Banking Explained For Idiots Like Me

[thecrashingisles]

Ok. So if your bank, natwest or whatever haven't go tthe pound coins they say they do and advance you a loan..what exactly have they given you, and where did they get it from?

How did they get it?

What of their own is involved in this process?

Why is asking my bank where they get their money from and how stupid, when I wanted to find out where they got their money from and how?

Seems to me you don't get it. You are probably one of the peopel who thinks that pretending to do something is the same as doing it, if you can get away with it. It isn't.

OK, what do they give you? Purchasing power and in return you are endebted to them to whatever amount you agree.

How did they get it? Apart from the legal framework for the banking industry they get their 'trust' (which is really what we're talking about - fiat money) through their reputation and size. People trust that they can meet their obligations. To give you a non-banking example, if you go into an expensive restaurant with a rich person but with no money, they will still serve you because they trust that someone is going to pay the bill - in effect the rich person is 'lending' you their financial credibility. Similarly if you buy a car on credit, the garage trusts that they will get paid by the bank who gave you the loan, and the bank trusts that you will repay them. If you don't then they've lost that money from their balance sheet.

What of their own is involved? Their balance sheet and their goodwill. As you can see with lenders in the US at the moment, if they make too many bad loans, they go bankrupt like any other business.

Why is it stupid to ask about it in a bank? Because the people who work there are just glorified shop assistants.

[Injin]

OK, what do they give you? Purchasing power and in return you are endebted to them to whatever amount you agree.

How did they get it? Apart from the legal framework for the banking industry they get their 'trust' (which is really what we're talking about - fiat money) through their reputation and size. People trust that they can meet their obligations. To give you a non-banking example, if you go into an expensive restaurant with a rich person but with no money, they will still serve you because they trust that someone is going to pay the bill - in effect the rich person is 'lending' you their financial credibility. Similarly if you buy a car on credit, the garage trusts that they will get paid by the bank who gave you the loan, and the bank trusts that you will repay them. If you don't then they've lost that money from their balance sheet.

What of their own is involved? Their balance sheet and their goodwill. As you can see with lenders in the US at the moment, if they make too many bad loans, they go bankrupt like any other business.

Why is it stupid to ask about it in a bank? Because the people who work there are just glorified shop assistants.

Ah ok. I see what you are saying.

But ..if that's what is happening, the bank is still equal, aren't they?

After all, they have estimated Bob's ability to pay them back at the value which he has been given. (Or someone else has without Bob's knowledge or permission which is still a balanced book AND fraud.)

Their books are still balanced the second that Bob's spend his "money".

Now, as you and me both know, the bank can do this because people are confident that the bank has their cash and can give it to them. They do this because they are ignorant of the facts about banking. Not one man in 1,000 will be able to follow this discussion, if that. Not only that, but the average man in the street thinks that for every transaction actually cash with brenda's face on it is moving about.

Is the ability to fool both Bob and the general public Bob's fault, or the general publics or even a property that is owned by the bank?

If it is, please show me how.

If a rich man has no money, he's not a rich man, he's a fraudster pretending to be a rich man. Also if the rich man is "just a gloriified shop assitant" I am confused. Which is true?

If a vendor is offered payment and accepts it, isn't it his responsibility to decide what he wants to accept as payment? Values are subjective after all. How does the vendor agreeing to waive the bill put an obligation on Bob? Bob's books are balanced, the rich man's books are balanced and the vendor's book is balanced. Where is the debt here?

If Bob does not repay his loan, then the bank loses nothing. Before Bob arrived, the money that they "loaned" to him did not exist. The bank has stood no risk, offered nothing of it's own. Bob carries all the risk personally.

Would you give someone a car and then, because you felt so grateful to them for accepting it, give them another one as well, with a full fuel tank?

What would you think of someone who you gave a car to who moaned that you had only sent them another two wheels and an exhaust as payment for accepting it?

