100% reserve banking
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DJP wrote:ALB wrote:If Positive Money really think that a bank could operate without outside funding
They don't seem to think this, but seem to be holding two contrary positions at once:http://positivemoney.org/2012/07/if-banks-can-create-money-how-come-northern-rock-went-bust/
Then I would like to borrow a million pounds from them created by bank credit (inside funding) not central bank reserves (outside funding). Presumably Northern Rock forgot about their ability to create "bank credit" without central bank reserves.
I know that it's not what they really think but they argue as if they did. Their deeper argument is more subtle and involves the whole banking system including, crucially, the Bank of Exchange which as the state central bank does have the power to "create money out of nothing". They don't really think that a single bank can create money out of nothing, nor that all the banks together could without the involvement of a state central bank.The contradiction in their position comes out in what the supporters of the same idea in Switzerland are arguing: that banks there should still be allowed to lend but only from savings accounts and what they've borrowed from other banks or the central bank. But as a loan would still involve double entry book-keeping it should still, on the PM argument we care discussing here, involve banks creating money from nothing but they don't argue this. In fact, the description of what they think should happen is what happens now except that now banks can also lend money deposited (from outside) in current accounts (which are in effect also loans, from the depositor to the bank).This seems an unecessary restriction on banking lending from a capitalist point of view. In fact, by restricting credit it could slow down business activity and the accumulation of capital which capitalism is all about. Which is one reason why fellow banking reformer Ann Pettifor is opposed to it:https://www.opendemocracy.net/ourkingdom/ann-pettifor/why-i-disagree-with-positive-money-and-martin-wolfShe wants banks to continue to be able to, as she would put it, create money out of thin air (in fact, to continue more or less as they do now subject to more regulation). She also makes the relevant point that the PM theory is derived from Monetarism.
Here's Richard Murphy (who has Corbyn's ear):http://www.taxresearch.org.uk/Blog/2016/01/05/jo-stiglitz-needs-to-lean-what-banks-do-and-dont-do/
Quote:The relationship between deposits and investment is much more remote and complex in that case. Effectively deposit taking is a service utterly distinct from lending although historically undertaken by the same institutions. What the deposit taking does provide is capital to underpin risk at very low cost. That is because money deposited in banks ceases to be the property of the depositor: it becomes the property of the bank. What the depositor is left with is a loan to a bank that may, or may not be repaid (hence the bank deposit protection schemes that would not, otherwise, be needed). So the cash deposited then becomes the bank’s risk capital in the event that they make poor lending decisions (as was seen in the case of Northern Rock). But that capital is a buffer to the bank, and not a source of funds for lending.So, er, the deposits do cover teh loans, and are intermediated.
It's interesting what happens when you check sources. On http://positivemoney.org/how-money-works/proof-that-banks-create-money/ they have a very damning looking quote which says :
Quote:“Where does money come from? In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood. The principal way in which they are created is through commercial banks making loans: whenever a bank makes a loan, it creates a deposit in the borrower’s bank account, thereby creating new money. This description of how money is created differs from the story found in some economics textbooks.”But when you click on the source and go to the BoE website there's a crucial bit missing between the last two sentences :
Quote:. As ‘Money creation in the modern economy’ explains, though, banks cannot create money in this way without limit: how much banks lend will rest on the profitable lending opportunities available to them which will, crucially, depend on the interest rate set by the Bank of England. In this way, monetary policy acts as the ultimate limit on money creation.I think I'm just going to have to read the document that got PM started in the first place – http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf . I've a feeling everything will be answered in there.
Quote:The reserve funds of the banks, in countries with developed capitalist production, always express on the average the quantity of money existing in the form of a hoard, and a portion of this hoard in turn consists of paper, mere drafts upon gold, which have no value in themselves. The greater portion of banker's capital is, therefore, purely fictitious and consists of claims (bills of exchange), government securities (which represent spent capital), and stocks (drafts on future revenue). And it should not be forgotten that the money-value of the capital represented by this paper in the safes of the banker is itself fictitious, in so far as the paper consists of drafts on guaranteed revenue (e.g., government securities), or titles of ownership to real capital (e.g., stocks), and that this value is regulated differently from that of the real capital, which the paper represents at least in part; or, when it represents mere claims on revenue and no capital, the claim on the same revenue is expressed in continually changing fictitious money-capital. In addition to this, it must be noted that this fictitious banker's capital represents largely, not his own capital, but that of the public, which makes deposits with him, either interest-bearing or not.https://www.marxists.org/archive/marx/works/1894-c3/ch29.htmHe seems to be suggesting that the paper value of such capital depends on the prevailing rate of interest (which is itself a dependent but arbitrary aspect of the overall rate of profit).May require more careful reading.
