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

[Bloo Loo]

because they start with my 100K deposited in a bank

Mr A borrows 90K and buys a ferrari from Mr B

Mr B deposits 90K in his bank

Mr C borrows 81K and buys a painting from Mr D

Mr D deposits it in his bank

so we started with just my 100K using that same 100K we now have people with bank deposits of 271K and have bought 171K worth of goods with the same 100K.

no, you are adding up assets and liabilities. Money is needed to move these balances around.

[davidhpc]

no, you are adding up assets and liabilities. Money is needed to move these balances around.

no i'm not. we have 271K in liabilities and 271K in assets.

[Injin]

no i'm not. we have 271K in liabilities and 271K in assets.

And about a fiver in cash aka legal tender.

What was money again? I missed your definition.

[babesagainstmachines]

if you are just trying to be argumentative, then fair enough.

I wasn't, I was serious. But now I think about it, the answer could be zero legal capital requirements. At least then consumers would choose based on their own risk/reward assessment rather than assuming the law will look after them.

[Injin]

I wasn't, I was serious. But now I think about it, the answer could be zero legal capital requirements. At least then consumers would choose based on their own risk/reward assessment rather than assuming the law will look after them.

The law exists to stop people making their own money and to make sure they stay poor.

Can't have an elite without someone to look down on.

[Bloo Loo]

no i'm not. we have 271K in liabilities and 271K in assets.

Good. Its in balance- where is the money you say is created?

[davidhpc]

Good. Its in balance- where is the money you say is created?

well there is the essence of it.

i can come along with Mr B and Mr D and we have 271K in our bank books. but in fact only 100K, was ever, and still is in existence.

#73 covers it.

[Injin]

well there is the essence of it.

i can come along with Mr B and Mr D and we have 271K in our bank books. but in fact only 100K, was ever, and still is in existence.

#73 covers it.

I thought that was "broad money."

I love these threads, I really do. Banking is a religious experience, and it's akin to debating with scarlets749. No definitions offered, no reality pointed to, pertinent questions ignored, dogma pushed.

Great stuff.

What is money, anyway?

[is it me]

Has anyone built into the model yet that for evey £1,000 deposited the staff get £500 in bonuses.

[Bloo Loo]

well there is the essence of it.

i can come along with Mr B and Mr D and we have 271K in our bank books. but in fact only 100K, was ever, and still is in existence.

#73 covers it.

Yes thats right, no money is created here.

But they can and do add money into the system. Its got absolutely nothing to do with fractional reserve, thin air or ghosts in the machine. its simply the conversion of a thing of value into something portable, and widely accepted. Note the word conversion.

At the end of the day, money adds no wealth into the system. Its the things that money is created for that add wealth.

However, with money, wealth can be moved around, so your house, once worth 100K to you, the money you borrowed to buy it has moved that wealth to the person you bought it off. You are in debt to the tune of 100k at the start of the loan. Thats all it is. The bank needed absolutely nothing to do this, Just your willingness to pay them back with money plus interest.

[algobet]

Read 'New Monetarism' by David Roche. until then:

new money from nowhere using securisation as follows:

Bank A has:

loan assets 100 dr

deposits 90 cr

capital 10 cr

Bank B has cash assets of 100 balanced with capital 100. Bank C has T-bonds 100, capital 100. At this stage Bank A has reached its capital ratio limit but Bank B and Bank C can still lend 90 each.

Now Bank A securitise 100 loans into an spv. the spv issues 100 of bonds to Bank B. Bank B gives 100 in cash into the spv which uses the money to buy t-bond collateral from bank C.

when the music stops:

Bank A now has no loan risk on its balance sheet and can lend another 100.

Bank B has AAA bonds worth 100 (which dont require regulatory capital even though they have credit risk of the original 100 loans*) matched with 100 capital and can still lend as before

Bank C has 100 cash with 100 capital and can lend as before.

The SPV has 100 t-bonds and 100 debt.

*this is because some clever sod managed to turn subprime debt into AAA rated bonds. the banks missold the bonds as AAA when they were subprime, the investors only looked at the high yield, rating agencies could only see their fees growing exponentially, the FSA was asleep, the monolines didnt understand the risk (or were too far distanced to price it correctly).

[davidhpc]

Yes thats right, no money is created here.

But they can and do add money into the system. Its got absolutely nothing to do with fractional reserve, thin air or ghosts in the machine. its simply the conversion of a thing of value into something portable, and widely accepted. Note the word conversion.

At the end of the day, money adds no wealth into the system. Its the things that money is created for that add wealth.

However, with money, wealth can be moved around, so your house, once worth 100K to you, the money you borrowed to buy it has moved that wealth to the person you bought it off. You are in debt to the tune of 100k at the start of the loan. Thats all it is. The bank needed absolutely nothing to do this, Just your willingness to pay them back with money plus interest.

the bank needs 100K to give to the person i bought the house off.

[Bloo Loo]

the bank needs 100K to give to the person i bought the house off.

If you say so

[Injin]

the bank needs 100K to give to the person i bought the house off.

and a 100k to the depositor. And find some interest for everyone involved from somewhere.

it can do all that without creating any new money, obviously.

Of course if we had a proper definition of money, that would clear a lot of things up.....

[davidhpc]

If you say so

well if you know somebody who is willing to part with their 100K house without receiving 100K for it, then ...?

[Bloo Loo]

well if you know somebody who is willing to part with their 100K house without receiving 100K for it, then ...?

I dont. they wouldnt.

Now run along and be a good peoples drone

Edited February 27, 2008 by Bloo Loo

[davidhpc]

I dont. they wouldnt.

well the bank needs a 100K to give to them then , doesn't it?

[Bloo Loo]

well the bank needs a 100K to give to them then , doesn't it?

convert the house into money.. blah blah, yawn. now have house liability, blah blah, new money as asset, blah blah, all balanced, blah, everybody happy.

[davidhpc]

convert the house into money.. blah blah, yawn. now have house liability, blah blah, new money as asset, blah blah, all balanced, blah, everybody happy.

ah, so the latest from the conspiracy theorists is that banks create money by turning houses into it.

wish i hadn't wasted my time to be honest.

[algobet]

the bank needs 100K to give to the person i bought the house off.

i struggle to understand how you worked in a bank and dont udnerstand the banking system. what bank was it and why didnt they give you any training?

[Bloo Loo]

i struggle to understand how you worked in a bank and dont udnerstand the banking system. what bank was it and why didnt they give you any training?

Northern Rock no doubt. Now money creation is a conspiracy.

Lucky Im only here for entertainment purposes

[agb41]

To anyone who doesn't know what he's getting at, I wrote about this extensively in the economics subforum some time ago. Maybe I should repost it on the main one?

[davidhpc]

thank you agb41

[Injin]

well the bank needs a 100K to give to them then , doesn't it?

Not if they accept a piece of paper with a £ sign and some numbers on it instead.

[Injin]

To anyone who doesn't know what he's getting at, I wrote about this extensively in the economics subforum some time ago. Maybe I should repost it on the main one?

Yes, as I said on that thread, great post.