounts of customers at different commercial banks,

they are ultimately settled by transferring central bank money (reserves) between the reserves

accounts of those banks."

http://www.bankofengland.co.uk/markets/Pages/money/reserves/default.aspx

According to you this is incorrect. How does it then work in reality?

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I'm asking is the figure correct that in all this time the deposits at the fed havent altered in 50 odd years? Or has something else grown as "bank" deposits which would shrink the 10000% growth down.

Disclaimer: I am not a banker.

From memory I think Steve Keen quotes the exact figure of $20bn in the chapter of his book he dedicates to debunking the money multiplier (which he calls a myth) and the false belief that monetary creation is exogenous to an economy i.e. the purview of a central bank. In fact, with the trivial exception of notes and coins, monetary creation is an endogenous phenomenon. Commercial lenders bring credit money into existence from nothing when they originate loans, they turn to the central bank as lender of last resort only when their reserve requirements cannot be secured through the wholesale markets. As a consequence credit bubbles can develop and expand to such proportions that they imperil the very financial system itself.

As lender of last resort, post-credit crunch the Fed's deposit reserves have grown somewhat (below).

*Edit. The 'something else' irro alludes to was the shadow banking system of dervatives and swaps which powered the wholesale credit markets and kept the plates spinning with minimal central bank intervention until Lehmans and AIG blew up in 2008.

FisherInvestmentsBanksExcessReserves2012915449.jpg

Edited by zugzwang

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Well, this is news to me, and since you work in banking (as I understand it) and I don't, I'd be grateful if you could give some more info on this.

As a starter, this is from the BoE website, on its section on the sterling monetary framework relating to reserves accounts:

"Reserves accounts are effectively sterling current accounts for commercial banks - they are

among the safest assets a bank can hold and are the ultimate means of payment between banks.

Whenever payments are made between the accounts of customers at different commercial banks,

they are ultimately settled by transferring central bank money (reserves) between the reserves

accounts of those banks."

http://www.bankofengland.co.uk/markets/Pages/money/reserves/default.aspx

According to you this is incorrect. How does it then work in reality?

Sorry, I should have been clearer. Yes, bank reserves are used to make inter bank payments - in fact the CHAPS payments system is run on BOE accounts. However the actual cash required to make the payments is quite small and improvements made to the system recently have reduced the requirement further.

The main component of central bank deposits is cash buffers.

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yup.

bank deposits belong to the depositors

it is not the property of the bank.they are merely holding it

Sorry that is not the case. The money, if you can call it that, is legally the banks and they have a debt to you of the amount of the deposit.

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Sorry that is not the case. The money, if you can call it that, is legally the banks and they have a debt to you of the amount of the deposit.

That is correct.

We run our economy on commercial bank IOUs, which generally come into existence when someone borrows at interest from a commercial bank.

Two excellent books which explain this expensive and unstable 'rent-a-currency' system and which propose an alternative debt-free, publicly issued money system:

http://www.positivemoney.org/product/where-does-money-come-from/

http://www.positivemoney.org/product/modernising-money/

A short explanation of the UK two-tier money system:

http://www.positivemoney.org/2011/11/ambiguity-two-tier-money-system/

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Taking this further,

The banks make money by lending, they lose money by paying interest on deposits.

Lending is slowing, so savings rates have to be low for the bank to make a profit.

Low interest rates also encourage more borrowing and staves of defaults.

The above is just a hypothesis by the way.

So interest rates for savers will only rise when borrowing demand rises.

Which brings me back to the real economy, the system relies on the ability to borrow expanding.

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By any measure there is record global debt and every bank loan results in a cash deposit, electronic or otherwise.

So, let's start there and work back. Something is unhinged.

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yup.

bank deposits belong to the depositors

it is not the property of the bank.they are merely holding it in trust.

...and frankly,that element of trust is wearing a bit thin at present.

if other parties arrive on the scent that can prove they are a more efficient deployer of capital/more ethical in their dealings, then the aforementioned banks must and will succumb to the new mantra.

adapt or die.

there has been of late, way too much centralisation...these guys need a dose of good,honest,old fashioned competition .for their own good.

.......monopolies have a habit of metastacising and not giving people the best deal around.

the banks are quite happy to harp on about this in every other industry apart from their own, but now it is time to put this particular profession and its cohorts under the microscope.

Except now in the EU should a bank fail the deposits are to be used to pay the banks creditors. Bail-Ins: EU Deal Protects Taxpayers in Bank Bailouts

I can imagine that as we speak cogs are turning in the BoE that will in due course "harmonize" this area of of banking system with the EU. When this is done there will be no talk of applying any EU legislation that might improve the resilience of our banking system, ie restrictions on bonuses etc.

