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Banking and money
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johnhemming2



Joined: 30 Jun 2015
Posts: 2159

PostPosted: Sun Jul 19, 2015 11:20 pm    Post subject: Reply with quote

biffvernon wrote:
Automation, was the major theme of David Fleming's (he of TEQs) work in the 1970s and 80s and the basis of his PhD thesis. It's about time it got more attention.

I have spoken about it and have small amounts of press attention on a number of occasions, it is this change in the employment market that is not recognised and really does need attention.
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johnhemming2



Joined: 30 Jun 2015
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PostPosted: Sun Jul 19, 2015 11:22 pm    Post subject: Reply with quote

Catweazle wrote:
johnhemming2 wrote:
The bank does not create the liquidity. It may create broad money, but the narrow money to execute the transaction (complete) has to be found from somewhere else.


Thanks for clearing that up Rolling Eyes

I did put all of that in the 3.12 post in some detail. The essence of the point is that the bank cannot in isolation create everything for a mortgage to complete it needs somehow to get access to reserves at the bank of England.

It also needs capital for the risk weighted assets requirement. (the current equivalent of fractional reserve).
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Catweazle



Joined: 17 Feb 2008
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Location: Little England, over the hills

PostPosted: Sun Jul 19, 2015 11:25 pm    Post subject: Reply with quote

johnhemming2 wrote:
I did put all of that in the 3.12 post in some detail.


I'll go back and read it.
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biffvernon



Joined: 24 Nov 2005
Posts: 18541
Location: Lincolnshire

PostPosted: Sun Jul 19, 2015 11:27 pm    Post subject: Reply with quote

http://www.thenation.com/article/goldmans-greek-gambit/

Quote:
The Greek debt crisis offers another illustration of Wall Streetís powers of persuasion and predation, although the Street is missing from most accounts.


The crisis was exacerbated years ago by a deal with Goldman Sachs, engineered by Goldmanís current CEO, Lloyd Blankfein. Blankfein and his Goldman team helped Greece hide the true extent of its debt, and in the process almost doubled it. And just as with the American subprime crisis, and the current plight of many American cities, Wall Streetís predatory lending played an important although little-recognized role.

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Catweazle



Joined: 17 Feb 2008
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Location: Little England, over the hills

PostPosted: Sun Jul 19, 2015 11:36 pm    Post subject: Reply with quote

OK, I read the 3:12 post. It seems to imply that banks have to behave responsibly and keep a decent reserve with the BOE.

But we know that the BOE has been inventing money like crazy and lending it to the banks at almost zero interest.

Doesn't this mean that the banks can just keep creating money with impunity ?

Or am I missing something ?
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johnhemming2



Joined: 30 Jun 2015
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PostPosted: Sun Jul 19, 2015 11:40 pm    Post subject: Reply with quote

Catweazle wrote:
OK, I read the 3:12 post. It seems to imply that banks have to behave responsibly and keep a decent reserve with the BOE.

But we know that the BOE has been inventing money like crazy and lending it to the banks at almost zero interest.

Doesn't this mean that the banks can just keep creating money with impunity ?

Or am I missing something ?

The bank of england will provide liquidity (narrow money) for banks as a lender of last resort - or in other ways, but the interest rate tends to be higher than market rates. To make a profit the lender has to get the liquidity (narrow money) at a better interest rate. The best source is often deposits with the bank (real ones not the one or two day ones that relate to mortgages etc).

There is also then the risk weighted assets issue. All of these things mean that the bank cannot just create money and lend it. (it can create broad money, but needs the liquidity to lend it and there are constraints on this).
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Little John



Joined: 08 Mar 2008
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PostPosted: Sun Jul 19, 2015 11:59 pm    Post subject: Reply with quote

Where do those deposits come from?
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vtsnowedin



Joined: 07 Jan 2011
Posts: 5588
Location: New England ,Chelsea Vermont

PostPosted: Mon Jul 20, 2015 1:59 am    Post subject: Reply with quote

Little John wrote:
Where do those deposits come from?

Why from you old man! Every household and every business has an account somewhere where they deposit the days receipts or the weeks paycheck or the monthly dole stipend. Makes no difference if they are only there for a day or two as in aggregate the average is a good few thousand. CDs where the depositor can't pull out his money prior to term are nice but the banks have long sense learned how to make use of your money on it's way in and out of your checking account. And before anyone dumps on the money that is only in your account for hours after payday realize that as soon as you pay all those bills your money shows up in a deposit in your landlords or grocers bank account.
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Little John



Joined: 08 Mar 2008
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PostPosted: Mon Jul 20, 2015 3:27 am    Post subject: Reply with quote

vtsnowedin wrote:
Little John wrote:
Where do those deposits come from?