You seem like a nice bloke, but please be aware of the need to rationalise things backwards. Things work a certain way and the fact that they work can lead an otherwise level headed fellah to try to justify how they operate, rather than look at facts and evidence.

Thanks for your time and tell me what you think!

[thecrashingisles]

Now, as you and me both know, the bank can do this because people are confident that the bank has their cash and can give it to them. They do this because they are ignorant of the facts about banking. Not one man in 1,000 will be able to follow this discussion, if that. Not only that, but the average man in the street thinks that for every transaction actually cash with brenda's face on it is moving about.

Is the ability to fool both Bob and the general public Bob's fault, or the general publics or even a property that is owned by the bank?

This is where I think you're wrong about people's psychology. I think people can understand most of the principles involved quite well from their own experience. To take a simple example if you loan money to a friend to buy some jewellery you would understand that they couldn't pay you back without selling it first, and also that if they had to sell it quickly, for example to a pawnbroker, then they may not get the best price. The key point about a bank is that they have to keep enough cash on hand to service normal withdrawals. This only breaks down if there is a run on the bank but it doesn't mean that the system is a fraud - maybe it's because I watched Mary Poppins as a child.

If a rich man has no money, he's not a rich man, he's a fraudster pretending to be a rich man. Also if the rich man is "just a gloriified shop assitant" I am confused. Which is true?

I meant the people who work in retail banking outlets are just like shop assistants. They don't know anything about finance.

Good point about the fraudster or conman. A confidence trickster passing himself off as a rich man can get surprisingly far before having to pick up the tab but eventually he will come unstuck. I think it illustrates that people instinctively understand the idea of credit based on trust though.

If a vendor is offered payment and accepts it, isn't it his responsibility to decide what he wants to accept as payment? Values are subjective after all. How does the vendor agreeing to waive the bill put an obligation on Bob? Bob's books are balanced, the rich man's books are balanced and the vendor's book is balanced. Where is the debt here?

If Bob does not repay his loan, then the bank loses nothing. Before Bob arrived, the money that they "loaned" to him did not exist. The bank has stood no risk, offered nothing of it's own. Bob carries all the risk personally.

Would you give someone a car and then, because you felt so grateful to them for accepting it, give them another one as well, with a full fuel tank?

What would you think of someone who you gave a car to who moaned that you had only sent them another two wheels and an exhaust as payment for accepting it?

You seem like a nice bloke, but please be aware of the need to rationalise things backwards. Things work a certain way and the fact that they work can lead an otherwise level headed fellah to try to justify how they operate, rather than look at facts and evidence.

Thanks for your time and tell me what you think!

Ok, imagine what happens if the bank lends money to 50 million people to buy cars, and none of them pay it back. The bank still owes the car companies the money and if it can't afford to pay it then it would go bankrupt. From this example it's clear that the bank is making a risk when it issues loans - the money doesn't come at no cost to them.

[GDS]

You might also want to read http://www.lifeboatnews.com to see where the distributors of the video are coming from.

It's not necessary to go along with weird religious beliefs or conspiracy theories to question the wisdom of using debt as the country's means of exchange. Why should we depend on exponentially increasing numbers of people going into the red just so that we can exchange goods and services with each other? Why should the entire economy slow down or even worse, grind to a halt, whenever there aren't enough borrowers willing to lay their solvency on the line?

The problem with the present system is that money is continuously disappearing as debts are repaid, so there must be a steadily increasing stream of people borrowing it back into circulation faster than it is disappearing. When, as now, people are defaulting on their debts, and new borrowers are unwilling to step forward, money becomes scarce and everybody suffers. Even when sufficient money is being borrowed to replace what's being repaid, it's distributed according to the priorities of the banks, and tends not to go where it's most needed (ie, into speculation, rather than investment).