Like normal the UK sheeple are being readied for shearing.

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a ) Except now in the EU should a bank fail the deposits are to be used to pay the banks creditors. Bail-Ins: EU Deal Protects Taxpayers in Bank Bailouts

b ) I can imagine that as we speak cogs are turning in the BoE that will in due course "harmonize" this area of of banking system with the EU When this is done there will be no talk of applying any EU legislation that might c ) improve the resilience of our banking system, ie restrictions on bonuses etc.

Like normal the UK sheeple are being readied for shearing.

a ) Which is exactly what should have happened and should happen everywhere

b ) they dont need to harmonize them, these have been the rules in place for decades until they stupidly changed them in 2008.

c ) the easiest way to improve the banks resilience is to force it via the market and remove all govt guarantees from depositors/investors so they actually start to give a toss about whos borrowing and leveraging their savings

Edited by Maria Gorski

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I can't quite believe after all this time you are asking this.

The interbank money or is 'base money' is M0. It is basically used to settle at a total net level the transactions of customers at the 'clearing' banks.

I personally believe that the only way to restore capitalism and 'normalise' rates, we need to have a far greater proportion of our money supply as base money rather than credit money. This means more QE and then raise rates to constrain any incipient inflation rather than soaking up the QE.

Why not? IIRR doesn't read this forum - he just spams it.

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I can't quite believe after all this time you are asking this.

The interbank money or is 'base money' is M0. It is basically used to settle at a total net level the transactions of customers at the 'clearing' banks.

I personally believe that the only way to restore capitalism and 'normalise' rates, we need to have a far greater proportion of our money supply as base money rather than credit money. This means more QE and then raise rates to constrain any incipient inflation rather than soaking up the QE.

Given that the existing 'credit money' represents legal contracts between 2 parties, say a mortgagor and a bank, how do you propose that the cedit money is extinguished and replaced with base money?

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Given that the existing 'credit money' represents legal contracts between 2 parties, say a mortgagor and a bank, how do you propose that the cedit money is extinguished and replaced with base money?

Positive Money have a well developed proposal:

http://2joz611prdme3eogq61h5p3gr08.wpengine.netdna-cdn.com/wp-content/uploads/2013/03/Positive-Money-Reforms-in-Plain-English.pdf

http://2joz611prdme3eogq61h5p3gr08.wpengine.netdna-cdn.com/wp-content/uploads/2013/04/The-Positive-Money-Proposal-2nd-April-2013.pdf

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Taking this further,

The banks make money by lending, they lose money by paying interest on deposits.

Lending is slowing, so savings rates have to be low for the bank to make a profit.

Low interest rates also encourage more borrowing and staves of defaults.

The above is just a hypothesis by the way.

So interest rates for savers will only rise when borrowing demand rises.

Which brings me back to the real economy, the system relies on the ability to borrow expanding.

Private banks make money from speculation i.e. by creating, marketing and managing financial instruments. They speculate in the housing market by creating mortgages. They speculate in risk markets by creating CDOs etc.

Credit money is created out of nothing. Deposits and loans are brought into existence simultaneously on opposite sides of the balance sheet. Reserves are then sought on the wholesale markets, if needed, consistent with local reserve requirements. If for some reason these cannot be secured the central bank is then obliged - as lender of last resort - to accommodate the demand and expand reserves proportionally or risk causing a credit crunch.

The money multiplier model, on the other hand, falsely assumes that causality runs the other way: that the central bank creates excess reserves first which are then deposited with the private banks and multiplied to borrowers by fractional reserve lending.

Between 2008 and 2010, Bernanke expanded US base money growth from 2.3% p.a. to over 100% p.a. (an injection of $1.3 trn) expecting the money multiplier to rapidly revive the US economy - as neoclassical theory insisted it should. Only that's not what happened. Most of the additional reserves were returned on deposit to the Federal Reserve. US economic output barely moved. Inflation rose from -2.1% to a peak of 2.7% before falling back to a rate of 1%.

.

Edited by zugzwang

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What about excess reserves (My link)?

220px-EXCRESNS.png

These are the excess reserves that have been returned redundantly to the Fed after Helicopter Ben expanded base money reserves from $850bn to $3.2trn. He expected each additional dollar of M0 to produce 5-10 dollars worth of economic activity, via the money multiplier. In fact it's produced hardly any economic growth at all, and most of that has come from financial asset inflation.

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