100% reserve banking
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Steve Keen wrote:Banks don't on-lend deposits they take in from depositors. Banks create money — and debt — whenever they extend credit to a client, whether it's by means of credit cards, mortgages, or business loans.
How many times do we have to repeat that banks don't lend only from what has been deposited with them but also from what they themselves borrow from the money market? The Bank of England papers state this clearly enough. Of course if you define a bank loan as money then by definition banks "create money" when they make a loan, but this leaves open the question of where they get the funds to make loans. Keen knows perfectly well that they don't simply conjure them up out of thin air. So do all practical bankers.
Well, ALB, the mystification of money continues. And we have our work set out for us to challenge such now deeply embedded analyses. I don't believe Zoe Williams is an economist but she does reflect Guardian readershiphttps://www.theguardian.com/global/shortcuts/2017/oct/29/how-the-actual-magic-money-tree-works
Quote:data shows that most MPs do not know how money is created. Responding to a survey commissioned by Positive Money just before the June election, 85% were unaware that new money was created every time a commercial bank extended a loan, while 70% thought that only the government had the power to create new money. ..How is money created? Some is created by the state, but usually in a financial emergency. For instance, the crash gave rise to quantitative easing – money pumped directly into the economy by the government. The vast majority of money (97%) comes into being when a commercial bank extends a loan. Meanwhile, 27% of bank lending goes to other financial corporations; 50% to mortgages (mainly on existing residential property); 8% to high-cost credit (including overdrafts and credit cards); and just 15% to non-financial corporates, that is, the productive economy…All money comes from a magic tree, in the sense that money is spirited from thin air. There is no gold standard. Banks do not work to a money-multiplier model, where they extend loans as a multiple of the deposits they already hold. Money is created on faith alone, whether that is faith in ever-increasing housing prices or any other given investment…Any commercial bank could create too much and generate over-indebtedness in the private economy, which is what has happened.We really should have an educational page that presents our definitive explanation so we can link to in comments and even send off corrections.
Someone should tell the ECB ;
Quote:Commercial banks can also create so-called “inside” money, i.e. bank deposits – this happens every time they issue a new loan. The difference between outside and inside money is that the former is an asset for the economy as a whole, but it is nobody’s liability. Inside money, on the other hand, is named this way because it is backed by private credit: if all the claims held by banks on private debtors were to be settled, the inside money created would be reversed to zero. So, it is one form of currency that is created – and can be reversed – within the private economy.https://www.ecb.europa.eu/explainers/tell-me-more/html/what_is_money.en.html
Someone should indeed tell the ECB !
European Central Bank wrote:Commercial banks can also create so-called “inside” money, i.e. bank deposits – this happens every time they issue a new loan. (….). Inside money (….) is named this way because it is backed by private credit.https://www.ecb.europa.eu/explainers/tell-me-more/html/what_is_money.en.htmlThe whole ECB document is a good description how the modern monetary system works. In fact it is something we can, and should, quote (and quote again) against the "thin air" school of banking. "Private credit" of course includes outside deposits (i.e not those opened by a bank for those it makes a loan to, but people and organisations depositing their own money there) and what banks themselves borrow.I think I'll put it to Steve Keen since he claims the backing of German banks for his description of how the monetary system works (and since he teaches just down the road from me at Kingston University). Not that he's a "thin-airist". It''s just that his description is an open invitation for them to misinterpret him..
a currency crank wrote:data shows that most MPs do not know how money is created. Responding to a survey commissioned by Positive Money just before the June election, 85% were unaware that new money was created every time a commercial bank extended a loan, while 70% thought that only the government had the power to create new money. ..How is money created? ..All money comes from a magic tree, in the sense that money is spirited from thin air.It is sort of re-assuring that only 15% of MPs think that "money is spirited from thin air". Let's hope that they represent the views of their constituents on this. In which case, currency crank ideas are not all that widespread, though they still need refuting.