Why from you old man! Every household and every business has an account somewhere where they deposit the days receipts or the weeks paycheck or the monthly dole stipend. Makes no difference if they are only there for a day or two as in aggregate the average is a good few thousand. CDs where the depositor can't pull out his money prior to term are nice but the banks have long sense learned how to make use of your money on it's way in and out of your checking account. And before anyone dumps on the money that is only in your account for hours after payday realize that as soon as you pay all those bills your money shows up in a deposit in your landlords or grocers bank account.


That's right, from me V (this answer also applies to John hemming)

And where do you think I got that money from?

Even if we were to be generous and pretend that banks still operated under the quaint principle of fractional reserve lending (which they don't), this only makes sense if the deposits they hold are, themselves, real money. The problem is they are not. They are, in fact, comprised almost entirely of lent-into-existence-debt.



The above is a schematic showing how an initial £1000 created by a Central bank and then placed in Bank A, cascades down through the banking system (based on a notional fractional reserve requirement of 20%) being lent out over and over again. This is because the lent-into-existence-debt of one bank is allowed to be used as the deposits of other banks. At the systemic level, it's basically legalised double accounting fraud (hell, it is even double accounting fraud at the level of an individual bank since they can accept as a deposit with one hand the debt they have lent-into-existence with the other!).

Of course, each time the money enters the next bank in the chain, a bit is shaved off the amount that can subsequently be lent out because some of the debt-based deposit must remain on the deposit side of a given bank's books. The process of re-lending out of the same money only stops when infinity is approached.

So, starting from a baseline figure of 1000 central bank money, we end up with a situation where the total amount of "money" in the system is £4000 (due to banks effectively using the debt side of other banks' balance sheet as the deposit side on their own balance sheet) and that the debt based monetary system must actually grow over the next 5 years by another £600 just to make the books balance at the end of that period. This is because of the compound interest applied to the loans.

The only way the above can be made to work is if the central bank continues to push money into the system to cover the hole in the balance sheet implied by interest rates on loans. But, of course, the banks are simply going to multiply lend out any new money that comes into the system and so the problem keeps on growing.

All of the above is the reason why governments shit themselves when growth stops because, when that happens, the ponzi-scheme money-supply promptly collapses. However, they can't allow it to collapse and so they keep pushing money into the system regardless. The trouble is, as I know you are well aware, this new money no longer has an economic home to go to (due to halted growth) and so merely has the effect of causing inflationary driven prices rises due to the oversupply of money. This is why recessions often bring inflationary price rises with them instead of deflationary collapses in prices, which is what one might have intuitively expected.

In the above schematic, the central bank base money supply will need to grow to £1150 in 5 year's time to cover the interest repayments on the loans and this means that there is a built-in requirement that the economy will grow by 3% per year for each of those 5 years to accommodate the extra money flowing into the system. Any growth less than that and you end up either with deflation (if the CB does not create enough base money) or inflation (if the CB does create the money). The only way you avoid either inflation or deflation is if the economy grows by just the right amount. Whatever happens, the economy must perpetually grow in order for this type of compound-interest-debt-based money-supply to work.

But, in reality, it's far, far worse than all of the above.

In reality banks have no fractional reserve requirements and so there are not even the limits described above as an initial deposit tends towards zero. In reality, virtually all of the money in circulation is debt based and only a minute fraction is base money whose only purpose now is to provide hard cash for physical withdrawals

In short, an essentially private, debt based money-supply is always a car-crash waiting to happen and on a finite planet of finite resource you can be guaranteed it will happen (due to the limits to growth implied by those finite resources).

Greece and other countries are simply part of that car crash and none of this has got bugger all to do with profligate Greeks in the end.


Last edited by Little John on Mon Jul 20, 2015 8:39 am; edited 19 times in total
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johnhemming2



Joined: 30 Jun 2015
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PostPosted: Mon Jul 20, 2015 8:43 am    Post subject: Reply with quote

Little John wrote:

In reality banks have no fractional reserve requirements

Regulation requires banks to hold various minimum levels of capital.

This is mainly based upon a percentage of risk weighted assets. Loans made to people are assets to the bank.
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Little John



Joined: 08 Mar 2008
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PostPosted: Mon Jul 20, 2015 9:03 am    Post subject: Reply with quote

johnhemming2 wrote:
Little John wrote:

In reality banks have no fractional reserve requirements

Regulation requires banks to hold various minimum levels of capital.

This is mainly based upon a percentage of risk weighted assets. Loans made to people are assets to the bank.
I note you have avoided addressing a single substantive point in the post. How very predictable.

