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August 30, 2012 at 11:07 pm #89100AnonymousInactiveHud955 wrote:See you at the meeting.August 30, 2012 at 11:16 pm #89101gnome wrote:Hud955 wrote:See you at the meeting.
Never miss a trick do you g-nomey old fellow. Good man!August 30, 2012 at 11:19 pm #89099DJP wrote:It would seem that the bank in your first example would go bankrupt the first time a single withdrawal of £100 or more was made, quite likely since the bank has to account for £1000. That’s why the situation doesn’t hold in real life.
I think this can be solved by getting balance sheets for all the major UK retail banks totalling them up and seeing if deposits increase in parallel with loans.
LOL. I’m never going to get supper am I? (And by the way how is the assignment going?)
Actually, I don’t think the bank would necessarily go bankrupt at all. If you mean a withdrawal of £100 cash then all banks have cash reserves. Don’t forget also that cash is circulating through the system all the time. Any cash that it had to pay out would only be gone temporarily because, just like electronic payments, those grubby notes will come winging back rapidly in a new deposit (probably into the accounts of a retail business where it was spent). In any case banks can account for such withdrawals statistically when planning their lending policies. And in the last resort, if they did run out of cash temporarily, they could also borrow some briefly using their electronic reserves at the central bank.
As far as factoring payments into a bank’s lending policy is concerned it will know that statistically depositors do not withdraw money from their account all in one go but gradually – typically over the course of a month (in the case of a deposit account maintained by a salary cheque). But it will also know that by the time that first £100 withdrawal islikely to be made, the banks debtor – the owner of the loan account will have paid back the first installment of his loan. Banks do, as a matter of course calculate the rate of repayment carefully. And in this case loans made against salary accounts are usually very short term.
By the way, I’m not claiming that this is what does happen; I’m just suggesting that theoretical arguments like this areoften not as straightforward as they seem. But in any case I suspect banks can get away with lending above deposits for short periods, so long as they are not too out of step with what the rest of the system is doing. The important point is that this results in a creation of bank deposits, and in a ‘creation’ of credit but not a creation of money. I can’t see that happening in any of the scenarios I have looked at – positive money’s notional banking with its unfettered creation of accounts or the several varieties of reserve banking.August 31, 2012 at 8:05 am #89102Hud955 wrote:Assume a single bank for now and assume a bank rate of 10%. If the bank receives a deposit of £100 and lends 900% of that or £900 as your green party guy claims, it will in due course receive a deposit of £900. Its books will then show £1000 in deposits (£100 and £900) and a £900 loan. There would be no obvious way of distinguishing between this situation and another where it recieved an initial deposit of £1000 and loaned 90% of that or £900. Again, its books would show deposits of £1000 and a loan of £900.
But it would be what happens next that would be different. Assuming that the bank has chosen or is obliged by law to keep 10% of any deposit as cash, if on receiving a deposit of £100 it can lend then out £900 which then comes back to it, this means that it could then immediately lend out 9 times that, ie. £8,100. And when this comes back 9 times that, or £72,900. And when this comes back it could lend 9 times that, or £656,100. And then 9 times that, or £5,904,900. It doesn’t finish there. In fact in never finishes. I think the Ancient Romans logicians used to call this refutation by means of reductio ad absurdum.August 31, 2012 at 9:46 am #89103ALB wrote:Hud955 wrote:Assume a single bank for now and assume a bank rate of 10%. If the bank receives a deposit of £100 and lends 900% of that or £900 as your green party guy claims, it will in due course receive a deposit of £900. Its books will then show £1000 in deposits (£100 and £900) and a £900 loan. There would be no obvious way of distinguishing between this situation and another where it recieved an initial deposit of £1000 and loaned 90% of that or £900. Again, its books would show deposits of £1000 and a loan of £900.
But it would be what happens next that would be different. Assuming that the bank has chosen or is obliged by law to keep 10% of any deposit as cash, if on receiving a deposit of £100 it can lend then out £900 which then comes back to it, this means that it could then immediately lend out 9 times that, ie. £8,100. And when this comes back 9 times that, or £72,900. And when this comes back it could lend 9 times that, or £656,100. And then 9 times that, or £5,904,900. It doesn’t finish there. In fact in never finishes. I think the Ancient Romasn logicians used to call this refutation by means of reductio ad absurdum.
