ISF Logo   IS Forum
Forum Index Register Members List Events Mark Forums Read Help

Go Back   International Skeptics Forum » General Topics » Economics, Business and Finance
 


Welcome to the International Skeptics Forum, where we discuss skepticism, critical thinking, the paranormal and science in a friendly but lively way. You are currently viewing the forum as a guest, which means you are missing out on discussing matters that are of interest to you. Please consider registering so you can gain full use of the forum features and interact with other Members. Registration is simple, fast and free! Click here to register today.
Reply
Old 23rd October 2017, 12:11 AM   #201
Tippit
Master Poster
 
Tippit's Avatar
 
Join Date: Jul 2007
Posts: 2,626
Originally Posted by lupus_in_fabula View Post
The irony never stops.

#1: You're accusing me of obfuscating while, at the same time, referring to an article that turned out to be completely botched. The figures used (later revised, btw.) was a calculation of all potential contingencies going wrong for all the relevant public sector programs – including tax cuts, TARP (Bush), ARRA (Obama), FDIC, and all the Fed's programs such as Maiden Laine, MBS and GSE purchases. That is, if all programs took the maximum loss (conceivable), you might end up with such a figure as reported; i.e., about the double of the actual balance sheet figures.
Ok. That still leaves $4.5 trillion dollars created out of thin-air, at the direct expense of savers and workers, to bail-out/subsidize the private money center banks. Unacceptable. And you still haven't denied the fact that foreign bank swaps won't be accounted for in the data used to compose a graph of member bank balances. Which means it's useless for anything other than trying to convince someone on the internet that central banks aren't debasing their currencies more than at any time in history, which they are.

Quote:

#2: You want to draw attention to something which happened after the financial crisis (and which you managed to err in as well) when then issue under consideration was the Fed creating money for non-US banks prior to the financial crisis – as an explanation for asset prices going up and peaking at 2000 and 2006.
Nope. In fact, the Fed has been directly responsible for booms and busts since it's inception in 1913, as well as funding a couple of world wars along the way. Ever heard of the great depression, which Ben Bernanke and the Fed admitted culpability for causing?
"Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again." - Ben Bernanke
https://www.federalreserve.gov/BOARD...2002/20021108/

Please, add your apologies for that too. Oops! So sorry!

Quote:

No, the private financial sector managed to increase private money and leverage just fine without any meaningful or comparable rise in the money supply (reserves and cash). Your unfounded escapade into foreign bank and later off-balance sheet territory does not change that simple fact.

The whole financial assembly which spectacularly came crashing down was an attempt to build a financial system structured on private sector safe assets (securitization), leverage and liquidity. Define shadow banking as money market funding of capital market lending and you begin to understand why the crisis started with a run on the money market rather than on deposit banks, and why it was about lack of public sector liquidity, such as reserve balances, rather than abundance of it which brought down the whole structure. It was never built on central bank liquidity to begin with. That's why we now, after the great financial crisis, find central banks, particularly the Fed, in the odd position of not only being a lender of last resort but also a dealer of last resort.
What you're attempting to say, in so many words, is that the Federal Reserve is irrelevant. Of course, that's utter nonsense. Everything is "built" on central bank liquidity, to begin with. That's why it's called base money.

If the Federal Reserve has become irrelevant, then I trust that you will agree with me that it should be immediately abolished. Who needs it? Thank you.
__________________
"The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks."
- Lord Acton

Last edited by Tippit; 23rd October 2017 at 12:14 AM.
Tippit is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 23rd October 2017, 01:25 AM   #202
JJM 777
Illuminator
 
JJM 777's Avatar
 
Join Date: Jun 2004
Posts: 4,016
Originally Posted by Tippit View Post
$4.5 trillion dollars created out of thin-air, at the direct expense of savers and workers, to bail-out/subsidize the private money center banks. Unacceptable.
It is unacceptable in my personal opinion too, but the American political system accepted it, and no riots were seen on the street. So it is unacceptable on a personal moral opinion level, but not on a de facto political level.

Originally Posted by Tippit View Post
Federal Reserve (...) should be immediately abolished.
Zillions of Left-leaning people fill online forums with calls to at least nationalize the private central banks. But they are doomed to political irrelevance, because their voice is a small drop disappearing in the vast ocean of de facto politics. As clever as you seem, are you clever enough to divert your enthusiasm into something that can change the world for the better? I try to insinuate that online discussions such as this one will not change the world a bit, and one day you will go to the grave still having these same bad feelings about those evil Feds.
JJM 777 is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 23rd October 2017, 01:26 AM   #203
JJM 777
Illuminator
 
JJM 777's Avatar
 
Join Date: Jun 2004
Posts: 4,016
Originally Posted by psionl0 View Post
If that is what you call a "clear idea" of Tippit's dogma then I have NO chance of explaining anything to you.
Neither of you is making the pedagogical effort of explainin your position in one clear and complete presentation, so that nothing would need to be guessed, assumed, deduced, concluded, extrapolated, or remembered from page 2.

Originally Posted by psionl0 View Post
Tippit is arguing that the total supply of money should be fixed. He just wants gold to be money to ensure that it is.
Which is impractical, because the amount of gold is not fixed. People dig it up from underground all the time. Nobody even knows how much gold exists in the world, in the necklaces etc. of ordinary people.

Originally Posted by psionl0 View Post
Any critical thinker would realize that none of my posts support any Fed conspiracy theory.
But you are critical of fractional reserve banking, at least.
JJM 777 is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 23rd October 2017, 01:26 AM   #204
psionl0
Skeptical about skeptics
 
psionl0's Avatar
 
Join Date: Sep 2010
Location: 31°57'S 115°57'E
Posts: 11,825
Originally Posted by Tippit View Post
Ever heard of the great depression, which Ben Bernanke and the Fed admitted culpability for causing?
"Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again." - Ben Bernanke
https://www.federalreserve.gov/BOARD...2002/20021108/

Please, add your apologies for that too. Oops! So sorry!
Ben Bernanke is not supporting your cause as much as you think he is.

He is saying that attempts by the federal government to protect its revenue base and attempts by the fed to protect the money base (both necessary under the gold standard) made the depression worse than it might have been.
__________________
"The process by which banks create money is so simple that the mind is repelled. Where something so important is involved, a deeper mystery seems only decent." - Galbraith, 1975
psionl0 is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 23rd October 2017, 01:42 AM   #205
lupus_in_fabula
Graduate Poster
 
lupus_in_fabula's Avatar
 
Join Date: Nov 2006
Posts: 1,529
Tippit, this irony-thing is expanding faster than the Fed's balance sheet.

Did you even read Bernanke's speech? They guy in your avatar. The main point being about what central banks should do in a crisis so that a depression like in the 1930s can be averted! And that's exactly what Bernanke and the Fed did, as opposed to what the Fed in 1928-29 did when it started to tighten instead of loosening (yeah: "We're very sorry")… the Fed as per 2007 stabilized the crash by expanding its balance sheet enormously (i.e., "we won't do it [the past mistake] again") .

