Do banks create money?

kippy

Franz Von Peppercorn II wrote: »

1) The banks create the money for the loans they issue.
2) they don’t owe that to anyone. It’s new money.
3) they can also take loans out, like anybody else, from other banks.
4) they can also get loans from the CB. That’s rare though.

Why take loans out from other banks if they can simply create money?

KyussB

BDI wrote: »

Yeah but it leads to devalue of the currency.

Not that simple. It's not the creation of currency that affects its value, it's the spending of the currency - and particularly, the spending of the currency relative to the size/GDP-output of the economy.

If an asteroid wiped out half of a countries industrial base, you can expect a significant devaluation of that countries currency, without any new money being created.

If you create and spend a ton of money in a country which can rapidly expand GDP/output, then (crudely) as long as the rate of increase in spending doesn't outpace the rate of increase in GDP/output, then the value of the currency won't be significantly affected - unless you keep creating and spending, after maximum GDP/output is reached.

BDI

Thanks lads, I always wished two freakishly rich twins would wager one dollar that a tradesmen like me could work in finance if he was just given a chance. Then to settle it they could put a finance guy out on a building site and see what happens.

Whatever happens I bet it’d have very comedic effects.

Junkyard Tom

I believe that for every Pound that the BoE created only 8p made it to main street while the rest was used to inflate the costs of assets. I can only imagine the incredible growth that would have been spurred if a fraction of money created was used for public works.

Franz Von Peppercorn II

kippy wrote: »

Why take loans out from other banks if they can simply create money?

They can’t create money for themselves. They issue loans to customers.

kippy

Franz Von Peppercorn II wrote: »

They can’t create money for themselves. They issue loans to customers.

Why would they need to create money for themselves?

Franz Von Peppercorn II

kippy wrote: »

Why would they need to create money for themselves?

You asked that question. You asked why don’t they.

They don’t create their own reserves.

Franz Von Peppercorn II

Even if banks lent from deposits a loan would be new money. Why? Because there’s no reduction in the deposits that savers have when loans are issued.

Imagine a scenario where Mary owns an account with 100k in a bank. This is the only bank account in the country and she has no other funds (weird place but easier to explain). So the total money supply is 100K. Current accounts are included in broad money.

Imagine she personally loans 90K to John. Now she has 10K and he has 90K. Total money supply now still 100K.

Now imagine instead of of her loaning to John, the banks loans 90K to John. Total money supply now 100K and 90K = 190k.

Some books claim that this is really from her deposit, but in fact since (unlike the first scenario where she personally loans the money) her account is not debited that’s just not true.

Clearly the 90k isn’t from the money deposited with the bank, as the bank now has a liability to its customers of 190K, while previously it was 100k. It also has as an asset the loan that John will pay back. Over time it will earn money on that and build its reserves.

Since the bank is clearly creating money when it loans, and deposits are not being reduced, the money isn’t coming from depositer accounts but just being invented. What limits it is the reserve requirements, laws and rules.

Geuze

Yes, post 39 is good.

Note that although new money is being created by this process, so is new debt.

So there is no extra new wealth.

It's not "free money".

So it's nothing to get excited about, it happens every day, and is part of the normal commercial banking process.

And it's somewhat different from the central bank deliberately increasing the money supply, as happened with QE recently.

sbsquarepants

Franz Von Peppercorn II wrote: »

They can’t create money for themselves. They issue loans to customers.

I can never wrap my head around this stuff.

The bank can't create money for itself, but it can to lend to someone else?

So in theory, bank A wants money, it approaches bank B and says "giz a lend of a tenner till payday". Bank B says i don't have it, so bank A creates the tenner, lends it to B who owes them 11 now, B lends back ten and A now owes B 11 too.

The debts cancel each other out but A now has a tenner?

Fúcking sweet

Geuze

For comm banks to be involved in money creation, there must also be customers making deposits and borrowing.

Rufeo

Does the investment arm of a bank not create money?

