Posted: Mar 29, 2013 1:31 am
Panderos wrote:Blackadder, thanks for replying. I know the video referred to it but this thread isn't intended to be about the financial crisis, and I don't disagree about what you said there. Here I'm really interested in how banking / central banking works (and I'm not, at least not yet, interested in their new post-crisis 'innovations'. Just the 'normal stuff').
Anyway, couple of questions (for now)
First, do you know why banks are offering accounts with interest rates higher than the Central Bank Base rate? I mean if they can borrow at 0.5% from the Bank of England, why set up a 5% current account?
They pay interest of say 5%, but they rake in interest of say 8% from loans.
Second, is it your understanding that accounts with a central bank are separate from accounts within commercial banks? That is, a bank cannot just type a number into one of their current accounts and then transfer that into their account with the central bank?
I'm not sure on the answer to this, but as I said earlier, there are two separate issues here: 1. fractional lending; and 2. creation of new money. Number 1 isn't really a problem as all transactions are accounted for. Even though an initial deposit $X can supposedly work through the system fractionally, as described in an equation by someone above, there is no new creation of money. Nothing magical is happening. The only fear with this approach is a bank run. Highly unlikely, and in the event it happened, can be backstopped by the government/central reserve. The second point is the real issue. How is money created and how is it paid for? This is what gets some people's panties in a twist. But as I said, if money wasn't created out of debt, there would be no disincentive to just borrow squillions (other than inflation, that is).