Originally Posted by Tippit
Ok. That still leaves $4.5 trillion dollars created out of thin-air, at the direct expense of savers and workers, to bail-out/subsidize the private money center banks. Unacceptable. And you still haven't denied the fact that foreign bank swaps won't be accounted for in the data used to compose a graph of member bank balances. Which means it's useless for anything other than trying to convince someone on the internet that central banks aren't debasing their currencies more than at any time in history, which they are.
You should actually read the speech by Bernanke you referred to.


Foreign CENTRAL bank swaps – the only currency swaps the Fed does – is and has always been accounted for on the Fed's balance sheet. Line item nr. 21 "Central bank liquidity swaps". Started December 12 2007; henceforth more formal and stable agreements signed May 9 2010 plus later extensions.
Originally Posted by Federal Reserve, Line item 21
Central bank liquidity swaps: The FOMC has authorized temporary reciprocal currency arrangements (central bank liquidity swaps) with certain foreign central banks to help provide liquidity in U.S. dollars to overseas markets.

These swaps involve two transactions. First, when the foreign central bank draws on the swap line, it sells a specified amount of its currency to the Federal Reserve in exchange for dollars at the prevailing market exchange rate. The foreign currency that the Federal Reserve acquires is placed in an account for the Federal Reserve at the foreign central bank. This line in the statistical release reports the dollar value of the foreign currency held under these swaps.

Second, the dollars that the Federal Reserve provides are deposited in an account for the foreign central bank at the Federal Reserve Bank of New York. At the same time as the draw on the swap line, the Federal Reserve and the foreign central bank enter into a binding agreement for a second transaction in which the foreign central bank is obligated to repurchase the foreign currency at a specified future date at the same exchange rate. At the conclusion of the second transaction, the foreign central bank pays a market-based rate of interest to the Federal Reserve. Central bank liquidity swaps are of various maturities, ranging from overnight to three months.
This is also why, for example, non-US banks effectively had no claims on the US in terms of reserves prior to the financial crisis.
Look | BIS | right hand panel.


Originally Posted by Tippit
What you're attempting to say, in so many words, is that the Federal Reserve is irrelevant. Of course, that's utter nonsense. Everything is "built" on central bank liquidity, to begin with. That's why it's called base money.

If the Federal Reserve has become irrelevant, then I trust that you will agree with me that it should be immediately abolished. Who needs it? Thank you.
Nope.

So now you're basing an argument about causality on a naming convention. Really?
__________________
...Forever shall the wolf in me desire the sheep in you...

Last edited by lupus_in_fabula; 23rd October 2017 at 01:56 AM.
lupus_in_fabula is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 23rd October 2017, 02:54 AM   #206
lupus_in_fabula
Graduate Poster
 
lupus_in_fabula's Avatar
 
Join Date: Nov 2006
Posts: 1,529
Originally Posted by JJM 777
It is unacceptable in my personal opinion too, but the American political system accepted it, and no riots were seen on the street. So it is unacceptable on a personal moral opinion level, but not on a de facto political level.
Occupy Wall Street 2011 was, I think, quite an important and justified protest movement.
__________________
...Forever shall the wolf in me desire the sheep in you...
lupus_in_fabula is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 23rd October 2017, 03:46 AM   #207
psionl0
Skeptical about skeptics
 
psionl0's Avatar
 
Join Date: Sep 2010
Location: 31°57'S 115°57'E
Posts: 11,825
Originally Posted by JJM 777 View Post
Neither of you is making the pedagogical effort of explainin your position in one clear and complete presentation, so that nothing would need to be guessed, assumed, deduced, concluded, extrapolated, or remembered from page 2.
I made it perfectly clear at the beginning of this thread what the disadvantages of the current fractional reserve banking system were and how they could be addressed with the alternative. Your response was merely to say that I should be finding points in favour of the thing that I am arguing against.

This is the equivalent of arguing that an atheist should find arguments in favour of the existence of a god.

Originally Posted by JJM 777 View Post
But you are critical of fractional reserve banking, at least.
I don't believe X but I believe Y therefore I believe X??? C'mon, you are just reaching now.
__________________
"The process by which banks create money is so simple that the mind is repelled. Where something so important is involved, a deeper mystery seems only decent." - Galbraith, 1975

Last edited by psionl0; 23rd October 2017 at 04:02 AM.
psionl0 is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 23rd October 2017, 11:17 AM   #208
Tippit
Master Poster
 
Tippit's Avatar
 
Join Date: Jul 2007
Posts: 2,626
Originally Posted by psionl0 View Post
Ben Bernanke is not supporting your cause as much as you think he is.

He is saying that attempts by the federal government to protect its revenue base and attempts by the fed to protect the money base (both necessary under the gold standard) made the depression worse than it might have been.
Lol. Ben Bernanke and I don't have a cause-in-common.

I linked proof that the Federal Reserve admits culpability for the worst depression in history, and I get lectured about why it doesn't mean what I think it means. I am well aware that Bernanke thinks that the Fed didn't print enough, but of course, the truth is that the Fed caused the "boom" up to and prior to the 1929 crash.

Bernanke is right, it was the Fed's fault, but not because it didn't do enough, it was because it existed at all.
__________________
"The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks."
- Lord Acton
Tippit is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 23rd October 2017, 11:28 AM   #209
Tippit
Master Poster
 
Tippit's Avatar
 
Join Date: Jul 2007
Posts: 2,626
Originally Posted by JJM 777 View Post
It is unacceptable in my personal opinion too, but the American political system accepted it, and no riots were seen on the street. So it is unacceptable on a personal moral opinion level, but not on a de facto political level.
I don't even know what this means. It is "accepted" because the public isn't even remotely aware of the problem.

Quote:

Zillions of Left-leaning people fill online forums with calls to at least nationalize the private central banks. But they are doomed to political irrelevance, because their voice is a small drop disappearing in the vast ocean of de facto politics. As clever as you seem, are you clever enough to divert your enthusiasm into something that can change the world for the better? I try to insinuate that online discussions such as this one will not change the world a bit, and one day you will go to the grave still having these same bad feelings about those evil Feds.
The Fed is more or less "nationalized". It was created by an act of Congress in 1913, authored by a conspiracy of the world's wealthiest bankers on an island not far from where I live in 1910. The politicians get all of the money that they ever want to spend from the Fed, but that is only part of the problem. The private benefactors get still more. The fact that it's "nationalized" isn't the problem, the fact that the power to create money will be perpetually abused while it exists, is.

I use the forum as a barometer of understanding about this issue, and based on the results clearly I have failed to convince anyone. I think we're living in the dark ages of money, and history won't be kind. But maybe humanity isn't ready for this level of awareness yet.
__________________
"The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks."
- Lord Acton
Tippit is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 23rd October 2017, 09:46 PM   #210
lomiller
Philosopher
 
lomiller's Avatar
 
Join Date: Jul 2007
Posts: 8,703
Originally Posted by lupus_in_fabula View Post
I don't think there's any such thing as "un-reserving".
Banks certainly can decrease their reserves, so yeah call it whatever you want. You are already playing at pedantry wrt to the original argument being advanced previously and I'm not chasing you down that rabbit hole.

