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


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they have liabilities of 190K. they have 100K in cash and are owed 90K by MR C.

OK both depositors want their money, they are short. where is the money creation?

Edited by Bloo Loo
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OK both depositors want their money, they are short. where is the money creation?

ok banks dont have everybody's money. thats why they have a problem if there is a run. the money creation is because the same 100K can buy many times more goods and services PROVIDING it is re-deposited and re-lent many times.

edit: we have demonstrated that by showing we have way over 100K in bank deposits, that is what is referred to as 'money creation'. It is not banks just creating money from thin air.

Edited by davidhpc
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ok banks dont have everybody's money. thats why they have a problem if there is a run. the money creation is because the same 100K can buy many times more goods and services PROVIDING it is re-deposited and re-lent many times.

edit: we have demonstrated that by showing we have way over 100K in bank deposits, that is what is referred to as 'money creation'. It is not banks just creating money from thin air.

the banks can create as much money as they like. seriously. they just need somone to sign and accept the liability ie the borrower.

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the banks can create as much money as they like. seriously. they just need somone to sign and accept the liability ie the borrower.

No they can't.

If they could, they would lend as much as they could, because it wouldn't cost them anything and they would not even need any of it back.

Why would they try and attract money from savers? Why would they borrow money on the money markets?

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ok banks dont have everybody's money. thats why they have a problem if there is a run. the money creation is because the same 100K can buy many times more goods and services PROVIDING it is re-deposited and re-lent many times.

edit: we have demonstrated that by showing we have way over 100K in bank deposits, that is what is referred to as 'money creation'. It is not banks just creating money from thin air.

No, if money had been created, they wouldnt be in the position of not being able to pay the depositors on demand.

You have confused here IMO, liabilities, and money.

For example, company x can buy 10 widgets and put them into stock and have say 10K invoice to pay next month. Company x has gambled that they can sell the widgets and pay the supplier.

The Company has created a liability of 10K. If the they only sell 5 by the end of the month, they are in trouble.

Its the same with your example, the bank has gambled that it wont have to pay the 190K to its depositors as it only has 100K in its vaults. If it could simply create money, then thats what they would do, but they cant in this case.

If they had Mortgaged to C though and created his money, they would still have 100K in the vault, D would deposit his 90K and all would be tickateeboo.

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No they can't.

If they could, they would lend as much as they could, because it wouldn't cost them anything and they would not even need any of it back.

Why would they try and attract money from savers? Why would they borrow money on the money markets?

SIVS and other off balance sheet vehicles enable just this trick to be pulled and avoid capital adequacy requirements.

Thats why the fact that much of the losses in these vehicles coming back onto the banks books is so painful, it restricts new lending and forces banks to repair balance sheets as they attempt to get "Legal" again.

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No they can't.

If they could, they would lend as much as they could, because it wouldn't cost them anything and they would not even need any of it back.

Why would they try and attract money from savers? Why would they borrow money on the money markets?

they do lend as much as they can. the funding requirement is:

(total loans issued - securitised loans) * reserve ratio = deposits + other borrowing

so you are right but only in as much as they cannot securitise. there is no limit on the amount they can securitise since its not regulated. the central banks were too slow and have missed a trick, now its too late. imagine if they said "you have to bring it all on balance sheet and fund it"!!

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No, if money had been created, they wouldnt be in the position of not being able to pay the depositors on demand.

You have confused here IMO, liabilities, and money.

For example, company x can buy 10 widgets and put them into stock and have say 10K invoice to pay next month. Company x has gambled that they can sell the widgets and pay the supplier.

The Company has created a liability of 10K. If the they only sell 5 by the end of the month, they are in trouble.

Its the same with your example, the bank has gambled that it wont have to pay the 190K to its depositors as it only has 100K in its vaults. If it could simply create money, then thats what they would do, but they cant in this case.

If they had Mortgaged to C though and created his money, they would still have 100K in the vault, D would deposit his 90K and all would be tickateeboo.

That is what banks do.

Why would we need them otherwise? They borrow money and lend it on at a higher rate. They never have all the money deposited with it, they couldn't possibly have it, how would they make a profit?

The difference between the 100K and the 190K we have in deposits is broad money creation and is the 'creation' the BofE and others are talking about.

The notion that you can walk in to a bank and say lend me 100K and the bank just creates it out of thin air is just mental.

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they do lend as much as they can. the funding requirement is:

(total loans issued - securitised loans) * reserve ratio = deposits + other borrowing

so you are right but only in as much as they cannot securitise. there is no limit on the amount they can securitise since its not regulated. the central banks were too slow and have missed a trick, now its too late. imagine if they said "you have to bring it all on balance sheet and fund it"!!

yes ok they can sell the loans on, even if temporarily.

