Do PositiveMoney have a point? Can banks create money from nothing?

[FairDooz]

It's called Fractional Reserve Banking. There is absolutely no conspiracy involved. It is real.

 

Agreed, fractional reserve banking is easily understood. No conspiracy involved. That's simply using depositors money to loan to borrowers to earn a bit of interest and pay the depositor some of that interest.

 

The mutuals work that way.

 

But did banks "create" money? I still don't see how ... but it seems to be a theory that people are using to explain the credit crunch.

 

They certainly increased the flow of money ... but that's just another term for lending (other people's money) wrecklesly.

[I1L2T3]

I guess I'm close to understanding this ... however ... surely the explanation only works if there is only one bank.

 

The problem arises when money is transferred between banks. One banker who is up to funny business would hardly likely to trust another banker because he would knows how the game works and it doesn't actually work like this (?)

 

The system actually depends upon everybody within the system being able to transfer recognised value (in whatever form - gold coins, paper money, numbers in and account) from one person to another.

 

Let's say a rogue bank starts to "create money from nothing" by granting loans to anyone who asks for it.

 

Let's say 100 people go to that bank looking for a mortgage to buy a house. The bank doesn't actually have the money to loan, but claims that it does. It "creates" the money (as simply numbers in the computer?) and transfers that money to the accounts of 100 house vendors who bank elsewhere.

 

The game is up pretty quick unless that bank can prove it has something to back up its claim of having the money to loan in the frst place. Somebody has to have faith in the bank in the first place. There has to be depositors or other institutions within the system that place "real" value in the bank to loan out.

 

If banks could just create money from nothing then Northern Rock wouldn't have gone bust.

 

It's because they were making loans from not just depositor's "real" money, but also from the "real" money they borrowed themselves on the money markets. Everybody trusted them to make the loans judiciously, but the trouble started when they were no longer trusted to do that. "Real" money was in jeopardy, not just fictitious money they created themselves.

 

The banks will always be custodians of other people's money. They have debtors and creditors. You can't have one without the other. Unless the bank plays the game with their own money and they'd have to be pretty stupid to do that ???

 

Am I getting closer to understanding/explaining funny money?

 

Some very important points you touch on there:

 

1. Confidence/trust/faith in the system. There has to be enough confidence in the system to keep it rolling. Enough people have to believe in it. If that belief is lost the system cannot be sustained and it will struggle to avoid collapse

 

2. The banks don't play the game with their money. They play it with OUR money. Taxpayers are the ultimate backstop for bailing out banks. As we have seen.

 

3. Rogue banks creating money. We have a whole class of new banks in the last 20-30 years, in what is known as the shadow banking system. They are not banks as we would generally understand but function as banks in many respects. They operate globally. They can create credit. They are almost unregulated. They can create credit themselves using complex financial instruments. They can trade these. The trades are only possible because others believe the instruments can be exchangeable for 'real' money at some point in the future. The complex financial instruments are seen to be as good as money, freely convertible. Of course when it turns out the instruments are worthless after all then we have the unfortunate spectacle of (sometimes reputable) institutions forced to de-leverage and unwind positions in the instruments created by the rogue banks. And that is when a conversion to 'real' money begins, when we see central banks buying the toxic assets of banks to keep them from going under. The rogue credit becomes real money that the central banks have to print to keep the system liquid.

[FairDooz]

 

In the video, do you see more than $100 at any time?

 

I can see post-it notes with amounts on them, but these are promises to repay money, not actual money. It's a decent explanation of fractional reserve banking, but in what sense did the bank "create" money?

 

Notionally Mr Shoe still has $100 and Mr Hat has $90, but in truth, there's only $90 in circulation from an original $100. No money is "created from nothing" which is what PositiveMoney and others are telling us.

 

If Mr Shoe wants to withdraw anything more than $10 then the bank could only give him a post-it note ... or did I miss something in this 3 cups magic trick?

[chem1st]

We need a demurrage currency.

 

http://en.wikipedia.org/wiki/Demurrage_(currency)

 

Have you heard of Worgl?

 

http://alt-money.tribe.net/thread/70e5eb29-853d-44ca-9faa-b789d1757037

 

Worgl Success

 

Over the 13-month period the Worgl money was in circulation, the mayor carried out all the intended works projects. The council also built new houses, a reservoir, a ski jump, and a bridge. The people also used scrip to replant forests, in anticipation of the future cash flow they would receive from the trees.

 

Six neighboring villages copied the system successfully. The French Prime Minister, Eduoard Dalladier, made a special visit to see the 'miracle of Wörgl'. In January 1933, the project was replicated in the neighboring city of Kirchbuhl, and in June 1933, Unterguggenburger addressed a meeting with representatives from 170 different towns and villages. Two hundred Austrian townships were interested in adopting the idea.

 

To all whom it may concern ! Sluggishly circulating money has provoked an unprecedented trade depression and plunged millions into utter misery. Economically considered, the destruction of the world has started. - It is time, through determined and intelligent action, to endeavour to arrest the downward plunge of the trade machine and thereby to save mankind from fratricidal wars, chaos, and dissolution. Human beings live by exchanging their services. Sluggish circulation has largely stopped this exchange and thrown millions of willing workers out of employment. - We must therefore revive this exchange of services and by its means bring the unemployed back to the ranks of the producers. Such is the object of the labour certificate issued by the market town of Wörgl : it softens sufferings dread; it offers work and bread.”

