100% reserve banking

MAY 2022 Forums General discussion 100% reserve banking

Viewing 15 posts - 331 through 345 (of 347 total)
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  • #87051
    ALB
    Keymaster
    #87052
    Young Master Smeet
    Participant

    This seems to be the subtle shift we har from some latter-day Keynsians:https://medium.com/iipp-blog/public-budgeting-for-public-purpose-de1f4bd2a6d9

    Quote:
    And it is the state — today mainly via publically owned central banks — that is the original source of this money. The central bank also grants other institutions the privilege to create money and settle payments in sterling via the granting of banking licenses, but even these entities must ultimately settle their payments with each other using state currency issued by the central bank — money has a hierarchy. The state asserts its monopoly power over the right to issue sterling by deeming it ‘legal tender’ and putting you in prison if you attempt to forge the currency.

    Which seems a reasonable way of describing affairs, the important point is that money is state backed, unless it is commodity money.

    #87053
    ALB
    Keymaster

    Yes I think that's right. No single bank can lend more than it has or can get quickly but the whole banking system can create new "money" but central to this system is the State bank which is the ultimate source in the system that can create new money (claims on wealth) "out of thin air" (and cause too much inflation if it gets it wrong, it being official policy in Britain, the US, etc to inflate the currency by about 2 percent a year). Not the same as creating more wealth of course. Only humans applying their mental and physical energies to materials that originally came from nature can do that.

    #87054
    ALB
    Keymaster

    Interesting description of how the "securitisation" of mortgages that preceded the Crash of 2008 worked in this book published a couple of years ago by Corporate Watch:

    Quote:
    Unlike traditional mortgage lenders, investment banks didn't have deposits that they could use to make mortgage loans. Instead they invented a new technique called mortgage backed securitisation (MBS). They borrowed money by issuing bonds secured against the expected repayments on the mortgages.Bassically, this works as follows:• The mortgage company, with its arrangers and lawyers, sets up a kind of paper company called a 'special purpose vehicle' (SPV).The SPV issues a bond, promising to pay interest to the bond investors who buy it.As the mortgage borrowers pay back their mortgages over, say, the next 30 years, the company will pay the money into the SPV.So long as the money paid out to the bond investors is lower than the money paid in by the mortgage borrowers, the SPV is in surplus. The mortgage company keeps the difference as its profit – after paying out cuts to the banks that arranged the deal for it, the lawyers who wrote up all the complex SPV paperwork, any insurers who underwrote the deal, etc (page 27).

    Surprising too since the author seems to be a bit of an anarchist and fan of David Graeber who does endorse the crackpot view that financial institutions can create money out of thin air to lend and then charge interest on it. Anyway, the author clearly recognises that these companies had to borrow the money to give mortgages. Incidentally, this practice has now spread to financing car loans and credit card loans where it is even more obvious that the finance companies involved can't have just conjured up the money they lend.

    #207596
    ALB
    Keymaster

    I thought I’d revive this old thread where we recorded various statements on how a bank works as ammo to use against the banking cranks. and their theory that banks can somehow create money to lend out of thin air.  So here’s Ed Conway, Sky News Economics Editor, in today’s Times on an ordinary bank’s business model:

    “For all the apparent complexity of finance, running a traditional bank is quite simple and comes down to the difference between two numbers. The first is the interest rate you charge customers when you lend them money; the second is the interest rate you pay them when they deposit their money  with you. Provided the first number is more than the second, you’re in the money.”

    #220839
    alanjjohnstone
    Keymaster

    long time since this thread was active but I came across this news item that banks are diversifying because of low-interest rates and less money made from lending.

    https://www.theguardian.com/business/2021/aug/19/lloyds-plans-big-move-into-uk-rental-market-with-50000-homes

    Banking group joins other high street names seeking a fresh income at a time of record low interest rates

    #220842
    ALB
    Keymaster

    Interesting as you say. I wonder whether they will be investing their own capital in this or money that has been lent to them. Probably the latter I guess.

    And why not? Banks are in business to make money by borrowing it at one rate of interest and lending it at a higher rate. But if they can get a higher return from using the money they borrowed to get an income in some other way, that makes business sense even if it is no longer banking in the strict sense.

    Even before this they will have been lending money to people to buy-to-let and sharing in the rental income through the interest the borrower pays them. Now they are going for the whole rental income.

    A bit of a problem for the thin air school of banking as you imply.

    #220844
    Matthew Culbert
    Keymaster

    They could depress the rental markets of the small fry too and buy them up.

    #221166

    https://libcom.org/blog/mmt-bankrupt-theory-bankrupt-capitalism-13112020

    The Deficit Myth
    https://www.socialist.net/review-the-deficit-myth-two-wrongs-don-t-make-a-right.htm

    We have a book review on the Socialist Standard of 3/21

    #221167
    #224843
    alanjjohnstone
    Keymaster

    The Independent in a lengthy article on banking and the creation of money (M4) plus the goldsmiths theory.

    https://www.independent.co.uk/news/business/analysis-and-features/history-of-money-pound-fury-book-b1929066.html

    #224845
    ALB
    Keymaster

    I can’t think what possessed the Independent to devote so much space and publicity to an exposition of the purest currency crankery. Mosse seems to be an unthinking follower of the notorious currency crank Richard Werner. Werner is on record as claiming that, if banks’ loans can be 10 times their cash reserves, this means that when somebody deposits £100 in a bank that bank can then lend £900 whereas in fact it means they can lend only £90.

    M4 is a measure of total bank lending and is only called “money creation” because making a loan is, misleadingly, defined as creating money. This is misleading as it suggests what is lent is not purchasing power that already exists but new money that is created from nothing. And is believed by economic illiterates like Mosse on the say-so of cranks like Werner.

    Mosse’s recounting of the Goldsmith’s Tale is all wrong. For a start, at the time the currency was silver and that not gold was what was “usually” deposited with them; their deposit certificates never became “the generally accepted means of payment”; and none of them took the risk of committing the foolhardy business practice (and criminal act) of issuing more certificates than the value of the silver deposited with them.

    These mistaken views are refuted in detail in chapters four and five of our pamphlet The Magic Money Myth.

    Mosse blames the banks for resources being devoted to what is most financially profitable rather than to what is socially needed. This does happen of course but it is the result of private capitalist firms aiming to maximise their profits. It is capitalism operating normally. Banks don’t cause this; they only channel spare capital towards it. So, restricting their lending won’t end this. In fact, it would probably — no, certainly — spark off a huge economic crisis. One good reason not to vote for the Green Party which swallows this nonsense too — they might even try to implement it.

    #224852
    Matthew Culbert
    Keymaster

    You have to pay £1 and sign up for a £9 monthly debit to make a contributing discussion on this. So I gave up.

    We should invite him to a debate.

    #224854
    ALB
    Keymaster

    Good idea. I think he is based in Goldsmiths college (yes, that’s its name and who endowed it) which is not all that far from our Head Office. Could be an entertaining as well as an educational evening. Writing off for a review copy anyway.

    #225031
    alanjjohnstone
    Keymaster
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