There are plenty of people entirely unconnected with any weirdo beliefs who have pointed out the inadequacies of the present financial system. Have a look at Huber and Robertson's "Creating New Money", for instance - free download here: http://www.jamesrobertson.com/book/creatingnewmoney.pdf

They reckon we'd be better off to the tune of £45 bn plus, if the nation reclaimed the right to issue its money, rather than "borrowing" it into existence. This is not a new idea. Until the 1950s almost half of the money in circulation was issued, entirely free of debt, by the Treasury, in the form of notes and coins. It's the present situation, where virtually every penny has to be borrowed into existence, that's the dangerous break with tradition.

http://www.freewebs.com/whosemoney

[Injin]

Ah ok.

First example.

If I loan some jewelry to a mate, I lose the jewelry. It doesn't pop into my hand the moment he asks for it by the very action of him asking for it. If it did, I could hardly claim it to be mine, because his actions created it, not mine. I am sure this is why banking works, people put it down to their own personal level and don't think about it globally. I am not talking about psychology, I am talking about factual material reality. i.e. what actually occurs in fractional reserve banking.

If I lend anything out, I lose the thing I lend. If a bank lends anything out, they lose nothing.

The fact that the fraud works doesn't make it not a fraud, any more than hiding a murder victim really well means that no one was murdered.

Good point about the fraudster or conman. A confidence trickster passing himself off as a rich man can get surprisingly far before having to pick up the tab but eventually he will come unstuck. I think it illustrates that people instinctively understand the idea of credit based on trust though.

Yes, they extend credit. And conmen do come unstuck. Peopel also understand the concept of being systematically lied to. This is a bank run, where the fraud fails. I am puzzled as to why you think that Bob (in our example) should pay anything for extending his credit to the bank?

I meant the people who work in retail banking outlets are just like shop assistants. They don't know anything about finance.

And yet these are the people who sign the contracts in good faith, without knowing what they are really doing. Doesn't seem very ethical to me really. What do you think?

Ok, imagine what happens if the bank lends money to 50 million people to buy cars, and none of them pay it back. The bank still owes the car companies the money and if it can't afford to pay it then it would go bankrupt. From this example it's clear that the bank is making a risk when it issues loans - the money doesn't come at no cost to them.

I don't think so, because the money to pay the car companies has been created by the forms that all those people signed and then given to the car companies. If the people do not pay the "loan" back, then the bank is exactly where it started. If they do, then the bank gets to keep for itself the full amount of the loan + interest.

The people's books are balanced, the banks books are balanced, the car companies books are balanced if no one "repays" the bank. (And the currency is fooked!).

Bob's bookkeeping - -£100 to bank, +£100 from bank

Car company - -car + £100 from Bob

Bank - +£100 from Bob -£100 from Bob to car company

[OverInflated]

If you want to download you can get links from here.

http://keepvid.com/?url=http%3A//video.goo...474362583451279

[Mr H]

I don't think so, because the money to pay the car companies has been created by the forms that all those people signed and then given to the car companies. If the people do not pay the "loan" back, then the bank is exactly where it started. If they do, then the bank gets to keep for itself the full amount of the loan + interest.

The people's books are balanced, the banks books are balanced, the car companies books are balanced if no one "repays" the bank. (And the currency is fooked!).

Bob's bookkeeping - -£100 to bank, +£100 from bank

Car company - -car + £100 from Bob

Bank - +£100 from Bob -£100 from Bob to car company

Call me stupid if you will, but shouldn't the last line read: Bank: -£100 to Bob, +£100 from Bob? The Bank's transactions have never been with the Car Company so shouldn't figure on this line. Also there should be a second transaction for Bob, as he gives money to the car company in return for the car. Nit picking I know, but if you're wishing to illustrate a point, at least include all the detail.

These figures only balance because of the additional +£100 (Introduced into the equation on the last line) given back to the Bank by Bob, presumably when he's earned it somehow. And as Bob's bookkeeping doesn't take into account the repayment to the Bank (his third transaction), the Bank's books shouldn't have been balanced.