Or are we just talking about the retail side of things (current accounts etc)

Geuze

Geuze wrote: »

For comm banks to be involved in money creation, there must also be customers making deposits and borrowing.

Isn’t this what the Icelandic bank was doing? Offering lucrative interest rates to customers all over Europe, so it had plenty of deposits it could effectively borrow against.

Which is great, until you can’t borrow any more money and the depositors want their interest paid and the lenders want their money back.

Franz Von Peppercorn II

Rufeo wrote: »

Does the investment arm of a bank not create money?

Or are we just talking about the retail side of things (current accounts etc)

Any loan issue as far as I know, is money.

Eric Cartman

Franz Von Peppercorn II wrote: »

My own opinion is that when banks lend money they actually create money that is not there. Its not from savings. Most bank and central bank economists agree with this.

Its called fractional reserve banking, they lend multiples of what they have on deposit, the problem is legally they can lend single digit multiples but often go double

Franz Von Peppercorn II

Eric Cartman wrote: »

Its called fractional reserve banking, they lend multiples of what they have on deposit, the problem is legally they can lend single digit multiples but often go double

They don’t lend from deposits, as I said.

Cheerful Spring2

Franz Von Peppercorn II wrote: »

This is a follow up from a removed thread where the op said.

Some people seem to be under the false belief that commercial banks create money they don't. They take in deposits and lend out a proportion of those deposits while maintaining minimum capital thresholds on the balance sheet. One of my passions is dispelling myths, this is a myth which needs to be dispelle

(The thread was removed because the poster was a serial re-reg. deleting the original post of a thread deletes the thread).

I not an expert, just my opinion. I believe they print the paper money and then it circulates out to customers in the economy. Bank makes money from loans interest payments, using ATMs then. They are basically getting rich of the back of others.

Banks don't make anything, so there not really a company. I see the banks as holding the assets of others, and then charging you, if you bank with them. It's a beautiful scheme they have got away with for a hundred years if not more years.

Essentially the government could do the same thing and save people headache trying to pay high interest payments.

Mortgage payments- banks are truly ripping off people big time. The system set up this way and nobody complaining about it and so it continues.

Quantum Erasure

i heard when you take out a loan, you're not borrowing from a bank, but from your future self, now I don't know how true or not that is, but I can't get my head around it, only in a metaphorical way, which i'm not sure it was meant...

Quantum Erasure

Geuze wrote: »

Yes, post 39 is good.

Note that although new money is being created by this process, so is new debt.

So there is no extra new wealth.

so, the bank create €100 in new money to give to you, but also, say €150 in debt that you have to pay back over the course of the loan, thats new money to them that they can use as assets to loan out again multiples times its value, and the cycle continues...

how'd you set up a bank, lads? looks like a sweet deal

Lambshank

Odelay wrote: »

How can I do this?

Lend your friend €100 in exchange for an IOU, then buy something with your IOU.

Lambshank

Banks don't actually create new money when they take deposits ans lend, when I refer to money I refer to cash.

If a bank accepts €100 worth of it can lend out €90, it can't lend out €900 as it doesn't have €900 to lend out. It only has €100.

Lambshank

Franz Von Peppercorn II wrote: »

Even if banks lent from deposits a loan would be new money. Why? Because there’s no reduction in the deposits that savers have when loans are issued.

Imagine a scenario where Mary owns an account with 100k in a bank. This is the only bank account in the country and she has no other funds (weird place but easier to explain). So the total money supply is 100K. Current accounts are included in broad money.

Imagine she personally loans 90K to John. Now she has 10K and he has 90K. Total money supply now still 100K.

Now imagine instead of of her loaning to John, the banks loans 90K to John. Total money supply now 100K and 90K = 190k.

Some books claim that this is really from her deposit, but in fact since (unlike the first scenario where she personally loans the money) her account is not debited that’s just not true.

Clearly the 90k isn’t from the money deposited with the bank, as the bank now has a liability to its customers of 190K, while previously it was 100k. It also has as an asset the loan that John will pay back. Over time it will earn money on that and build its reserves.

