[DaveO]

Re: Money For Nothing : Wed Aug 29, 2012 2:08 pm  

SBR wrote: Well because multiple people 'have' the same money. The money supply does not increase because people "have" money. That decreases it because they are sitting on it i.e. it is not active in the economy. A deposit and loan are the same thing just viewed from a different perspective. When you deposit money in your bank account you are loaning that money to the bank. When a bank makes a loan they are depositing that money with you. What has that got to do with the way fractional reserve banking increases the money supply via lending? Nothing. It requires money just as the mark-up in a shop requires money. This again doesn't require new money, it is simply money circulating through the economy funding economic activity. So the shop owner borrows money to buy stock. He adds a mark up to the cost of the stock that covers his costs and his profit. Part of his costs are the cost of borrowing the money. When he sells the stock he pays the interest on the loan. The bank then has its profit which it puts back into the economy via another loan, the money markets, dividends etc. All money in the economy was created at some point and the amount of money in the economy varies over time. The money used to pay interest can be money created by commercial banks in the way described. If I borrow money at 0% interest on my credit card and use it to pay down another loan with a higher rate of interest rate I will be using money created by one bank to pay a loan on money another bank created. "Created" means created as described here http://en.wikipedia.org/wiki/Money_creation by the way. And you'd have a massive decrease in economic activity as deposited money will just be sat there losing value. We are currently seeing the effects of banks having to maintain larger reserves and restricting lending. This has reduced the money supply. And the reason it does is that restricts how much money they can create because they can't lend as much on. The massive (and unprecedented) progress made over the last 20/30 has been funded by the financial industry. Moving money efficiently around the world to where it can be used most productively. This is pretty much the purpose of investment banks. The problem with the progress made over the last 20/30 years is the much of the assets the banks have been lending against have proved worthless. This leads to banks taking a dim view of other banks credit worthiness as they believe they risk insolvency so they cease lending to those banks. And lo and behold the money creation process hits another hiccup because lending is reduced for this reason (as well as because banks have to hold more in reserve).

SBR wrote: Well because multiple people 'have' the same money. The money supply does not increase because people "have" money. That decreases it because they are sitting on it i.e. it is not active in the economy. A deposit and loan are the same thing just viewed from a different perspective. When you deposit money in your bank account you are loaning that money to the bank. When a bank makes a loan they are depositing that money with you. What has that got to do with the way fractional reserve banking increases the money supply via lending? Nothing. It requires money just as the mark-up in a shop requires money. This again doesn't require new money, it is simply money circulating through the economy funding economic activity. So the shop owner borrows money to buy stock. He adds a mark up to the cost of the stock that covers his costs and his profit. Part of his costs are the cost of borrowing the money. When he sells the stock he pays the interest on the loan. The bank then has its profit which it puts back into the economy via another loan, the money markets, dividends etc. All money in the economy was created at some point and the amount of money in the economy varies over time. The money used to pay interest can be money created by commercial banks in the way described. If I borrow money at 0% interest on my credit card and use it to pay down another loan with a higher rate of interest rate I will be using money created by one bank to pay a loan on money another bank created. "Created" means created as described here http://en.wikipedia.org/wiki/Money_creation by the way. And you'd have a massive decrease in economic activity as deposited money will just be sat there losing value. We are currently seeing the effects of banks having to maintain larger reserves and restricting lending. This has reduced the money supply. And the reason it does is that restricts how much money they can create because they can't lend as much on. The massive (and unprecedented) progress made over the last 20/30 has been funded by the financial industry. Moving money efficiently around the world to where it can be used most productively. This is pretty much the purpose of investment banks. The problem with the progress made over the last 20/30 years is the much of the assets the banks have been lending against have proved worthless. This leads to banks taking a dim view of other banks credit worthiness as they believe they risk insolvency so they cease lending to those banks. And lo and behold the money creation process hits another hiccup because lending is reduced for this reason (as well as because banks have to hold more in reserve).

Re: Money For Nothing : Wed Aug 29, 2012 5:39 pm  

Kosh wrote: You may have to wait until one comes along with a religiously-motivated reason for promoting an alternative system. Or did the main thrust of the piece escape you? You don't have to be religiously motivated to promote an alternative to a debt based monetary system, as proven by the people behind http://www.positivemoney.org.uk/ prove.