Either you accept, at the very least, the essential details of the schematic, which incorporates a fractional reserve, in which case you must accept that the money banks use to settle payments on mortgages is very largely lent-into-existence debt that has been transformed into a a deposit via the magic of legalised double accounting fraud. Or, you do not, in which case you are obliged to logically refute that schematic. In the absence of either, your silence will be taken as a de-facto acceptance of the implications of that schematic.


Last edited by Little John on Mon Jul 20, 2015 9:53 am; edited 4 times in total
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marknorthfield



Joined: 24 Nov 2005
Posts: 177
Location: Bracknell

PostPosted: Mon Jul 20, 2015 9:52 am    Post subject: Reply with quote

johnhemming2 wrote:
Little John wrote:

In reality banks have no fractional reserve requirements

Regulation requires banks to hold various minimum levels of capital.

This is mainly based upon a percentage of risk weighted assets. Loans made to people are assets to the bank.


I don't post on Powerswitch much because I can't cope with the confrontational aspects, as well as being busy. But I've been following this discussion with interest.

I would thoroughly recommend NEF's book 'Where Does Money Come From' by Josh Ryan Collins, Tony Greenham, Richard Werner and Andrew Jackson (published in 2012) as the most in depth look at the UK monetary/banking system that I have ever come across, including - among many other things - how the lines can become blurred between different types of money. I'd like to quote a few things.

In chapter 4 'Money & Banking Today' about central bank reserves, it suggests:

'The larger any individual bank is as a proportion of the total value of customer payments, the fewer reserves it is likely to need because so many transactions take place between its own customers and not between it and other banks.'

Then after going through an example with Lloyds, it adds:

'Other things being equal, the smaller the bank, the relatively larger the amount of central bank reserves it requires to settle its customers' transactions, and so the lower amount of more profitable assets it will be able to hold.'

(It then goes into rather more detail to flesh this out.)

In another section in chapter 4 on how banks decide how much central bank money they need, the book suggests (from the authors' calculations of BoE stats):

'On average, prior to the financial crisis of 2008 onwards, the banks had £1.25 in central bank money for every £100 of customers' money. In the more cautious post-crisis environment, the banks still have on average only £7.14 for every £100 of customers' money.'

The chapter concludes with a summary of the two main liquidity constraints on money creation: having enough central bank reserves to ensure payments through the BoE closed loop system at any one time, and also enough demand deposits in cash so that solvent customers can get access to cash whenever they wish. It points out that these constraints are weak under the current monetary policy regime.

On regulation (in chapter 5 - 'Regulating Money Creation And Allocation') it goes into some detail about Basel rules and their inadequacy in limiting credit creation, along with other attempts to regulate liquidity. Three nuggets worth extracting here:

'Banks create brand new money at will by extending credit or buying assets. As discussed in 4.5, the size of their reserves is mainly determined in consultation with the Bank of England by banks' own estimates of what is needed to cover their every-day payment requirements.'

(which doesn't sound like hard and fast regulation to me)

And on risk-weighting, it makes the point that business loans have a 100% risk weighting compared to mortgages on 35%, saying:

'From this it follows that unless a business loan makes three times as much profit as a mortgage, the bank will prefer to extend mortgages.'

Finally, in a section entitled 'why capital adequacy requirements do not limit credit creation', this:

'Furthermore, different dynamics come into play when we distinguish between an individual bank and the banking system as a whole. As we argued in section 4.3, if the banks expand their balance sheets in step, there is little to restrain them. If only one bank continues to lend, it will find that it bumps up against its capital adequacy and liquidity limits, but if all banks are lending and creating new deposits, providing they remain willing to lend to one another, the banking system in aggregate will generate enough additional capital and liquidity.'

As I said, a book worth reading if you want to understand this topic in detail. I don't think anything has substantially changed in the past 3 years to render it out of date.
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johnhemming2



Joined: 30 Jun 2015
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PostPosted: Mon Jul 20, 2015 10:53 am    Post subject: Reply with quote

marknorthfield wrote:
...

This is a much better and well informed post than many recently.

The nub of the recent debate is whether reserve transactions are needed or whether banks can simply create "money" out of thin air that enables a mortgage to be funded.

At least you confirm that reserve transactions are needed for payments on behalf of customers to other banks.

I accept the point that if it is a book entry within the same bank then reserve transactions are not needed. However, the broad money is still stuck in the same bank. Hence there is a need for narrow money.

Secured loans are, of course, much less risky than unsecured loans.

My point about the level of reserves is that there are a number of ways of getting additional reserves, but that reserves are needed in order to make payments to other banks. Normally reserves have some cost either as equity or interest bearing in some way.

Obviously as the Bank of England can lend more reserves this is more of an operational decision than a regulatory decision.