I agree, this theory is entirely rubbish, and based on a mistaken understanding of the bank reserve process as published. I don’t have a problem with that. (Though I’ve never heard a proponent of it making a defence. It would be interesting to see how they do it. This problem must have occurred to them.) In that respect, I think the Positive Money argument is stronger. That’s what’s giving me problems.
But just on Darren’s point, which, if valid, would have been a useful check on any theory that claimed that banks could issue more loans than they had deposits – checking to see if bank deposits were less than loans would not prove anything unless you could do some pretty sophisiticated statistical analysis. If banks were lending at 900% of deposits (presuming they were able, or at least lending in excess of deposits), all that would show up in the accounts is the short-term temporary difference between recent deposits and loans as a percentage of total deposits, which would be much smaller than 900%.August 31, 2012 at 12:01 pm #89104Hud955 wrote:In that respect, I think the Positive Money argument is stronger. That’s what’s giving me problems.
I don’t think we should call the argument that a bank can make a loan without having the funds to cover it as long as it finds those funds by the end of the day “the Positive Money argument”. That is to give them too much credibility. They are basically currency cranks who have latched on to one side of an argument between economists about whether or not a central bank can control the level of bank lending and they propose a currency crank solution (basically the old Social Credit one that the government should organise lending).I think that the argument that is giving you problems is the one presented, for instance, in this article where the author argues that a bank does not necessarily have to have the funds available before it grants a loan, but that it does have to get them later. This is a rather different argument from currency cranks who argue loans don’t have to be counter-balanced by funds.The author argues that a bank making a loan without funds can get the money, via the clearing system run by the central bank. The central bank will grant it an overdraft but expect that to be paid off by the end of the day, so the bank has to borrow the money from other banks or the money market generally. He also argues that, as borrowing from the money market is more expensive than borrowing from outside depositors, banks have an incentive to seek deposits to lend from them rather than getting from the money market the money to cover loans:Quote:Note underneath Bank A’s balance sheet I’ve shown the totals or net changes to its balance sheet overall, which is simply a loan created offset by borrowings in the money markets on the liability/equity side. So, the loan was made without Bank A ever needing to meet reserve requirements, without needing reserve balances before making the loan, and without needing any deposits. Can Bank A just continue to make loans forever this way without ever needing any of these? The key here is to understand the business model of banking—which is to earn more on assets than is paid on liabilities, and to hold as little capital (equity) as possible (since that’s generally more expensive than assets). The most profitable way to do this is to make loans (that are paid back, obviously, so credit analysis is an important part of this) that are offset by deposits, since deposits are the cheapest liability; borrowings in money markets would be more expensive, generally. So, Bank A, if it is not able to acquire deposits is not operationally constrained in making the loan, but it will find that this loan is less profitable than if it could acquire deposits to replace the borrowings.
That doesn’t sound unreasonable and explains why banks seek deposit (something the currency cranks can’t explain). It brings profits into the picture and accepts that banks’ income comes from the difference on the interest they pay on their liabilities and the interest they get on their assets, i.e the difference between the rate they pay those who lend them money and the rate they charge lenders.Although we can object to some of the language employed, especially that banks can create loans “out of thin air” (a term that does occur in the article), I can’t see that this undermines our argument that loans do have to be covered by funds, i.e we don’t necessarily have to take the side of Krugman in this argument. In fact, of course, we don’t have to take either side. The currency cranks of course favour the anti-Krugman side for the reason that puts us off (the use of the term “out of thin air”), but the arguments of this side do not back up the basic currency crank argument that loans don’t have to be covered by funds or that banks make their money by making loans from nothing and charging intertest on this.August 31, 2012 at 9:52 pm #89105
I’m running fast to catch up with all the posts now.
I’ve always assumed that what the article claims is pretty much what does happen in the real world of banks and bankers. Banks would rather borrow from depositors than the money markets because it’s cheaper and therefore more profitable, but they can and will borrow from the money markets where necessary because that can still be profitable, though less so. They can do it when access to deposits is limited or there is a run on their cash or deposits, or BACS payments, etc.
