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Money creation in the modern economy (2014) [pdf]

bankofengland.co.uk

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Re: Money creation in the modern economy (2014) [pdf]

#11

Post by SkyMarshal »

I think Richard Werner's empirical research on how banks create money is probably better than anything put out by the banking system itself, including the central banks.

https://www.researchgate.net/publication/265909749_Can_Banks...

https://www.researchgate.net/publication/283907413_Do_banks_...

His work made realize that not even the banking system fully understands the banking system.

(Werner is the economist that coined the term Quantitative Easing, originally created to describe Japanese post-WWII economic re-development monetary policy, research that later informed the US Fed's response to the GFC, among other things)

Re: Money creation in the modern economy (2014) [pdf]

#12

Post by [deleted] »

stephen_g wrote: post #6
nabla9 wrote: post #2

This is outdated. Maybe Bank of England still operates like this? Major central banks like US Fed, European ECB or Bank of Japan don't generate money using fractional reserve banking anymore. They use open market operations or quantitative easing instead. In other words, they buy debt, like treasuries with money.

One implication of what the article is talking about, in fact, is that fractional reserve banking isn’t really a thing, and has only ever been an inaccurate model for how banks really work. A large proportion of money in modern economies is generated (along with private debt) in the private banking system. It is true that central banks can also create money (and in fact can do it without creating debt, unlike private…

[deleted]

Re: Money creation in the modern economy (2014) [pdf]

#13

Post by nabla9 »

kccqzy wrote: post #8
nabla9 wrote: post #2

This is outdated. Maybe Bank of England still operates like this? Major central banks like US Fed, European ECB or Bank of Japan don't generate money using fractional reserve banking anymore. They use open market operations or quantitative easing instead. In other words, they buy debt, like treasuries with money.

The article doesn't talk about fractional reserve. It talks about commercial banks creating money by extending loans. It also talks about QE as another way of creating money by the central bank, when commercials banks aren't creating enough money.

That's not what quantitative easing is.

Central banks are passing private banks in their money creation.

Re: Money creation in the modern economy (2014) [pdf]

#14

Post by mandelbrotwurst »

stephen_g wrote: post #7
mandelbrotwurst wrote: post #5

Earlier quoted context omitted.

The Fed actually completely eliminated the reserve requirement in March of last year (1). Unsurprisingly, this hasn't gotten a lot of attention from the corporate media. 1 - https://www.federalreserve.gov/monetarypolicy/reservereq.htm

Lots of countries have no reserve requirement. It actually doesn’t change much, just the asset mix banks hold. How much a bank can lend is basically entirely determined by the amount of paid-up capital, not reserves anyway. The maximum ratios are fairly strictly regulated (e.g. Basel rules).

So, I'd been interpreting this change as meaning that they're no longer required to carry some minimum amount of cash.

I would be more confident in banks if they were required to carry some minimum fraction of their balances in cash in order to guarantee availability of funds.

That said, I'm re-reading the page that I linked a bit more closely and realizing that it doesn't just say "reserve requirements must be satisfied by holding vault cash" , it says "reserve requirements must be satisfied by holding vault cash and, if vault cash is insufficient, by maintaining a balance in an account at a Federal Reserve Bank".

It's not clear to me whether that "balance" at a Fed bank must be in cash, but even if it is, I'm realizing that the requirement I was hoping existed may not have existed even prior to this change.

TL;DR - Requirement for strong, local, cash reserves would be better than weaker requirements is better than no requirements. I'm not sure how close to the good end of that spectrum we've ever been, but where we are now certainly doesn't seem too good.

Note: Please do explain if there is some nuance that I'm missing here

Re: Money creation in the modern economy (2014) [pdf]

#15

Post by whimsicalism »

SkyMarshal wrote: post #11

I think Richard Werner's empirical research on how banks create money is probably better than anything put out by the banking system itself, including the central banks. https://www.researchgate.net/publication/265909749_Can_Banks... https://www.researchgate.net/publication/283907413_Do_banks_... His work made realize that not even the banking system fully understands the banking system. (Werner is the economist that…

I think we give far too much credence to term coiners.

I'm unsurprised to see him recommended here, as HN seems to veer heavily towards inflation trutherism, anti-central banking, and libertarianism, even if most commentators probably wouldn't share Werner's antivaxx beliefs.

Re: Money creation in the modern economy (2014) [pdf]

#16

Post by andrepd »

rahimnathwani wrote: post #4

Some of the content is in this short video: https://www.youtube.com/watch?v=CvRAqR2pAgw Money is created by both the central bank and retail banks. When the Bank of England buys an asset, it pays in newly-created pounds. These pounds are an obligation of the central bank, i.e. a debt owed by the bank. So these pounds are 'central bank money'. When a commercial or retail bank gives you a loan, you have two accounts at…

So this begs the question: how come private banks can do this (create money + a matching liability, that is, with no interest), but private individuals can't? Why can't I, if I want to buy a car, not simply give myself 20,000€ cash and register a 20,000€ liability, which I will pay back in due course?

