Own vs. owed

[robz7777]

The difference is if the bank lent out the ten from 1 then had the ten deposited to them they would then be able to lend out 100 if this was redeposited the 1000 and so on they would have no limit and be lending money they dont have collecting the full interest and principle instead of the spread and would have no cost of funding issues and no counterparty risk on default there is huge difference. i dont see why people have such an issue with the banks having full utility or whatever the fraction is on the money they are paying for the privelage of everyone else does. do you see the differencr now you confusing deposits with reserve and creation with velocity. no one is creating anything. you cant lend money you dont have!

The point is the bank can't lend against the 10.. It has already lent against the 1 to create about 9 (1x 0.9x 0.81 etc) but only if depositors (who got the money from the person who borrowed from the bank in the first place) keep banking the reducing value.. If the money gets kept under the mattress at home (rather than going back into the bank) then there is a problem as the banks can't source the funds to make other transactions (lending, paying other depositors who want their money)..

The trouble with the Greek/Spanish etc etc is that the assets held (to represent the $1 they hold to create additional lending) have hit the wall and aren't worth $1 anymore.. That is why the ECB (I believe) is swapping these toxic assets for government bonds with the banks so that they can continue to function..

 

[im sparticus]

The point is the bank can't lend against the 10.. It has already lent against the 1 to create about 9 (1x 0.9x 0.81 etc) but only if depositors (who got the money from the person who borrowed from the bank in the first place) keep banking the reducing value.. If the money gets kept under the mattress at home (rather than going back into the bank) then there is a problem as the banks can't source the funds to make other transactions (lending, paying other depositors who want their money)..

The trouble with the Greek/Spanish etc etc is that the assets held (to represent the $1 they hold to create additional lending) have hit the wall and aren't worth $1 anymore.. That is why the ECB (I believe) is swapping these toxic assets for government bonds with the banks so that they can continue to function..

How do you propose they differenciate from the ten once they are in circulation? Money out of thin air doesnt add up.

 

[joea]

Money out of thin air doesnt add up.

Email Wayne Swan! Happy to help solve the problem.

joea

 

[Starcraftmazter]

I am tired of the amount of crap posted here when it comes to banking systems. So I will post some explanations as best I can, and I hope to God I will not make any mistakes in the following;


I'll work through an example For the US Fractional Reserve Banking System since that is what most people seem to be talking about, and that is where a lot of fiat money is created. I will be using a classic reserve ratio of 1:9 - although it's actually 1:10 or 10% in the US, however in reality fractional reserve requirement are irrelevant in the modern world, and do not even apply on all bank deposits - which is why most of the world has done away with them. However in the US it does still hold a lot of relevance for banks' convenience - but do not take this to mean they are in any way constrained by it.

Now, assuming a ratio of 1:9 for every individual X dollars deposited, the banking system can lend:
(X * 0.9 ) + (X * 0.9) * 0.9 + ((X * 0.9) * 0.9) * 0.9 + ..... to infinity

In other words, this is an infinite series of X*0.9^n. Luckily this is geometric series, whereby we can find it's limit.

The limit can be calculated by L = (X / (1 - 0.9) ) - X. Note the - X is to take out the original deposit.

Long story short, for every $1 of customer money deposited into the banking system, it will create up to $8 out of nowhere, resulting in a total of $9 within the banking system.

However that's only customer deposits - and you would be right to wonder where the hell the $1 comes from if it was not already in the banking system to begin with.

Banks can (and do as part of FRB) deposit money at the central bank. This money makes up some part of their fractional reserve. This money, they can draw upon in a different way - borrowing in a 1:9 ratio, that being if a bank has $1000 deposited at a central bank, it can then borrow $9000 from the central bank - at the central's bank special interest rate. This is not money that neither the retail bank has nor the central bank has at the time the retail bank made a request for it - this is money which the central bank now prints out of thin air and lends to the retail bank, which then re-lends it to the customer.

At that point, the money created out of thin air by the central bank enters the banking system, and can then be redeposited and relent in a 9:1 ratio, so that $9000 will create up to an additional $81,000.

The original $9000 borrowed from the central bank must be eventually repaid with interest, leaving the vast majority of the additional amount of money created within the banking system - up to $81,000 in it's circulation.

