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A simple explanation of how money moves around the banking system (2013)

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Re: A simple explanation of how money moves around the banking system (2013)

#31

Post by slv77 »

JumpCrisscross wrote: post #27
slv77 wrote: post #26

Earlier quoted context omitted.

Banks cover their funding needs through the interbank market that provides the overnight loans required to balance their books at the end of the day. Banks will raise deposit rates to attract deposits if they constantly find that they need to go to the interbank market to balance their books because it is cheaper. The discount window is used when the bank is unable to access the interbank market which is usually an i…

> will raise deposit rates to attract deposits if they constantly find that they need to go to the interbank market to balance their books because it is cheaper This is true for the largest banks. For many smaller banks, interbank lending is cheaper than deposits. Particularly if those deposits must come from new customers. Your model is roughly correct over long, strategic time periods. But in tactical timeframes, d…

Yes, if a small bank is in an geographic area experiencing high loan demand the interbank market may be a cheaper source of funds. If the bank also has inefficient infrastructure to service retail customers they may find internal deposits more expensive then the interbank market.

Regulators however are less than thrilled if these imbalances persist long term because banks that rely heavily on hot funds tend to experience runs.

Re: A simple explanation of how money moves around the banking system (2013)

#32

Post by contingencies »

tmnvix wrote: post #21

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!

Re: A simple explanation of how money moves around the banking system (2013)

#33

Post by slv77 »

cryptica wrote: post #29
JumpCrisscross wrote: post #25

Earlier quoted context omitted.

> it helps to improve the aggregate well being of those who participate in the fake economy at the expense of those who participate in the real economy This is financial Luddism. Just because something is unfamiliar doesn’t mean it’s bad. Private money creation is necessary for a growing, dynamic economic condition. (The problem is simpler in a static or simply cyclic economy.) Growth is heterogenous. To preserve pri…

The way the banking system works now, it mostly creates money where it's not needed. That's why there is such high inequality which keeps growing. New capital is just deployed to chase old capital. It creates anti-competitive moats which prevent money from going where it's really needed and where it could be used most efficiently. It makes bureaucracy viable and economic efficiency non-viable. The vast majority of pe…

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 to deal with broken promises. The first is through bankruptcy courts where a judge allocates losses according to the law. The second is through taxes where politicians take money from one group to honor promises made to another. The third is to drive inflation and break promises by returning dollars that have less value then promised.

This choice that central banks made was the latter by trying to drive up inflation. The side effect of the policy choice however it has tended to favor speculators and the well connected versus other policy paths.

I’m not entirely sure those other paths would have been better. Broken promises tend to be what drives revolutions and the best path is to not make promises that you can’t keep.

Re: A simple explanation of how money moves around the banking system (2013)

#34

Post by utunga »

tmnvix wrote: post #21

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

Re: A simple explanation of how money moves around the banking system (2013)

#35

Post by epistasis »

metadat wrote: post #17
User23 wrote: post #3

Earlier quoted context omitted.

Simple, but completely wrong. The bank never loans your money. When it wants to originate a loan it creates new deposits from nothing.

The reality is actually significantly worse than what parent comment posits. Money gets created out of thin air frequently in banking, it's quite the scheme / sham. Learning more about how the financial system works is usually upsetting, and in surprising ways. The entire business has a certain ring and scumbag scent to it.

I don't think that's a fair interpretation of money or of what banks are doing.

Imagine that a business has $1M/month of revenue, mostly through a quote and purchase order system where the terms are typically net 30. Then imagine they turn to net 60 or net 15, either increasing or decreasing their cashfrow for a single month. The terms of the invoicing are debt creation. And all debt creation is money creation.

Thinking of money like swapping gold really limits the reality of how money has always functioned in our society. Money and debt are social relations, bonds between people, bonds between individuals and a larger collective. It's a human creation, that's been created again and again over time, and the idea of a money-less society is pretty much impossible to come up with.

We must think of money not as an external thing, outside of humanity, but as an essential part of what humans do and create.

Re: A simple explanation of how money moves around the banking system (2013)

#36

Post by drexlspivey »

mgraczyk wrote: post #7
NovemberWhiskey wrote: post #6

Earlier quoted context omitted.

That is not how fractional reserve banking works, people - or, to me at least, it gives a wrong impression. Say we are in a fractional reserve banking system, where the required reserve is 10%. I deposit $1M at the bank. My bank can now lend $900K to you. You can now deposit $900K back at your bank. Your bank can now lend $810K to someone else, and so on and so on. The geometric sum of this is "1/reserve_ratio"; so i…

This used to be true, but hasn't mattered for a long time. The reserve requirement is zero for most (all?) US banks. https://www.federalreserve.gov/monetarypolicy/reservereq.htm

So basically all commercial banks are free to issue unlimited loans (and create unlimited new dollars)?

Re: A simple explanation of how money moves around the banking system (2013)

#37

Post by User23 »

drexlspivey wrote: post #36
mgraczyk wrote: post #7

Earlier quoted context omitted.

This used to be true, but hasn't mattered for a long time. The reserve requirement is zero for most (all?) US banks. https://www.federalreserve.gov/monetarypolicy/reservereq.htm

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.

Re: A simple explanation of how money moves around the banking system (2013)

#38

Post by BoiledCabbage »

slv77 wrote: post #33
cryptica wrote: post #29

Earlier quoted context omitted.

The way the banking system works now, it mostly creates money where it's not needed. That's why there is such high inequality which keeps growing. New capital is just deployed to chase old capital. It creates anti-competitive moats which prevent money from going where it's really needed and where it could be used most efficiently. It makes bureaucracy viable and economic efficiency non-viable. The vast majority of pe…

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" or equivalent of all assets. This increases inequality in society.

The second option is to provide money to people that primarily purchase goods/services. This increases the demand and thus the price on goods and services, the increased demand pushes up demand for labor, which increases wages and benefits that group. The increased prices of goods/services also increases the value of assets/investments that depend on those revenue streets - but due to the nominal increases in revenues there is no "bubble" increase in "P/E ratios" and equivalent metrics.

2008 did mostly the former and essentially none of the latter.

Covid did a mixture of both, although it coincided with severe supply shortages and oil shocks making its impact unseparable for measuring and not controllable due to the external factors.

Re: A simple explanation of how money moves around the banking system (2013)

#39

Post by snowwrestler »

User23 wrote: post #3
marcodiego wrote: post #2

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.

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).

Re: A simple explanation of how money moves around the banking system (2013)

#40

Post by unmole »

contingencies wrote: post #32
tmnvix wrote: post #21

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 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.
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