Originally Posted by lupus_in_fabula View Post
It's a + + transaction rather than a + - transaction. That’s why the bank's balance sheet expands as a consequence.
Sorry but no. Banks can't credit someones account without debiting an account someplace else. Ballance sheets have nothing to do with this.
__________________
"Anything's possible, but only a few things actually happen"
lomiller is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 23rd October 2017, 09:53 PM   #211
lomiller
Philosopher
 
lomiller's Avatar
 
Join Date: Jul 2007
Posts: 8,703
Originally Posted by psionl0 View Post
Did you read post #69 before making up this lie?
You position on the matter is well documented on these forums. I suggest you remember that before accusing other of lying about it. You have long claimed banks create money form thin air, and deposit it to peoples accounts. This is incorrect and if it occurred, it it would be fraud. It does not occur, of course.
__________________
"Anything's possible, but only a few things actually happen"
lomiller is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 23rd October 2017, 10:21 PM   #212
lomiller
Philosopher
 
lomiller's Avatar
 
Join Date: Jul 2007
Posts: 8,703
Originally Posted by JJM 777 View Post

I have a less clear idea of what your dogma is than what Tippit's dogma is: abolish the central banks,
No doubt he'll try to disguise his it but he's essentially arguing for government to take over lending with banks being some type of broker. Banks would charge people for depositing money and for services like transfers.

Originally Posted by JJM 777 View Post


Which reminds me that nobody ever answered this question: Why use any reserve at all (such as gold reserve), why not simply agree that the total amount of money in society is X, end of topic?
The process of lending creates deposits in excess of the "real" money in existence. People treat these deposits just like they would money, and they behave as money in the economy, even though what they really are is a promise pay money on demand.

Under the current system the Central Bank actively manages the base money supply in order to keep the effective money supply (eg M2 money in the US), stable and growing at a rate than results in a small but consistent level on inflation. The small level of inflation is meant to be a buffer against potentially economically devastating deflation.

Using a gold standard or some such, doesn't change anything. Rather they are both aiming for a full reserve, which means banks would be required to keep sufficient money on hand to pay out ALL current deposits with that bank should everyone try to withdraw their money all at once. From the banks perspective, there would be no point in allowing people to have deposits because they get nothing from the arrangement.
__________________
"Anything's possible, but only a few things actually happen"
lomiller is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 23rd October 2017, 10:43 PM   #213
psionl0
Skeptical about skeptics
 
psionl0's Avatar
 
Join Date: Sep 2010
Location: 31°57'S 115°57'E
Posts: 11,825
Originally Posted by lomiller View Post
You position on the matter is well documented on these forums. I suggest you remember that before accusing other of lying about it.
You are welcome to dig up the posts where I stated that "banks are fraudulently creating money from thin air". Of course, you won't find one because you are just making this up.

Originally Posted by lomiller View Post
You have long claimed banks create money form thin air, and deposit it to peoples accounts.
Again, you say something that I have never said.

My preferred expression nowadays is "banks create new deposits ex nihilo (when they make loans)". Although "creating money out of thin air" is just as apt (because bank accounts are treated as money) too many idiots think that I am talking about Federal Reserve Notes or something if I say that.

Of course, the biggest idiot is the person who thinks that the banks have created something before the bank increased my deposit (or the person who claims that I would say something so stupid).
__________________
"The process by which banks create money is so simple that the mind is repelled. Where something so important is involved, a deeper mystery seems only decent." - Galbraith, 1975

Last edited by psionl0; 23rd October 2017 at 10:46 PM.
psionl0 is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 23rd October 2017, 10:58 PM   #214
psionl0
Skeptical about skeptics
 
psionl0's Avatar
 
Join Date: Sep 2010
Location: 31°57'S 115°57'E
Posts: 11,825
Originally Posted by lomiller View Post
Sorry but no. Banks can't credit someones account without debiting an account someplace else.
You never said which account.

I know that on the balance sheet, the loan will be recorded as an asset and the increased deposit will be recorded as a liability. However, as your next statement shows, you must be talking about something else.

Originally Posted by lomiller View Post
Ballance sheets have nothing to do with this.
__________________
"The process by which banks create money is so simple that the mind is repelled. Where something so important is involved, a deeper mystery seems only decent." - Galbraith, 1975
psionl0 is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 23rd October 2017, 11:00 PM   #215
lupus_in_fabula
Graduate Poster
 
lupus_in_fabula's Avatar
 
Join Date: Nov 2006
Posts: 1,529
Originally Posted by lomiller
You have long claimed banks create money form thin air, and deposit it to peoples accounts. This is incorrect and if it occurred, it it would be fraud. It does not occur, of course.
Originally Posted by psionl0
My preferred expression nowadays is "banks create deposits ex nihilo". Although "creating money out of thin air" is just as apt (because bank accounts are treated as money) too many idiots think that I am talking about Federal Reserve Notes or something.

You might be interested in this study by Prof. Werner (2014): Can banks individually create money out of nothing? – The theories and the empirical evidence.

The article wasn't that interesting because we already knew the result. But in this case, the use of expressions is. So, for example, from the abstract:

Originally Posted by R. Werner, International Review of Financial Analysis
An empirical test is conducted, whereby money is borrowed from a cooperating bank, while its internal records are being monitored, to establish whether in the process of making the loan available to the borrower, the bank transfers these funds from other accounts within or outside the bank, or whether they are newly created. This study establishes for the first time empirically that banks individually create money out of nothing. The money supply is created as ‘fairy dust’ produced by the banks individually, "out of thin air".
__________________
...Forever shall the wolf in me desire the sheep in you...

Last edited by lupus_in_fabula; 24th October 2017 at 12:00 AM.
lupus_in_fabula is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 23rd October 2017, 11:46 PM   #216
psionl0
Skeptical about skeptics
 
psionl0's Avatar
 
Join Date: Sep 2010
Location: 31°57'S 115°57'E
Posts: 11,825
Originally Posted by lupus_in_fabula View Post
You might be interested in this study by Prof. Werner (2014): Can banks individually create money out of nothing? – The theories and the empirical evidence.

The article isn't that interesting because we already knew the result. But in this case, the use of expressions is. So, for example, from the abstract:
I guess you can get away with colourful expressions when you are an accredited expert.