Since the bank is clearly creating money when it loans, and deposits are not being reduced, the money isn’t coming from depositer accounts but just being invented. What limits it is the reserve requirements, laws and rules.

The total money supply (cash) is not €190k, it's still €100k. The bank doesn't have all Mary's money on deposit, they only €10k and they owe her still the full €100k.

Lambshank

Franz Von Peppercorn II wrote: »

Banks don’t lend from deposits at all. Deposits are liabilities to the banks. Instead they lend multiples of their own reserves.

They lend the cash they receive in the form of deposits.

They lend the €90k and keep the €10k as reserves.

TheChizler

Lambshank wrote: »

They lend the cash they receive in the form of deposits.

They lend the €90k and keep the €10k as reserves.

Credit unions maybe

Franz Von Peppercorn II

Lambshank wrote: »

They lend the cash they receive in the form of deposits.

They lend the €90k and keep the €10k as reserves.

No. The 10K is not reserves. Reserves are the bank’s own money, money they have on deposit at the central bank or in cash.

Lambshank wrote: »

Banks don't actually create new money when they take deposits ans lend, when I refer to money I refer to cash.

If a bank accepts €100 worth of it can lend out €90, it can't lend out €900 as it doesn't have €900 to lend out. It only has €100.

Banks don’t lend from deposits at all. Deposits are liabilities to the banks. Instead they lend multiples of their own reserves.

Lambshank wrote: »

The total money supply (cash) is not €190k, it's still €100k. The bank doesn't have all Mary's money on deposit, they only €10k and they owe her still the full €100k.

The total money supply is the sum total of all the money in the economy, electronic or not. Mary has 100k and John has 90K. In broad money that’s 190k.

Franz Von Peppercorn II

I guess lamb shank was the original poster of the deleted thread. Lambshank, we hardly knew ye.

Quantum Erasure

bitcoins, lads.
server farms and energy consumption and whatnot,
its the future, the future is here

ILoveYourVibes

Franz Von Peppercorn II wrote: »

My own opinion is that when banks lend money they actually create money that is not there. Its not from savings. Most bank and central bank economists agree with this.

True. If they get it right and predict things correctly they create money that will be there though.

Foolish lending is creating something out of nothing for sure.

A bank credits the bank account of a mortgage holder with a bank deposit.

Op banks do create money though. They send credit to bank accounts.


Its only really in times of emergency that a state will create money. That is done through quantitative easing.

When a bank gives a loan that loan becomes listed as a financial asset of that bank. Its listed as that loan along with interest though.

Banks don't need ever rising mortgages to create this money though. They only need faith in the ability of the institutions or people to pay back that loan on time with the interest.

Stable house prices are enough to stop defaults. Falling house prices alas are not. So the bank SHOULD have an interest in stopping pricing bubbles.


When banks lend so much they become very FRAGILE TO ANY SMALL TINY TINY change in the asset they have. So even the TINIEST TINIEST MINUTE fall in the housing market will cause a bank that has way over lent to crash.

One of the things people don't realize is that it was not falling house prices that caused the banking crisis. It was over lending.

House prices should go up and down and not affect banks.

Banks have to understand falling house prices are normal static markets are normal etc. This shouldn't affect their ability to make profit.

They let their equity go to zero and for some reason where too badly connected or had too little business sense to raise equity and stop lending so much.

I could NEVER figure out why Irish banks don't try to raise more equity.

Why weren't banks trying to raise equity /capital in the years coming up the crash?

That's more bizarre to me than the over lending.

But i am not an economist.

But as far as i know op. Banks do create money.

ILoveYourVibes

Franz Von Peppercorn II wrote: »

They don’t lend from deposits, as I said.

They lend from equity. Shareholders equity.

Quantum Erasure

as soon as someone draws down a loan / mortgage, money is created.

Is money ever destroyed? I'm not talking physically, i suppose debt write-off 'destroys' money, but more is created out of nothing to cover that loss....