Kosh wrote: You may have to wait until one comes along with a religiously-motivated reason for promoting an alternative system. Or did the main thrust of the piece escape you? You don't have to be religiously motivated to promote an alternative to a debt based monetary system, as proven by the people behind http://www.positivemoney.org.uk/ prove.

Re: Money For Nothing : Wed Aug 29, 2012 5:52 pm  

Cookridge_Rhino wrote: If money is simply created by banks, as you seem to think, completely out of nothing, how is a run on a bank possible? If tomorrow i go to any bank in the UK with a £1000 deposit, and i wish to buy a £100k house, and ask for a 200% mortgage (i want to buy a nice car and do up the house etc), they would say no. Why? In your version of reality it costs them nothing to give me the mortgage, the money is created out of thin air. From their point of view absolute worst case scenario: the housing market crashes and the house becomes worthless, and i default on the very first repayment. They've still gained a free house and got paid £1000 for nothing. If in your world the worst case scenario for the bank is that they get £1000 for nothing, why in the real world wont they give me the mortgage? In your scenario the bank have loaned out £200,000 which the customer then spent into the economy by buying a house and £100,000 worth of consumer goods. The bank got £1000 and the deeds to a £100,000 house. However they have to cover this loan by holding extra reserves of Central Bank money, say 10% so £20,000. But what if nobody will loan the bank this money on the interbank lending markets? Sure they have a house worth (in theory) £100,000 but a house isn't a 'liquid' asset so they are now £19,000 short causing liquidity difficulties. News of this gets out and there is a run on the bank as people want 'their' money, causing a liquidity crisis. http://www.positivemoney.org.uk/2012/07 ... went-bust/

Cookridge_Rhino wrote: If money is simply created by banks, as you seem to think, completely out of nothing, how is a run on a bank possible? If tomorrow i go to any bank in the UK with a £1000 deposit, and i wish to buy a £100k house, and ask for a 200% mortgage (i want to buy a nice car and do up the house etc), they would say no. Why? In your version of reality it costs them nothing to give me the mortgage, the money is created out of thin air. From their point of view absolute worst case scenario: the housing market crashes and the house becomes worthless, and i default on the very first repayment. They've still gained a free house and got paid £1000 for nothing. If in your world the worst case scenario for the bank is that they get £1000 for nothing, why in the real world wont they give me the mortgage? In your scenario the bank have loaned out £200,000 which the customer then spent into the economy by buying a house and £100,000 worth of consumer goods. The bank got £1000 and the deeds to a £100,000 house. However they have to cover this loan by holding extra reserves of Central Bank money, say 10% so £20,000. But what if nobody will loan the bank this money on the interbank lending markets? Sure they have a house worth (in theory) £100,000 but a house isn't a 'liquid' asset so they are now £19,000 short causing liquidity difficulties. News of this gets out and there is a run on the bank as people want 'their' money, causing a liquidity crisis. http://www.positivemoney.org.uk/2012/07 ... went-bust/

Re: Money For Nothing : Wed Aug 29, 2012 6:04 pm  

SBR wrote: Accepting that banks create money out of nothing when they make a loan. What happens to the repayments on the loan? Now part of the repayment will be covering the interest and so clearly that is profit for the bank (just like mark-up in a shop). However I'm unclear as to what happens to the part of the repayment that reduces the outstanding amount of the loan. Is part of the money which the bank created then destroyed so all of the repayment profit for the bank? Or does the repayment money cancel out the bank created money in some way? When you repay a bank loan the bank destroys the money (credit), apart from the interest which the bank keeps as profit. The “sin” here is not that of any one person or company – it is the collective failure of our society to educate itself about the nature of the financial, economic and banking systems we have depended upon for our material needs. The money system we have acquiesced in having foisted upon us operates on a kind of alchemy, which allows private banking interests to generate what we rather ludicrously refer to as “our” money. Those who interpret the meaning of these events speak as though there was a fixed pool of money which belongs to the Irish people, inferring that what has happened is that certain people have “stolen” from “us”. This is nonsense. “Our” money system is owned and controlled by the banks. This is the way our leaders have decided things should be, and there has been no appreciable dissent. Privately-owned banks, operating all but indifferently to the public good, create and destroy money more or less at will. Consequently, all but a tiny percentage of our money system exists in a digital limbo inaccessible by the people. For every euro of money created, a corresponding debt is brought into being, and this is multiplied over time by the process of levying interest. Thus, our economy consists overwhelmingly of debt, at once spelling our salvation and our doom. http://www.irishtimes.com/newspaper/opi ... 84392.html