However, if you are a non-entity trying to explain a concept to other non-entities who don't understand the concept in a skeptics forum, your choice of language can be crucial if you don't want to be instantly dismissed as a kook.
__________________
"The process by which banks create money is so simple that the mind is repelled. Where something so important is involved, a deeper mystery seems only decent." - Galbraith, 1975
psionl0 is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 23rd October 2017, 11:51 PM   #217
lupus_in_fabula
Graduate Poster
 
lupus_in_fabula's Avatar
 
Join Date: Nov 2006
Posts: 1,529
Originally Posted by lomiller
Banks certainly can decrease their reserves, so yeah call it whatever you want. You are already playing at pedantry wrt to the original argument being advanced previously and I'm not chasing you down that rabbit hole.
Individual banks can certainly transfer funds (reserves) to each other within the central bank accounting system, but the amount of reserves in the system remains unaffected – someone must always hold them. In normal times, at the end of the banking day, if an individual bank happens to need reserves, it will simply borrow them from another bank at the interbank market.

It's my guess that you would resort to convoluted terminology like "un-reserving the money before lending" because you, for whatever reason, want to stick with some kind of multiplier story. This is, as the Fed, Bundesbank, Norway's central bank or the Bank of England would call a common misconception.

For example, BoE:
Originally Posted by Bank of England
Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.
…and more specifically, page 2:
Originally Posted by Bank of England
Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach.


Originally Posted by lomiller
Sorry but no. Banks can't credit someones account without debiting an account someplace else. Ballance sheets have nothing to do with this.
It's all about balance sheets.

See, for example, Bank of England's explanation, page 3:
Originally Posted by Bank of England
Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created. For this reason, some economists have referred to bank deposits as ‘fountain pen money’, created at the stroke of bankers’ pens when they approve loans.

This process is illustrated in Figure 1, which shows how new lending affects the balance sheets of different sectors of the economy (similar balance sheet diagrams are introduced in ‘Money in the modern economy: an introduction’). As shown in the third row of Figure 1, the new deposits increase the assets of the consumer (here taken to represent households and companies) — the extra red bars — and the new loan increases their liabilities — the extra white bars. New broad money has been created. Similarly, both sides of the commercial banking sector’s balance sheet increase as new money and loans are created.

This is what I mean when I say it's a + + transaction for the bank rather than a + - transaction. I.e., the bank's asset side of the balance sheet grows (loans) as well as the liability side (deposits). Hence, as a consequence, the bank's balance sheet expands.
__________________
...Forever shall the wolf in me desire the sheep in you...

Last edited by lupus_in_fabula; 23rd October 2017 at 11:55 PM.
lupus_in_fabula is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 24th October 2017, 12:55 AM   #218
psionl0
Skeptical about skeptics
 
psionl0's Avatar
 
Join Date: Sep 2010
Location: 31°57'S 115°57'E
Posts: 11,825
Originally Posted by lupus_in_fabula View Post
Individual banks can certainly transfer funds (reserves) to each other within the central bank accounting system, but the amount of reserves in the system remains unaffected – someone must always hold them.
Just as a minor nit-pick, reserves also includes vault cash. Total reserves in the system are affected by cash deposits and cash withdrawals.

Originally Posted by lupus_in_fabula View Post
It's my guess that you would resort to convoluted terminology like "un-reserving the money before lending" because you, for whatever reason, want to stick with some kind of multiplier story.
If the borrower immediately makes a cash withdrawal then I suppose you could invent the term, "un-reserving the money AFTER lending".

One of the more convoluted explanations I have seen is that the bank simultaneously takes the cash out of the vault then puts it back in when it credits the borrower's account (and if the borrower makes a cash withdrawal then the banker has to make a third trip to the vault).

It's amazing the lengths some posters will go to in order to shoehorn current banking practices into the "money from the vault" theory. It's not that unexpected however. This explanation is still taught in many schools of economics.
__________________
"The process by which banks create money is so simple that the mind is repelled. Where something so important is involved, a deeper mystery seems only decent." - Galbraith, 1975
psionl0 is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 24th October 2017, 01:50 AM   #219
lupus_in_fabula
Graduate Poster
 
lupus_in_fabula's Avatar
 
Join Date: Nov 2006
Posts: 1,529
Originally Posted by psionl0
Just as a minor nit-pick, reserves also includes vault cash. Total reserves in the system are affected by cash deposits and cash withdrawals.
Yes, true, but in this context I prefer to treat it as somewhat irrelevant, because the ratio of cash-to-reserves (both liabilities of the central bank) is mostly dependent on the public's demand for cash. That has essentially nothing to do with banks' lending practices. Actually, within the banking organization the lending department is separate from the department handling reserves and liquidity positions.

So it's not like the clerk making a loan is checking the bank's reserve position in order to decide if a loan can be granted or not.

Originally Posted by psionl0
If the borrower immediately makes a cash withdrawal then I suppose you could invent the term, "un-reserving the money AFTER lending".

One of the more convoluted explanations I have seen is that the bank simultaneously takes the cash out of the vault then puts it back in when it credits the borrower's account (and if the borrower makes a cash withdrawal then the banker has to make a third trip to the vault).

It's amazing the lengths some posters will go to in order to shoehorn current banking practices into the "money from the vault" theory. It's not that unexpected however. This explanation is still taught in many schools of economics.
Yeah, there are some weird interpretations when basic accounting would simply suffice. The interesting thing is that economists and textbook writers used to know this stuff before the neoclassical school of thought became the dominant one (after WW II). Now they're all over the place.

I also heard a rumor (via Prof. Keen) that in the Bank of England article I previously referred to, the authors were kind of "persuaded" into inserting the idea that the amount of money in the economy is "ultimately dependent on the policy of the central bank". But because the authors go to great lengths in busting popular myths when explaining the actual mechanisms involved, the only variable left to explain the central bank's essential role with, is the interest rate.

So, the argument is: central banks "ultimately" affect the amount of money in the economy, not by creating some particular amount of base money, but via setting the interest rate.

I don't think it's entirely convincing as an explanation. It's however better than the multiplier story, but I think it's too vague in terms of implications to be entirely satisfactory.
__________________
...Forever shall the wolf in me desire the sheep in you...
lupus_in_fabula is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 24th October 2017, 07:37 AM   #220
JJM 777
Illuminator
 
JJM 777's Avatar
 
Join Date: Jun 2004
Posts: 4,016
Originally Posted by lupus_in_fabula View Post
Occupy Wall Street 2011 was, I think, quite an important and justified protest movement.
Considering that USA has 300 million people, protest movements can be massive without being anywhere near the threshold of having power to make decisions in a democratic process.

Originally Posted by Tippit View Post
It is "accepted" because the public isn't even remotely aware of the problem.
Partly so, but also the general public will not easily vote against any current status quo, no matter how injust, if they feel uncertain about the short-term effects of a change to their jobs etc. I don't think that the general public in USA would have the balls to vote against Wall Street, which runs their beloved economy, in any circumstances that may arrive in the foreseeable future. They would be worried about their personal financial situation, and right-wing policians would certainly try to fuel their fears as much as they can.

"Too big to fail", the Wall Street is, and the Fed too.

Originally Posted by Tippit View Post
But maybe humanity isn't ready for this level of awareness yet.
The same applies here as above: Humanity is a mass of individuals, each of whom is worried about their own personal economy in the near future. And besides, the "democratic" process is designed to defend the existing status quo, and to allow professional politicians to talk smooth and act differently than what they talk. Voting is not a legal contract between voters and politicians, a politician still has the free will to act differently than his election promises or voters intended before elections.

