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Banks create money, but it's less impressive than it sounds

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Re: Banks create money, but it's less impressive than it sounds

#101

Post by baobabKoodaa »

cryptica wrote: post #86

>> A bank loan is merely an exchange of 2 IOUs Wow. This is a flat out lie. Banks operate on a fractional reserve system and they are allowed to loan out more money than they have. It's not just about swapping an IOU between a depositor and a borrower. With the recent COVID-19 regulations, banks don't need any reserves at all anymore. The Fed had been constantly lowering the reserve requirement over the years, effect…

The "money" created by the bank in the process of loaning money _is_ an IOU, so all this stuff that you talked about does not invalidate the description that "taking a loan is an exchange of 2 IOUs". If you disagree with something in the article, please be more specific what you disagree with.

Re: Banks create money, but it's less impressive than it sounds

#102

Post by dragandj »

mehrdadn wrote: post #18

This is a fantastic page. I just have an issue with one of his points though: > That banks do not have any special powers in relation to money creation They most definitely do though: FDIC insured accounts have legal government backing—a random IOU from me can't achieve that, no matter how much anyone trusts me. Put another way, a bank deposit seems less like an "IOU" and more like a "WeOU"—"we (the bank or the gover…

I agree with you, but as a non-expert in the matter, I have to add that banks are heavily regulated in that regard and have to deposits certain reserves to central banks (depending on the country) for that privilege. It's not that they operate differently than LLCs while having the privilege of insurance. They pay a price for that privilege, and we can argue whether that price is too low or not.

Re: Banks create money, but it's less impressive than it sounds

#103

Post by cryptica »

baobabKoodaa wrote: post #21
mehrdadn wrote: post #18

This is a fantastic page. I just have an issue with one of his points though: > That banks do not have any special powers in relation to money creation They most definitely do though: FDIC insured accounts have legal government backing—a random IOU from me can't achieve that, no matter how much anyone trusts me. Put another way, a bank deposit seems less like an "IOU" and more like a "WeOU"—"we (the bank or the gover…

Hey, author here. Your criticism is correct. Deposit insurance is a fundamental difference between bank IOUs and non-bank IOUs. So it's incorrect for me to say that banks have _no_ special powers (still not even close to central bank's power though).

This article is misleading. Banks do ultimately create money. Even if you ignore the details and complexity of how this works, the empirical evidence is clear:

- How do you explain that the M2 money supply is always going up? Where is all that new money entering into the system? Government contracts funded by government bonds? If that was the case, government contractors would be getting very wealthy and everyone would be working for them (directly or indirectly)...

- How do you explain the recent, significant, almost instantaneous jump in stock prices of major tech companies after the Fed printed and injected trillions of new dollars into the economy? Did these corporations all suddenly score huge government contracts from the bonds which the government created? Seems more like investors and company insiders used loan money from banks to do stock buybacks or increase their positions.

- Under the model suggested by the article, how does one explain why there are so many millionaires are in the real estate industry? If you assume the opposite argument that banks are able to print money (directly or indirectly), the number of millionaires makes perfect sense since everyone buys houses using 'loans' from banks; so it's natural that all this free money from banks would constantly inflate real estate prices; each new generation of citizens would inflate the prices of the properties which were bought by the previous generation with increasingly larger loans from newly printed credit from their banks.

What is claimed by the article does not match the evidence, even the people have wised up to this scheme which is why Bitcoin and cryptocurrencies have been able to hold their value.

Re: Banks create money, but it's less impressive than it sounds

#104

Post by II2II »

After starting to read this article, I had several random thoughts:

* What makes this author's explanation credible?

* Does anyone actually understand how money works, or are people trying to rationalize what we already have?

* All that really matters (to me) is the value is relatively stable and it doesn't create a crazy imbalance of power.

* Money does an okay job maintaining a stable value for some stuff (e.g. food), but an incredibly lousy job for other stuff (e.g. land).

That got me to thinking about a game I was recently playing and frustration with it's two in-game currencies, neither of which have anything to do with external transactions (such as obtaining DLC). One of those currencies could fluctuate in value based upon supply and demand (actually, how much you were trying to sell). Now that leaves me wondering if the game developers discovered that it was impossible to balance the game with a single currency (i.e. avoid an imbalance of power through the fluctuating value of currency).

