Replying to Gnome and ALB –

Replying to Gnome and ALB – We are involved in a circular argument here – You say deposits come before loans, so a bank cannot create money. I say the banks increase their lending togther (or they did between 1997 and 2007, making new loans faster than debt repayments), which increases deposits, money and eventually their reserve accounts at the Bank of England. All the banks need to increase their lending together, to increase the money supply, so one or two don't fall behind and get into problems, and hopefully receive corresponding loan repayments and deposits.. Northern Rock were desperate to get new depositors like me  by offering high interest rates because they knew they had expanded their loan book too fast, as well as borrowing short from other banks.This meant it's reserve account at the B of E was in danger of running out.  The system has to collapse eventually anyway, because the real economy cannot service the increased interest and debt repayment. This is what causes the boom and bust cycle, and why politicians are now so keen to get the banks to supply credit/money to business to get the economy going and increase the debt burden again.  It is a chicken and egg situation.   Positive Money do say that banks do not need funds to make loans (in the sense that a bank can make a loan without reducing someone's deposit account) but they show that a bank like Northern Rock can get into trouble if it does as I have described. They are really saying the same as me, that all the banks increase their lending in concert, so new deposits and money are created, although they do not make this clear until you work your way through the process. It is hard for the man in the street to understand the money creation process until they have looked at it in some detail, and Positive Money are trying to apeal to broad group of people, as well as banking and economist geeks. This money did not come from the central bank, apart from that which it has recently created (£375 billion) by buying gilts on the secondary market, and 3% physical cash.The banking 101 videos on the Positve Money site show how a bank can have problems when it lends faster than receiving repayments and deposits (or when there is a run on the bank), and it is all to do with their reserve accounts at the B of E. I accept that it is a simplification  to say that a bank does not have to have deposits (or be receiving loan repayments) before it can make a loan, because it has to keep an eye on it's reserve account. A credit union cannot behave in the same way as one of the big banks, because it cannot lend beyond it's deposits. The main thing to realise is that if all the banks increase their lending together (doubling the money supply in 10 years from 1997), new deposits will naturally flow back to them and the money supply will increase. I have not studied the recent situation with the Coop bank in detail, so I am not sure why they have had problems. Where do you think all the money came from between 1997 and 2007, when the money supply doubled ? It did not come from the central bank, or at least very little of it.