I feel some of the threads on this post are more than a little vague, regardless of whether or not the poster understands the subject at hand. It seems that some of the assertions regarding Fractional Reserve Banking require the reader to take one or two 'leaps of faith', in order to be 'enlightened', and anyone who doesn't get it is treated as a half wit, regardless of how much or little sense the statements make.

Why can't any of you explain the FR principle in terms those of us with more than a passing knowledge of numbers (real or imaginary) and finance can understand. In my experience, the measure of an expert is one who understands their subject with such intimacy that they can explain it in terms the lay person can easily grasp. Do we have any experts on here?

[Injin]

Call me stupid if you will, but shouldn't the last line read: Bank: -£100 to Bob, +£100 from Bob? The Bank's transactions have never been with the Car Company so shouldn't figure on this line. Also there should be a second transaction for Bob, as he gives money to the car company in return for the car. Nit picking I know, but if you're wishing to illustrate a point, at least include all the detail.

These figures only balance because of the additional +£100 (Introduced into the equation on the last line) given back to the Bank by Bob, presumably when he's earned it somehow. And as Bob's bookkeeping doesn't take into account the repayment to the Bank (his third transaction), the Bank's books shouldn't have been balanced.

I feel some of the threads on this post are more than a little vague, regardless of whether or not the poster understands the subject at hand. It seems that some of the assertions regarding Fractional Reserve Banking require the reader to take one or two 'leaps of faith', in order to be 'enlightened', and anyone who doesn't get it is treated as a half wit, regardless of how much or little sense the statements make.

Why can't any of you explain the FR principle in terms those of us with more than a passing knowledge of numbers (real or imaginary) and finance can understand. In my experience, the measure of an expert is one who understands their subject with such intimacy that they can explain it in terms the lay person can easily grasp. Do we have any experts on here?

The initial money comes from Bob. Bob gives the bank an asset, which the bank then returns to Bob, but tells him that it is their asset they are lending to him. The scheme only works if Bob believes them and asks no questions.

Bank starts with £0

Bob gives bank £100 asset

Bank returns £100 asset to Bob

Bob spends £100

Bank demands that Bob furnish them with another £100 + interest

Bob falls for it and does so Bank is up £100 + interest

Bob dies, or goes pop or something similar and bank is exactly where they started, minus the cost of the stationary.

Sometimes there is an intermediate stage where the bank goes elsewhere to sell Bob's asset to raise the funds to give him. This was NR's finance model.

I'm not an expert, just a stupid man who doesn't jump to conclusions when I am shown big numbers on a screen by people in sharp suits.

[music man]

I enjoyed it once again.

[cells]

the problem with these videos is that they do not provide ALL the information! i often wondered why a bank takes our money and gives us interest. why would they pay us money to lend them our money IF they can just print it!

i know the answer and ill post it later after some of you think about it

but once you understand this little fact, the whole banking systems image turns from one of the devil to one of a relatively respectable business!

one day i will buy a proper banking book although its interesting figureing things our yourself

[Injin]

the problem with these videos is that they do not provide ALL the information! i often wondered why a bank takes our money and gives us interest. why would they pay us money to lend them our money IF they can just print it!

i know the answer and ill post it later after some of you think about it

but once you understand this little fact, the whole banking systems image turns from one of the devil to one of a relatively respectable business!

one day i will buy a proper banking book although its interesting figureing things our yourself

You'll have to explain to me how a currency backed by violence isn't evil I think before I can get it.

Is it because banking is indoor work with no heavy lifting?

Is it to make us want the paper beyond the need to hand it to the taxman to avoid losing everything and getting thrown into a cell?

Nothing wrong with banking ofc, if it was done in a free market. The statist version will require some explaining before I can see it as "respectable".

[cells]

You'll have to explain to me how a currency backed by violence isn't evil I think before I can get it.

