Banks Borrow Money Into Existence, But Not At 0% Interest

[davidhpc]

well ive read this but i still disagree - sorry. assets and liabilities always remain balanced - its double entry accounting. if you earn profit of 100m or lose 10m your books will still balance. if you mis-state your assets by 100m your books will still balance. here i create a loan:

dr loan 100m

cr customer accounts 100m

thats all that happens. the fact that books balance is an accounting necessity nothing to do with showing banks are not creating money.

why do you think the FSA have and made the statement i refer to above? it is because they have lost control of the money supply. they have lost the control over bank lending via the reserve ratio.

i now ask you a question. what is the effect on a banks capital when it securitises assets? does it free up capital and enable further loan creation to be possible thereby circumventing the capital requirments of BoE? [the answer is yes by the way ]

securitising is a way of raising more capital. a simple way of trying to explain it is, a bank has a million in deposits it lends out 900,000 and is stuck for making new loans, it 'sells' the 900K in loans to a pension fund and is back to a million again and can lend again.

in your first example, you can not make that loan without having any money in your loan account.

[Injin]

securitising is a way of raising more capital. a simple way of trying to explain it is, a bank has a million in deposits it lends out 900,000 and is stuck for making new loans, it 'sells' the 900K in loans to a pension fund and is back to a million again and can lend again.

in your first example, you can not make that loan without having any money in your loan account.

Banks don't lend out deposits. They swap credit with borrowers. The books must balance so they can work out what they have done and keep up the appearance they need to convince people like yourself.

Your problem is that you don't look at real world actions, you focus on linguistic distinctions.

[davidhpc]

Banks don't lend out deposits. They swap credit with borrowers. The books must balance so they can work out what they have done and keep up the appearance they need to convince people like yourself.

Your problem is that you don't look at real world actions, you focus on linguistic distinctions.

well that is another thing you are wrong on. I have worked for many banks and see what they do first hand.

[algobet]

securitising is a way of raising more capital. a simple way of trying to explain it is, a bank has a million in deposits it lends out 900,000 and is stuck for making new loans, it 'sells' the 900K in loans to a pension fund and is back to a million again and can lend again.

in your first example, you can not make that loan without having any money in your loan account.

no, banks securitise to remove assets from the balance sheet - they often only remove the risk by the way they dont actually sell them. in a securitisation the cash raised from issuing (normally) medium term notes (mtns) is used to buy collateral which sits in the siv. the cash doesnt go to the originating bank.

i dont even understand your second point re creating a loan above. the bank just creates the double entry in its books. arguing in your favour: the only circumstance where it will be restricted from freely creating the loan is where ALL these things occur:

1. the customer wants the cash in another bank or in a bag to take with them

2. the bank does not have any free capital

3. the bank doesnt take an equivalent deposit on the same day

4. the bank doesnt securitise the same day [or within the quarter it needs to do its Pru returns!]

[Bloo Loo]

no i'm not arguing that there is anything tangible backing money. i know the days of the gold standard are long gone.

i'm arguing that a bank needs to obtain money from somewhere before it can make a loan. whether it is borrowed from another bank or the central bank or depositors.

I understand what you are saying, but what you need to add to your thinking is that your house is money too. The bank simply releases the money (value) of your pledge and converts it into notes, coins or phosphor dots.

It is just a bookkeeping entry HOUSE IN= MONEY OUT. its all balanced. This is called monetisation. Its what banks do.

Same with the Government. The government need money but it can issue Bonds, but pays the BoE to turn that into money BOND ISSUE IN=MONEY OUT

in your scenario the sum looks like this MONEY IN=MONEY OUT.

The first two examples Add to the money available until the loan is repaid. This is money creation. The third example is a simple trade in money.

[Injin]

well that is another thing you are wrong on. I have worked for many banks and see what they do first hand.

Ahh there is your problem! We'll need to start right at the beginning.

Define money for me please.

[davidhpc]

I understand what you are saying, but what you need to add to your thinking is that your house is money too. The bank simply releases the money (value) of your pledge and converts it into notes, coins or phosphor dots.

It is just a bookkeeping entry HOUSE IN= MONEY OUT. its all balanced. This is called monetisation. Its what banks do.

Same with the Government. The government need money but it can issue Bonds, but pays the BoE to turn that into money BOND ISSUE IN=MONEY OUT

in your scenario the sum looks like this MONEY IN=MONEY OUT.