Thus, the $9000 borrowed from the central bank is destroyed just as it was created, the interest paid to the central bank on that loan is paid out in part to the US Federal Treasury and in part to the private shareholders of the Fed, and the up to $81,000 stays within the banking system, being created out of nothing.

Hopefully this example conveys both the complexity and the end result of how FRB works. I will also say as a disclaimer lest I be misunderstood, not all of the money which the bank sets aside as it's fractional reserve is leveraged in this way, and it is very short-term debt which must be paid back quickly - in reality it is re-payed and re-borrowed very quickly as new money is created from it continuously.


That amount of money - up to $81,000 is what increases the monetary supply and what creates inflation. Again, I cannot fathom how stupid it is to suggest that banks only lend out a portion of deposits. If this was true, there would be no money left in the world a long time ago. How do you suppose M1 grows?

Not to mention the money supply in every country grows simultaneously, no one country is lending to another - money is created constantly in very large amounts.



As a further added note, according to the Fed's reports, as of the 9th of May, the top 25 US commercial banks have a total of $4,069.7Bn - in other words, over $4Tr borrowed from the Fed. Foreign commercial banks have borrowed around $1Tr, although I am personally unfamiliar with what sort of collateral if any a US bank would need to provide the Fed to borrow money from it. The point is however, as of 9th of May, the Fed has over $4Tr that it created out of nothing and lent to the retail banks. Every minute that money (which will eventually be destroyed) stays in the banking system, it creates new money (which will stay in the banking system).


But the most important thing is that Unlike the US, Australia does not use the Fractional Reserve Banking System, Australia has no fractional reserve requirements, the amount of loan money created in Australia bares no relation to any reserve requirements (because they don't exist!), The RBA does not print money and lend it to Australian banks as happens in the US as well as other countries (not always necessarily under the FRB system either).


Does that mean that Australian banks get loan money from deposits, or that they are constrained in any particular way by the amount of deposits they have when it comes to creating new loans?

NO, there is no direct relation between the amount of deposits an Australian bank has, and how much money it can lend out - and this applies collectively to the entire Australian banking system.


In fact, if you look at the balance sheet of any Australian bank, although I have not checked each one personally, I can guarantee that not a single one of them will have anywhere near enough deposits to cover their loans on a 1:1 basis as some posters would claim. Just for the record, I think if they did have to make all loans from deposits, that would be great - but that's not how it works.


No, lending money has little to do with deposits. Loans must be funded yes, and deposits are one way of funding loans yes - however fundamentally speaking, loans can be funded entirely and indefinitely through borrowing.

In the US, in simple terms, all the money banks need which isn't funded by deposits they can get directly from the Fed.

In Australia, banks do not have anywhere near enough deposits to fuel our housing bubble, and as the RBA does not lend them money, they are forced to borrow it from foreign banks, which can borrow money from their central banks whom in turn create it out of nothing.

Neither US nor Australian banks are limited by deposits or anything else regarding how much money they can create as loans.

However both US and Australian banks are limited in terms of how much money they can loan out by capital requirements - which prevent the banks from becoming insolvent by having enough capital to cover what is considered to be a reasonable amount of losses in it's lending portfolio.

Understand that the above are two separate concepts.


By this time you might wonder what that means for Australians and their banks.

Broadly speaking, it means we have borrowed from other countries the money to fund our speculative housing bubble, and must in turn pay that money back with interest. This money and interest are created through the hard work of Australians, through the sweat of our miners, the inventions of our scientists, the ingenuity of our manufacturers and the skills of all other professionals who provide various services. Much of this wealth that we create every year is taken away from us to fund our massive current account deficit instead of staying in Australia to be spend on things like infrastructure, research and development and entrepreneurship.

So there you have it, the money created out of nothing by foreign central banks - that is what funds (about 40% of) our housing bubble, creates a lot of our inflation and robs us of our wealth.


Lastly, this is only some of the many problems with central banking. While it would clearly be more advantageous for Australia if the RBA printed our own money and lent it to our banks at it's own cash rate so that they would not need to borrow from overseas, and taxpayers would not have to be made liable for their borrowings in times of significant crisis - believe me that will not address other problems with central banking and create different problems which we don't have to face due to the fact that RBA doesn't lend to our banks (borrowing infinite money and gambling on derivatives for instance).