Is it because banking is indoor work with no heavy lifting?

Is it to make us want the paper beyond the need to hand it to the taxman to avoid losing everything and getting thrown into a cell?

Nothing wrong with banking ofc, if it was done in a free market. The statist version will require some explaining before I can see it as "respectable".

think about why northen rock almost went bust

they didnt have enough money! but surely a bank can just create teh money?

the simple truth is that the bank CAN create money and it does. from then on it gets a lot more complicated. Firstly the banks must have a zero balance sheet every night.

that means that they must have £1 to every £1 loaned out. They can do this by either giving customers a decent interest rate on savings or just simply borrow it from another bank.

so although they can create money, they still need to have a balanced book (so if they have £10 missing, doesnt matter if they can create £10 becuase they created it they still have £10 missing. they only way to get clean £10 is to borrow from a bank with surplus or to borrow from the people by offering them a decent interest!)

now you come onto the subject of what is money, money is simply a medium of trade. it can be ANYTHING, including debt.

a bank creates money, for two individuals.

say you have a house and i want to buy it

i borrow 100,000 from halifax. and pay you. you now deposit it abby. Halifax now had 100k missing, so needs to offer savers a good interes rate to get 100k more in savings. (or borrow it from another bank, who got or gets its money from savers)

so i borrowed 100k from the bank who created it out of nothing and is charging me 6.25%, and you deposited it into some bank giving you interest at say 6%. the bank i borrowed from now needs to find 100k, it might be from you directly if you put the money in them. or it might be from another bank who you put money into.

the "profit" they make is the difference from what they charge me, and what they give you. (in this case 0.25%)

now you might say boooo, bad banks, creating money out of nothing. But all he did was act as a middle man between you and me. i wanted a house, you wanted to sell a house. i didnt have enough money to buy it outright so i promissed you i would give you the money in installments of 1month, which after 25 years would be the capital plus some interest we agree upon.

the only problem with fractional reserve banking is that the interest rate is artificually set, this setting is usually far too low and we get inflation from that. if interest was set at the correct level, the number of new loans created out of thin air would equal the number of loans being paid off.

"why does the goverment borrow money from a bank when it can create it itself and pay no interest!" the video asks. the reason is that, that would cause instant inflation. whereass borrowing it from a bank in itself doesnt cause inflation (unless offcourse the interest rate is set too low!

there is also one extreamly massive advantage of this debt system, which is probably why it will stay with us for a very long time.

that being.. that capital is not required to build stuff. You do not need to save money as a goverment or as a business to build machines or infistructure. you can just print that money and build that way.

note: im not a banker, but the more and more i learn about the banking system the more sane and reasonable it becomes.

like i said before, why would banks offer you any interest if they can just print money and leave it at that!

long read, sorry

[Mr H]

The initial money comes from Bob. Bob gives the bank an asset, which the bank then returns to Bob, but tells him that it is their asset they are lending to him. The scheme only works if Bob believes them and asks no questions.

Bank starts with £0

Bob gives bank £100 asset

Bank returns £100 asset to Bob

Bob spends £100

Bank demands that Bob furnish them with another £100 + interest

Bob falls for it and does so Bank is up £100 + interest

Bob dies, or goes pop or something similar and bank is exactly where they started, minus the cost of the stationary.

Sometimes there is an intermediate stage where the bank goes elsewhere to sell Bob's asset to raise the funds to give him. This was NR's finance model.

I'm not an expert, just a stupid man who doesn't jump to conclusions when I am shown big numbers on a screen by people in sharp suits.

Me neither, I generally question everything and/or, when I've time, do as much research as I can.