The regulatory issues relate to holding of capital etc.

There are those that would nationalise all the banks. I disagree with that proposal.

There is then a question as to whether additional changes to bank regulation are needed. I am happy to look at suggestions in this area, but the nub of the issue is that narrow money is required to make payments to other banks and the cost of this has a wider impact on decisionmaking.
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Little John



Joined: 08 Mar 2008
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PostPosted: Mon Jul 20, 2015 11:06 am    Post subject: Reply with quote

Still making your bald assertion without addressing any of the substantive points put to you in that post I see. Let me make this really, really explicit for you:

1) Do you accept that central banks create base money for our economy either by buying it in from outside the system via the issuance of government bonds or, if they wish, by directly creating it from scratch with mechanisms such as QE.

2) Do you accept that the banks who take out loans of base money from the CB can then lend out a proportion of it to other banks and/or non-banks customers based on their fractional reserve requirements?

3) Do you accept that either:

non-bank customers are either going to deposit the money they have borrowed into a bank or are they going to spend the money such that the recipient (or some recipient at some point down the chain of transactions) is going to deposit the money into a bank, thus allowing the recipient banks to declare that loaned money that has been deposited with them on their books as a part of their assets and thus increase their fractional reserve?

or

other banks who have directly borrowed the money from the first bank in the chain are going to be able to declare their loaned money as an asset on their books and thus increase their fractional reserves?

4) Do you accept that in either or both instances of (3), the increased fractional reserves of the banks having received previously loaned money means that they can now lend more money out than was the case prior to their receipt of it?

5) Do you accept that all of the above processes will, unless there is a direct regulatory intervention, continue until all capacity to wring a return out of deposits received (within the fractional reserve requirements) is exhausted? In other words, until infinity is approached? Furthermore, that the smaller the fractional reserve requirement, the greater will be the proportion of the total money supply that is debt based before infinity is, for all practical purposes, reached and that, as a consequence, the vast majority of money in circulation used for the vast majority of transactions is lent-into-existence debt based money. Finally, that in the absence of any fractional reserve requirement, the only remaining function of base money is to give the punters something to put in their pockets for the increasingly rare occasion they may have cause to transactionally require it?

No more obfuscation or misdirection please Mr Hemming. Answer the questions.
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johnhemming2



Joined: 30 Jun 2015
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PostPosted: Mon Jul 20, 2015 12:59 pm    Post subject: Reply with quote

Little John wrote:

1) Do you accept that central banks create base money for our economy either by buying it in from outside the system via the issuance of government bonds or, if they wish, by directly creating it from scratch with mechanisms such as QE.

Issuing a bond does not create narrow money. QE does. Simply increasing it - printing money - does.

Little John wrote:

2) Do you accept that the banks who take out loans of base money from the CB can then lend out a proportion of it to other banks and/or non-banks customers based on their fractional reserve requirements?

The regulatory process is similar, but not the same as fractional reserves. It is based upon holding capital to cover risk. The clearing banks don't strictly lend out from their narrow money, but instead use reserves for liquidity.

Little John wrote:

3) Do you accept that either:

non-bank customers are either going to deposit the money they have borrowed into a bank or are they going to spend the money such that the recipient (or some recipient at some point down the chain of transactions) is going to deposit the money into a bank, thus allowing the recipient banks to declare that loaned money that has been deposited with them on their books as a part of their assets and thus increase their fractional reserve?
or keep it under the bed etc.


Little John wrote:

or

other banks who have directly borrowed the money from the first bank in the chain are going to be able to declare their loaned money as an asset on their books and thus increase their fractional reserves?
Such a loan does not affect the quantity of capital. BTW that's a No.

Little John wrote:

4) Do you accept that in either or both instances of (3), the increased fractional reserves of the banks having received previously loaned money means that they can now lend more money out than was the case prior to their receipt of it?
No. The regulatory requirements set limits based upon the amount of capital.

Little John wrote:

5) Do you accept that all of the above processes will, unless there is a direct regulatory intervention, continue until all capacity to wring a return out of deposits received (within the fractional reserve requirements) is exhausted? In other words, until infinity is approached? Furthermore, that the smaller the fractional reserve requirement, the greater will be the proportion of the total money supply that is debt based before infinity is, for all practical purposes, reached and that, as a consequence, the vast majority of money in circulation used for the vast majority of transactions is lent-into-existence debt based money. Finally, that in the absence of any fractional reserve requirement, the only remaining function of base money is to give the punters something to put in their pockets for the increasingly rare occasion they may have cause to transactionally require it?

No

Little John wrote:

No more obfuscation or misdirection please Mr Hemming. Answer the questions.

I have explained how banks are regulated and the information is available from reliable sources on the net.
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