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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)

#61

Post by danielmarkbruce »

neilwilson wrote: post #60
danielmarkbruce wrote: post #59

Earlier quoted context omitted.

How do you know if I have enough assets? I'm just some random finance source. Sorry, this isn't how it works. To transfer to another bank the banks will adjust central bank balances. Look up how ACH works behind the scenes, or the equivalent in other jurisdictions. As for "centuries", again, no. Clearing houses - look them up. In general - if something sounds magical in finance, you have to dig deeper. There is no ma…

"How do you know if I have enough assets? I'm just some random finance source." You have enough assets because you've just created a loan of precisely that amount secured against physical collateral. That's the asset. Therefore I can take over the deposit you have created knowing I can claim against that collateral in the final analysis. And therefore I can create a deposit for my customer of the same amount. That's…

Who said anything about physical collateral?

I can make an unsecured line of credit available to you, and until you try to draw on it, you don't know if I have the ability to fund it. Same problem if the loan is supposed to be secured by your car. There is no magic you can come up with that changes that. Now if you are smart, you'll have done some diligence on me, and I might have a credit rating you can look up. Or someone in your org might be tasked with analyzing the credit and liquidity risks of all their counterparts. If it worked like magic, no one would bother doing this... but they do.

Correspondent banking makes up a tiny percentage of bank to bank settlements. "merely collateral optimization" makes the central bank role sound almost meaningless. Having credit risk and liquidity problems is kind of a big deal.

As for the comments on what the central bank is doing - it doesn't change the fact that banks can't make money out of thin air. If you look at the link above/below for WFC's balance sheet - every asset on their books is funded by real liabilities (plus some equity).

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

#62

Post by danielmarkbruce »

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…

It's worth taking a look at the balance sheet of a bank. Most of them will have credit card receivables. A lot of them. No collateral. They'll also have all kinds of unsecured loans.

Banks were never taking much in the way of risk. It's not what they are there for. They are and always have been there to take depositors money and make low risk loans. It is what it is.

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

#63

Post by neilwilson »

danielmarkbruce wrote: post #61
neilwilson wrote: post #60

Earlier quoted context omitted.

"How do you know if I have enough assets? I'm just some random finance source." You have enough assets because you've just created a loan of precisely that amount secured against physical collateral. That's the asset. Therefore I can take over the deposit you have created knowing I can claim against that collateral in the final analysis. And therefore I can create a deposit for my customer of the same amount. That's…

Who said anything about physical collateral? I can make an unsecured line of credit available to you, and until you try to draw on it, you don't know if I have the ability to fund it. Same problem if the loan is supposed to be secured by your car. There is no magic you can come up with that changes that. Now if you are smart, you'll have done some diligence on me, and I might have a credit rating you can look up. Or…

"Who said anything about physical collateral?"

Anybody who is actually making a loan, rather than playing rhetorical games.

Banks are discount houses. They allow us to spend real things.

Except for the bank serving government, which discounts the power to tax.

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

#64

Post by danielmarkbruce »

neilwilson wrote: post #63
danielmarkbruce wrote: post #61

Earlier quoted context omitted.

Who said anything about physical collateral? I can make an unsecured line of credit available to you, and until you try to draw on it, you don't know if I have the ability to fund it. Same problem if the loan is supposed to be secured by your car. There is no magic you can come up with that changes that. Now if you are smart, you'll have done some diligence on me, and I might have a credit rating you can look up. Or…

"Who said anything about physical collateral?" Anybody who is actually making a loan, rather than playing rhetorical games. Banks are discount houses. They allow us to spend real things. Except for the bank serving government, which discounts the power to tax.

Credit cards are not secured by collateral. A good chunk of corporate loans are unsecured. Just take a look at a real balance sheet of a real bank. Wells Fargo has over $50 bill of just credit card loans. No collateral.

A statement isn't a "game" just because it's inconvenient.