Isn't there a small flaw with that analysis? If the Bank returns the £100 asset, Bob owes them nothing. But, if they LOAN him £100, obviously he does, and of course they charge interest (aka profit). The obvious question is why Bob would take out a loan for £100, when he has £100 capital already in the Bank (the majority of which admittedly it's probably already loaned to someone else), and just has to go to the Bank and ask for it back. But assuming that he does take out the loan, and thus repay it over a given amount of time, the Bank's margin is the difference between the interest Bob pays them and the interest they pay him for the initial deposit.

This of course has little to do with the FR model, whereby the Bank has already handed most of Bob's deposit out to other borrowers, and subsequently increased their 'assets' by taking on significant loans from other Financiers to hand out to even more borrowers. The problem comes when Bob wants his £100 back, and causes a short term cashflow problem. Not sure I've grasped yet the whole technicalities of how it works, but I'm working on it....

[LargelyIgnorant]

What happens to all the interest the BoE gets on the money it prints out of thin air?

[Injin]

Me neither, I generally question everything and/or, when I've time, do as much research as I can.

Isn't there a small flaw with that analysis? If the Bank returns the £100 asset, Bob owes them nothing. But, if they LOAN him £100, obviously he does, and of course they charge interest (aka profit). The obvious question is why Bob would take out a loan for £100, when he has £100 capital already in the Bank (the majority of which admittedly it's probably already loaned to someone else), and just has to go to the Bank and ask for it back. But assuming that he does take out the loan, and thus repay it over a given amount of time, the Bank's margin is the difference between the interest Bob pays them and the interest they pay him for the initial deposit.

This of course has little to do with the FR model, whereby the Bank has already handed most of Bob's deposit out to other borrowers, and subsequently increased their 'assets' by taking on significant loans from other Financiers to hand out to even more borrowers. The problem comes when Bob wants his £100 back, and causes a short term cashflow problem. Not sure I've grasped yet the whole technicalities of how it works, but I'm working on it....

No, the bank didn't loan him anything. They lied to him. He provided the only thing of value in the transaction, his signature and promise to pay. Without it the bank had nothing. It's impossible to say that the bank loaned to Bob because without Bob here would be no money. Therefore the funds must come from Bob.

Check your tenners - "I promise to pay the bearer on demand". Well, Bob promised to pay as well.........and someone somewhere accepted it as valuable.

[Mr H]

No, the bank didn't loan him anything. They lied to him. He provided the only thing of value in the transaction, his signature and promise to pay. Without it the bank had nothing. It's impossible to say that the bank loaned to Bob because without Bob here would be no money. Therefore the funds must come from Bob.

Check your tenners - "I promise to pay the bearer on demand". Well, Bob promised to pay as well.........and someone somewhere accepted it as valuable.

Think you're beginning to lose me here. Didn't Bob pay the funds into the Bank in the first place? What therefore does his signature and 'promise to pay' have to do with the transaction?

Surely the initial transaction (regardless of what happens next to the funds) is that Bob makes a deposit? Please enlighten

[Injin]

think about why northen rock almost went bust

they didnt have enough money! but surely a bank can just create teh money?

the simple truth is that the bank CAN create money and it does. from then on it gets a lot more complicated. Firstly the banks must have a zero balance sheet every night.

that means that they must have £1 to every £1 loaned out. They can do this by either giving customers a decent interest rate on savings or just simply borrow it from another bank.

so although they can create money, they still need to have a balanced book (so if they have £10 missing, doesnt matter if they can create £10 becuase they created it they still have £10 missing. they only way to get clean £10 is to borrow from a bank with surplus or to borrow from the people by offering them a decent interest!)

now you come onto the subject of what is money, money is simply a medium of trade. it can be ANYTHING, including debt.

a bank creates money, for two individuals.

say you have a house and i want to buy it

i borrow 100,000 from halifax. and pay you. you now deposit it abby. Halifax now had 100k missing, so needs to offer savers a good interes rate to get 100k more in savings. (or borrow it from another bank, who got or gets its money from savers)

so i borrowed 100k from the bank who created it out of nothing and is charging me 6.25%, and you deposited it into some bank giving you interest at say 6%. the bank i borrowed from now needs to find 100k, it might be from you directly if you put the money in them. or it might be from another bank who you put money into.