But I cannot square what you say about Positive Money with what I read in their literature. You are wrong, I think, to assert that they cannot explain, for instance, why banks seek deposits. They have what is, on the surface, a perfectly cogent explanation for it, one that I’ve been rehearsing here. Banks need to attract deposits to balance their lending otherwise they will find themselves in mounting debt to other banks through their overnight BACS payments. Once again, the argument comes down to the simple question of whether deposits create loans or loans create deposits.
Bear in mind that, on this model, as banks create more and more loans unbacked by previous reserves, capital borrowing or deposits, they also create more and more future deposits. But just like the loans that created them, these deposits are created from ‘money’ that was originally unbacked. So their argument is not that banks don’t need deposits, but that, just like loans, they can create the deposits they need out of nothing. By creating deposits out of nothing in this way they create the means by which the whole banking system pulls itself up to capitalist heaven by its own bootstraps.
Sounds nonsense, of course. But where is the logical flaw in the argument? Or the empirical evidence that demonstrates it doesn’t happen. I’m beginning to suspect that though the material evidence is potentially there it is inaccessible, at least for someone like me, and that within its own terms the logic is unassailable. Fortunately, just because an argument is valid, it doesn’t mean that its conclusion is true.
September 3, 2012 at 8:06 pm #89106
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).September 5, 2012 at 1:16 pm #89107
On your first point, I’m not sure it matters. If you extend the scenario beyond the simple model presented to talk about all actual loans and deposits a real bank might issue and receive (not just the £4,000 ‘created out of nothing’ as mentioned), it still has to balance its books at the end of the day. Deposits arising from loans made ‘out of thin air’ would necessarily form part of that. If it received a total of £x deposits from loans that were backed by previous deposits and £y deposits that were not, it would still need £x+£y depositsat the end of the day to balance £x+£y loans, at least if it is not to have to go to the money markets etc to settle with other banks. The logic is the same in the aggregate as it is for the limited model.
I agree with your second point but the NEF model relies – has to rely – on banks managing their accounts so over time inter-bank balances tend towards zero. Banks that persistently lend only at the expense of borrowing at interest from the Bank of England etc are eventually going to be squeezed out of a competitive market.
Edit – Sorry, not sure if the above was clear, I knocked it off quickly before hurrying for a train. This might be a bit clearer (for me as well.)
If a bank has a net deficit at the end of each day it needs to fund its BACS payments by borrowing, but these borrowings don’t balance the loans they have mad: they are merely required to transfer them from the loan account into a new deposit account. You can see that by considering the situation of a deposit that came back into the same bank that lent it. No balancing BACS payments and therefore no borrowing would be necessary. Looking at this another way. If at the end of the day bank A has £n fewer deposits than loans then it follows necessarily that at the end of the day the rest of the banking system collectively has £n loans fewer than deposits. Bank A is quids out, while the rest of the banking system, in relation to it, is quids in to the same amount. From the point of view of the banking system as a whole the only thing that has balanced the loans are the new deposits that inevitably occur (inevitably if we asume a digital transfer). But as I argued before, if the loans that were made were ‘created out of nothing’ (assuming this is possible) then the deposits derived from them would also ultimately have been ‘created out of nothing’. This has to be the case. You could not create loans out of nothing using either commoditity or paper money, and digitised loans inevitably create a deosoit for every loan, as they are simply bookeeping exercises.September 18, 2012 at 3:40 pm #89108DJPParticipant
How did the meeting with Positive Money go? Was it recorded?September 18, 2012 at 5:52 pm #89109AnonymousInactiveDJP wrote:How did the meeting with Positive Money go? Was it recorded?
The subject was a bit dry, to be sure – but quite topical, and the discussion was lively, good humoured, and surprisingly wide ranging. The chat we had with the ‘Positive Money’ people in the pub afterwards was really very enjoyable – a frank and open exchange of views.The entire debate was filmed by ‘Positive Money’ and presumably will be made available at some stage. This was one of the biggest public meetings the Party’s had in recent years with 72 people present.
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