 

It'd be a darn sight better than the system we have now, where we have homeless builders and hungry food production workers that may/may not be unemployed. Both groups of workers suffer from precarious labour markets.

 

We also have a million unemployed youths and nearly ten million jobless (economically inactive).

 

We should measure Youth unemployment in pyramids. 40 million hours a week are being lost.

[FairDooz]

Rogue banks creating money ... They can create credit. They are almost unregulated. They can create credit themselves using complex financial instruments. They can trade these. The trades are only possible because others believe the instruments can be exchangeable for 'real' money at some point in the future. The complex financial instruments are seen to be as good as money, freely convertible. Of course when it turns out the instruments are worthless ...

 

I can understand/agree with most of what you say there, apart from the detail of "creating money".

 

I think it's not the creation of money that happened, but the creation of those complex financial instruments and the credit to buy those "assets".

 

Investors used "real" money to chase illusory money making "instruments" which only had value while people believed they had value. In truth nobody knew what they were dealing with, but the banks and their employees ened up with a fair slice of the real money that was attracted into the system.

 

It seems like a small point in the scale of the crisis but I don't believe the banks ever created money (the raison d'etre of PositiveMoney).

 

Banks (and others?) created an accelerated flow of money and skewed that flow away from the "real" economy, but they didn't have the power to create new money. (in my opinion but I'm still wrestling with this issue)

[FairDooz]

We need a demurrage currency.

 

http://en.wikipedia.org/wiki/Demurrage_(currency)

 

At first read it seems like an interesting idea. Of course there's the massive inertia within the current system to overcome ... but unlike a friend who recently said "things are the way they are and there isn't anything we can do" I still have a small hope "we" can change things ... if only we could agree on something, anything ... ???

[I1L2T3]

I can understand/agree with most of what you say there, apart from the detail of "creating money".

 

I think it's not the creation of money that happened, but the creation of those complex financial instruments and the credit to buy those "assets".

 

Investors used "real" money to chase illusory money making "instruments" which only had value while people believed they had value. In truth nobody knew what they were dealing with, but the banks and their employees ened up with a fair slice of the real money that was attracted into the system.

 

It seems like a small point in the scale of the crisis but I don't believe the banks ever created money (the raison d'etre of PositiveMoney).

 

Banks (and others?) created an accelerated flow of money and skewed that flow away from the "real" economy, but they didn't have the power to create new money. (in my opinion but I'm still wrestling with this issue)

 

It depends on where you think the money came from in the first place.

 

If you think the central bank created it all then you are missing the role of commercial banks in multiplying money lent to them by the central bank.

[FairDooz]

It depends on where you think the money came from in the first place.

 

If you think the central bank created it all then you are missing the role of commercial banks in multiplying money lent to them by the central bank.

 

I'm still struggling to understand this multiplying mechanism ... the fact that the central bank loaned them the money in he first place means that it's the central bank that created the money not the private clearing or investment banks???

 

The banks have circulated that money wrecklessly by issuing credit that has fuelled an unrealistic boom in asset prices, but without the backing of the central bank they would have been powerless to do this.

 

Again, maybe I'm missing something ... ?

 

Did the governemnet themselves believe that our financial industry had the power to create money ... and they were just wrong? All they had the power to do was create a house of cards, a ponzi scheme?

[I1L2T3]

I'm still struggling to understand this multiplying mechanism ... the fact that the central bank loaned them the money in he first place means that it's the central bank that created the money not the private clearing or investment banks???

 

The banks have circulated that money wrecklessly by issuing credit that has fuelled an unrealistic boom in asset prices, but without the backing of the central bank they would have been powerless to do this.

 

Again, maybe I'm missing something ... ?

 

Did the governemnet themselves believe that our financial industry had the power to create money ... and they were just wrong? All they had the power to do was create a house of cards, a ponzi scheme?

 

The Bank of England creates money in two ways.

 

Firstly it organises minting of coins and printing of notes. This is the circulating money we use every day. It's a small fraction of the total money supply.

 

Secondly it basically pushes buttons to create money that can be loaned into existence (i.e. lent to banks) or used to purchase assets (Treasury bonds = QE, assets from banks = bank bailouts).

 

The centrally created money that ends up at member private banks can then be loaned into the economy at large, by the private banks. It's at that point that the money borrowed from the central bank is multiplied. Think of it as the central banks granting a special licence to its member banks to expand the money supply. There is nothing unusual in this. The central bank expects that when the money is lent to the member bank that it will use it to expand the amount of money in the wider economy. It is how the system works. How much the private bank expands the money supply will depend on how much of a reserve it has chosen to keep.

 

It doesn't always work that way though. It isn't working that way now. Look up 'central bank pushing on a string' on Google.

 

So that covers the role of the private member banks that have the privilege of borrowing at low rates from the central banks. But it gets more interesting, and I alluded to it with an earlier post re: shadow banks. Shadow banks can also artificially and unofficially expand the money supply in an unregulated way, and also increase velocity of money which is part of the picture you are presenting. I won't go into it in detail but look up 'rehypothecation shadow banks'.

[sanchos]

If all the debt was paid off on the planet, no money would exist. All money is based on debt. Watch the documentary, 'Money as debt'. If people truly understood how the monetary system worked there would be a revolution tomorrow morning. At the moment the revolution is underground because only a few people understand, but it is slowly gaining momentum.