Originally Posted by Tippit View Post
I use the forum as a barometer of understanding about this issue, and based on the results clearly I have failed to convince anyone.
Many here agree that central banks shold be nationalized. In my opinion, all other banks too. This is not exactly news which I or the others heard in this thread for the first time ever. But this is not my personal agenda to promote, my general perception is that the big guys of economy and politics are big enough to run their system as they want, and to defend it against criticism or overthrow. If I want something better and more just, my perception is that I will have to found my own company or community or whatever, and do it there, among its members. That is as much as I imagine realistically having the power to change in this world of 7 billion people.

Originally Posted by psionl0 View Post
There are 4 arguments that can be made against fractional reserve banking:
  1. It is pro-cyclical.
  2. It creates property bubbles.
  3. It makes regulation of the money supply difficult.
  4. It requires a massive amount of insurance.
The "OP" was a bit difficult to find, it now rests as #67.

You criticise fractional reserve banking, but to be precise, you fail to mention what alternative is your preferred solution. Full gold reserve banking? Something else?

Last edited by JJM 777; 24th October 2017 at 07:39 AM.
JJM 777 is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 24th October 2017, 07:45 AM   #221
lomiller
Philosopher
 
lomiller's Avatar
 
Join Date: Jul 2007
Posts: 8,703
Originally Posted by lupus_in_fabula View Post
Individual banks can certainly transfer funds (reserves) to each other within the central bank accounting system, but the amount of reserves in the system remains unaffected – someone must always hold them. In normal times, at the end of the banking day, if an individual bank happens to need reserves, it will simply borrow them from another bank at the interbank market.

It's my guess that you would resort to convoluted terminology like "un-reserving the money before lending" because you, for whatever reason, want to stick with some kind of multiplier story. This is, as the Fed, Bundesbank, Norway's central bank or the Bank of England would call a common misconception.
I thought you were simply being pedantic when you said
Originally Posted by lupus_in_fabula View Post
Banks don't lend reserves to the public.
Reserves are the money banks are set aside and do not lend, so of course in than sense they do not lend them to the public or anyone else. They are of course free to lend funds not designated as part of their reserve however they like.
If you are going to use reserves in a looser sense to mean something like “all the funds available to a bank” then they certainly do lend from their reserves because every loan has a corresponding debit from another internal account.

As long as you are consistent I don’t care which approach you take, but as I said I’m not going to go in circles.

Originally Posted by lupus_in_fabula View Post
You might be interested in this study by Prof. Werner (2014): Can banks individually create money out of nothing? – The theories and the empirical evidence.

The article wasn't that interesting because we already knew the result. But in this case, the use of expressions is. So, for example, from the abstract:
Bad paper is bad. After much wasted time citing long out of date papers and commentary they get to their empirical test. I can only conclude that they hopped no one would read long enough to see what their actual test entailed.
The bank at which they performed their “test”
The bank is a cooperative bank within the Raiffeisen and cooperative banking association of banks, with eight full-time staff.
In other words, for the bank to be able to make a loan, it first has to check its excess reserves, as this is, according to this theory, a strictly binding requirement and limitation, as well as its distinguishing feature. The bank cannot at any moment lend more money than its excess reserves, and it will have to draw down the reserve balance to lend.
This isn’t just a “theory” it’s the law. The go on to say:
It needs to be verified when the empirical test of bank lending is implemented, whether the bank first confirmed the precise amount of its available excess reserves before entering into the loan contract or paying out the loan funds to the customer, so as not to exceed that figure.
This part s false. All the bank needs to do is transfer the funds from an account that is not treated as part of it’s required reserves.
If the bank is found not to have checked or not to have drawn down its reserve balances then this constitutes a rejection of the fractional reserve theory.
First, since the bank doesn’t need to include a specific check in order to insure full compliance with the law the test is flawed from the start. In this case the bank does debit it’s own internal account with the full amount of the loan.


Second, this is only a test for compliance with regulation. Even if the loan would end up violating the banks reserve requirements (something they never checked) as long as they debited another account when making the loan, which the bank does, they are not “creating money from nothing”.



They go on to conclude that since there were no changes in the banks reserves (held by a central co-operative) and that no explicit instructions were give to draw down those reserves but of course this is not necessary because the loan was transferred from an account that was not part of their reserve to begin with.


In the end the evidence they actually collected not only doesn’t support the claim in the abstract, it actively refutes that claim. The bank in question most DID debit one of it’s own internal accounts when making the loan. The banks balance sheet grew as expected, and they seem to point to this as some sort of smoking gun, but again it’s expected behavior.
__________________
"Anything's possible, but only a few things actually happen"
lomiller is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 24th October 2017, 07:56 AM   #222
psionl0
Skeptical about skeptics
 
psionl0's Avatar
 
Join Date: Sep 2010
Location: 31°57'S 115°57'E
Posts: 11,825
Originally Posted by JJM 777 View Post
The "OP" was a bit difficult to find, it now rests as #67.

You criticise fractional reserve banking, but to be precise, you fail to mention what alternative is your preferred solution. Full gold reserve banking? Something else?
Yes, the mods merging posts into this thread changed the numbering of the posts.

You haven't seen my "preferred solution" because you haven't gotten far enough with your search. Let me help: http://www.internationalskeptics.com...5&postcount=75
__________________
"The process by which banks create money is so simple that the mind is repelled. Where something so important is involved, a deeper mystery seems only decent." - Galbraith, 1975
psionl0 is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 24th October 2017, 07:58 AM   #223
lomiller
Philosopher
 
lomiller's Avatar
 
Join Date: Jul 2007
Posts: 8,703
Originally Posted by lupus_in_fabula View Post


It's all about balance sheets.

See, for example, Bank of England's explanation, page 3:


This is what I mean when I say it's a + + transaction for the bank rather than a + - transaction. I.e., the bank's asset side of the balance sheet grows (loans) as well as the liability side (deposits). Hence, as a consequence, the bank's balance sheet expands.
Every loan represents and new asset and a new liability, so of course the banks balance sheet grows when it issues a loan.

This is completely separate from claims the bank is just crediting peoples accounts with money that doesn’t exist. When the bank issues a loan it debits one of it’s internal accounts and credits the customers account. So in terms of money (not assets) it's a + -. Even if you look at just assets saying it's + asset and + liability.
__________________
"Anything's possible, but only a few things actually happen"
lomiller is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 24th October 2017, 08:22 AM   #224
psionl0
Skeptical about skeptics
 
psionl0's Avatar
 
Join Date: Sep 2010
Location: 31°57'S 115°57'E
Posts: 11,825
Originally Posted by lomiller View Post
......
If you are going to use reserves in a looser sense to mean something like “all the funds available to a bank” then they certainly do lend from their reserves because every loan has a corresponding debit from another internal account.
..........
All the bank needs to do is transfer the funds from an account that is not treated as part of it’s required reserves.
..........
In this case the bank does debit it’s own internal account with the full amount of the loan.
...........
as long as they debited another account when making the loan, which the bank does, they are not “creating money from nothing”.
............
the loan was transferred from an account that was not part of their reserve to begin with.
............
The bank in question most DID debit one of it’s own internal accounts when making the loan.
This is just a pure fairy tale. There is no "internal account" involved in a transfer of funds when a bank makes a loan.