the "profit" they make is the difference from what they charge me, and what they give you. (in this case 0.25%)

now you might say boooo, bad banks, creating money out of nothing. But all he did was act as a middle man between you and me. i wanted a house, you wanted to sell a house. i didnt have enough money to buy it outright so i promissed you i would give you the money in installments of 1month, which after 25 years would be the capital plus some interest we agree upon.

the only problem with fractional reserve banking is that the interest rate is artificually set, this setting is usually far too low and we get inflation from that. if interest was set at the correct level, the number of new loans created out of thin air would equal the number of loans being paid off.

"why does the goverment borrow money from a bank when it can create it itself and pay no interest!" the video asks. the reason is that, that would cause instant inflation. whereass borrowing it from a bank in itself doesnt cause inflation (unless offcourse the interest rate is set too low!

there is also one extreamly massive advantage of this debt system, which is probably why it will stay with us for a very long time.

that being.. that capital is not required to build stuff. You do not need to save money as a goverment or as a business to build machines or infistructure. you can just print that money and build that way.

note: im not a banker, but the more and more i learn about the banking system the more sane and reasonable it becomes.

like i said before, why would banks offer you any interest if they can just print money and leave it at that!

long read, sorry

If you stop seeing the different banks as anything other than branches of the central bank, this problem is cleared up almost immediately. If they were to just massively overprint money, then peopel woudl notice and drop into the real world again, but a gradual erosion is not noticed by most. (Unlike the next few weeks when everyone is going to wonder where their buying power went)

People only accept legal tender because they have no choice to pay taxes, fines, for licences and so forth which they have to acquire or they will be attacked or stolen from.

Capital isn't required to build stuff...so why do you need money? You don't, you only need resources and to persuade a few people to help you out. in the old days "profit" was the actual thing you made - a road, a school, a picture of britney before she got fat.....now "profit" is the bit left over after you have handed out fiat currency over to all and sundry.

[the_austrian]

If a bank has 10% reserves and more than 10% of the depositors ask for their money back does that mean the rest lose out because the bank has run out of cash? (my guess would be no...)

[gavp]

Not more of this 'banks can create money out of thin air' crap. You're all a bunch of loons.

Injin, here is how it works:

Fred deposits £100 in the bank

The bank loans £100 to Bob

Bob repays £100 + 8% interest to the bank

Fred withdraws his £100 + 5% from the bank

The bank keeps the remaining 3% as its profit (less costs)

It really is as simple as that.

[Mr H]

Not more of this 'banks can create money out of thin air' crap. You're all a bunch of loons.

Injin, here is how it works:

Fred deposits £100 in the bank

The bank loans £100 to Bob

Bob repays £100 + 8% interest to the bank

Fred withdraws his £100 + 5% from the bank

The bank keeps the remaining 3% as its profit (less costs)

It really is as simple as that.

In principle, yes, but the bank has to keep a certain amount in 'reserve'. It's now less than 10% of the amount deposited, but means that they can't lend the £100 to Bob, only (for the sake of argument) £90.

[Injin]

Think you're beginning to lose me here. Didn't Bob pay the funds into the Bank in the first place? What therefore does his signature and 'promise to pay' have to do with the transaction?

Surely the initial transaction (regardless of what happens next to the funds) is that Bob makes a deposit? Please enlighten

Deposits are loans "savers" have made to the bank and are liabilities.

Loans are assets given to the banks. Bob signs the form, the bank rates it as an asset and pays Bob it's value. Nowhere on earth is that a loan except in finance.

Put more simply, Bob's "loan" is treated by the bank as an asset. It's called a loan, but nowhere on earth would anyone who isn't a banker recognise it as one. It's like having a pet cat called dog. If you hear the words it can fool you, but as soon as you see the cat, the trick is over and the nonsense is revealed.