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the banks can create as much money as they like. seriously. they just need somone to sign and accept the liability ie the borrower.

Yep.

The borrower creates the cash for the bank who then hand it back to them and charge them double + interest for the effort of accepting it.

Bank has nothing.

I walk in, sign loan form, bank suddenly has £10,000.

Where has it come from?

Has to be from me.

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The notion that you can walk in to a bank and say lend me 100K and the bank just creates it out of thin air is just mental.

do you do accept its just an accounting entry? or are you arguing there is something tangible backing money? because the days of the gold standard are long gone if you are.

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Yep.

The borrower creates the cash for the bank who then hand it back to them and charge them double + interest for the effort of accepting it.

Bank has nothing.

I walk in, sign loan form, bank suddenly has £10,000.

Where has it come from?

Has to be from me.

the money has come from someone elses deposits. it all balances. at the end of each working day, the books must balance with the bank of england as does every other bank in the system.

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do you do accept its just an accounting entry? or are you arguing there is something tangible backing money? because the days of the gold standard are long gone if you are.

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.

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the money has come from someone elses deposits. it all balances. at the end of each working day, the books must balance with the bank of england as does every other bank in the system.

youre right. Mr A walks into bank and gets a loan for £100. bank enters in books as follows:

Dr Loans £100

Cr Customer accounts £100

Mr A decides he wants to take the cash with him. Bank says ok and enters in books:

Dr Customer accounts £100

Cr Cash £100

Net effect:

Dr Loans £100

Cr Cash £100

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the money has come from someone elses deposits. it all balances. at the end of each working day, the books must balance with the bank of england as does every other bank in the system.

No it doesn't.

Go to your bank.

Ask them what account your loan money came from.

Bank has £1,000

You walk in and borrow £10,000 - they agree and give it to you in bank draft or cheque form, or if you want to wait they either exchange your promisory note with the bank of england for legal tender or sell the promisory note on the open market to get the legal tender.

Note the order of events, for this is crucial. You sign, then they acquire the money by using the form you signed to do so.

This is fraud.

All banking is fraud.

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No it doesn't.

Go to your bank.

Ask them what account your loan money came from.

Bank has £1,000

You walk in and borrow £10,000 - they agree and give it to you in bank draft or cheque form, or if you want to wait they either exchange your promisory note with the bank of england for legal tender or sell the promisory note on the open market to get the legal tender.

Note the order of events, for this is crucial. You sign, then they acquire the money by using the form you signed to do so.

This is fraud.

All banking is fraud.

the loan money has come from their deposit reserves.

if the bank has a shortfall, at the end of the day it must borrow the money from another part of the system, generally another bank. some banks will have a surplus some will have a deficit, they must balance themselves out each day at the bank of england.

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the loan money has come from their deposit reserves.

if the bank has a shortfall, at the end of the day it must borrow the money from another part of the system, generally another bank. some banks will have a surplus some will have a deficit, they must balance themselves out each day at the bank of england.

No, it really doesn't. Banks can lend to you when the vaults are empty and they have nothing.

Go and ask your bank where the money from your loan (or any loan) came from.

(Oh and there is only one bank, the BOE, the rest are just branches of it.)

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Okay I'm trying to get my head round this. So we know that the amount of gold dug out of the ground each year only increases the supply of gold by a very small amount - less than 1% or something?

Now we know that the actual supply of money in the economy is expanding a lot faster than that so "money" is being created somehow, somewhere. So if it isnt the private commercial banks (and i'm still not convinced that they don't create "money"), and counterfieters can't possibly produce this much, then it must be the Bank of England. So under what circumstances does the BOE create this money, who does it go to, and surely this flies in the face of their supposed endevours against inflation? And what the hell gives them the right to create money which isnt backed with gold, whilst counterfieters are thrown in jail for doing exactly the same? <_<

Edit: spellings

Edited by Prophet_of_Pwnage
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Okay I'm trying to get my head round this. So we know that the amount of gold dug out of the ground each year only increases the supply of gold by a very small amount - less than 1% or something?

Now we know that the actual supply of money in the economy is expanding a lot faster than that so "money" is being created somehow, somewhere. So if it isnt the private commercial banks (and i'm still not convinced that they don't create "money"), and counterfieters can't possibly produce this much, then it must be the Bank of England. So under what circumstances does the BOE create this money, who does it go to, and surely this flies in the face of their supposed endevours against inflation? And what the hell gives them the right to create money which isnt backed with gold, whilst counterfieters are thrown in jail for doing exactly the same? <_<

Edit: spellings

Apparently Britain abandoned the gold standard in 1931. link

The banking world it pretty complex but there is a lot of information about how money is created here: link

And if you have a couple of hours free watch this: link

all of the above links have an American bias but you get the idea.

