Do banks create money?

James Brown

Wanderer78 wrote: »

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

They're trying to make themselves money. The common good means less profit for the big boys. We should find a way of linking the public finances to the welfare of the state owned/partially owned banks, while leaving any private banks to their own faith, within regulation.

KyussB

Here is another area where it gets a bit mind-bending, but not as much related to banks:
When governments borrow money, they (crudely) do so by issuing government bonds, a liability - these bonds are tradeable, and because they usually carry interest and are pretty much guaranteed to be repaid (outside of Greece perhaps), they are worth more than the money lent - this means that bonds themselves operate almost as a (much more restricted) form of money, and actually contribute to inflation.

If, instead of issuing bonds, a government used directly created money - that would actually be less inflationary (if there is the same level of government spending), than spending using bonds/public-debt.

KyussB

Geuze wrote: »

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.

The deposit doesn't support further lending, though - because banks don't operate based on fractional reserve, and there is no money multiplier - because the central bank will never fail to lend to a bank short on reserves, no matter what.

It's a subtle point, but important. Collateral requirements set the limit on lending.

Wanderer78

Matt Barrett wrote:

They're trying to make themselves money. The common good means less profit for the big boys. We should find a way of linking the public finances to the welfare of the state owned/partially owned banks, while leaving any private banks to their own faith, within regulation.

I am a fan of public banking, but I'd imagine these systems are problematic in themselves, and probably have limitations to, so its probably a good idea to have one operating along side alternatives

Geuze

KyussB wrote: »

because banks don't operate based on fractional reserve, and there is no money multiplier - because the central bank will never fail to lend to a bank short on reserves, no matter what.

It's a subtle point, but important. Collateral requirements set the limit on lending.

Many economics textbooks need to be re-written, if there is no money multiplier.

https://en.wikipedia.org/wiki/Money_multiplier#Mechanism

https://www.federalreserve.gov/pubs/feds/2010/201041/201041pap.pdf

recedite

KyussB wrote: »

banks don't operate based on fractional reserve, and there is no money multiplier

What about these? They are still "required" to have some cash reserved.

hatrickpatrick

Hypothetically speaking, what actual arguments are there against outlawing usury altogether, abolishing the concept of interest bearing loans and simply issuing loans which would aim to break even (the principle would be owed back but not a penny more), from a publicly owned, public service, state run organization with responsibility for managing and overseeing the money supply?

I can think of numerous obvious benefits, but what if any are the actual drawbacks? The concept of usury and interest is fundamentally immoral as far as I’m concerned, the entire system is essentially a commercially adapted form of the philosophy that nobody should do anything unleee they personally benefit from it.

recedite

hatrickpatrick wrote: »

the entire system is essentially a commercially adapted form of the philosophy that nobody should do anything unless they personally benefit from it.

I regard it as a modern form of feudalism.
In ye olde days, the robber baron would come along with a small army, kill a few people, and then claim ownership of the land. Then he would rent out the land to the people who already lived and worked on it.

Essentially he was renting out the land to the people who already owned it, while living off them like a parasite himself.



Nowadays the robbing bankster rents out the money to the citizens who already own it. Sometimes it even goes full circle when the bankster evicts a family from a farm they have owned for generations, because compound interest on a small loan taken out to improve the farm gets out of control.



If you control the money supply, you don't need to control land.

KyussB

Geuze wrote: »

Many economics textbooks need to be re-written, if there is no money multiplier.

https://en.wikipedia.org/wiki/Money_multiplier#Mechanism

https://www.federalreserve.gov/pubs/feds/2010/201041/201041pap.pdf

Absolutely I'm surprised actually, that wiki section on 'loans first' has been there ever since 2009, when that article was first fleshed out properly - surprised I never saw that.

Whenever I come across an economics textbook, to superficially judge its worth I always flick to the index first, and track back to see what it says about the money multiplier, money creation, whether or not it discusses endogenous money etc..

Nearly all economics textbooks get it wrong. Especially the most popular ones used for teaching (Mankiw etc.).

KyussB

recedite wrote: »

What about these? They are still "required" to have some cash reserved.

Any institution that lends out money first and shore up reserves later, with the guaranteed last resort of the central bank if they fail to shore reserves up, is still effectively not limited by reserves - I assume (but can't know for sure) all such institutions act that way.

Geuze

hatrickpatrick wrote: »

Hypothetically speaking, what actual arguments are there against outlawing usury altogether, abolishing the concept of interest bearing loans and simply issuing loans which would aim to break even (the principle would be owed back but not a penny more), from a publicly owned, public service, state run organization with responsibility for managing and overseeing the money supply?