The bank creates zero-cost virtual cash and then earns interest by loaning it as if it was real! This is already questionable ethically, but the fact that they can do it but I can't, I have to pay the tithe to them... That's just wrong.

Correct me if I'm missing something :)

Re: Money creation in the modern economy (2014) [pdf]

#17

Post by rich_sasha »

rahimnathwani wrote: post #4

Some of the content is in this short video: https://www.youtube.com/watch?v=CvRAqR2pAgw Money is created by both the central bank and retail banks. When the Bank of England buys an asset, it pays in newly-created pounds. These pounds are an obligation of the central bank, i.e. a debt owed by the bank. So these pounds are 'central bank money'. When a commercial or retail bank gives you a loan, you have two accounts at…

Since it’s about Bank of England and money creation, this can’t be missed: https://en.wikipedia.org/wiki/Bank_of_England_%C2%A3100,000,...

Some banks in the UK can issue their own banknotes, but these must be backed up in cash with the BoE. And it’s awkward dealing with millions in used fivers. Hence the 100 million notes and friends.

You’d think other solutions exist in the 21st century but :shrug:

Re: Money creation in the modern economy (2014) [pdf]

#18

Post by whimsicalism »

andrepd wrote: post #16
rahimnathwani wrote: post #4

Some of the content is in this short video: https://www.youtube.com/watch?v=CvRAqR2pAgw Money is created by both the central bank and retail banks. When the Bank of England buys an asset, it pays in newly-created pounds. These pounds are an obligation of the central bank, i.e. a debt owed by the bank. So these pounds are 'central bank money'. When a commercial or retail bank gives you a loan, you have two accounts at…

So this begs the question: how come private banks can do this (create money + a matching liability, that is, with no interest), but private individuals can't? Why can't I, if I want to buy a car, not simply give myself 20,000€ cash and register a 20,000€ liability, which I will pay back in due course? The bank creates zero-cost virtual cash and then earns interest by loaning it as if it was real! This is already ques…

Yes, there are plenty of powers that we limit to a subset of chartered organizations. If you want to have a share in this power, you can buy ownership in a bank - a share of JP Morgan is about $160.

I disagree that it is intrinsically wrong that some people can do something that you cannot do.

Re: Money creation in the modern economy (2014) [pdf]

#19

Post by dang »

Some past threads:

Money Creation in the Modern Economy - https://news.ycombinator.com/item?id=25885849 - Jan 2021 (1 comment)

Money Creation in the modern economy [pdf] - https://news.ycombinator.com/item?id=22923785 - April 2020 (1 comment)

Money Creation in the Modern Economy - https://news.ycombinator.com/item?id=20875899 - Sept 2019 (1 comment)

Money creation in the modern economy (2014) [pdf] - https://news.ycombinator.com/item?id=16604251 - March 2018 (123 comments)

Money Creation in the Modern Economy (2014) [pdf] - https://news.ycombinator.com/item?id=11374907 - March 2016 (97 comments)

Re: Money creation in the modern economy (2014) [pdf]

#20

Post by rich_sasha »

andrepd wrote: post #16
rahimnathwani wrote: post #4

Some of the content is in this short video: https://www.youtube.com/watch?v=CvRAqR2pAgw Money is created by both the central bank and retail banks. When the Bank of England buys an asset, it pays in newly-created pounds. These pounds are an obligation of the central bank, i.e. a debt owed by the bank. So these pounds are 'central bank money'. When a commercial or retail bank gives you a loan, you have two accounts at…

So this begs the question: how come private banks can do this (create money + a matching liability, that is, with no interest), but private individuals can't? Why can't I, if I want to buy a car, not simply give myself 20,000€ cash and register a 20,000€ liability, which I will pay back in due course? The bank creates zero-cost virtual cash and then earns interest by loaning it as if it was real! This is already ques…

Banks are regulated through the nose (in most places at most times) to make sure they don’t mess it up. The money creation is a carefully choreographed juggling act where balls can’t fall on the ground.

The extra money created is effectively money someone doesn’t need right now (deposit) that can be temporarily used, and returned eventually, by someone else. When it works, it works very well, but when it doesn’t, banks go bankrupt and someone generally loses money (deposits are insured but then the insurance scheme loses).

It’s not a bad thing overall, our capitalist world would be impossible without it, but this money creation craziness is a necessary component.

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