Do banks create money?

recedite

Franz Von Peppercorn II wrote: »

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

No, but the ECB requires them to keep back a small % just to keep themselves out of trouble. In case a whole bunch of people want to withdraw money on the same day.


But Kyuss made the point that the central banks will never refuse them a temporary dig out, even if they are stuck, hence that is not really the limiting factor on how much they lend.
Its more the value and the quality of what is seen to be on their loan book that counts.

hatrickpatrick

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?

Absolutely, because running the monetary system and creating new money in the form of loans should be a public service where nobody stands to actually profit from it. Something this important to the functioning of society simply should not be put in the position where the people in charge of it have vested interests which do not necessarily align with those of society or its citizens.

Why is it that the state having a monopoly on other areas important to society isn't controversial, but it suddenly is when we're talking about something as fundamental as the foundation of our monetary system? Nobody shouts "monopoly!!!" when the Gardaí are the only people authorised to physically detain people in the course of upholding the law, nobody shouts "monopoly!!!" when the courts are the only institutions which can lawfully imprison or fine individuals for breaking the law, nobody shouts "monopoly!!!" when the FSAI is the only body with the power to enforce food safety standards... Why is it a problem with another central and fundamental aspect of the functioning of our society is proposed to be put entirely under public service control, removing profit from the equation?

In America, we've seen the disastrous consequences of for-profit prisons and for-profit healthcare, to take two examples. I'm merely proposing that the same principles be applied to the monetary system, wherein we've also seen the disastrous consequences of for-profit control of it.

Again, what would the negatives be, of removing interest-bearing debt entirely from society's equation, and consigning it to the dustbin of "things humans have tried which were a stupid idea with horrible consequences", like many other concepts society has abandoned over the course of human evolution on the grounds that they were misguided and against society's interests from the beginning?

KyussB

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?

We could convert banking to a fixed-fee rather than interest-based service.

Deposit banks could be split from investment banks, and firewalled off - and people who want interest on their money could go with investment banks.

KyussB

Franz Von Peppercorn II wrote: »

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

Nope, because the money from the loan is out there in the economy before the reserves are ever fixed up - and the whole idea of the loan money being redeposited and multiplying up in a well defined way, is itself not how things go in reality.

You might be able to very severely walk-back the individual elements that make up the idea of the 'money multiplier' (throw away the idea of banks not lending more than reserves, of reserves restricting loans, of the reserve rate being a meaningful determinant of how money 'multiplies up'), and say in a vague way "there is a money multiplier we can calculate" - economists are awful for doing this to perpetuate failed theories - but what you're left with is just a vague mathematical technicality which bears no relation to the actual 'money multiplier' theory which almost all economists are taught, and is not really of any use to anybody.

KyussB

recedite wrote: »

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.

The rules allow for them to lend first and shore up reserves later - banks can't know when they'll fail to do this and have to go to the CB - and the CB will never refuse.

KyussB

Franz Von Peppercorn II wrote: »

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

Hell, simply offering free deposit banking is a step up over almost all other banks. The perfect candidate for a universal public service.

Junkyard Tom

I guess the banks get to influence the nature of an economy if they decide what money/debt is created to fund.

hatrickpatrick

Junkyard Tom wrote: »

I guess the banks get to influence the nature of an economy if they decide what money/debt is created to fund.

And that’s one of several key reasons I find it absolutely ludicrous that we entrust these functions to private, for-profit companies with inherently self serving interests, rather than public, non profit bodies charges with putting the public interest first. In my view, it’s one of the central causes of many different areas in which society is screwed up.

recedite

Over time, society could decide what projects these zero interest loans could be created for.
For starters, the most important one, I think, is the one loan per person towards providing a home.
"Buy to let" loans need not apply. Wannabee landlords should go to private banking for that.


Solar panels and energy upgrades for houses, including landlords - yes.
Cars and vans where people need them for work - yes.
Upgrading your Ford Focus to a BMW 7 series - no.
Holidays and shopping trips - no.
SME business start ups - yes, if the business plan has been vetted and approved by an expert.

KyussB

Better than giving loans to purchase homes: Loans to form/fund housing co-operatives, tasked with building homes, for those that build/buy them to live in - with homes owned by the coop, and a nominal ground rent for maintenance/management/upkeep - where if you want to leave, the coop will only buy you out for what you put in (helping to eliminate property price speculation and overlending-fuelled boom/busts).

It's for another thread, but a significant chunk of the entire residential housing market should be converted into this, and it should become the basis of new development, to eliminate twin property-related crises like the last 20 years.

KyussB

On a closely related topic, looks like the Overton Window is shifting even further, towards ending Central Bank independence, and restoring government control over money creation:

...
It is a good thing that central bank independence is finally coming under scrutiny.

For a start, it has become clear that the notion of depoliticised central bankers is a myth. When he was governor of the Bank of England, Mervyn King lectured the government about the need for austerity while jealously guarding the right to set interest rates free from any political interference. Likewise, rarely does Mario Draghi, the outgoing president of the ECB, hold a press conference without urging eurozone countries to reduce budget deficits and embrace structural reform.

Central bankers have views and – perhaps unsurprisingly – they tend to be quite conservative ones. As the US economist Thomas Palley notes in a recent paper, central bank independence is a product of the neoliberal Chicago school of economics and aims to advance neoliberal interests. More specifically, workers like high employment because in those circumstances it is easier to bid up pay. Employers prefer higher unemployment because it keeps wages down and profits up. Central banks side with capital over labour because they accept the neoliberal idea that there is a point – the natural rate of unemployment – beyond which stimulating the economy merely leads to higher inflation. They are, Palley says, institutions “favoured by capital to guard against the danger that a democracy may choose economic policies capital dislikes”.

Until now, monetary policy has been deemed too important to be left to politicians. When the next crisis arrives it will become too political an issue to be left to unelected technocrats. If that crisis is to be tackled effectively, the age of independent central banks will have to come to an end.

https://www.theguardian.com/commentisfree/2019/sep/12/central-banks-political-independence-monetary-fiscal-policy