In the test conducted, it was found that two accounts were affected, the borrower's current account was credited with 200,000 and a loan account was debited with 200,000. From the paper:
Quote:
Firstly, the researcher confirmed that the only three bank officers involved in this test and bank transaction were present throughout, whereby two (the directors) only watched and neither accessed any computer terminal nor transmitted any instructions whatsoever. The accounts manager (head of the credit department, Mr. Keil) was the only operator involved in implementing, booking and paying out the loan. His actions were filmed. It was noted and confirmed that none of the bank staff present engaged in any additional activity, such as ascertaining the available deposits or funds within the bank, or giving instructions to transfer funds from various sources to the borrower's account (for instance by contacting the bank internal treasury desk and contacting bank external interbank funding sources). Neither were instructions given to increase, draw down or borrow reserves from the central bank, the central cooperative bank or indeed any other bank or entity. In other words, it was apparent that upon the signing of the loan contract by both parties, the funds were credited to the borrower's account immediately, without any other activity of checking or giving instructions to transfer funds. There were no delays or deliberations or other bookings. The moment the loan was implemented, the borrower saw his current account balance increase by the loan amount. The overall credit transaction, from start to finish, until funds were available in the borrower's account, took about 35 min (and was clearly slowed down by the filming and frequent questions by the researcher).

Secondly, the researcher asked the three bank staff present whether they had, either before or after signing the loan contract and before crediting the borrower's account with the full loan amount inquired of any other parties internally or externally, checked the bank's available deposit balances, or made any bookings or transfers of any kind, in connection to this loan contract. They all confirmed that they did not engage in any such activity. They confirmed that upon signing the loan contract the borrower's account was credited immediately, without any such steps.
__________________
"The process by which banks create money is so simple that the mind is repelled. Where something so important is involved, a deeper mystery seems only decent." - Galbraith, 1975
psionl0 is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 24th October 2017, 08:44 AM   #225
lomiller
Philosopher
 
lomiller's Avatar
 
Join Date: Jul 2007
Posts: 8,703
Originally Posted by psionl0 View Post
This is just a pure fairy tale. There is no "internal account" involved in a transfer of funds when a bank makes a loan.

In the test conducted, it was found that two accounts were affected, the borrower's [b]current account was credited with 200,000 and a loan account was debited with 200,000.
One account credited, one account debited so I guess it’s not a fairy tale after all.
__________________
"Anything's possible, but only a few things actually happen"
lomiller is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 24th October 2017, 09:02 AM   #226
lupus_in_fabula
Graduate Poster
 
lupus_in_fabula's Avatar
 
Join Date: Nov 2006
Posts: 1,529
…lomiller, you are surprisingly confused.

First of all, many jurisdictions don't even have reserve requirements anymore (for example the UK, Australia, Canada, Sweden etc.). So it cannot be the case that "This isn’t just a 'theory' it’s the law." Or "All the bank needs to do is transfer the funds from an account that is not treated as part of its required reserves".

Originally Posted by lomiller
First, since the bank doesn’t need to include a specific check in order to insure full compliance with the law the test is flawed from the start. In this case the bank does debit it’s own internal account with the full amount of the loan.
Do you realize that in jurisdictions where mandatory reserve requirements are implemented, they are implemented according to maintenance periods? So, for example, in the ECB system the maintenance period is six weeks. That means they are checked every six weeks according to the average of the maintenance period. Individual banks only need to meet the criteria (average) at specific periods, for which they can borrow funds in the interbank market, or simply pledge eligible collateral with the central bank itself. Furthermore, in the ECB system, minimum reserves can be used for fund transfers between banks during banking hours – so any bank that has the exact amount of required reserves but not a single euro more than that, can still use those for transaction purposes provided they comply with the reserve requirements later, at mentioned intervals.

Originally Posted by lomiller
Second, this is only a test for compliance with regulation. Even if the loan would end up violating the banks reserve requirements (something they never checked) as long as they debited another account when making the loan, which the bank does, they are not “creating money from nothing”.
Banks don't debit the cash/reserve account when they lend. That doesn't even make any sense from an accounting perspective. Banks' cash/reserve accounts are used when they transfers funds to each other or customers withdraw cash.

Accounting for banks 101:
  • Debit means left hand side of the balance sheet (assets)
  • Credit means right hand side of the balance sheet (liabilities)
  • To increase an asset, debit the asset side.
  • To increase a liability, credit the liability side.
__________________
...Forever shall the wolf in me desire the sheep in you...

Last edited by lupus_in_fabula; 24th October 2017 at 09:08 AM.
lupus_in_fabula is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 24th October 2017, 09:11 AM   #227
psionl0
Skeptical about skeptics
 
psionl0's Avatar
 
Join Date: Sep 2010
Location: 31°57'S 115°57'E
Posts: 11,825
Originally Posted by lomiller View Post
One account credited, one account debited so I guess it’s not a fairy tale after all.
Remember, your claim was "All the bank needs to do is transfer the funds from an account that is not treated as part of it’s required reserves".

The loan account was created when the borrower signed the document. No funds were "transferred" to or from either the borrower's loan account nor the borrower's current account.
__________________
"The process by which banks create money is so simple that the mind is repelled. Where something so important is involved, a deeper mystery seems only decent." - Galbraith, 1975
psionl0 is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 24th October 2017, 12:12 PM   #228
GnaGnaMan
Graduate Poster
 
Join Date: Sep 2008
Posts: 1,001
Originally Posted by lomiller View Post
One account credited, one account debited so I guess it’s not a fairy tale after all.
Where does the money in these "internal accounts" come from?
__________________
I don't think it's quite fair to condemn a whole program because of a single slip-up.
GnaGnaMan is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 24th October 2017, 12:27 PM   #229
lomiller
Philosopher
 
lomiller's Avatar
 
Join Date: Jul 2007
Posts: 8,703
Originally Posted by lupus_in_fabula View Post
…lomiller, you are surprisingly confused.

First of all, many jurisdictions don't even have reserve requirements anymore (for example the UK, Australia, Canada, Sweden etc.). So it cannot be the case that "This isn’t just a 'theory' it’s the law." Or "All the bank needs to do is transfer the funds from an account that is not treated as part of its required reserves".



