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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

#171

Post by baobabKoodaa »

nstj wrote: post #139
baobabKoodaa wrote: post #127

Earlier quoted context omitted.

It's not black and white like some IOUs are accepted everywhere and some IOUs are accepted nowhere. For example, USD is not accepted as payment in Finland, where I live. In the article I gave a concrete example of non-bank IOUs which were effectively money. If you have an argument why the Full Tilt Poker IOUs should not be considered money, let me hear it.

Full Tilt Poker didn't operate like a bank from what you described as they "had slowly siphoned off almost all player funds over the course of multiple years, leaving only a small fraction in reserve". In this case they were like a _Ponzi Scheme_ and not like a fractional reserve bank as they had _no assets_ to redeem the claims of their depositors with. Pokerstars (from what you've described) was operating in a mann…

Pokerstars was not operating like a fractional reserve bank, because it had segregated player funds to separate bank accounts. As in, it didn't have a "fraction" of reserves for the money players saw in their accounts, it had "full" reserves. It didn't have to go out and sell illiquid assets in order to pay players. It already had the money at hand.

If you want to characterize Full Tilt Poker's operation as a ponzi scheme, I have no problem with that. Full Tilt Poker was operating as a fractional reserve bank, and in addition to this it was siphoning assets of the bank to its owners.

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

#172

Post by PeterStuer »

Alice is a customer of ABank Bob is a customer of BBank.

Alice asks ABank for a $100 loan at 10% interest to buy some fidgets from Bob Bob asks BBank a $100 at 10% interest to buy some doodads from Alice

ABank creates a $100 credit line for Alice, and creates an asset of $110 future revenue payments. BBank creates a $100 credit line for Bob, and creates an asset of $110 future revenue payments.

Bob and Alice make their deals each paying with their respective debit cards.

ABank and BBank settle their transactions with a net 0 transfer.

Alice and Bob both repay $100 to their outstanding loan.

Both ABank and BBank now own $10 in future revenue from Alice and Bob respectively. You can argue that 'technically' ABank and BBank didn't 'create' the money, they merely created the legally backed first row claim to that money that will be created.

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

#173

Post by bproven »

FinanceAnon wrote: post #95
justinzollars wrote: post #74

I recommend reading "The creature from Jekyll Island". This book opened my eyes up to the question "what is money?" and it's especially relevant today, given we are living through the largest wealth transfer in human history. But it also talks about how smaller banks work, and this notion of IOUs, credit and loans.

From wikipedia, about the author: 'He is an HIV/AIDS denialist, supports the 9/11 Truth movement, and supports a specific John F. Kennedy assassination conspiracy theory.[2] He also believes that the Biblical Noah's Ark is located at the Durupınar site in Turkey.[6]'. I would recommend learning from different sources.

I agree. And the book does off into crazy land about the 1/2 through to the end of the book.

BUT I think the first part is actually a pretty good approachable explanation of the Federal Reserve and how our money works.

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

#174

Post by zimablue »

There's another paper by Richard W that I happened to read yesterday which seems to contradict this article and is not refuted or addressed in it, basically that a combination of accouting practices and "client money rules" distinguish bank loans from "random IOUs", basically anyone can issue an IOU but anyone other than a bank has to draw down their accounting assets when they disburse it, and undisbursed IOUs are not spendable.

https://www.sciencedirect.com/science/article/pii/S105752191...

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

#175

Post by zimablue »

baobabKoodaa wrote: post #109
cryptica wrote: post #103

Earlier quoted context omitted.

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.

The key question or claim is not whether banks create money but whether the way in which they are able to do it is unique.