SBR wrote: Accepting that banks create money out of nothing when they make a loan. What happens to the repayments on the loan? Now part of the repayment will be covering the interest and so clearly that is profit for the bank (just like mark-up in a shop). However I'm unclear as to what happens to the part of the repayment that reduces the outstanding amount of the loan. Is part of the money which the bank created then destroyed so all of the repayment profit for the bank? Or does the repayment money cancel out the bank created money in some way? When you repay a bank loan the bank destroys the money (credit), apart from the interest which the bank keeps as profit. The “sin” here is not that of any one person or company – it is the collective failure of our society to educate itself about the nature of the financial, economic and banking systems we have depended upon for our material needs. The money system we have acquiesced in having foisted upon us operates on a kind of alchemy, which allows private banking interests to generate what we rather ludicrously refer to as “our” money. Those who interpret the meaning of these events speak as though there was a fixed pool of money which belongs to the Irish people, inferring that what has happened is that certain people have “stolen” from “us”. This is nonsense. “Our” money system is owned and controlled by the banks. This is the way our leaders have decided things should be, and there has been no appreciable dissent. Privately-owned banks, operating all but indifferently to the public good, create and destroy money more or less at will. Consequently, all but a tiny percentage of our money system exists in a digital limbo inaccessible by the people. For every euro of money created, a corresponding debt is brought into being, and this is multiplied over time by the process of levying interest. Thus, our economy consists overwhelmingly of debt, at once spelling our salvation and our doom. http://www.irishtimes.com/newspaper/opi ... 84392.html

Re: Money For Nothing : Wed Aug 29, 2012 6:36 pm  

DaveO wrote:

The interesting question is where does the money to pay the interest come from? Out of thin air?

This is the biggest flaw in the system. Nobody ever creates the interest needed. The only way that the global economic system as a whole can keep going is by continual debt expansion, creating new money to fund past debt plus interest payments.

Once you get to a stage where the borrower of last resort (The Government) can't take on more debt the system collapses, as we are going to see with the implosion of the Euro.

Re: Money For Nothing : Wed Aug 29, 2012 6:40 pm  

Charlie Sheen wrote:

Do the bank get chicks for free though?

Yes.

They get to buy their services with their big, tax payer funded, bonus payouts. So they do indeed get the chicks for free because you are paying for them instead.

Re: Money For Nothing : Wed Aug 29, 2012 6:44 pm  

Cookridge_Rhino wrote:

I agree with your explanation of fractional reserve banking but the OP doesnt, he (because he has misunderstood things he has read and heard) thinks that they need no money at all in their reserves in order to lend money, he thinks they literally lend as much money as they want because it all compeletely comes from nowhere.

Forget the fractional reserve system, thats from yesteryear.

Banks now just create money from nothing, then go into the interbank lending markets and loan the money needed to cover their reserve ratios. That's how Northern Rock was sunk, nobody would lend them the money.

Re: Money For Nothing : Wed Aug 29, 2012 6:54 pm  

LeighGionaire wrote:

Forget the fractional reserve system, thats from yesteryear.

Banks now just create money from nothing, then go into the interbank lending markets and loan the money needed to cover their reserve ratios. That's how Northern Rock was sunk, nobody would lend them the money.

They were borrowing money on the markets. That's just the same as me borrowing a fiver from you.

Re: Money For Nothing : Wed Aug 29, 2012 7:26 pm  

tb wrote:

Haven't we done the 'let's return to the 14th Century and pretend the Lombards never existed" to death now? Can we move on from "money for nothing" and discuss the more intriguing topic of chicks for free?

In my opinion understanding how money is created and destroyed is the number one political question.

Why do we let private banks control the money supply? Why do governments continue to borrow debt based money from private banks when they could create the money themselves?

Re: Money For Nothing : Wed Aug 29, 2012 7:34 pm  

Banking 101 http://www.positivemoney.org.uk/how-ban ... ce-sheets/ This is my understanding of how the banking system works at present. If anybody can point out any inaccuracies in the article I'd be interested to hear them.

Banking 101 http://www.positivemoney.org.uk/how-ban ... ce-sheets/ This is my understanding of how the banking system works at present. If anybody can point out any inaccuracies in the article I'd be interested to hear them.