ALB wrote:Someone should indeed tell the ECB !European Central Bank wrote:Commercial banks can also create so-called “inside” money, i.e. bank deposits – this happens every time they issue a new loan. (….). Inside money (….) is named this way because it is backed by private credit.https://www.ecb.europa.eu/explainers/tell-me-more/html/what_is_money.en.htmlThe whole ECB document is a good description how the modern monetary system works. In fact it is something we can, and should, quote (and quote again) against the "thin air" school of banking. "Private credit" of course includes outside deposits (i.e not those opened by a bank for those it makes a loan to, but people and organisations depositing their own money there) and what banks themselves borrow.I think I'll put it to Steve Keen since he claims the backing of German banks for his description of how the monetary system works (and since he teaches just down the road from me at Kingston University). Not that he's a "thin-airist". It''s just that his description is an open invitation for them to misinterpret him..
if that were true why would they say “create inside money”? Why not just say that they borrow money from other banks in order to lend it out? Why even include it in a section called “how is money created?” at all?the only way it makes sense is if they create it at the moment the loan is made. They say it’s backed by “Private Credit” because they are saying it’s only temporary. It will (hopefully) be paid back.
dms wrote:if that were true why would they say “create inside money”? Why not just say that they borrow money from other banks in order to lend it out? Why even include it in a section called “how is money created?” at all?Because their definition of "money" includes both credit and deposits…
It is a question of definition in the end. No serious person thinks banks can create money out of thin air, certainly not bankers themselves. If you define a bank loan as money, then of course banks "create money" but not out of thin air. It's, as the ECB says, out of "private credit".The other confusing definition is that of a "bank deposit". Originally, this meant money deposited in a bank from outside. Now it is also used for the bank deposit a bank creates for someone they make a loan to and into which they put the money that is being loaned. So the two are confused although they are quite different, leading to double counting since some of the money banks lend will come from what has been deposited with them.Also of course, banks don't just lend what has been deposited with them from outside, but also from what they themselves borrow from the money market. Both are "private credit" and in fact a distinction between them is made in the official literature, the former being called "retail funding" for the bank's lending activities and the latter "wholesale funding". High Street banks and Building Societies are typically funded more by customer deposits than wholesale funding. In fact it was over-doing the more risky (because the interest rate can suddenly increase) wholesale funding that did for Northern Rock and HBOS.In making a loan banks are using existing money to extend credit not "creating [new] money". If someone wants to call this "creating money" they shouldn't imagine that this is the same as when the State "creates" fiat money. If we are going to have to live with this definition I like the ECB distinction between "outside" and "inside" money.
Just followed up Steve Keen's reference to what the German central bank has to say about the modern monetary system. Here's what the Deutsche Bundesbank says about what it calls "book money" (the ECB's "inside money"):
Quote:The banks create new book money when they grant loans. For example, Mr Müller needs a loan to buy a car. He negotiates this with the bank's loan officer. The bank grants a loan to Mr Müller. The loan amount is credited to his account and his credit balance increases. The bank has created new book money. It did this without needing to raise any savings deposits first.But (and it's at this point that Keen — and currency cranks — stop reading) it has to raise the money somehow in the end:
Quote:But how much book money can banks create?As described earlier, book money is largely created by granting loans. However, a business will only take out a loan if it has investment projects planned and if the expected returns are high enough to generate the required interest on the loan. The banks in turn check whether the borrower will be able to pay the interest and pay off the loan. Because if the borrower cannot pay the interest and repay the loan, the bank will incur a loss.The banks also keep a constant eye on the costs that may incur by granting loans and creat-ing book money. For example, if the customer uses the new credit balance to transfer money to an account at another bank, from the bank's point of view money will be flowing out. The bank then often has to recover this money, for example by taking out a loan from another bank, or by "refinancing" itself with a loan from the central bank. Alternatively, it can persuade savers to invest cash or credit balances at the bank in the form of savings or fixed-term deposits.As a rule, the bank has to pay interest on these refinancing measures. The banks' willingness to create book money therefore depends on how high the cost of interest is for the bank itself.This is in effect accepting that banks are financial intermediaries, borrowing money at one rate of interest and re-lending it at a higher rate. It's just describing it in rather a roundabout way, by saying that they lend money at one rate of interest and then have to find the money to fund this at a lower rate.
