Hud, here’s the argument you

September 3, 2012 at 8:06 pm #89106

Keymaster

Hud, here’s the argument you are wrestling with as presented by someone on another forum (Urban 75 discussing our debate with Positive Money on Wednesday):

Quote:

But even more to the point, it is necessary to consider the banking system as a whole, because just as you might claim money created by private banks ‘leaves’ when it is drawn on to another bank, it arrives when the reverse happens. Suppose we have four major high st banks, each of them make a loan of £10,000 to one of their customers. Now suppose each of these customers draws their loan by paying someone at another bank, so each bank has given one loan and been paid by another. What is the overall position? None of the banks has any change in their position with the central bank. The banking system as a whole has created £40,000, out of thin air, by keystrokes on a computer.

In this example the banking system has indeed made new loans totalling £40,000 but not “out on thin air”.The model this contributor is using of the way the modern banking system works assumes that at the end of each day payments out (which will include loans that are spent) are covered by payments in (electronic deposits of one kind or another). In his example the £10,000 each bank paid out to a borrower is compensated by payments in, the same day, of the same amount. (He assumes that they are compensated by payments in from the borrowers from one of the other banks, but they could come from anywhere.)The same model of the way the banking system works also assumes that, if at the end of the day, a bank ends up with payments out exceeding payments in, then it borrows the difference, either from the Bank of England or from other banks or from the money market. So once again any loans are covered by an equivalent amount.The only difference is that this model assumes that the money that covers the loan can be acquired after the loan has been made (even if only later the same day) rather than having to exist before the loan could be made. But it still assumes that all loans do have to be covered. So much for “thin air” (and bootstraps).