 

[Starcraftmazter]

You make it sound like the money doesnt exist if the banks call in all loans they will have enough to pay all deposits its all accounted for there is no conspiracy

If the Australian banks called in all loans, Australia would suffer the biggest and most violent property crash in the history of the world, and they would in minutes be rendered insolvent, and taxpayers would be under the hook for almost half a trillion dollars in debt just to foreign banks - not to mention being liable for all of their own deposits through their future tax obligations (as well as their children's, and their children's children, etc). And that's in the highly optimistic scenario that the world would still want to lend to our federal government - which by now would have hundreds of percent public debt to GDP.

 

[im sparticus]

If the Australian banks called in all loans, Australia would suffer the biggest and most violent property crash in the history of the world, and they would in minutes be rendered insolvent, and taxpayers would be under the hook for almost half a trillion dollars in debt just to foreign banks - not to mention being liable for all of their own deposits through their future tax obligations (as well as their children's, and their children's children, etc). And that's in the highly optimistic scenario that the world would still want to lend to our federal government - which by now would have hundreds of percent public debt to GDP.

all beside the point fact still remains you cant lend money you dont have! Banks are only collecting the difference between what they buy and sell at regardles of what effect this has on the money supply (which your understanding of is flawed), you seem to still be having trouble connecting the dots. if i have full utility of money i borrow why shouldnt the banks?
Understand these simple facts and you will understand why there is noting wrong with the current banking system it all adds up and is here to stay to think we would be better off on the gold standard is just rediculous wont happen.

 

[im sparticus]

Read back the only faulse statements on the banking system have been your own they even contradict your latest statement, ever get the feeling you have something growing on your forehead scm??

 

[againsthegrain]

Banks borrow alot of money against property which is valued at a certain $ if all the loans were called in property would crash and that value on the assets that the banks borrow against would not be attainable

 

[im sparticus]

Banks borrow alot of money against property which is valued at a certain $ if all the loans were called in property would crash and that value on the assets that the banks borrow against would not be attainable

banks dont borrow against property they lend to think i hadnt considered this and completely miss the point i was making is about as shallow as me picking your post when i know exactly what your getting at so.

all the loans in australia do not equal all the property in australia you might want to check just how many houses out there are morgaged to the hilt though this was not my point. My point was no money was created out of thin air loans have no effect on monetary base. people seem to think an increase in the money supply = increase in monetary base but they are two completely different animals. like trying to compare quantity with velocity. this is where the youtube videos ala money is debt blur the truth to push there agenda.

I really dont know how to make it any clearer.

 

[Macquack]

Im sparticus,
You say banks cant lend out money they do not have.
Address this situation please.
Say the Commonwealth bank is all maxed out on a particular day and according to you can not make a new loan.

I walk in to the bank and ask for a loan to buy a property off you Im sparticus for $1 million.
The bank ignores your advice not to lend money it does not have and proceeds to write me a bank cheque in favour of you for the $1 million.
Now if you happen to bank with the Commonwealth bank, you present the cheque and your account is credited with $1 million dollars.

The result is I have a debt (mortgage) of $1 million and pay interest at say 7 %, you have a deposit of $1 million (say term deposit) and receive interest at say 5 %. The bank has created $1 million dollars out of thin air and makes the spread of approximately 2 %.

 

[im sparticus]

your situation only exists in your head.

how do you lend money you dont have without increasing the monetary base?

 

[Macquack]

here is a hint if they could create money out of thin air and lend it they would profit not only the total interest but the principal aswell.

That is not correct.

In the above example which you failed to address, the Commonwealth Bank is still liable to pay you the $1 million if you withdraw it from their bank.

For every dollar created out of thin air, an equivalent deposit is created.

Im sparticus, if you prefer we can use the term "credit creation" instead of "creating money out of thin air".

 

[im sparticus]

That is not correct.

In the above example which you failed to address, the Commonwealth Bank is still liable to pay you the $1 million if you withdraw it from their bank.

For every dollar created out of thin air, an equivalent deposit is created.

