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Panderos wrote:
So you're saying the bank has to pay back the central bank come the morning? Can they not just renew the loan indefinitely?
Panderos wrote:Ok. On it's own I'd say this is not a good answer, since why even bother with depositors when you can borrow from the central bank cheaper. But if you're saying they can't continuously borrow from the central bank, then that would make sense.
Panderos wrote:But couldn't you just create one account, type some numbers in, transfer the money to another account (still at your bank) and then transfer from there to another commercial bank?
Panderos wrote:With regard to the central bank, how do you 'put money in' to an account with a central bank? Can that only be done by transferring money into that account from another person's account at the central bank? So that the total money in central bank accounts is fixed (ignoring QE)?
Panderos wrote:I guess what I'm after here is an understanding of how all the different 'accounts' work and how people are prevented from just typing in zeros. Because if you just created a simple bank that wasn't connected to other banks, there'd be absolutely nothing stopping you from doing this.
Regarding banks creating "new money", I stand by what I said. Fractional reserve lending is not "new money", as it is accounted for. It doesn't cost anything and it doesn't add to inflation (that I know of). "new money" is what the central banks create when they buy government bonds or print money.
Modern Banking and the Fractional Reserve System
[Figures and illustrations were current when written in 2002.]
Do you know where the bank gets the $160,000 for your mortgage? It’s very simple. Someone walks over to a computer and types 160,000 beside your name. With only $27.93 of cash reserves for every $10,000 of assets (in Canada as of June 1999) the bank has just created the remaining $159,553 of that interest-earning money out of thin air. When, after 25 years of hard work, you pay off your mortgage, the $159,553 vanishes back into thin air.
Not so the interest however. It vanishes into the banker’s pocket. Chartered (i.e. privately owned) banks, such as The Bank of Montreal, The Royal Bank, The CIBC, etc. have created about 95 percent of our total money supply ($589.1 billion as of Sept 1999) in exactly this way. But the cash reserves in their vaults amount to only a paltry $3.893 billion.
Macdoc wrote:Regarding banks creating "new money", I stand by what I said. Fractional reserve lending is not "new money", as it is accounted for. It doesn't cost anything and it doesn't add to inflation (that I know of). "new money" is what the central banks create when they buy government bonds or print money.
epete it adds to the money supply = that's the main goal is to match money supply with demand/growth and it works if it's coralled into that zone.
If lending is too loose and based on false valuations then it is inflationary tho not in the way that printing new money is.
Blackadder wrote:Panderos wrote:Can they not just renew the BoE loan indefinitely?
Yes of course they can. They can roll over the deposit indefinitely but they will only ever earn the overnight interest rate, which is paltry. If a bank knew that it was going to put money on deposit for a longer term, it would choose a different form of deposit.
Blackadder wrote:If you "create" an account, i.e. a deposit, the money that goes into that deposit has to come from somewhere outside the bank (if it's a genuine deposit). This can be either in paper money or by a transfer from another bank via cheque or electronic settlement. Banks keep accounts between themselves so when a bank transfers money to another bank, The sending bank will debit the receiving bank's account held at the sending bank. These accounts are regularly reconciled to match against all the inter-bank payments and receipts to ensure that the system remains in balance overall.
And for a bank to be able to transfer money to another bank, that money also as to come from somewhere external to the sending bank itself. This can be only one of two places (I simplify again). Either it comes from the account that the sending bank holds with the receiving bank or it comes from an account that the sending bank holds with a third party (e.e. the central bank).
Blackadder wrote:Panderos wrote:With regard to the central bank, how do you 'put money in' to an account with a central bank?
As above. The central bank is just another bank for these purposes. You can transfer money to it by asking a third party bank to take money from your account with it and to credit the central bank. Another way to put money in to the central bank is to buy government securities from the central bank. A security is simply an IOU from its issuer, like a bank deposit.
Blackadder wrote:Panderos wrote:I guess what I'm after here is an understanding of how all the different 'accounts' work and how people are prevented from just typing in zeros. Because if you just created a simple bank that wasn't connected to other banks, there'd be absolutely nothing stopping you from doing this.
Correct. But then you would not be able to affect the money supply, either.
GT2211 wrote:@Panderos
Frances Coppola wrote about money creation and PM here.
http://coppolacomment.blogspot.co.uk/20 ... -debt.html
Coppola wrote:Positive Money correctly describe the way bank lending works
Coppola wrote:The accounting entries for a new bank loan for £10,000 are as follows:
Customer loan account: £10,000 DR
Customer deposit account: £10,000 CR
It is not possible to distinguish in any meaningful way between a deposit created from a bank loan and a deposit made by the customer.
Blackadder wrote:If you "create" an account, i.e. a deposit, the money that goes into that deposit has to come from somewhere outside the bank (if it's a genuine deposit).
