Do you know how money is created?

fortwilliam

Stop mixing up the words "Money" and "Currency"

The ten Euro note in your pocket is not "Money", it is a note of "Currency"

faceman

fortwilliam wrote: »

Stop mixing up the words "Money" and "Currency"

The ten Euro note in your pocket is not "Money", it is a note of "Currency"

I call it fancy paper.

KahBoom

topper75 wrote: »

It's glib because it glosses over the fact that if we all go down to withdraw at a certain time tomorrow then the whole thing falls apart. If I want my money back from the bank, no use them telling me that they'll get it for me as soon as they sell Tommy Ryan's boat/Mary Murphy's house/Joe O'Sullivans printworks. The precarious ratio of loans/deposits IS a gamble whatever fancy maths you use to try explain it away.

In a bank run, banks can breach reserve requirements and this can cause a crisis, yes - but bank lending isn't limited by reserve requirements, it is limited by capital requirements.

If there is demand for loans, and all banks are at the limit of their reserve requirements, the central bank will (upon request) do an exchange with banks to increase their reserves.

So what you've described, doesn't actually conflict with anything I've said.

Nino Brown

Naz_st wrote: »

Also, the counterpoint to the "banks create money by lending" that is often overlooked, is that money is "destroyed" when you pay it back.

Only if the money completes a single cycle, which doesn't happen, twice lent money creates debt that cannot be destroyed without more currency creation.

http://paulgrignon.netfirms.com/MoneyasDebt/twicelentanimated.html

The Dagda

Naz_st wrote: »

How so?

I think the general point here is that banks don't "create money out of thin air" in the sense that the loans they create (which do "create money" or rather liquidity), are generally backed by something of notionally equal or similar value. For example, if you go to the bank and look for 500k mortgage on a house worth 500k, the "value" was already in the system, the "money" the bank created is releasing the value implicit in the asset. So one important function of a bank is to add liquidity to the system. Of course there is a problem in this model when banks overvalue underlying assets, as we know. But that is an implicitly different problem to flat out saying that the banking system is wrong because it "creates money out of thin air".

Also, the counterpoint to the "banks create money by lending" that is often overlooked, is that money is "destroyed" when you pay it back.

Here is an article from a respected author, in a reputable newspaper, which explains things gently...

http://www.theguardian.com/commentisfree/2014/mar/18/truth-money-iou-bank-of-england-austerity

pH

The Dagda wrote: »

Here is an article from a respected author, in a reputable newspaper, which explains things gently...

http://www.theguardian.com/commentisfree/2014/mar/18/truth-money-iou-bank-of-england-austerity

But again it is incorrect to say that banks create money. If they really created it then it would be irrelevant whether it was ever paid back. Also as pointed out above repaying a bank loan "destroys" money in exactly the same way as a bank "created" it when it was lent originally.

Banks lend you other peoples money, simples.

The Dagda

pH wrote: »

But again it is incorrect to say that banks create money. If they really created it then it would be irrelevant whether it was ever paid back. Also as pointed out above repaying a bank loan "destroys" money in exactly the same way as a bank "created" it when it was lent originally.

Banks lend you other peoples money, simples.

So basically you're sticking your fingers in your ears and saying "I can't hear you"!

Nino Brown

pH wrote: »

But again it is incorrect to say that banks create money. If they really created it then it would be irrelevant whether it was ever paid back. Also as pointed out above repaying a bank loan "destroys" money in exactly the same way as a bank "created" it when it was lent originally.

Banks lend you other peoples money, simples.

Are you trying to be funny?

pH

The Dagda wrote: »

So basically you're sticking your fingers in your ears and saying "I can't hear you"!

Not sure what point you're making - there are many stupid people who think they've heard something clever about how banks "create" money - and like to parrot it on the net - they're wrong, you're wrong - I can hear what's being said just fine, it's just fashionable nonsense spouted by people who think it makes them look clever and informed about the banks and economics.

The Dagda

pH wrote: »

Not sure what point you're making - there are many stupid people who think they've heard something clever about how banks "create" money - and like to parrot it on the net - they're wrong, you're wrong - I can hear what's being said just fine, it's just fashionable nonsense spouted by people who think it makes them look clever and informed about the banks and economics.

Yeah I'll believe the professor from the london school of economics rather the shouty rant from a blinkered ignoramus. Thanks.

Nino Brown

pH wrote: »

Not sure what point you're making - there are many stupid people who think they've heard something clever about how banks "create" money - and like to parrot it on the net - they're wrong, you're wrong - I can hear what's being said just fine, it's just fashionable nonsense spouted by people who think it makes them look clever and informed about the banks and economics.

Yeah I hate when people say things online to make themselves seem clever and informed. Good thing you dodged that bullet!

Yogosan

faceman wrote: »

I call it fancy paper.

If that caught on there would be a financial meltdown overnight!

-How will you be paying for this Ferarri sir?
-Why with 200,00 in fancy paper of course!

LeonardNelson

Money just comes out from hardwork. Though money is a cycle, i'm curious too.

the culture of deference

Naz_st wrote: »

If you know of a bank that loans out €1m for a house worth 50k, I want their number!

A MAJOR investigation has been launched into how former Finance Minister Charlie McCreevy obtained a massive €1.6m Irish Nationwide loan to buy a luxury apartment in the K Club.


The Irish Independent has learned the EU Commissioner purchased the property in 2006, at the height of the boom, after borrowing funds that exceeded the value of the property.


Re the Guardian article


any money a bank loans out will just end up back in some bank again. So for the banking system as a whole, every loan just becomes another deposit.

y0ssar1an22

So is a bank similar to a giant, legal ponzi scheme? In that they can't afford to repay all the depositors?

The Dagda

y0ssar1an22 wrote: »

So is a bank similar to a giant, legal ponzi scheme? In that they can't afford to repay all the depositors?

Yes, and since the crash now we know it's too big to be allowed fail.