Im sparticus, if you prefer we can use the term "credit creation" instead of "creating money out of thin air".

the bank can not issue you the credit without having the funds available this is something they simply cannot ignore read what you just wrote they cant create deposits.

in your example they would be netting more than 2% as they would have relent the mil after i deposited it creating money out of thin air doesnt add up lending what you have does. do the math banks are not as profitable as your idea would allow

 

[Tyler Durden]

No with frb the bank can only loan 90c in the dollar with 10c going in reserve if that 90c gets redeposited the bank can lend 81c and so on if no more deposits are made or funds raised the bank is done lending big difference. you cant lend money you dont have

The difference is if the bank lent out the ten from 1 then had the ten deposited to them they would then be able to lend out 100 if this was redeposited the 1000 and so on they would have no limit and be lending money they dont have collecting the full interest and principle instead of the spread and would have no cost of funding issues and no counterparty risk on default there is huge difference.

...

 

[Sir Osisofliver]

Im sparticus,
You say banks cant lend out money they do not have.
Address this situation please.
Say the Commonwealth bank is all maxed out on a particular day and according to you can not make a new loan.

I walk in to the bank and ask for a loan to buy a property off you Im sparticus for $1 million.
The bank ignores your advice not to lend money it does not have and proceeds to write me a bank cheque in favour of you for the $1 million.
Now if you happen to bank with the Commonwealth bank, you present the cheque and your account is credited with $1 million dollars.

The result is I have a debt (mortgage) of $1 million and pay interest at say 7 %, you have a deposit of $1 million (say term deposit) and receive interest at say 5 %. The bank has created $1 million dollars out of thin air and makes the spread of approximately 2 %.

What they just gave you a million with nothing as security?

Guys give a little bit of thought to this... Is money deposited at a bank an asset for the bank or a liability?? It is in fact a liability it's money that the bank must repay to you.

Banks make their money mostly from fees and interest. Assets for the banks are loans not deposits, because this is what the banks earns interest from.

Hence my comment above. Banks tend not to make unsecured loans so in your example quack to borrow a million you'd have to stump up some security...which changes the banks ability to lend....because they now have the ability to use your security as their security...minus their capital adequacy requirements.

Make sense?

Sir O

 

[im sparticus]

ok here goes just because the money supply is inflated by 9x during frb does not mean the bank can take x dollars and lend/create 9x against it, it means they can lend 9/10ths of it (whats really unfair is that they have to pay the utility of 10/10ths in interest on it but at a lower rate than they lend ofcourse) never in the process do they create funds or lend money they dont have.

 

[Macquack]

What they just gave you a million with nothing as security?


Hence my comment above. Banks tend not to make unsecured loans so in your example quack to borrow a million you'd have to stump up some security...which changes the banks ability to lend....because they now have the ability to use your security as their security...minus their capital adequacy requirements.

Make sense?

Sir O

Obviously, the security is the mortgage over the property.

 

[Starcraftmazter]

all beside the point

Besides the point? Convenient to say when you are shown incorrect. You have said not a single accurate thing so far.

fact still remains you cant lend money you dont have!

Semantics - nobody has the money they lend out, it is created through debt and entered into the banking system.

Read back the only faulse statements on the banking system have been your own they even contradict your latest statement, ever get the feeling you have something growing on your forehead scm??

You have learned nothing.

how do you lend money you dont have without increasing the monetary base?

Irrelevant concept. It increases the broader money supply, it causes inflation, it results in no productivity - it is unjustified.

ok here goes just because the money supply is inflated by 9x during frb does not mean the bank can take x dollars and lend/create 9x against it, it means they can lend 9/10ths of it (whats really unfair is that they have to pay the utility of 10/10ths in interest on it but at a lower rate than they lend ofcourse) never in the process do they create funds or lend money they dont have.

This is incorrect in many ways, read my big post again. You seem to be incapable of grasping how banking works....in any country.

 

[im sparticus]

all your posts have ever taught me and anyone else for that matter is that you lack the ability to count have know idea what your on about with pretty much everything. i feel so sorry for you evertime you post its not even fun anymore.

 

[Starcraftmazter]

all your posts have ever taught me and anyone else for that matter is that you lack the ability to count have know idea what your on about with pretty much everything. i feel so sorry for you evertime you post its not even fun anymore.

Maybe if you learned to write proper English you would be taken more seriously.