I can think of numerous obvious benefits, but what if any are the actual drawbacks? The concept of usury and interest is fundamentally immoral as far as I’m concerned, the entire system is essentially a commercially adapted form of the philosophy that nobody should do anything unleee they personally benefit from it.

How would the costs be covered?

How would the defaults be covered?

How would savers be paid for supplying their savings to match these loans?

Franz Von Peppercorn II

KyussB wrote: »

Any institution that lends out money first and shore up reserves later, with the guaranteed last resort of the central bank if they fail to shore reserves up, is still effectively not limited by reserves - I assume (but can't know for sure) all such institutions act that way.

Isnt it still a multiplier though - of reserves (or base/narrow money?).

recedite

KyussB wrote: »

Any institution that lends out money first and shore up reserves later, with the guaranteed last resort of the central bank if they fail to shore reserves up, is still effectively not limited by reserves - I assume (but can't know for sure) all such institutions act that way.

They would be backed up in the case of a bank run, but in the normal course of business they would have to abide by rules for keeping reserves, and occasionally they are "stress tested" by order of the central banks or ECB.

recedite

Geuze wrote: »

How would the costs be covered?

How would the defaults be covered?

How would savers be paid for supplying their savings to match these loans?

How are state pensions paid? Social welfare?

These are effectively giant insurance schemes, and every citizen is a paid up member.

A state issuing its own money, lending it out, and generally controlling the money supply is doing the same thing.

recedite

Here's a hypothetical example.
On reaching a certain age (say 25) each citizen is entitled to a €150,000 loan at 0% interest which can only be put towards buying a house.


The vast majority of them will easily pay it back. This allows them to use the rest of their disposable income to stimulate other parts of the economy.


A few default because they can't work due to sickness unemployment etc..

The state examines their cases and then writes off those loans, fully or in part. But these "defaulters" are fewer than the number of people claiming social housing now, so the state makes a net saving in social welfare costs.


The state has created this new money out of thin air, so it costs nothing to issue the loan. The collateral is the power of the state itself.
The amount of loans being given out is limited by the number of people reaching the specified age in any given year, which is fairly constant over time.

Wanderer78

recedite wrote:

The state has created this new money out of thin air, so it costs nothing to issue the loan. The collateral is the power of the state itself. The amount of loans being given out is limited by the number of people reaching the specified age in any given year, which is fairly constant over time.

Interesting idea, Steve keen believes there's currently too much private and corporate debt in existence, and a modern day debt jubilee is required. He believes all citizens should be given credit, that automatically goes towards debt write down, and if individuals don't have debt, the credit goes towards corporate debt write down, and the individual gains corporate shares worth the same value, bringing down corporate debt levels, and democratising share ownership in the process. Also an interesting idea, but a pie in the sky.

recedite

Wanderer78 wrote: »

and if individuals don't have debt, the credit goes towards corporate debt write down

I cant see that bit flying. Its the old "moral hazard" again.

Geuze

recedite wrote: »

How are state pensions paid? Social welfare?

These are effectively giant insurance schemes, and every citizen is a paid up member.

A state issuing its own money, lending it out, and generally controlling the money supply is doing the same thing.

Ok, so you want taxes to be loaned out.

Therefore, people would save less, and pay more tax, as taxes would replace savings as a source of finance for lending?

The State bank lender would replace all commercial banks?

The State bank lender would be a monopoly?

How would the transition happen? Just for new lending at first?

The commercial banks stop all new lending?

Savers stop adding to bank deposits?

Taxes would have to rise by many billions to provide the finance to cover the new State bank lending for mortgages, car loans, etc.

Staff would transfer from the commercial banks in the new State bank?

Geuze

recedite wrote: »

The state has created this new money out of thin air, so it costs nothing to issue the loan. The collateral is the power of the state itself.
The amount of loans being given out is limited by the number of people reaching the specified age in any given year, which is fairly constant over time.

Be careful here.

It's central banks that can create new money, and they are an arm of the State, yes.


So the central bank begins lending directly to retail customers, cutting out the comm banks, ok.

This means the CB would be many times bigger than it currently is.

This also means that all lending to households and firms moves into the Govt sector.

So in effect the State and the CB becomes the monopoly lender to households and firms?

Geuze

If the CB has all these loans to households on the asset side of their balance sheet, what is on the liability side? New money you say.

At the moment, when CB create new money, i.e. QE, they use the new money to buy assets.

They buy financial assets, e.g. corporate and Govt bonds.

You are suggesting their main asset should be loans to households and firms?

Franz Von Peppercorn II

Geuze wrote: »

If the CB has all these loans to households on the asset side of their balance sheet, what is on the liability side? New money you say.

