March 19, 2009

What are banks for? What are houses for? What’s credit for? What’s the economy for? Or, for that matter, what’s the environment for?
posted by sugarmilktea 15 years ago
  • "Most money today is created not by governments but by banks – in Britain, for example, commercial banks create 95 per cent of the country’s money. They do this by making loans. If one dollar is deposited with a bank by one person, the bank is allowed to lend one dollar to ten people on the back of that one dollar deposit." Hmmm... that sounds like a risky thing to do. I know how a government can print more money, but how can a bank lend non-existent money that they have not got?
  • Easy, most of the money that is loaned goes into someone else's bank account. It's just a matter of changing some numbers around. If we all took out loans so we could go on a shopping spree with a suitcase full of cash this wouldn't work.
  • Great article. But probably too optimistic about the possibility of improvement. Sigh.
  • Improvement is harder than starting over.
  • >>>"If one dollar is deposited with a bank by one person, the bank is allowed to lend one dollar to ten people on the back of that one dollar deposit." >>but how can a bank lend non-existent money that they have not got? >Easy, most of the money that is loaned goes into someone else's bank account. It's just a matter of changing some numbers around. That doesn't answer the question. I think the answer is: this is a misstatement. The bank can't give out money that doesn't have: banks keep only a fraction of their demand deposits in reserve (as cash and other highly liquid assets) and lend out the remainder. And in fact, the UK doesn't even have a reserve requirement. The current problems are from the leveraging of mortgage backed securities and insurance, not bank lending. Am I wrong?
  • Bank lending has its part to play in our current problems - the banks are the originators of a lot of the mortgages, for example. And banks do "give out" money that they don't have. For example, Bank A gets $100 in deposits - under a (10%) fractional reserve system, it can lend out $90. This ends up in Bank B, which can lend out $81, which goes back to Bank A. Now bank A has a theoretical $181 in deposits, and its loan book can grow to $162.90. If it lends out $72.90 to someone who banks with Bank B, it's possible that $65.61 comes back to Bank A on deposit. Now it's got $246.61 on deposit, and the loan book can grow to $222. And so on. On top of this, Bank B doesn't even have to exist. Everyone could be a customer of Bank A and the initial $100 on deposit could support lending of $222 ... $1000.
  • Most money today is created not by governments but by banks... My point was that when a bank loans me $10 surely it is either from a deposit made to them or money they have in turn borrowed from a larger bank or from the Federal Reserve. So the banks are not making money, they are just passing it along. And if I am right on this then the article was factually wrong, (or deliberately misleading) and I can just ignore the rest of it. ;-)
  • Correction: Having read this I see that the conventional definition of money supply is "cash + demand deposits". So if SMT puts $100 in a bank and I borrow $100 from that same bank together we think we have a total of $200 of "money", so the "money supply" is said to be $200. In reality I would have a debt of $100 and cash of $100, and SMT would have a bank credit of $100. Which in my book is not a total of $200, because in practice SMT and I cannot spend our $100s simultaneously, so perhaps the traditional definition of money supply is a bad one. But in that sense it is correct to say "banks create money".
  • This wikipedia article describes the UK system, where some retail banks are very clearly creating their own money.
  • I stand corrected. In fact, I did understand this but I guess my feeble mind slipped a bit. Either way, it's not the "bank's fault" in-so-much as they were doing exactly what they've always done, at least as far as lending out direct deposits. The fault lies in the lack of regulation of the derivatives market. You can't wrap up high-risk sub-prime loans, then rank those AAA, and not expect a down-side. I'd vote for NO BAIL OUT, if I didn't think that would really plunge us in to real systemic anarchy.