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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.

Davidhpc.

I can't believe this is anything other than bear baiting. No one could be so stupid as to think banks don't need to raise funds to match lending. I think this has become a wind-up. Personally, I'm not going any further in debating this with the "banks create money from thin-air crazies".

Optobear

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the fact that the banks have to "even up their books" at the end of the day proves that they can make money on their own.

if it was a matter of them borrowing money first, from say the money markets, THEN lending it out, their books would never be out of balance.

the mortgage created is the backing for the money created for the most part.

they credit you 100, you promise to pay 100 plus interest.

saver's deposits, and the money market loans are for reserve requirements and capital adequacy.

as Loo says, the LAW says you have to have X many dollars in your bank or reserve account for every so many loans you create. and the law changes constantly, they could do away with all requirements if they wanted.

if they give a 100 pound loan, for a 100 pound mortgage, they don't have to borrow 100 pounds, just a few to cover the requirements.

the mortgage itself balances the rest.

Edited by Mr Nice
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Personally, I'm not going any further in debating this with the "banks create money from thin-air crazies".

Optobear

please read some narrative on modern banking. you will obviously be surprised.

i find it very interesting that you and davidhpc are probably in the majority. indeed the 'man on the street' probably doesnt understand half of what you do. i dont ever think there would be a banking collapse but i do think over the next year more of the real story will come out in the media (though not Heat magazine) and jo public will be surprised.

its not illegal what the banks have done, its just amazing the central banks were caught napping.

- and my final word on creating 'money'. we are of course only talking about creating 'money' in terms of credit and not physical cash or gold. it is true a bank needs reserves before they can create loans subject to the BoE reserve requirements. BUT the expansion of the banking system/money supply (which is happening so fast) means deposits are being made with them so fast (and therefore increasing and expanding their capital base) they have the capital against which to make new loans so easily. How is the capital base increasing so fast then if as a whole banks need capital against which to expand? As ive said above, securitsing existing loans removes the loans off balance sheet and frees up more capital. sivs are non regualted and have no capital. theres your loans out of thin air.

please done just say 'banks cant just make money from thin air'. please take some time to read wider.

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heres something just from this mornings BBC website - quoted below:

its essentially stating our argument that expansion of credit has been made possible by selling off loans/securitising them. if the banks cannot create as much credit in future then the supply of money falls and all other things being equal interest rates rise. indeed if the risk is on balance sheet you better be charging for it!!

quote:

The Financial Services Authority (FSA) has warned banks that the crisis in the financial markets will force them to change the way they do business.

FSA chief executive Hector Sants said banks will never again be able to raise as much money as cheaply as they had been doing by selling off their loans.

In an exclusive interview with the BBC, he said they will have to keep more of their loans on their own books.

That, in turn, may permanently push up the cost of borrowing for all of us.

"Banks themselves need to give consideration to how their business models will need to adapt to the changed market circumstances they have seen," said Mr Sants.

Hector Sants said that the way bankers are rewarded is not helpful to financial stability... which, from an habitually cautious regulator, represents a sound ticking off for the City

"Secondly, we will be looking for firms to treat their customers fairly in these arguably more difficult times in prospect."

BBC business editor Robert Peston said the implication of Mr Sants' position "will be a pretty steep reduction in the amount of credit available and the cost of it".

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please read some narrative on modern banking. you will obviously be surprised.

i find it very interesting that you and davidhpc are probably in the majority. indeed the 'man on the street' probably doesnt understand half of what you do. i dont ever think there would be a banking collapse but i do think over the next year more of the real story will come out in the media (though not Heat magazine) and jo public will be surprised.

its not illegal what the banks have done, its just amazing the central banks were caught napping.

- and my final word on creating 'money'. we are of course only talking about creating 'money' in terms of credit and not physical cash or gold. it is true a bank needs reserves before they can create loans subject to the BoE reserve requirements. BUT the expansion of the banking system/money supply (which is happening so fast) means deposits are being made with them so fast (and therefore increasing and expanding their capital base) they have the capital against which to make new loans so easily. How is the capital base increasing so fast then if as a whole banks need capital against which to expand? As ive said above, securitsing existing loans removes the loans off balance sheet and frees up more capital. sivs are non regualted and have no capital. theres your loans out of thin air.

please done just say 'banks cant just make money from thin air'. please take some time to read wider.

please take some time to understand what you read. post #73 in this thread has a very good attempt at explaining what you are misunderstanding.

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In order to see that banks are not simply creating money for themselves and lending it out, we need only look at the assets and liabilities, they remain balanced. The bank is paying the depositor and charging the borrower, and as you correctly point out, this is how they make their money.

Japhy

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 :o ]

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