[ALB]

Yes he was a member of the Communist Party of Britain (the Morning Star mob) until 1995.

[ALB]

It is strange but I think it's a a question of reversion rather than conversion as that's what he was before he joined. But would need to check.

[ALB]

We can do better than that. We can send you a review copy. But don't worry. It's a proper 230-page book, fully proof-read and with an ISN and all.  It's in the post already.

[ALB]

The stuff from Varouflakis confirms the point that the discussion amongst bourgeois economists, conventional and unconventional, is not so much about what banks can and cannot do or should or should not be allowed to do as about which policy to pursue to try prevent bank lending getting out of hand in a boom.The theories they have developed are theories tailored to back up their preferred policy. Pretty academic really as none of them are going to work as "excessive" bank lending in a boom is neither the cause of the boom nor the reason why it will eventually end. It is, rather, a reflection of the boom. Booms and slumps are not cause by monetary movements but by movements in the real, productive economy. It is true, though, that mistaken monetary policies can make things worse. For instance, what Positive Money propose: not allowing banks to lend from customers' current accounts would restrict the flow of credit to productive industry and so hold back the accumulation of capital.

[ALB]

Yes, he was a lifelong Russia-lover. The obituary in today's Times says that

Quote:

In 1985 he was expelled from the [Communist] party for "conduct deeply detrimental to the party".

It doesn't say what it was, but at that point the "Eurocommunists" would have been in charge of the CP, wouldn't they?

[ALB]

dms wrote:

ALB wrote:

dms wrote:

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.html

Absolutely, but they didn't end there with a full stop, did they? It is a colon because it's misleading if they left the sentance as you left it. They went on a bit longer than that :

ECB wrote:

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.

They qualified after the colon "backed by private credit" to mean that the money they create is backed by the liability on the debtor to pay it back. That they're able to do it as it's temporary.  They then go on :

ECB wrote:

  So, it is one form of currency that is created

If that's what the ECB meant (and you could be right, though "backed" would be an odd word to use in that context) then all they are describing is double-entry bookkeeping where every new asset has to be balanced in the accounts by a new liability and every new liability by a new asset. In the case of a bank loan, the loan is the liability that is balanced by an asset (an IOU from the borrower). But this still does not explain where the bank got the money to lend from in the first place. Some say it's from thin air but in fact it's from money the bank has itself borrowed or will soon have to borrow, as the Bundesbank explained:

Quote:

The banks also keep a constant eye on the costs that may incur by granting loans and creating 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.

The often (mis)quoted 2014 article from the Bank of England makes the same point:

Quote:

Figure 1 showed how, for the aggregate banking sector, loans are initially created with matching deposits. But that does not mean that any given individual bank can freely lend and create money without limit. That is because banks have to be able to lend profitably in a competitive market, and ensure that they adequately manage the risks associated with making loans. Banks receive interest payments on their assets, such as loans, but they also generally have to pay interest on their liabilities, such as savings accounts. A bank’s business model relies on receiving a higher interest rate on the loans (or other assets) than the rate it pays out on its deposits (or other liabilities). (…) The commercial bank uses the difference, or spread, between the expected return on their assets and liabilities to cover its operating costs and to make profits. The banks also keep a constant eye on the costs that may incur by granting loans and creating 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.(see: https://www.worldsocialism.org/spgb/socialist-standard/2010s/2014/no-1317-may-2014/cooking-books-harry-graeber-and-magic-wand

It also doesn't distinguish a bank from a payday loan company or even a pawnbroker. The money they lend is also balanced by an IOU from the debtor, so why are they not said to create new money, whether out of thin air or elsewhere? Actually, a bank is similar to them, and all lenders of money, in that they have to have (or quickly obtain) the money they lend. What all these and other financial institutions are involved in is the mere circulation of money. They are not, as Alan has just pointed out, creating any new wealth for money to buy.

[ALB]

dms wrote:

It's partly conjured up out of thin air, and partly money that the banks have borrowed from depositors, other banks and financial institutions. They do this because they have to meet their reserve requirement.

Not according to the European Central Bank you yourself cited earlier in this discussion. They say it is wholly backed by "private credit" (without a cubic centimetre of thin air):

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.html

[ALB]

Forgot to add that all these articles will be on the Archives section of this website:http://www.worldsocialism.org/spgb/socialist-standard/archive

[ALB]