Do you realize that in jurisdictions where mandatory reserve requirements are implemented, they are implemented according to maintenance periods? So, for example, in the ECB system the maintenance period is six weeks. That means they are checked every six weeks according to the average of the maintenance period. Individual banks only need to meet the criteria (average) at specific periods, for which they can borrow funds in the interbank market, or simply pledge eligible collateral with the central bank itself. Furthermore, in the ECB system, minimum reserves can be used for fund transfers between banks during banking hours – so any bank that has the exact amount of required reserves but not a single euro more than that, can still use those for transaction purposes provided they comply with the reserve requirements later, at mentioned intervals.
What point are you trying to make here? It was the paper YOU presented that suggested up to the instant evaluation of required reserves was a requirement when in fact this is nonsensical.
Originally Posted by psionl0 View Post
The loan account was created when the borrower signed the document. No funds were "transferred" to or from either the borrower's loan account nor the borrower's current account.
The loan account doesn’t belong to the customer nor can they withdraw from it in any way so it is not part of the money supply or the banks required/desired reserves. It’s an accounting step that is required because banks can’t just credit peoples accounts without a corresponding debit in another account
__________________
"Anything's possible, but only a few things actually happen"
lomiller is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 24th October 2017, 01:04 PM   #230
GnaGnaMan
Graduate Poster
 
Join Date: Sep 2008
Posts: 1,001
Originally Posted by lomiller View Post
The loan account doesn’t belong to the customer nor can they withdraw from it in any way so it is not part of the money supply or the banks required/desired reserves. It’s an accounting step that is required because banks can’t just credit peoples accounts without a corresponding debit in another account
Where does this "another account" come from? Where does the money in it come from?
__________________
I don't think it's quite fair to condemn a whole program because of a single slip-up.
GnaGnaMan is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 24th October 2017, 01:19 PM   #231
lomiller
Philosopher
 
lomiller's Avatar
 
Join Date: Jul 2007
Posts: 8,703
Originally Posted by GnaGnaMan View Post
Where does the money in these "internal accounts" come from?
Think of what this transaction would look like of the entire thing were done with cash.

Loan officer agreed to the loan goes and gets cash from the vault. Since the money is being deposited back to a customer account as soon as the customer receives it they hand it to a teller who records the deposit and puts the money back in the vault. The cash is exactly where it started in the bank vault but the customer now has a deposit in their account that they can use very much like money.

Notice, however, that you can perform the exact same transaction without touching the cash at all. It can stay exactly where it started so long as the accounting process is followed. Making the transaction electronic instead of entries in ledgers, similarly, does not chance the process so long as the accounting rules are followed. Since it’s an electronic transaction, it could be some other type of account, but again since its instantly re-deposited it doesn’t really matter. psionl0 may try to argue something like “banks don’t lend form their vault cash” but it’s more accurate to say it’s instantly re-deposited so the vault cash (or balance) doesn’t change due to the transaction.

The loan account in this context would be the equivalent of taking the money out of the vault and the deposit would be the equivalent of putting it back in and creating a record in the customers account. As long as the accounting is done properly (credits and debits offset) and the bank has sufficient cash flow and liquidity it can make the loan and is doing nothing wrong. It’s something rife for conspiracy theories because even though banks are no doing something fundamentally different than they have ever done it’s more complex and complexity tends to breed a belief that anything could happen.
__________________
"Anything's possible, but only a few things actually happen"
lomiller is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 24th October 2017, 01:37 PM   #232
psionl0
Skeptical about skeptics
 
psionl0's Avatar
 
Join Date: Sep 2010
Location: 31°57'S 115°57'E
Posts: 11,825
Originally Posted by lomiller View Post
The loan account doesn’t belong to the customer nor can they withdraw from it in any way so it is not part of the money supply or the banks required/desired reserves. It’s an accounting step that is required because banks can’t just credit peoples accounts without a corresponding debit in another account
You were challenged several times to identify the "internal account" where the funds came from. You could not.

Now you expect us to believe that you were agreeing with Lupus's accounting all the time?
__________________
"The process by which banks create money is so simple that the mind is repelled. Where something so important is involved, a deeper mystery seems only decent." - Galbraith, 1975
psionl0 is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 24th October 2017, 02:08 PM   #233
GnaGnaMan
Graduate Poster
 
Join Date: Sep 2008
Posts: 1,001
Originally Posted by lomiller View Post
Think of what this transaction would look like of the entire thing were done with cash.

Loan officer agreed to the loan goes and gets cash from the vault. Since the money is being deposited back to a customer account as soon as the customer receives it they hand it to a teller who records the deposit and puts the money back in the vault.
Ok. So at the end of this process the bank still has the same amount of cash and the customer has money in his account.
But the money in the customer's deposit was not created out of thin air because we can imagine the money made a round trip from the vault?
I don't think I'm following this.

Quote:
The cash is exactly where it started in the bank vault but the customer now has a deposit in their account that they can use very much like money.
Demand deposits are money by the usual definition. Is there are a reason why you say "can be used like money"?
__________________
I don't think it's quite fair to condemn a whole program because of a single slip-up.
GnaGnaMan is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 24th October 2017, 10:24 PM   #234
lupus_in_fabula
Graduate Poster
 
lupus_in_fabula's Avatar
 
Join Date: Nov 2006
Posts: 1,529
Originally Posted by lomiller
What point are you trying to make here? It was the paper YOU presented that suggested up to the instant evaluation of required reserves was a requirement when in fact this is nonsensical.
Well, the paper operationalizes three different theories, of which two implies the bank ought to withdraw funds from another account in order to make the credit available for the customer; either by drawing down (a) reserves or (b) other funds – depending on the theory under investigation.

However, this is not much different from what you seemed to be implying when you wrote about
  • "un-reserving before lending"
  • "reserves are the money banks set aside and do not lend"
  • "they certainly do lend from their reserves (if concept used in a looser sense)", etc.

. . . Not to speak of your suggestion to GnaGnaMan, where one cannot help but to imagine the bank clerk running up and down the compound like a squirrel, unsure where to stash the nut.

But in any case, banks don't need to set reserves aside because they can't lend them to the public anyway. The only way they could lend reserves, as opposed to cash (which is unusual), is if the recipients also have an account with the central bank.

Therefore, here's a shorter version of how bank lending transpires:
  • DEBIT loan account, CREDIT deposit account.

That’s it. No un-reserving. No setting reserves aside. No lending from reserves, even in the looser sense. No bank clerk running around with cash. That CREDIT right there is what we generally use as money… and that's how it was created, as a book-keeping entry.
__________________
...Forever shall the wolf in me desire the sheep in you...

Last edited by lupus_in_fabula; 24th October 2017 at 10:43 PM.
lupus_in_fabula is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 24th October 2017, 10:36 PM   #235
psionl0
Skeptical about skeptics
 
psionl0's Avatar
 
Join Date: Sep 2010
Location: 31°57'S 115°57'E
Posts: 11,825
Originally Posted by GnaGnaMan View Post
Demand deposits are money by the usual definition. Is there are a reason why you say "can be used like money"?
Demand deposits are classified as "M1" money but they are not Federal reserve notes. They are merely a declaration of what the bank owes you. IE they are IOUs.