Panderos wrote:
I'm not quite following. Lets say the bank rings up the Bank of England at 4.30pm (is that when day becomes night in the financial world?) and asks to borrow £10bn. At 9am the next morning they ring up again and say 'roll us over another day'. Meanwhile the lend the money out in loans. Every day they ring the BoE and ask to keep rolling it over. Borrowing at 0.5%, lending out at, say 10%.
Panderos wrote:Thank you. I think I actually learnt something here . But what is to stop two banks from colluding, and increasing the amount of money in the other one's account? I put £10tn in your account, you put £10tn in mine. We then spread that money through our accounts at other banks.
Panderos wrote:This is a bit confusing. I can transfer money into the central bank from my account with another bank, or I can take that money in my account with another bank and transfer it to the central bank and get government securities in return?
Panderos wrote:
What if you were like a super isolated bank, back in 19th century America say. And someone deposits $10,000 in you, and you lend half out it out. Now one guy thinks he has $10,000, and another thinks he has $5,000. Has the money supply not increased?
Panderos wrote:Or even worse if people don't actually use cash, they just order you to transfer money from one of your accounts to another. I can they just type zeros into my own employees accounts if I wanted. When they buy something, the 'money' goes from their account to the seller's (who also uses my bank). Free money for anyone the bank wants, no?
Coppola wrote:The accounting entries for a new bank loan for £10,000 are as follows:
Customer loan account: £10,000 DR
Customer deposit account: £10,000 CR
It is not possible to distinguish in any meaningful way between a deposit created from a bank loan and a deposit made by the customer.
Blackadder wrote:Regardless, it is possible to keep rolling (i.e. reborrowing) on a daily basis. However the total amount borrowed does not increase in this case. All that happens is that instead of repaying and then reborrowing immediately, these two steps are merged and the borrowed principal "rolls over" for another night.
Blackadder wrote:Panderos wrote:What is to stop two banks from colluding, and increasing the amount of money in the other one's account? I put £10tn in your account, you put £10tn in mine.
Why would they do that? Leaving aside that massive fraudulent accounting on that scale is unlikely to succeed, and the implications for their capital and reserves ratios, it would not benefit them to do so. A bank does not create money for itself by creating fictitious assets and liabilities, as I already explained.
Blackadder wrote:And two banks colluding to create fictitious assets and liabilities between themselves do not create new money for themselves vis a vis the outside world, i.e. other banks.
Blackadder wrote:Buying government securities removes money (a deposit with another bank) from the banking system and replaces it with government debt. It's a common way for central banks to directly influence the supply of money.
Blackadder wrote:As stated above, banks can create money by lending. For this purpose, employees are not the bank - they are external parties. If a bank "lends" money to its employees by adding a nought to their bank balances, that's fine. Those employees can spend that money and so the bank has created new money. So far so good. But if the bank has no intention of asking the employees ever to repay the gifted nought in their accounts, the bank has created bad assets, i.e. loans that won't be repaid. If it keeps doing this, it will soon run out of cash to lend and have a liability to depositors that it cannot fund because it has no assets that it can turn into cash. The bank is therefore insolvent. So no, it is not free money in endless supply.
Panderos wrote:
Yes, that's what I was saying, which means my question is unanswered. In what way is doing this not preferable to taking deposits from customers if the base rate is only 0.5% (and deposit interest rates are higher)? If I were a bank I'd not bother will all the effort and cost of attracting customers and running their accounts and paying for bank branches. Just borrow from the central bank at next to nothing.
Panderos wrote:
The purpose of my questions is to try to understand what prevents them from doing this.
Panderos wrote:Why not? What stops me from doing that deal I said above, then making a transfer from my account at the co-conspirator bank into another bank? The other bank will ask the co-conspirator if I have the money, and they will say yes. Hmm wait I think I just figure that out... is it because in that second transaction, the third bank would reduce the value of the account of the co-conspirator bank at the third bank, so that the co-conspirator bank still has a massive liability?
Panderos wrote:
Right but that is not the same as transferring money into my account with the central bank. That is transferring money to the central bank itself, right? Otherwise I am having my cake and eating it.
Panderos wrote:Ok but what if there is no cash involved? The system today uses less and less cash compared to electronic money. People have already begun to talk about cashless economies. That way there can be no asset that people want to withdraw that causes a bank to crash.
Panderos wrote:Also, even if there is cash, could a bank not theoretically pay its employees ridiculous money, and then just go bankrupt? I mean if you are running a bank and looking to get rich but don't care about the future of the institution? I'm not saying that's happened..although my belief if that if there is a cheap way of getting rich, somebody will try it at some point.
Panderos wrote:Also: and this goes to anyone replying. I'd really rather get the 'true but complicated' picture rather than the 'simplified but not really accurate' picture as I've found the latter is actually more confusing than the former.
Yes a bank could do that. However deliberately running an institution into bankruptcy would expose its directors and senior management to potential criminal charges. The point you are making isn't so crazy though. In the last ten years many banks took on all kinds of assets which turned out to be virtually worthless. This was fundamentally what caused the banking crisis. I would call that reckless negligence on a monumental scale. But that's another topic.