As i said on another thread on another topic, the SPGB lacks credibility when it comes to MSM. We have no big names. Certainly no house-hold names or even in professional circlesBut i think your earlier suggestion of friendly contacting Steve Keen direct is a promising one, presenting our case to him and perhaps getting him to reply and agreeing to it to be in the Socialist Standard.Perhaps, an exchange with him would result in us gaining a bit more legitimacy in the eyes of the broader economic world.I think you may be qualified to make a non-confrontational informed approach, ALB, either privately or as an editor of the SS, and try to elicit his cooperation in clarifying his views on the matter.
Quote:alanjjohnstone wrote:Well, ALB, the mystification of money continues. And we have our work set out for us to challenge such now deeply embedded analyses. I don't believe Zoe Williams is an economist but she does reflect Guardian readershiphttps://www.theguardian.com/global/shortcuts/2017/oct/29/how-the-actual-…]There are plenty of people, including me, replying to this journalist's nonsense.
I have vague memories of watching the Positive Money videos some years ago and I’m sure they mentioned that banks would borrow from other banks in order to maintain the minimum amount they are required to hold by law. For example, if after all the transactions from the day have been cleared, the new money created from loans, and the money destroyed by people making repayments, if they don’t meet the 10% reserve requirement (or whatever) they’d be forced to borrow from other banks. Even the Wikipedia article (https://en.wikipedia.org/wiki/Money_creation ) says :“Because of this money creation process by the commercial banks, the money supply of a country is usually a multiple larger than the money issued by the central bank” I dont think these newspaper articles with quotes talking about banks having to borrow from other banks disprove anything. No one disputes that. The banks borrow in order to meet their reserve requirements. The question is whether the money supply is expanded and contracted by private businesses/individuals taking out and repaying loans from commercial banks. It sounds to me like it is and I think the ECB article backs me up on this.
Here is Steve Keen's reply:
Quote:Very quickly Adam, because I don’t have time for individual email queries (1) the intermediaries story is used by mainstream economists (Bernanke, Krugman etc) to argue that credit (change in bank debt/year) can be macroeconomically ignored: this is overwhelmingly contradicted by the data, which you’ll see if you read my book of the same name; (2) the essence of the intermediary story is that lending shuffles bank liabilities around but doesn’t create new assets and liabilities: that is also categorically false.Cheers, SteveProfessor Steve KeenClearly, he is sticking to his guns and is not prepared to be contradicted. He does admit, though, that there are others who don't accept his theory. But, then, he prides himself on being "unorthodox".It is rather his assertion that banks "create new assets and liabilities" that is categorically false (except in the trite double-entry bookkeeping sense). In fact he virtually admits this in the interview Alan drew our attention to when he says:
Quote:central banks are the only banks that can legally run negative net asset balances, i.e. whose liabilities are allowed to exceed their assets.In other words, only central banks can create money for which there is no corresponding outside liability.Which is precisely what the ECB stated ("outside" money is money created by the central bank):
ECB wrote:Commercial banks can also create so-called “inside” money, i.e. bank deposits – this happens every time they issue a new loan. The difference between outside and inside money is that the former is an asset for the economy as a whole, but it is nobody’s liability. Inside money, on the other hand, is named this way because it is backed by private credit.Despite the brevity and his (understandable) explanation that he does not conduct lengthy email exchanges on an individual basis, i think we should persist with my suggestion that we contact him with the view of creating a dialogue via the Socialist Standard.A formal invitation should be offered setting out our idea to him, appealing to his professional integrity that both sides of the debate should be presented and that ours is the Marxist and not the Krugman critique.If i recall accurately an earlier post on Keen on this thread, his answer in his exchanges with Krugman is that there can be a time-lag in the accounting but deposits must match loans eventually – money from thin air, indeed – but only temporarily.But perhaps i misremembered or misinterpreted. I've said enough times i have not the economic understanding that others possess in the Party
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