IOUs can be considered to be a form of money which can be created by anybody. Whenever you say, "I will pay you later" and your offer is accepted you have created a verbal IOU and your word has paid for the purchase.

And if the proprietor says, "No, don't pay me, pay what you owe to Joe Bloggs instead" then your word has become a "negotiable instrument".
__________________
"The process by which banks create money is so simple that the mind is repelled. Where something so important is involved, a deeper mystery seems only decent." - Galbraith, 1975
psionl0 is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 24th October 2017, 11:09 PM   #236
JJM 777
Illuminator
 
JJM 777's Avatar
 
Join Date: Jun 2004
Posts: 4,016
Originally Posted by psionl0 View Post
You haven't seen my "preferred solution" because you haven't gotten far enough with your search. Let me help: http://www.internationalskeptics.com...5&postcount=75

Banks can get money for lending from two sources:

1. By borrowing from the central bank.
This would allow the central bank to control the money supply more effectively and limit the explosion in property prices.

2. Lending money that has been deposited into savings accounts (not checkable deposit accounts).
This would still lead to deposit expansion in savings accounts but not increase the money in circulation.
Option 1: Would the central bank have the right to "print more money", in a manner that causes inflation?

Option 2: So you basically suggest that fractional reserve banking is OK, but its required cash reserve ratio should be 50%, rather than the typical 10%. (According to my math, in your example the bank is allowed to double the amount of "money" in existence, while in the real world they have the right to multiply it 10-fold.)

Last edited by JJM 777; 24th October 2017 at 11:11 PM.
JJM 777 is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 25th October 2017, 01:04 AM   #237
psionl0
Skeptical about skeptics
 
psionl0's Avatar
 
Join Date: Sep 2010
Location: 31°57'S 115°57'E
Posts: 11,825
Originally Posted by JJM 777 View Post
Option 1: Would the central bank have the right to "print more money", in a manner that causes inflation?
They could if they deemed it necessary for an economic recovery. More importantly, they could tell the banks things like, "we will lend you money to extend business overdrafts or for first home buyers but not subsequent home buyers".

Originally Posted by JJM 777 View Post
Option 2: So you basically suggest that fractional reserve banking is OK, but its required cash reserve ratio should be 50%, rather than the typical 10%. (According to my math, in your example the bank is allowed to double the amount of "money" in existence, while in the real world they have the right to multiply it 10-fold.)
Your maths is off. Firstly, 85% of deposits are in savings accounts. Secondly, the lend re-deposit lend re-deposit cycle would still see savings account balances expand many times. However, this is M2 money and not money that is actively circulating so it would be less inflationary.
__________________
"The process by which banks create money is so simple that the mind is repelled. Where something so important is involved, a deeper mystery seems only decent." - Galbraith, 1975
psionl0 is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 25th October 2017, 06:32 AM   #238
lomiller
Philosopher
 
lomiller's Avatar
 
Join Date: Jul 2007
Posts: 8,703
Originally Posted by GnaGnaMan View Post
Ok. So at the end of this process the bank still has the same amount of cash and the customer has money in his account.
But the money in the customer's deposit was not created out of thin air because we can imagine the money made a round trip from the vault?
I don't think I'm following this.
No one disputes that lending creates deposit expansion, this isn’t the issue. The accusation being made is that banks create new money on their own without any legal authority in order to deposit it to the customers account. Walking though the underlying process using cash allows you to see clearly that doesn’t happen.

Originally Posted by GnaGnaMan View Post
Demand deposits are money by the usual definition. Is there are a reason why you say "can be used like money"?
If we were to do the same thing with gold, you would get the same deposit expansion effect but you would not suggest new gold had been created. The same is true with money, the base money created by the central bank doesn’t change because there is a new demand deposit.

There are many things that can act like money within an economy so economists need to consider it as such in their analysis. In the US, bank demand deposits are counted as part of the M1 money supply. Savings accounts are part of the M2 money supply. CD’s are counted as part of the M3 money supply. Commercial paper is counted as part of the M4 money supply. All these are really just promises to pay that people treat as money, the more liquid it is the more prone they are to people using them as money. In the end it’s more accurate to describe them as something like money because they may or may not be considered money depending on context.
__________________
"Anything's possible, but only a few things actually happen"
lomiller is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 25th October 2017, 06:42 AM   #239
psionl0
Skeptical about skeptics
 
psionl0's Avatar
 
Join Date: Sep 2010
Location: 31°57'S 115°57'E
Posts: 11,825
Originally Posted by psionl0 View Post
........ is the person who thinks that the banks have created something before the bank increased my deposit (or the person who claims that I would say something so stupid).
Originally Posted by lomiller View Post
The accusation being made is that banks create new money on their own without any legal authority in order to deposit it to the customers account.
Q.E.D.
__________________
"The process by which banks create money is so simple that the mind is repelled. Where something so important is involved, a deeper mystery seems only decent." - Galbraith, 1975
psionl0 is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 25th October 2017, 10:40 AM   #240
GnaGnaMan
Graduate Poster
 
Join Date: Sep 2008
Posts: 1,001
Originally Posted by lomiller View Post
No one disputes that lending creates deposit expansion, this isn’t the issue. The accusation being made is that banks create new money on their own without any legal authority in order to deposit it to the customers account. Walking though the underlying process using cash allows you to see clearly that doesn’t happen.
I think I see the point you are trying to make. Since we can imagine the process being conducted with hard cash, there is no point at which new money is obviously booked into existence "from thin air".
I don't think the argument will impress anyone. You are still dealing with a fractional reserve system. My guess is that someone who considers it fraudulent will consider it inacceptable that the bank hands over cash which was given to it for safe-keeping.

Indeed, the money supply still increases at the point at which the loan is granted even if the money is immediately paid out in cash. Base money held by banks does not count as part of the money supply. (Let's go with the common definitions.) TBH, the argument looks like just a slight of hand to me.

Quote:
If we were to do the same thing with gold, you would get the same deposit expansion effect but you would not suggest new gold had been created. The same is true with money, the base money created by the central bank doesn’t change because there is a new demand deposit.
Well, if you re-define money to mean only cash then there is no money created during lending. However, even so, lending still leads to the creation of new base money. The private bank has more deposits, so it needs more reserves. So it borrows more base money from the cental bank.
__________________
I don't think it's quite fair to condemn a whole program because of a single slip-up.
GnaGnaMan is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Reply

International Skeptics Forum » General Topics » Economics, Business and Finance

Bookmarks

Thread Tools

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Forum Jump


All times are GMT -7. The time now is 03:00 AM.
Powered by vBulletin. Copyright ©2000 - 2017, Jelsoft Enterprises Ltd.
© 2014, TribeTech AB. All Rights Reserved.
This forum began as part of the James Randi Education Foundation (JREF). However, the forum now exists as
an independent entity with no affiliation with or endorsement by the JREF, including the section in reference to "JREF" topics.

Disclaimer: Messages posted in the Forum are solely the opinion of their authors.