The first two examples Add to the money available until the loan is repaid. This is money creation. The third example is a simple trade in money.

if what you say is true, the bank is simply buying a house from you? i dont know where you have got this notion from. the house does not enter the banks balance sheet as an asset, the loan does.

what happens is a bank lends money to Mr A to give to Mr B for his house. the house is security, if Mr A doesn't pay the loan back it can be sold to recoup the money.

Mr Smith goes to the pawnbroker and borrows fifty pounds leaving his watch as security, similiar sort of thing.

[algobet]

well that is another thing you are wrong on. I have worked for many banks and see what they do first hand.

did you work in capital markets or in a branch?

[Injin]

if what you say is true, the bank is simply buying a house from you? i dont know where you have got this notion from. the house does not enter the banks balance sheet as an asset, the loan does.

what happens is a bank lends money to Mr A to give to Mr B for his house. the house is security, if Mr A doesn't pay the loan back it can be sold to recoup the money.

Mr Smith goes to the pawnbroker and borrows fifty pounds leaving his watch as security, similiar sort of thing.

Until you give a concrete definition of money...............

[davidhpc]

no, banks securitise to remove assets from the balance sheet - they often only remove the risk by the way they dont actually sell them. in a securitisation the cash raised from issuing (normally) medium term notes (mtns) is used to buy collateral which sits in the siv. the cash doesnt go to the originating bank.

i dont even understand your second point re creating a loan above. the bank just creates the double entry in its books. arguing in your favour: the only circumstance where it will be restricted from freely creating the loan is where ALL these things occur:

1. the customer wants the cash in another bank or in a bag to take with them

2. the bank does not have any free capital

3. the bank doesnt take an equivalent deposit on the same day

4. the bank doesnt securitise the same day [or within the quarter it needs to do its Pru returns!]

i was trying to explain it simply.

so what is this " in a securitisation the cash raised from issuing (normally) medium term notes" - where does this cash raised come from?

it has nothing at all to do with the argument and neither does double entry bookkeeping

post #73 is a great post and explains things with great clarity. if you don't, or refuse to, understand it, then i can't make things any clearer. i'll have to join the others and throw the towel in. there is no point me arguing any further and you are entitled to your own opinion.

[algobet]

i was trying to explain it simply.

so what is this " in a securitisation the cash raised from issuing (normally) medium term notes" - where does this cash raised come from?

it has nothing at all to do with the argument and neither does double entry bookkeeping

post #73 is a great post and explains things with great clarity. if you don't, or refuse to, understand it, then i can't make things any clearer. i'll have to join the others and throw the towel in. there is no point me arguing any further and you are entitled to your own opinion.

yes, we dont seem to be understanding each other!

the cash raised in a securitisation comes from 'sophisticated investors'. these can be other banks, insurance companies, many US state funds, sovereign wealth funds, etc. i dont think many pension funds invested as fortunately i dont think they were allowed. the mtns are sold to 'sophisticated investors' and so dont need regulation as these sophisticated investors are supposed to read and understand the offer documents. the cash buys AAA rated assets (t-bonds, pfandebriefe, etc) held by the siv. risk of the mortgage assets is transferred not by selling but by means of a credit default swap - a financial insurance contract.

it is the key to the argument. are you having a joke with me now???

[davidhpc]

look, you've said it yourself. it raises more cash from investors. whether it is a Hedge Fund or another bank or Mrs Miggins from the pie shop doesn't matter. it needs to raise cash from somewhere to enable it to make more loans. it can not just create the loans from thin air.

good morning

[Injin]

i was trying to explain it simply.

so what is this " in a securitisation the cash raised from issuing (normally) medium term notes" - where does this cash raised come from?

it has nothing at all to do with the argument and neither does double entry bookkeeping

post #73 is a great post and explains things with great clarity. if you don't, or refuse to, understand it, then i can't make things any clearer. i'll have to join the others and throw the towel in. there is no point me arguing any further and you are entitled to your own opinion.

Typical banker, ask them to define money and they suddenly have better things to do.

[babesagainstmachines]

look, you've said it yourself. it raises more cash from investors. whether it is a Hedge Fund or another bank or Mrs Miggins from the pie shop doesn't matter. it needs to raise cash from somewhere to enable it to make more loans. it can not just create the loans from thin air.

good morning

What is a "run on the bank"?

