Do banks create money?

Geuze

KyussB wrote: »

What's useful about the debate, is that it leads to a lot of open-ended questions, that when followed to their logical conclusions, tear giant gaping holes clean through a lot of the political/economic narratives, over how countries should be run.

Questions like:
Don't public banks run this way, too?
What if a public bank funded government projects?
What if you then cut out the middle man?

The ownership of the bank shouldn't matter to the money creation process.

If the bank lends to a local govt building a road, the process is the same

I don't think it matters what type of borrower it is - small guy buying a car, farmer buying a tractor, Vodafone spending 100m on masts.

The money creation process doesn't depend on who the borrower is.

ILoveYourVibes

KyussB wrote: »

Ah that was fixing the foreign exchange estimates, I believe It was to help them shore up reserves at some times (I think...a while ago, now - don't remember how that worked), and at other times (I don't recall fully) it was to manipulate rates to net them gigantic profits on key deals or such.

All of the gains, basically came out of the pockets of people who had e.g. mortgages or other financial instruments, rated based on the LIBOR rare - which considering it affected most governments around the world, was pretty much every living person on the planet. One of the biggest frauds in history.

Ah!..the uk didn't really make so much of a fuss about tbh...i only remember a few headlines for like a month.

Maybe brexit distracted us all!

Geuze

KyussB wrote: »

This debate shows people, that it's actually Investments (Loans) that lead to Savings (Deposits) - the complete reverse...

Does it matter which comes first? Saving or borrowing?

ILoveYourVibes

Geuze wrote: »

The ownership of the bank shouldn't matter to the money creation process.

If the bank lends to a local govt building a road, the process is the same

I don't think it matters what type of borrower it is - small guy buying a car, farmer buying a tractor, Vodafone spending 100m on masts.

The money creation process doesn't depend on who the borrower is.

It does matter and it can be different. It also depends a lot on regulation wherever it is. Lending to certain bodies for example could create conflict of interests and may need to be done in a certain way.

ILoveYourVibes

Geuze wrote: »

Does it matter which comes first? Saving or borrowing?

Well for you saving matters. This isn't personal finance. That is a whole other kettle of sardines.

KyussB

Geuze wrote: »

The ownership of the bank shouldn't matter to the money creation process.

If the bank lends to a local govt building a road, the process is the same

I don't think it matters what type of borrower it is - small guy buying a car, farmer buying a tractor, Vodafone spending 100m on masts.

The money creation process doesn't depend on who the borrower is.

Imagine then, if a public bank was able to fund pretty much any government project that will eventually turn a profit - it could massively expand (effective) deficit spending - locking in todays historically low interest rates.

KyussB

Geuze wrote: »

Does it matter which comes first? Saving or borrowing?

Yes, Savings leading to Investment underpins basically the heart of modern macroeconomics - so the simple switch to Investments lead to Savings, upends nearly all of the basic macroeconomic models that people are taught, and which are used for economic forecasting.

Effectively, nearly all mainstream models ignore banking, money and debt in their models - which is why the crisis a decade ago (which only required Private Debt vs GDP graphs to see) was missed by just about the entire economics profession.

TheChizler

ILoveYourVibes wrote: »

That figure would mean the loans do out weight the deposits.

Other way actually. It's the loans expressed as a percentage of the deposits.

ILoveYourVibes

KyussB wrote: »

Yes, Savings leading to Investment underpins basically the heart of modern macroeconomics - so the simple switch to Investments lead to Savings, upends nearly all of the basic macroeconomic models that people are taught, and which are used for economic forecasting.

Effectively, nearly all mainstream models ignore banking, money and debt in their models - which is why the crisis a decade ago (which only required Private Debt vs GDP graphs to see) was missed by just about the entire economics profession.

Alan Krueger understood it...a lot better than more european economists ..prob why he usa did better than the eu after the crash imo

ILoveYourVibes

TheChizler wrote: »

Other way actually. It's the loans expressed as a percentage of the deposits.

Are you including the interest rates of the loans vrs the deposits?

It would be impossible for a bank to make money that way. It would be very unstable. Dangerous even.

They have to find other sources of equity.

ILoveYourVibes

Just realized Trump has a degree in economics.

Feisar

sbsquarepants

ILoveYourVibes wrote: »

Oh defaulting also destroys money as well as repaying loans.

Economics baffles me, but this can't be right.

If paying loans destroys money and not paying loans also destroys money, how is there any money?

TheChizler

ILoveYourVibes wrote: »

Are you including the interest rates of the loans vrs the deposits?

It would be impossible for a bank to make money that way. It would be very unstable. Dangerous even.

They have to find other sources of equity.

No offence, I know I don't know what I'm talking about so I'm limiting myself to talking about well known stats I can easily verify, but it feels like you're kind of making it up but attempting to sound authorative...

Wanderer78

sbsquarepants wrote: »

Economics baffles me, but this can't be right.

If paying loans destroys money and not paying loans also destroys money, how is there any money?

i think economics baffles the best of minds, even the professionals who call themselves experts, its very interesting though, its a very interesting time for the profession as we re currently experiencing a deep rethink of economics after the crash, its badly need to.

KyussB

sbsquarepants wrote: »

Economics baffles me, but this can't be right.

If paying loans destroys money and not paying loans also destroys money, how is there any money?

The money comes from Public Debt as well as Private Debt. Interestingly, this means that when governments run a surplus, this means that Private Debt has to increase if the economy is to keep growing - and/or exports (and thus foreign income) needs to increase.

What this means is: When the government here was running a surplus in the 2000's, in the runup to the crisis, that exacerbated the Private Debt boom that collapsed the economy - as the boom was built on a greater balance of Private Debt, rather than on public funding.