In other words, did art avoid emulating reality because the premise of reality is fundamentally flawed?

Re: Banks create money, but it's less impressive than it sounds

#105

Post by icebraining »

UmbraeImperator wrote: post #97

Would the same principle work for non national currency ? I am thinking specifically of Bitcoin. Say a bank would accept deposit and issue loan in Bitcoin. We apply the same example as in the article. Someone deposit 100BTC. Another person takes a loan of 10BTC and owns the bank 11BTC. (that would be much bigger value than $100, but the principle is the same) Would the total number of Bitcoin be higher than before th…

As the article said, deposits are just IOUs. You can definitively have IOUs denominated in BTC.

The number of Bitcoins in the ledger/blockchain would not increase, but if you asked everyone how many Bitcoins they owned and summed it all, it would have increased.

To use the standard terms, the hard limit on the number of BTC in the ledger/blockchain is M1. You can have an increase in M2/M3 without an increase in M1.

Re: Banks create money, but it's less impressive than it sounds

#106

Post by jacobush »

nly wrote: post #81

Fun fact: Bank of England bank notes, denominated in £ sterling, still have printed on them: "I promise to pay the bearer on demand the sum of pounds" Signed by the Chief Cashier of the BoE

The UK is like that, banks have their own notes, still.

Re: Banks create money, but it's less impressive than it sounds

#107

Post by danybittel »

But the bank hasn't made any money?! It just wants back "more" than it "gave". Am I missing something? The one who is forced to "create" the money is the one who has to pay back the 1$ extra in interests (which previously did not exist). But he is not allowed to create any! So he has to create anything of value and sell that for money, so he can pay back the money and the interest. But that just moves it to the next poor fellow.

Doesn't this create a feedback loop?

Re: Banks create money, but it's less impressive than it sounds

#108

Post by stanleydrew »

danybittel wrote: post #107

But the bank hasn't made any money?! It just wants back "more" than it "gave". Am I missing something? The one who is forced to "create" the money is the one who has to pay back the 1$ extra in interests (which previously did not exist). But he is not allowed to create any! So he has to create anything of value and sell that for money, so he can pay back the money and the interest. But that just moves it to the next…

Yes, I think. The feedback loop is the economy.

Re: Banks create money, but it's less impressive than it sounds

#109

Post by baobabKoodaa »

cryptica wrote: post #103
baobabKoodaa wrote: post #21

Earlier quoted context omitted.

Hey, author here. Your criticism is correct. Deposit insurance is a fundamental difference between bank IOUs and non-bank IOUs. So it's incorrect for me to say that banks have _no_ special powers (still not even close to central bank's power though).

This article is misleading. Banks do ultimately create money. Even if you ignore the details and complexity of how this works, the empirical evidence is clear: - How do you explain that the M2 money supply is always going up? Where is all that new money entering into the system? Government contracts funded by government bonds? If that was the case, government contractors would be getting very wealthy and everyone wou…

Yes, banks do create money. This is said in the article multiple times, if you would like to read it.

Re: Banks create money, but it's less impressive than it sounds

#110

Post by roenxi »

baobabKoodaa wrote: post #21
mehrdadn wrote: post #18

This is a fantastic page. I just have an issue with one of his points though: > That banks do not have any special powers in relation to money creation They most definitely do though: FDIC insured accounts have legal government backing—a random IOU from me can't achieve that, no matter how much anyone trusts me. Put another way, a bank deposit seems less like an "IOU" and more like a "WeOU"—"we (the bank or the gover…

Hey, author here. Your criticism is correct. Deposit insurance is a fundamental difference between bank IOUs and non-bank IOUs. So it's incorrect for me to say that banks have _no_ special powers (still not even close to central bank's power though).

How confident are you on that point? I don't have a reference on me right at this moment but I expect it is illegal for a non-bank entity to hand out IOUs at scale. People would be arrested.

I'm thinking of things like https://en.wikipedia.org/wiki/Liberty_dollar_(private_curren... which ended in FBI raids.

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