At the moment, when CB create new money, i.e. QE, they use the new money to buy assets.

They buy financial assets, e.g. corporate and Govt bonds.

You are suggesting their main asset should be loans to households and firms?

I think he’s more or less thinking of a commercial bank that is government owned issuing loans at 0%. The asset is the loan.

My fear would be major property inflation.

Geuze

recedite wrote: »

Here's a hypothetical example.
On reaching a certain age (say 25) each citizen is entitled to a €150,000 loan at 0% interest which can only be put towards buying a house.


The vast majority of them will easily pay it back. This allows them to use the rest of their disposable income to stimulate other parts of the economy.


A few default because they can't work due to sickness unemployment etc..

The state examines their cases and then writes off those loans, fully or in part. But these "defaulters" are fewer than the number of people claiming social housing now, so the state makes a net saving in social welfare costs.


The state has created this new money out of thin air, so it costs nothing to issue the loan. The collateral is the power of the state itself.
The amount of loans being given out is limited by the number of people reaching the specified age in any given year, which is fairly constant over time.

If the new State bank / CB is doing all this lending, and has a monopoly on all new lending, what happens to the stock of deposits?

There are 100bn of deposits.

Geuze

Franz Von Peppercorn II wrote: »

I think he’s more or less thinking of a commercial bank that is government owned issuing loans at 0%. The asset is the loan.

My fear would be major property inflation.

We have some State-owned banks already.

They have never lent at 0%, as that would be loss-making.

How would a State-owned bank attract deposits, cover costs, and make profits, if its lending is all charged out at 0%?

Franz Von Peppercorn II

Geuze wrote: »

We have some State-owned banks already.

They have never lent at 0%, as that would be loss-making.

How would a State-owned bank attract deposits, cover costs, and make profits, if its lending is all charged out at 0%?

Who knows. It’s not my idea. I was correcting you on where the asset is and what arm of the banking sector is doing the lending.

recedite

Geuze wrote: »

Be careful here.

It's central banks that can create new money, and they are an arm of the State, yes.

So the central bank begins lending directly to retail customers, cutting out the comm banks, ok.

This means the CB would be many times bigger than it currently is.

This also means that all lending to households and firms moves into the Govt sector.

So in effect the State and the CB becomes the monopoly lender to households and firms?

The Statebank would operate outside the central bank, as the job of the CB is more that of an overseer.
Private banks would continue to exist, offering finance for car loans etc.
They would have to become leaner, in order to compete better.
Credit unions and loan sharks could also continue.

It would not be a banking monopoly, I would see it more as a way of breaking the current banksters cartel.

recedite

Franz Von Peppercorn II wrote: »

I think he’s more or less thinking of a commercial bank that is government owned issuing loans at 0%. The asset is the loan.

Correct. The asset is the loan in any normal mortgage, that's why we have foreign vulture funds coming in and buying loans (as assets) in addition to actual property.

Franz Von Peppercorn II wrote: »

My fear would be major property inflation.

Can't happen because of the age thing for applicants, except a minor boost to property prices at the very start of the program, but it could be phased in if necessary.
There could only be a very steady and entirely predictable flow of new applicants.

recedite

Geuze wrote: »

We have some State-owned banks already.

They have never lent at 0%, as that would be loss-making.

How would a State-owned bank attract deposits, cover costs, and make profits, if its lending is all charged out at 0%?

The state has the power to tax citizens, and to demand that the tax be paid in its own currency. That's where the value of all currencies comes from.
The US dollar gets extra value because oil is traded in dollars, but that is a special situation.


So the state does not need deposits, it can create money out of thin air, as long as the state is prosperous and functional (unlike say Zimbabwe)


The state does not need to make a profit. Its main function is to look after the well being of its citizens. Something that most states forget, unfortunately.

Franz Von Peppercorn II

The state bank could attract deposits by paying interest on deposits I suppose. Like other banks.

recedite

Franz Von Peppercorn II wrote: »

The state bank could attract deposits by paying interest on deposits I suppose. Like other banks.

It could, but strictly speaking it does not need them.
Because it has the full backing of, well... the state.
That means if it messes up, it gets bailed out by the taxpayers.
Which happened anyway with private banks of course, but at least as citizens we'd feel better about bailing out ourselves as opposed to bailing out fat cat millionaires.

Franz Von Peppercorn II

recedite wrote: »

It could, but strictly speaking it does not need them.
Because it has the full backing of, well... the state.
That means if it messes up, it gets bailed out by the taxpayers.
Which happened anyway with private banks of course, but at least as citizens we'd feel better about bailing out ourselves as opposed to bailing out fat cat millionaires.

Yeah, arguably private banks don’t need deposits to loan.