"creating money" is ambiguous to be nearly meaningless, "creating money in a way that noone else is able to" is a lot less ambiguous

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

#176

Post by amgreg »

zimablue wrote: post #174

There's another paper by Richard W that I happened to read yesterday which seems to contradict this article and is not refuted or addressed in it, basically that a combination of accouting practices and "client money rules" distinguish bank loans from "random IOUs", basically anyone can issue an IOU but anyone other than a bank has to draw down their accounting assets when they disburse it, and undisbursed IOUs are n…

I think what the author would take issue with is this notion of “has to.” His point is that non-bank corporations can empirically create money (ie people will treat the IOUs as money), even if they may not be legally permitted to do so.

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

#177

Post by zimablue »

amgreg wrote: post #176
zimablue wrote: post #174

There's another paper by Richard W that I happened to read yesterday which seems to contradict this article and is not refuted or addressed in it, basically that a combination of accouting practices and "client money rules" distinguish bank loans from "random IOUs", basically anyone can issue an IOU but anyone other than a bank has to draw down their accounting assets when they disburse it, and undisbursed IOUs are n…

I think what the author would take issue with is this notion of “has to.” His point is that non-bank corporations can empirically create money (ie people will treat the IOUs as money), even if they may not be legally permitted to do so.

I think it's splitting a very meaningless hair in a way that's totally misleading to say that "anyone can create money", when you mean "anyone can theoretically create money, they'll just land in jail fairly quickly"

It's like saying that nation-states don't have a monopoly of force, because I can shoot my neighbour, or that I support abortion but I think you should be jailed afterwards.

Only banks can create money without getting locked up in jail.

That's the important point, and this article adds or takes nothing, other than a very weird dodge with the justification that somehow legality isn't a primary consideration.

It's as interesting as saying you don't have to pay your taxes, (small print: because you can choose to go to jail instead).

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

#178

Post by zimablue »

mgraczyk wrote: post #6
marcell wrote: post #5

> The main argument presented here is that banks do not have central bank-like special powers in relation to money creation; the process in which banks create money is entirely pedestrian. I think this is wrong in a subtle way. Regular banks have a reserve requirement that limits their ability to create money. They must hold a certain number of federal reserve notes to meet the reserve requirement. The Federal Reserv…

Reserve requirements haven't mattered in US banks for a long time. One way to think about it is that reserve requirements constrain bank behavior, but the optimal strategy for banks would be the same regardless of whether that requirement were removed. The requirement was removed in the US in March 2020 but has been a formality for most banks for a long time. https://www.federalreserve.gov/monetarypolicy/reservereq.h…

Can you please explain this in further detail or provide a link?

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

#179

Post by godelzilla »

>One might argue that the regulatory environment monopolizes money creation to banks, and that creating money as a non-bank is illegal. This might be true, but it does not prevent non-banks from creating money. Just like criminalizing murder does not prevent people from murdering each other. It would be silly to claim that something does not happen just because it is illegal.

One might argue that states can create wars, execute people, etc., and that killing people as a non-state is illegal. This might be true, but it does not prevent non-states from killing people. It would be silly to claim that something does not happen just because it is illegal. :/

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

#180

Post by zimablue »

eru wrote: post #54
baobabKoodaa wrote: post #11

Earlier quoted context omitted.

We could quibble about the definition of "special power" all day. Sure, a bank is in a better position to create money than a poker site. And a poker site is in a better position than an individual person. But these are not fundamental differences, these are differences of degree. Fundamental difference is having a literal money printer, versus not having one (central bank's ability vs regular bank). When you issue I…

Well, legal barriers aside, Amazon could print their own currency and be in the same position as the Fed. Though to make it absolutely the same position, Amazon's currency should not be tied to the dollar but freely floating. Then there can be no run on Amazon's currency, just like there can be no run on the dollar. However, of course, both Amazon's currency and the dollar can lose in value compared to goods and serv…

"legal barriers aside" is insane, legal barriers aside I'm off to rob a bank. There's only really two or three things that could possibly make banks different: the law, de facto capital requirements to enter the market and hidden knowledge, and you can normally buy hidden knowledge so the thing distinguishing banks from anyone else is either the law or money, and it's mostly the law.
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