[Bloo Loo]

look, you've said it yourself. it raises more cash from investors. whether it is a Hedge Fund or another bank or Mrs Miggins from the pie shop doesn't matter. it needs to raise cash from somewhere to enable it to make more loans. it can not just create the loans from thin air.

good morning

yes it needs cash to raise loans. It needs this cash because their is a LAW telling it must have so much cash in a ratio to the loans it creates.

It seems very simple to me- Your house is a thing of value. All they do is convert the thing of value into cash. ONE BEGETS THE OTHER. Money is nothing without an asset behind it.

Think man THINK HARD

This site is for entertainment purposes only

Edited February 27, 2008 by Bloo Loo

[Injin]

yes it needs cash to raise loans. It needs this cash because their is a LAW telling it must have so much cash in a ratio to the loans it creates.

It seems very simple to me- Your house is a thing of value. All they do is convert the thing of value into cash. ONE BEGETS THE OTHER. Money is nothing without an asset behind it.

Think man THINK HARD

He's here to muddy the waters mate.

Every thread like this anywhere on the internet attracts a banker VI who will spectacurlarly fail to define any terms and push the existing deposits fiction.

[Bloo Loo]

He's here to muddy the waters mate.

Every thread like this anywhere on the internet attracts a banker VI who will spectacurlarly fail to define any terms and push the existing deposits fiction.

just a few more posts and the third reich will get a mention too

[Injin]

just a few more posts and the third reich will get a mention too

A few more banking collapses and we'll actually have someone try and start one, probebly.

[davidhpc]

yes it needs cash to raise loans. It needs this cash because their is a LAW telling it must have so much cash in a ratio to the loans it creates.

It seems very simple to me- Your house is a thing of value. All they do is convert the thing of value into cash. ONE BEGETS THE OTHER. Money is nothing without an asset behind it.

Think man THINK HARD

This site is for entertainment purposes only

You THINK MAN, THINK HARD

what if a bank gives you money that is not a mortgage? on a credit card to spend down the pub, what is that then?

THINK MAN, because what you are saying is nonsense

[Injin]

You THINK MAN, THINK HARD

what if a bank gives you money that is not a mortgage? on a credit card to spend down the pub, what is that then?

THINK MAN, because what you are saying is nonsense

Define "money."

[davidhpc]

Define "money."

have you got two pencils up your nostrils?

[Injin]

have you got two pencils up your nostrils?

No need to be rude, it's a pretty simple question.

What does it look like if I want to put some of it in a wheebarrow?

[Bloo Loo]

You THINK MAN, THINK HARD

what if a bank gives you money that is not a mortgage? on a credit card to spend down the pub, what is that then?

THINK MAN, because what you are saying is nonsense

Thats easy, thats money from their stock. They got Billions in stock. they have to lend it out too, at interest otherwise inflation shags them as much as it does the rest of us.

As you will recall from a previous post, I said there were many ways to lend.

Some Banks like NR didnt have enough stock, so they borrowed it, having used up their ability (Under law) to create money under capital adequacy laws.

[algobet]

davidhpc,

we dig up the worlds resources and create value, we make and build things which create value, we trade with each other and create value. we call this profit. indeed it is and it quite correctly increases our wealth and we record in our books of national income as such.

the annual level of production equals national income or GDP and grows at around 3% per year (value creation). perhaps this is your idea of how money is created. ie there are lots of new houses and cars.

but the stock market and property and other assets in total have grown by much more than this 3%. how was the uk's balance sheet (total asset values) able to increase more than the 3% profit generated.

its called asset price inflation and it happens because we cannot produce enough new shiny things to sell to the people with all the new loans. so the excess cash bids up assets prices.

[babesagainstmachines]

You THINK MAN, THINK HARD

what if a bank gives you money that is not a mortgage? on a credit card to spend down the pub, what is that then?

THINK MAN, because what you are saying is nonsense

Look up Basel, fractional reserve banking and I'll add another Monetary Finanancial Institutions.

http://www.ecb.int/stats/money/mfi/general...l/index.en.html

The purpose of collecting information on MFIs is the following:

to facilitate the monitoring and production of a comprehensive and consistent balance sheet of the money-creating sector in the single currency area on the basis of an MFI population corresponding to sectors S121 and S122 of the European System of Accounts 1995 (ESA 95);

Sorry I can't find the similar doc on the BoE website, but there is one.