Wanderer78

KyussB wrote:

What this means is: When the government here was running a surplus in the 2000's, in the runup to the crisis, that exacerbated the Private Debt boom that collapsed the economy - as the boom was built on a greater balance of Private Debt, rather than on public funding.

And it's rather disturbing to still see mainstream/neoclassical economists, that advise governments, still banging on about public debt, but mentioning little or nothing about private debt

hatrickpatrick

The entire system by which money gets into circulation is responsible for many of the issues surrounding boom and bust economics, and a direct cause of perpetual inflation - there's always more total money owed in debt than there is in circulation, since money only comes into existence through the issuing of interest-laden loans from banks.

It's absolutely ludicrous that we entrust private, for-profit companies with managing our monetary system instead of having a non profit public service do it instead.

recedite

Geuze wrote: »

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.

It is free money for the banks when they collect the interest payments.
Not many business models out there where you can invent the "product" out of thin air, and then rent it out for cold hard cash.
That cold hard cash, the interest payment, ends up feeding what we call inflation. Every ponzi scheme requires constant growth. When growth is unavailable or runs out, a temporary collapse and a reset occurs.

Geuze

KyussB wrote: »

Imagine then, if a public bank was able to fund pretty much any government project that will eventually turn a profit - it could massively expand (effective) deficit spending - locking in todays historically low interest rates.

ptsb is a State-owned bank.

The EIB is a bank owned by EU members.

Are you asking can these banks lend to Govts?

The answer is yes.

The EIB has lent to several Irish local govts.

Geuze

KyussB wrote: »

The money comes from Public Debt as well as Private Debt. Interestingly, this means that when governments run a surplus, this means that Private Debt has to increase if the economy is to keep growing - and/or exports (and thus foreign income) needs to increase.

What this means is: When the government here was running a surplus in the 2000's, in the runup to the crisis, that exacerbated the Private Debt boom that collapsed the economy - as the boom was built on a greater balance of Private Debt, rather than on public funding.

You are referring to the identity about sectoral balances:

private sector + public sector = foreign sector

(Spriv - I) + (T - G) = (CA)

If the Govt runs a surplus, then the (T - G) term is positive.

Wanderer78

Geuze wrote:

ptsb is a State-owned bank.

Public banks are believed to be far more stable banks than alternatives, as they generally don't involve themselves in high risk activities such as derivatives trading etc, the German sparkasse bank being one such example, which is heavily protected under constitutional law. Some believing having a public banking system operate along side it's alternatives, creates a far more stable system overall, I also personally believe, we should have one to.

Geuze

sbsquarepants wrote: »

Economics baffles me, but this can't be right.

If paying loans destroys money and not paying loans also destroys money, how is there any money?

Be careful with language.

MONEY = cash in circulation + current account balances

MONEY is about 100bn in Ireland at the moment

Wanderer78

Geuze wrote:

MONEY = cash in circulation + current account balances

Only that current research is showing, credit is also a form of money, and a major part of our monetary system, and banks are not intermediates between parties, moving money from depositors to debtors, as depicted by neoclassical economics

drumm23

KyussB wrote: »

The money comes from Public Debt as well as Private Debt. Interestingly, this means that when governments run a surplus, this means that Private Debt has to increase if the economy is to keep growing - and/or exports (and thus foreign income) needs to increase.

What this means is: When the government here was running a surplus in the 2000's, in the runup to the crisis, that exacerbated the Private Debt boom that collapsed the economy - as the boom was built on a greater balance of Private Debt, rather than on public funding.

Sectoral Balances should be taught to everybody - critical fundamental aspect of macro that 99% of people don't understand

Geuze

Wanderer78 wrote: »

Only that current research is showing, credit is also a form of money, and a major part of our monetary system, and banks are not intermediates between parties, moving money from depositors to debtors, as depicted by neoclassical economics

Say I have 200 cash and 2,000 in current account.

Therefore, I have 2,200 of money, which is an asset that can be used as a medium of exchange.

Say I also have a CU loan or a mortgage.

These balances are liabilities, and can not be used to buy goods and services. They are not money.

coolshannagh28

Banking is a lucrative way of making money using leverage as lending expands however as seen in 08 when the economy crashes the leverage becomes fatal very quickly.

Franz Von Peppercorn II

Geuze wrote: »

Say I have 200 cash and 2,000 in current account.

Therefore, I have 2,200 of money, which is an asset that can be used as a medium of exchange.

Say I also have a CU loan or a mortgage.

These balances are liabilities, and can not be used to buy goods and services. They are not money.

Well they entered the system as credit which is what Wanderer is saying. If you took out a 6k CU loan to pay the kitchen contractor - then he will have that in a current account somewhere.

I have no problem with debt creating money provided it’s not just fuelling a building boom. It looks to me though that banks rarely support business anymore, certainly not startups.

Geuze

Franz Von Peppercorn II wrote: »

Well they entered the system as credit which is what Wanderer is saying. If you took out a 6k CU loan to pay the kitchen contractor - then he will have that in a current account somewhere.

I have no problem with debt creating money provided it’s not just fuelling a building boom. It looks to me though that banks rarely support business anymore, certainly not startups.

Ah ok, yes.

Yes, that is the money creation process at work.

My loan becomes a deposit.

That deposit supports further lending.

And on, and on.

Geuze

Franz Von Peppercorn II wrote: »

I have no problem with debt creating money provided it’s not just fuelling a building boom. It looks to me though that banks rarely support business anymore, certainly not startups.

Rest assured that my friends involved in property development tell me that bank lending to them is now much stricter, after the crisis we experienced.