41–50 of 68 posts
If this genre appeals to you, the Bits About Money newsletter ( https://bam.kalzumeus.com/archive/ ) has a lot more content along these general "how finance really works" themes. The article about mortgages, in particular, is great.
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https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years perhaps? Happy https://en.wikipedia.org/wiki/Anzac_Day ... miss the biscuits!
It couldn't have been Graeber's screed because OP read it before 2008 and it gave him a mental model of how the financial system unravelled.
Edit: Apologies for being slightly off topic here - this was meant more as a response to a comment elsewhere on money creation. I've been keenly interested in the subject of banks, debt, and money creation ever since I picked up a book on the subject of debt around 2006. I really appreciated having a (very faulty but nonetheless useful) mental model to apply when trying to make sense of subsequent events. I sometimes…
So what book was it?
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Simple, but completely wrong. The bank never loans your money. When it wants to originate a loan it creates new deposits from nothing.
If banks could create money out of nothing, then they could not be damaged by a bank run. They would just create enough money to satisfy the run. The reality is that they can be damaged (or bankrupted) by a bank run, because their books do need to balance. That is why the U.S. created FDIC insurance (which is funded by the banks themselves).
The reason bank run collapses are a thing is that the deposits aren't just sitting there as cash in the vault. Banks invest the deposits and those can't always be liquidated quickly and efficiently in case of a bank run.
If the bank doesn't have enough collateral to borrow the needed cash, the bank is forced to do firesales which is not the best business strategy. Nobody will lend you money when you're selling off your property at a huge discount.
Edit: Apologies for being slightly off topic here - this was meant more as a response to a comment elsewhere on money creation. I've been keenly interested in the subject of banks, debt, and money creation ever since I picked up a book on the subject of debt around 2006. I really appreciated having a (very faulty but nonetheless useful) mental model to apply when trying to make sense of subsequent events. I sometimes…
https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years perhaps? Happy https://en.wikipedia.org/wiki/Anzac_Day ... miss the biscuits!
It wasn't a book that I sought out. I just happened to be traveling at the time and was asked to return it to it's owner, so read it on the plane. I can't remember enough of the specific substance of the book to make a definitive recommendation but I can say that I remember it being very engrossing and will always appreciate that it broadened my interest in economics at the time (coincidentally I had just finished my studies in economics that year).
Edit: Apologies for being slightly off topic here - this was meant more as a response to a comment elsewhere on money creation. I've been keenly interested in the subject of banks, debt, and money creation ever since I picked up a book on the subject of debt around 2006. I really appreciated having a (very faulty but nonetheless useful) mental model to apply when trying to make sense of subsequent events. I sometimes…
I have no idea who you are but the fact you're interested in debt and in NZ makes me wonder if you'd be interested in a project we're working on https://cashless.social
The simplest explanation: - You invest in the bank - The bank loans your money to someone else at high interest rate - The bank gets paid, keeps most of the profit and uses a small part of it for your investment.
Why post something that was explained as incorrect by the Bank of England in 2014?[0] Where did you pick this misconception up from? [0]: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
I can "create money" too, out of thin air. I'll create a line of credit for you. $10,000. Boom, you have money to spend. I made it out of nothing. You have an account with me for $10,000. Problems arise when you actually go to spend it. Do I have enough assets so I can in fact send the money to the seller of the tractor you just purchased? It just became more concrete.
The idea banks make money out of thin air is a stupid idea, it sounds clever but does nothing except muddy the waters. Nobody used to say the local grocer was "creating money out of thin air" when they created a line of credit. In both cases they have enabled more economic activity - and "creating money" as defined by big brains in economic departments at universities is just a fancy, abstract way of saying "enabled more economic activity by creating credit".
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If banks could create money out of nothing, then they could not be damaged by a bank run. They would just create enough money to satisfy the run. The reality is that they can be damaged (or bankrupted) by a bank run, because their books do need to balance. That is why the U.S. created FDIC insurance (which is funded by the banks themselves).
These are unrelated things. The reason bank run collapses are a thing is that the deposits aren't just sitting there as cash in the vault. Banks invest the deposits and those can't always be liquidated quickly and efficiently in case of a bank run. If the bank doesn't have enough collateral to borrow the needed cash, the bank is forced to do firesales which is not the best business strategy. Nobody will lend you mone…
Just go look at the balance sheet of a real bank. You'll see it all balances very nicely - there are assets (mostly loans to businesses and consumers), liabilities (mostly deposits) and shareholders equity (mostly money shareholders put up). Here is one to look at:
https://www.sec.gov/ix?doc=/Archives/edgar/data/72971/000007...
All those 100's of billions of loans on the books are funded.
Money comes in, money goes out, nothing much has changed in 1000s of years.
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This is less of a problem with the way that the monetary system operates and more about policy choices made by central banks and politicians after the 2008 financial crisis. Debt is a promise to return something if value tomorrow for something of value today. Too many promises have been made than will ever be able to be repaid and promises are going to be broken. Regulators and politicians have three choices on how t…
It's a good comment, but you left off one important detail on option 3. When choosing the inflation route, there are two ways to inflate the economy by "providing" more dollars. One option is to provide more money to people/entities that primarily purchase investments/assers. The revenue stream of these investments will roughly remain the same, but their cost will go up permanently. Effecrively increasing "P/E ratios…
If this were not the case and the Federal Reserve were to lose money and be need to be bailed out the Federal Reserve would be making fiscal policy which is reserved to the US Congress by the constitution.
In other words the Federal Reserve would be able to bail out Ford Motors investors (if it wanted to) by simply buying unlimited amounts of Ford Motors bonds at below market rates. This would tend to piss off Congress who rightly believes that the Constitution grants them that authority.
In some cases Congress has granted the Federal Reserve some authority to purchase other assets such as during the 2008 financial crisis. I’m that case a specific amount of money was allocated by Congress. The Federal Reserve ended up leveraging up the allocated funds which ended up working out for the Taxpayer but didn’t make some in Congress happy.
The net-net of that rambling is that the Federal Reserve is fairly limited in what it can buy so it has very limited control over where they money it creates goes. It can flow into assets like stocks or real estate or into consumer loans to purchase groceries if there are people willing and able to assume more debt and banks able to lend it.
Congress and the Federal Reserve working together have more options. Congress can allocate $1 trillion dollars to fund a green energy program and then the Federal Reserve can buy all of the bonds necessary for the Treasury to fund it. The Treasury pays interest on those bonds and the Federal Reserve gives it back to Congress. As long as the Federal Reserve continues to roll the bonds it is essentially “free money”.
Of course nothing is ever really free as this free money transfers purchasing power from people holding cash as they are diluted. This is essentially what happened during covid.
Long term the bill still has to be paid either through taxes or increased inflation (like we’re seeing now) both with consequences for the economy.
If Congress wanted to provide more tools to the Federal Reserve it could provide them with tools to funnel money directly to households. For example creating an “America Saves” program where employers would be required to fund an employee savings account each year invested in US Treasuries which employees could borrow against and interest paid accumulated to the employee.
The Federal Reserve could create money by purchasing Treasuries from these accounts when consumers took out loans and remove money by increasing interest rates and limiting the percentage of assets that could be borrowed against.
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So basically all commercial banks are free to issue unlimited loans (and create unlimited new dollars)?
Basically, yes. There are “capital” requirements, but as far as I can tell that’s basically just laundering their loan business by trading equity with peer banks, which are of course largely based on loan performance.