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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

#151

Post by dalbasal »

zajio1am wrote: post #133
dalbasal wrote: post #123

Earlier quoted context omitted.

>* Does anyone actually understand how money works, or are people trying to rationalize what we already have? I would say, no.. considering the divergence of expert opinions. Limited consensus have formed around high profile economists (eg Keynes, Friedman) but generally erodes as history throws up new examples that don't fit neatly into popular theories. Monetarism is still the working understanding behind most cent…

> I would say, no.. considering the divergence of expert opinions. I would disagree and think it needs more details. There is difference between just 'how money works' and 'how economy works'. The first question 'how money works' is mostly just insitutional and legal knowledge of existing processes of central and commercial banks. OTOH, 'how economy works' is empirical field of knowledge about complex emergent phenom…

Keyensianism and monetarism are essentially "how money works."

Microeconomics is "how the economy works," and while there are still divergent opinions, there's stability in that divergence. Ricardo is still foundational when it comes to trade, for example.

The premise of macroeconomics is that how money works is different to that. That started with keynes, and continues through keynesianism. Monetarism literally refers to "a theory of money."

The point is that it isn't mostly just institutional and legal knowledge of existing processes of central and commercial banks. Those things regulate and affect money, but how it works is macroeconomics.

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

#152

Post by andrewaylett »

FinanceAnon wrote: post #91

In the first example, is it possible to repay all the debt? The bank has $100 cash and $11 promised. Customers have $10 cash and $100 promised. Assuming the person with $100 withdraws the money and wants to share it with the other person to pay off his loan, they end up with $99, but they started with $100. If they started at $0 they would be at -$1. How is this resolved in a real banking system?

The customers started with $100 and the bank started with $0. By the end, the customers have between them paid the bank $1 for their services.

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

#154

Post by anticristi »

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 love the IOU vs WeOU differentiation. Banks need to have licenses and adhere to strict regulations, which are checked at least yearly by auditors. (Joke: Unless you are a German bank, in which case you get checked only once-a-decade.) That is what makes banks special: They have legal backing, but also legal responsibility.

Side note regarding non-bank IOU: I found the idea of having a payment card from my grocery store very appealing. If they run out-of-cash, they can repay me in food, which I'm pretty happy to take at any time. However, that is not how it works in 2020. The grocery entity and the banking entity need to be separated, and have different licenses.

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

#155

Post by baobabKoodaa »

aronpye wrote: post #112

The article doesn’t adequately cover the role of central banks in fractional reserve banking. Back in the days of the gold standard you used to be able to redeem a set weight of physical gold from the central bank for a dollar / pound of paper cash or minted coin. This conversion ratio was set by the central bank and acted as a final brake on inflation. When the gold standard was abolished and the dollar and pound be…

Excellent comments. I have now made substantial changes to the article. If you would like to review the diffs, they are here: https://github.com/baobabKoodaa/blog/commit/c2f7fef53d621acc...

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

#156

Post by baobabKoodaa »

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).

I have now updated the article substantially. Deposit insurance is now covered in more depth. Diffs: https://github.com/baobabKoodaa/blog/commit/c2f7fef53d621acc...

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

#157

Post by baobabKoodaa »

irln wrote: post #138
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…

> Deposit insurance is a fundamental difference between bank IOUs and non-bank IOUs. Deposit insurance is a fundamental difference but it's not the main difference. Individuals and most non-banks don't have access to Federal Reserve accounts and therefore access to reserves. The main distinction between a bank and a non-bank is the ability to create IOUs ultimately backed by reserves (whether they have sufficient amo…

This is not entirely accurate. Suppose a fraudulent bank decided to credit my account with a trillion dollars. The federal reserve would not honor this IOU with actual dollars. This is in stark contrast to federal reserve's ability to create a trillion dollars. They could create an actual trillion dollars and give it to a corrupt politician. A regular bank does not possess this ability.

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

#158

Post by jacobush »

TheBobinator wrote: post #132
aronpye wrote: post #112

The article doesn’t adequately cover the role of central banks in fractional reserve banking. Back in the days of the gold standard you used to be able to redeem a set weight of physical gold from the central bank for a dollar / pound of paper cash or minted coin. This conversion ratio was set by the central bank and acted as a final brake on inflation. When the gold standard was abolished and the dollar and pound be…

Loaning money drives inflation; when a loan check is created, it spends just like cash, except the banks, behind the scene's, trade the loan checks so everyone has enough cash on hand to appear solvent. Inflation drives interest rates; interest consists of the rate of inflation plus risk and margin, no bank is going to make a loan at less the rate of inflation. This self-regultes the rate of loans; the first people t…

What empirical evidence is supposed to sway me in favour of genocide?

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

#159

Post by baobabKoodaa »

H8crilA wrote: post #87

> For example, when you make a bank transfer to another bank, the bank can not simply send over money created by itself. Uhh, yes it can. That's what LIBOR is (supposed) to represent - short term unsecured lending between major banks. I.e. they can agree that the sending bank is now slightly more indebted to the receiving bank. It depends on what the involved banks agree on. And because such things are based on trust…

Thanks for this feedback. I have now updated the article substantially. The new version covers the possibility of banks lending money to each other as opposed to settling a transaction with cash/reserve deposits. Diffs: https://github.com/baobabKoodaa/blog/commit/c2f7fef53d621acc...

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

#160

Post by z3ncyberpunk »

TheBobinator wrote: post #132
aronpye wrote: post #112

The article doesn’t adequately cover the role of central banks in fractional reserve banking. Back in the days of the gold standard you used to be able to redeem a set weight of physical gold from the central bank for a dollar / pound of paper cash or minted coin. This conversion ratio was set by the central bank and acted as a final brake on inflation. When the gold standard was abolished and the dollar and pound be…

Loaning money drives inflation; when a loan check is created, it spends just like cash, except the banks, behind the scene's, trade the loan checks so everyone has enough cash on hand to appear solvent. Inflation drives interest rates; interest consists of the rate of inflation plus risk and margin, no bank is going to make a loan at less the rate of inflation. This self-regultes the rate of loans; the first people t…

The entirety of your comment shows what's wrong with fractional reserve banking and centralized banking. It's a system predicted on debt which can never be paid back.
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