Blackadder wrote:Because the central bank provides short term funding to allow banks to settle overnight imbalances in their transaction flows, not to fund a bank's long term liabilities. If a bank continued to borrow very large sums of money indefinitely, then the bank supervisors would step in to investigate why the bank needed to borrow continuously from the central bank.
Blackadder wrote:Well in the UK, one thing that prevents them is the central bank. Commercial banks accounts with each other are actually held with the central bank (sorry I should have explained this better previously) and the central bank would certainly notice a sudden massive rise in interbank balances that didn't seem to match with any other transfer in or out of the two colluding banks.
Blackadder wrote:Apologies. I misunderstood your question. OK, if a bank wants to transfer money to its own account held at the central bank, that can come in two ways. It can come from another bank. This is what happens for example when you write a cheque and give it to someone who deposits at a different bank to yours. The two banks effect the transfer of money between themselves by adjusting their accounts with the central bank. The other way to transfer money to an account with a central bank is to sell securities back to the central bank, which will then add the proceeds to the selling bank's account held with it. The latter is simply converting financial assets into money whereas the former is moving existing money.
Blackadder wrote:It doesn't have to be cash. The definition of money is wider than notes and coins. A deposit at a bank can be withdrawn without notice and spent. That falls within the definition of money. The spending mechanism can be cash, cards, cheque. It doesn't matter. For this purpose they are interchangeable. If you use a debit card in a store, you are making a demand on your bank to pay the store's bank. If your bank doesn't have funds available or assets that it can readily liquidate and turn into funds, it will fail to honour your transaction and is technically bankrupt.
Blackadder wrote:Panderos wrote:Also, even if there is cash, could a bank not theoretically pay its employees ridiculous money, and then just go bankrupt?
Yes a bank could do that. However deliberately running an institution into bankruptcy would expose its directors and senior management to potential criminal charges. The point you are making isn't so crazy though. In the last ten years many banks took on all kinds of assets which turned out to be virtually worthless. This was fundamentally what caused the banking crisis. I would call that reckless negligence on a monumental scale. But that's another topic.
GT2211 wrote:@Panderos did you by chance see the Keen/Krugman online debate over banks/money?
Here was Scott Fullwiler's reply which I think might(?) help explain the previous point as to why I think BA's post earlier was wrong.
http://www.nakedcapitalism.com/2012/04/ ... -sign.html
David Glasner also provided a good summary with links to the posts around the blogosphere if you are interested.
http://uneasymoney.com/2012/04/11/endogenous-money/
What we have here is prime evidence that a huge chunk of mainline economists do not understand how the banking system works...This is absurd.
Blackadder wrote:
You didn't read my post all the way through. An INDIVIDUAL bank cannot lend 900% of its deposit base. However, as a SYSTEM, the banks can continue lending until the original $100 in my example is all lodged with the central bank as reserves.
"When banks extend loans to their customers, they create money by crediting their customers’ accounts." (Sir Mervyn King)
“The essence of the contemporary monetary system is creation of money, out of nothing, by private banks’ often foolish lending.” (Martin Wolf, Financial Times)
"Banks do not, as too many textbooks still suggest, take deposits of existing money from savers and lend it out to borrowers: they create credit and money ex nihilo – extending a loan to the borrower and simultaneously crediting the borrower’s money account." and "The financial crisis of 2007/08 occurred because we failed to constrain the private financial system’s creation of private credit and money." ( Lord Adair Turner, former chairman of the Financial Services Authority)
"Even before the crisis banks enjoyed various kinds of state support, including the effective right to create money." (Independent Commission on Banking Report)
"Banks extend credit by simply increasing the borrowing customer’s current account … That is, banks extend credit [i.e. make loans] by creating money." (Paul Tucker, Deputy Governor of the Bank of England)
"Under the present system banks do not have to wait for depositors to appear and make funds available before they can on-lend, or intermediate, those funds. Rather, they create their own funds, deposits, in the act of lending. This fact can be verified in the description of the money creation system in many central bank statements, and it is obvious to anybody who has ever lent money and created the resulting book entries." (IMF Working Paper Chicago Plan Revisited, p9 )
I believe you are peddling mythology of precisely the type the banks would like people to believe. Banks can indeed lend money that they do not have. If this is not true then you'll have to explain to me why nobody from the banking industry has made any attempt to refute what positivemoney.org (and numerous other campaigners) have said about this topic.
I am not peddling any "mythology". An individual bank cannot lend money it does not have on a sustained basis. That is a fact.
If it did, it would become insolvent.
The banking system as a whole, however, can and does. Nowhere did I defend this practice, nor make any political comment about it.
Many commentators have written about Positive Money and it is not my job to reproduce here a full analysis of their claims and whether they hold up to scrutiny.
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