Go through the balance sheet of one of the banks. You'll learn a lot. It will become real instead of some theoretical thing. You'll see how the assets are funded by the liabilities (deposits). You'll see that banks really can't make up money out of thin air.

Here is a simple, real, publicly listed bank in Hawaii:

https://www.sec.gov/ix?doc=/Archives/edgar/data/36377/000155...

Go to page 100 and check out the balance sheet. They have about 13 bill of loans out. They own a little over 8 bill of mortgage backed securities. Their total deposits are about 21 bill. Is this some strange coincidence? Of course it isn't.

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

#65

Post by User23 »

danielmarkbruce wrote: post #56
cryptica wrote: post #24

Earlier quoted context omitted.

Correspondent banking just seems messed up at the incentive layer... Seems like there is an incentive for banks to just credit free money into each other's accounts... Surely they can create lots of smaller (low profile) banks with accounts all over the place then use this mechanism to print free money for themselves to expand the money supply ad-infinitum. The attack surface is massive. With the same money being loa…

The banks can't print anything. "Money" is a stupidly defined term in econ/finance. You and I could create IOUs to each other out the wazoo. You owe me $10 mill. It's an asset to me. I owe you $10 mill, it's an asset to you. You and I could go around saying we have $10 mill each in assets. It's not even a lie. It's why when you enter into a contract for a loan from anyone sensible they want to see your assets and you…

Not just that, but I'm going to have a hard time using your $10 mil IOU as collateral for another loan. On the other hand I'd have no trouble whatsoever using a $10 mil IOU from the US Government as collateral. The question is do your liabilities have currency?

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

#66

Post by User23 »

danielmarkbruce wrote: post #48
ilammy wrote: post #44

Earlier quoted context omitted.

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…

They are certainly related. The reason the deposits aren't sitting there is because they went flying out the door to fund the loans the bank made. If the bank could just fund loans out of thin air, they wouldn't need bank deposits in the first place. 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 (most…

> Just go look at the balance sheet of a real bank. You'll see it all balances very nicely

The first rule of tautology club is the first rule of tautology club. By definition double entry bookkeeping always balances no matter what the operations are. This example in no way refutes the parent claim. Furthermore, the banking system must be reasoned about in aggregate. The entire banking system in the USA is a creature of Congress, and every bank is a member of the Federal Reserve system that Congress created. While a given bank may fail due to the arcane shenanigans of the banking guild, the system in aggregate cannot fail unless Congress itself fails.

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

#67

Post by User23 »

OscarCunningham wrote: post #14
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.

Except that the people who are loaned money withdraw it pretty quickly, and then the bank does need cash from deposits (or from inter-bank lending, but the net amount of that is zero).

In aggregate no. Why? Because the people who withdraw it pretty quickly pay it to someone else, and that someone else deposits it just as quickly. Very few people want to have north of $10,000 in cash on hand. So sure when I buy a house in SoCal for $2.4 million I withdraw that loan about as soon as it's created, but the prior owner of the house I just bought is going to deposit that check drawing on that newly created loan as fast as he possibly can.

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

#68

Post by danielmarkbruce »

User23 wrote: post #66
danielmarkbruce wrote: post #48

Earlier quoted context omitted.

They are certainly related. The reason the deposits aren't sitting there is because they went flying out the door to fund the loans the bank made. If the bank could just fund loans out of thin air, they wouldn't need bank deposits in the first place. 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 (most…

> Just go look at the balance sheet of a real bank. You'll see it all balances very nicely The first rule of tautology club is the first rule of tautology club. By definition double entry bookkeeping always balances no matter what the operations are. This example in no way refutes the parent claim. Furthermore, the banking system must be reasoned about in aggregate. The entire banking system in the USA is a creature…

Sure... you kind of left off the rest of the sentence there...In this case, what is the "it"? Ie, what specifically are the assets and liabilities?

In this case the loans are largely balanced by deposits. That was the point, and it does refute the parent claim.

If money was made up like folks are suggesting in this thread, then the items making the balance sheet balance would be... something else. I don't know, because it's such a stupid idea.

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