The Problem with the Banking System: How Money is Made / Created

[Longcol]

 

 

Who owns the Bank of England? Who are the share holders? These are private companies.

 

The Bank of England is nationalised. We did this on SF nearly two years ago.

 

http://www.sheffieldforum.co.uk/showthread.php?t=593035

[syne]

Inability to repay loans (ie bad debts) is what has brought the system into turmoil.

 

It is a fallacy that banks create money from nothing. They can only lend (around 90%) of money deposited with them - "savings" is probably the easiest term to use.

 

Interest charged by banks is their profit from taking the risk to people who will default (plus covering their expenses).

 

Now you can argue (as I would) that the banks shouldn't have made loans to people who posed an excessive risk - and that the reward system for bankers was all wrong - taking a cut from the deal rather than a cut from any surplus that materialises in the long term.

 

And this doesn't even start to explain governments role in the mess.

 

Banks create money from nothing. full stop.

Miners, fisherman, lumberjacks and farmers create money from something.

then the associated trades created things+money from their efforts, then the service industries stepped in and started creating money from thier time and efforts providing schools and nurses and policeman to help the secondary and tertiary industries roll along nicely all creating money from something.

Among the services came banks and they provided a worthwhile service storing your money they then transformed themselves into 'lending' services.

After a while fractional reserve banking was born.

a simplified example follows;

 

I have only £100 in my bank from depositors.

so I can lend out;

£90+

£85+

£80+

£75+

£70+

£65+

£60+

£55+

to to other people. which = £580 of lending from £100.

 

so yes banks do lend from 'nothing' and fractional reserve banking isn't the only way banks can 'create' money.

[epiphany]

The idea that a private bank creates money every time it makes a loan is wrong. Anyone who has done basic double entry bookeeping will tell you that.

 

The only banks that create new money are central banks like the Bank of England or the Federal Reserve in the USA. Private banks only circulate money - albeit at an ever increasing pace due to technology.

 

If private banks could create new money then surely they could have created the money to plug the holes in their balance sheets and not needed intervention from governments - and the drain on the taxpayer.

 

The problem created by the banks has not been money creation - it has been loaning investors money to people unable to repay the loans.

 

A good analysis is available here;

 

http://www.ied.info/articles/an-honest-bank-is-so-simple-you-can-run-it/logical-reasons-proving-private-banks-do-not-create-money

 

I have a huge respect for IED and the Economic Democracy movement in general and I am aware of their position on banking reform.

 

Perhaps I am oversimplifying, but when they say "Money is created when the Fed (central bank) buys or funds debt instruments", that to me suggests that private banks technically do create money, or they at least make the conditions so that creating money is necessary to fund the debt they create through their entries/loans. If debt must be monetised, and banks create debt through their loan agreements, then it's not exactly a tenuous link to say banks create money, since money and debt are interchangeable entities in the current system.

 

Is this just semantics at play here? The central bank creates and legitimises the currency, but surely it's the commercial banks' actions that necessitate creating that money in the first place. The central bank merely facilitates the operations of the commercial banks, so they decide when new money is needed.

 

I'm not saying there's anything inherently wrong with that process, but as I said before, there is the problem of compound interest that needs to be addressed. The current banking system is parasitic because it removes purchasing power from the system in order to pay for its own privilege.

[Longcol]

Banks create money from nothing. full stop.

Miners, fisherman, lumberjacks and farmers create money from something.

then the associated trades created things+money from their efforts, then the service industries stepped in and started creating money from thier time and efforts providing schools and nurses and policeman to help the secondary and tertiary industries roll along nicely all creating money from something.

Among the services came banks and they provided a worthwhile service storing your money they then transformed themselves into 'lending' services.

After a while fractional reserve banking was born.

a simplified example follows;

 

I have only £100 in my bank from depositors.

so I can lend out;

£90+

£85+

£80+

£75+

£70+

£65+

£60+

£55+

to to other people. which = £580 of lending from £100.

 

so yes banks do lend from 'nothing' and fractional reserve banking isn't the only way banks can 'create' money.

 

That lending illustrated above only works when the £90, £85, £80 etc are repaid. You are circulating money not creating it.

 

Have a read of this;

 

http://www.ied.info/articles/an-honest-bank-is-so-simple-you-can-run-it/logical-reasons-proving-private-banks-do-not-create-money

[Hairyloon]

Unless of course someone can explain to me when the system self corrects within this process...

Oh that's easy.

 

Everyone defaults on their debt and we start again.

 

Yes, but look at the fun and games we had (and are still having) when just a few people defaulted...

 

I think we need to start constructing a replacement system now, before the old one falls over.

[Longcol]

I have a huge respect for IED and the Economic Democracy movement in general and I am aware of their position on banking reform.

 

Perhaps I am oversimplifying, but when they say "Money is created when the Fed (central bank) buys or funds debt instruments", that to me suggests that private banks technically do create money, or they at least make the conditions so that creating money is necessary to fund the debt they create through their entries/loans. If debt must be monetised, and banks create debt through their loan agreements, then it's not exactly a tenuous link to say banks create money, since money and debt are interchangeable entities in the current system.

 

Is this just semantics at play here? The central bank creates and legitimises the currency, but surely it's the commercial banks' actions that necessitate creating that money in the first place. The central bank merely facilitates the operations of the commercial banks, so they decide when new money is needed.

 

I'm not saying there's anything inherently wrong with that process, but as I said before, there is the problem of compound interest that needs to be addressed. The current banking system is parasitic because it removes purchasing power from the system in order to pay for its own privilege.

 

The problem is not compound interest at all - how do you think banks make money to pay their staff, pay for goods and services, taxes, rates etc - and only central banks create money, period.

 

The root of the current financial crisis in a nutshell;

 

1) Banks making far too many loans to people who cannot repay them - the "toxic debts".

2) Governments spending more money than the revenue they get in.

[Longcol]

I think we need to start constructing a replacement system now, before the old one falls over.

 

All suggestions welcome

[Cyclone]

I’m surprised there has not been more posts in the thread. Are people really that uninterested in finance other than the instant gratification of spending. No wonder there are so many people in debt-to a large extent their own doing I guess.

 

Maybe everyone who cares already knows how fractional reserve banking works and isn't interested in wasting their time listening to something that supports chem1sts crazy ideas about the economy.

[Cyclone]

I don`t mind admitting that my understanding had always been that the BOE could only print an amount of money that was equal to the county`s gold reserves. This is certainly different to what the guy explained.

 

The gold standard was abolished in the 20's wasn't it?

[Cyclone]

97% of the money in the system has been loaned into said system. Nobody on the face of this planet lives within their means, as the system will not allow that, so how do you suggest we "live within our means" without major banking reform

 

Printing money (fractional reserve banking) and then using it doesn't mean you aren't living within your means.

If as an individual you spend less than you earn and you don't borrow then you are living within your means no matter what is done with the currency.