Introduction    9Part I :     The February Revolution: A Bourgeois Revolution    151.    The Russian Upheaval(Socialist Standard, December 1905)    172.   The Russian Revolution(Socialist Standard, April 1917)    223.    The Russian Situation(Socialist Standard, June 1917)    234.    Russia and Ourselves(Socialist Standard, July 1917)    26Part II :    The October Revolution: The Bolshevik Coup    315.    The Russian Situation(Socialist Standard, January 1918)    336.    The Revolution in Russia: Where it Fails(Socialist Standard, August 1918)    357.    Parliament or Soviet? A Critical Examination(Socialist Standard, April 1920)    458.    The Russian Dictatorship(Socialist Standard, July 1920)    499.    A Socialist View of Bolshevist Policy(Socialist Standard, July 1920)    5810. The Super-Opportunists: A Criticism of Bolshevist Policy(Socialist Standard, August 1920)    6411.   Editorial: Famine in Russia(Socialist Standard, October 1921)    6812.    The Collapse of Capitalism(Socialist Standard, February 1921)    7113.    The Passing of Lenin(Socialise Standard, March 1924)    7514.    Socialism and 'The Third International'(Socialist Standard, March 1925)    86Part III:   Bolshevik Russia: The Class Struggle Continues    9115.    The Class Struggle in Soviet Russia(Socialist Standard, December 1927)    9316.    Should the Workers Fight for Russia?(Socialist Standard, April 1928)    9917.    Russia: Land of High Profits(Socialist Standard, September 1930)    10618.    What Stalin Forgot To Mention(Socialist Standard, May 1933)    11219.    Changing Russia(Socialist Standard, September 1934)    11420. What is Wrong with Russia? The Mystery of the Trials(Socialist Standard, March 1937)    11821. Life in Soviet Russia(Socialist Standard, June 1937)    12422.    Some aspects of Russia(SocialistStandard, December 1937)    12823.    Inequality in Russia(Socialist Standard, January 1943)    132Part IV:    State Capitalism: The Nightmare Continues  13724. The Struggle for Power in Russia(Socialist Standard, February 1953)    13925.    From Lenin to Stalin(Socialist Standard, April 1953)  14226.    Cracks in the Russian Dictatorship  (Socialist Standard, May 1953)    14827.    The Russian Revolution – Its Impact on the Socialist Movement (SocialistStandard, September 1954)    15228.    Stalin the God and Stalin the Gangster(Socialist Standard, April 1956)    15729.    Stalin – the God Who Fell  (Socialist Standard, December 1961)    16030.    Russia Puts the Clock Back(Socialist Standard, June 1962)    16231.    Russian State Capitalism: Tony Cliff, Russia: A MarxistAnalysis, (International Socialism)(Socialis Standard, September 1964)    15232. Lenin: Just a Russian Revolutionary(Socialist Standard, April 1970)    17133. State Capitalism for Russia(Socialist Standard, April 1970)    17434.    Russia: Leftists in Dispute(Socialist Standard, January 1976)   17635.    Russia's Tolpuddle Martyrs(Socialist Standard, May 1978)    17936.    The Working Class in Russia(Socialist Stan dard, June 1979)   18237- What's the Russian for "Blackleg"?(Socialist Standard, November 1985)    186Part V:     Back to the Future? The Collapse of the Soviet Union    19138.    Where is Russia Going?(Socialist Standard, September 1988)    19339.    Gorbachev and the End of Communism(Socialist Standard, October 1988)    20340.    Socialism Has Not Failed(Socialist Standard, January 1990)    20941.    From Cold War to Class War(Socialist Standard, February 1990)    21442.    Marxism Versus Leninism(Socialist Standard, March 1990)    219 

[ALB]

Yes, if you define bank loans as money then in making a loan a bank is ceating money (by definition). If they extra loans over and above those being repaid then they expand the "money supply" (by definition). But the question remains: where does the money to make the loans, and the extra loans, come from? Is it simply conjured up out of thin air or is it money that the banks have borrowed from depositors, other banks and financial institutions, and/or the central bank? I don't think Zeitgeist is a reliable source of information on how banks work. Maybe they have learnt something in the meantime, but at the beginning they were out-and-out thin-airists. See:http://www.worldsocialism.org/spgb/socialist-standard/2000s/2009/no-1253-january-2009/banks-money-and-thin-air

[ALB]

The arguments between Keen, Krugman, Positive Money, etc are all about how to stop bank lending getting out of hand in a boom. Not an issue in which socialists need to take sides, especially as we think none of them are going to work as it's not something that governments can do much about. They might as well try to stop all capitalist firms making profits while the sun shines in a boom. Banking lending expands in a boom because capitalist businesses are prepared to borrow more to expand production.The boom is driven by profitable production (that will eventually lead to overproduction and economic downturn) not by bank lending. How could a government stop that without bursting the bubble prematurely?The issue is what is the nature of banking and banks, and can banks create credit or money out of thin air. The answer is that banks are financial intermediaries borrowing money at one rate of interest and lending it at a higher rate, the difference being their income out of which they must pay their workers and covers their expenses, what's left being their profits. They are not conjuring money out of thin air and  making a profit out of lending it. If they could, they be getting a higher rate of profit than the rest of capitalist business, but they don't. Ok, they are now linked together with the central bank in a single monetary system (Keen's point) but that doesn't make any essential difference to what commercial banks are and can (and cannot) do.

[ALB]

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 Keen

Clearly, 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.

[ALB]

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.

[ALB]

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.

[ALB]

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.

[Author]

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