If a bank has 10% reserves and more than 10% of the depositors ask for their money back does that mean the rest lose out because the bank has run out of cash? (my guess would be no...)

In the free market, yes.

In socialist la la land where Alistair Darling lives, no. They will run the printing presses to cough up the cash.

[Injin]

Not more of this 'banks can create money out of thin air' crap. You're all a bunch of loons.

Injin, here is how it works:

Fred deposits £100 in the bank

The bank loans £100 to Bob

Bob repays £100 + 8% interest to the bank

Fred withdraws his £100 + 5% from the bank

The bank keeps the remaining 3% as its profit (less costs)

It really is as simple as that.

Fred deposits £100 in the bank.

The bank loans £100 to Bob.

Fred Withdraws his £100

The bank still claims that Bob has been given £100.

If what you claim is true, money would deflate constantly and no debt could ever be repaid in full.

[cells]

What happens to all the interest the BoE gets on the money it prints out of thin air?

the boe doesnt often print money or create money, last time for for NR, before that it was more than 10 years ago iirc. it may print/lend money to the goverment often, but say it prints money a billion, it doesnt make a profit of the interest. it makes a profit of the difference in interest it charges the goverment and the base rate. so if it charges the goverment 5.8% and base rate is 5.75% it makes 0.05% profit!

the boe does give the base rate of interest to any bank with a surplus on its books that night, but the banks usually get more inteerest lending to a bank that doesnt have enough money that night than to the boe.

since most the money in the system is created by the banks (something like 95% or more) it means the boe pays no interest on that, (since the banks need net zero account, every penny they create they need to have or borrow that night. and only a surplus gets given the base rate).

the base rate, is a way to garantee the minimium savings account rate.

if there where say only 2 banks in a country, bank A and bank B. and the central bank in that country ups the base rate from 0% to 5%

bank A would offer 1% interest to customers, and that night deposit it in the BOE getting 5% interest, its profit would be 4%. But then bank B would offer customers 2% and deposit it in the cental bank @ 5% making 3% profit ect. until the savers got just a tad lower than the base rate on their savings

and if savings cost the base rate, then loans must be equal to or higher than the base rate!

[cells]

In principle, yes, but the bank has to keep a certain amount in 'reserve'. It's now less than 10% of the amount deposited, but means that they can't lend the £100 to Bob, only (for the sake of argument) £90.

you are wrong, there is no reserve, that was a long time ago

a bank can now create an infinite amount of money from 1p.

check wiki for uk required bank reserve, it is optional, banks can choose any reserve they like

in reality, the banks as a whole have near enough 100% reserve.

if you look up the amount of uk banks have (its about 1.3tril) and you look at the amount of deposits the banks have (again nearly 1.3tril) you will see that it is almost exactly the same

the reason for this is that banks must have zero balance sheet every night, so for ever pound they lent they must have a pound in savings. or at lest borrow a pound from another bank with a surplus. which is the whole reason banks offer you a savings account with interest, why offer you a savings acccount with interest if they can print print and print

Edited September 18, 2007 by cells

[Mr H]

Deposits are loans "savers" have made to the bank and are liabilities.

Loans are assets given to the banks. Bob signs the form, the bank rates it as an asset and pays Bob it's value. Nowhere on earth is that a loan except in finance.

Put more simply, Bob's "loan" is treated by the bank as an asset. It's called a loan, but nowhere on earth would anyone who isn't a banker recognise it as one. It's like having a pet cat called dog. If you hear the words it can fool you, but as soon as you see the cat, the trick is over and the nonsense is revealed.

In the free market, yes.

Are we missing a step here? We started off discussing Bob making a deposit into the Bank. Now we're talking about him taking out a loan. And yes, I do understand that a loan is an asset to the Bank, it makes perfect sense, why wouldn't it be an asset?