Young Master Smeet wrote:He seems to be suggesting that the paper value of such capital depends on the prevailing rate of interest (which is itself a dependent but arbitrary aspect of the overall rate of profit).He says so explicitly later on in the same chapter:
Quote:The formation of a fictitious capital is called capitalisation. Every periodic income is capitalised by calculating it on the basis of the average rate of interest, as an income which would be realised by a capital loaned at this rate of interest. For example, if the annual income is £100 and the rate of interest 5%, then the £100 would represent the annual interest on £2,000, and the £2,000 is regarded as the capital-value of the legal title of ownership on the £100 annually. For the person who buys this title of ownership, the annual income of £100 represents indeed the interest on his capital invested at 5%This is the conventional definition of "capitalization" (which can be applied to any regular stream of income) but I think that "notional capital" would have been a better term than "fictional capital" (given what Marxists tempted by currency crankism, and even those not, have made of this term).
ALB wrote:but I think that "notional capital" would have been a better term than "fictional capital"I wonder what the original German word was?
Afraid it is fiktiv but I've just noticed that the term in the English translation is "fictitious capital" rather than "fictional capital". But I have seen "fictional capital" used in the litterature. I still prefer "notional capital" to describe the concept as it avoids any suggestion of fabrication and fraud that so often occur in discussions about banks and banking.
Here's a recent example of a misinterpretation of "fictitious capital" by a group in the Marxist tradition leading to a theory of the financial meltdown of capitalism similar to that embraced by many currency cranks. It's from a new manifesto by Internationalist Perspectives who emerged from the ICC some years ago now and some of whose stuff isn't that bad. Unlike this:
Quote:Capitalism has, especially in the last 60 years, increasingly sought refuge in money creation, either to stimulate production and consumption, or to stimulate the growth of the hoard, propping up its “value” despite a declining rate of value creation in the real economy. In other words, a massive creation of fictitious capital, not resulting from new value but created out of thin air, has been mixed into the pot. Money has grown at an increasingly faster pace than “the real economy”, that is, than the value of the commodities that are actually produced and sold. Therefore, it must devalue. But that only happens when production and consumption are stimulated despite the lack of profitability. The result is high inflation, endangering the value of money as such and thus of the entire hoard.A second approach has been more efficient: by forking over newly-created money directly to capital (meanwhile demanding austerity from the rest of society), the hoard has been successfully defended. Most of that new money never enters into circulation except within the hoard itself. It therefore causes no inflation (again, except in the hoard). While propping up the demand for financial assets, the money is sterilized in the coffers of central and private banks in the fortunes of the super-rich. There, it does no good (only a small fraction of it re-enters the productive sphere) but also no harm. Precisely by not re-entering the circulation of commodities, the hoard hides the fictitious nature of the money that is created without a corresponding creation of value. The program of the capitalist left would accomplish the opposite and reveal the fiction. And it is on this fiction that capitalism rests. The belief that money is value and that value is real wealth. If that belief falters, capitalism breaks down.Another quote for the file, about one of the new banks set up to challenge the oligopoly of the established ones (from yesterday's Times):
Quote:Metro takes far more in deposits than it lends to customers. Deposits are now £5.1 billion, compared with £3.5 billion in loans, making its loan-to-deposit ratio 69 per cent at the end of 2015. The model, Metro says, is ultra-safe, but it also makes it difficult to generate profits, because banks normally make money from charging more on loans than they pay out in interest to depositors.Metro Bank in fact made a loss in 2015 as in previous years. They seem to be using deposits to expand their business (more branches) than for loans to others. A sensible start-up business strategy maybe, but not something that could properly be described as "ultra-safe". In any event, they are not creating anything out of thin air.
Article in Wednesday's papers about Peer-to-Peer lending which is supposed to be an alternative to banking. Actually, both are based on the same principle of people with money who don't want to use it themselves for the time being lending it to people who do need money for something. Banks are not doing anything essentially different from the P2P companies. They too are financial intermediaries. In both cases the money has to be there and, as Lord Turner points out, the borrowers need to be checked to see that they will repay any loan. Banks, No one has yet come up with the theory that P2P lenders can create the money they lend out of thin air.http://www.theguardian.com/money/2016/feb/10/former-city-regulator-warns-peer-to-peer-lending-lord-turner
An ideal opportunity to write a reply to a letter by a Oliver Healey in this weeks WW on 100% reserve banking and banks creating money http://weeklyworker.co.uk/worker/1096/letters/I would answer him but i have already had two letters recently in the WW and think it better if somone else wrote.
http://www.leedsbuildingsociety.co.uk/_resources/pdfs/press-pdfs/financial-resulsts-pdfs/reports-accounts-2015.pdfThis building society annual report makes interesting reading:"Bank Base Rate has remained at 0.5% for the last seven years and we don’t currently anticipateany rise until 2017. This, combined with increased competition in the mortgage market, meansborrowers have seen even greater benefit in this historically low rate environment.""We’ve already experienced increased competition, particularly in the mortgage market, in the second half of 2015 and we anticipate this will only intensify. Therefore, we expect to see some downward pressure on our net interestmargin as we move through 2016 and into 2017""Savings balances grew by £751m to £9.9bn, the highest level in our history""Our ability to pay above market returns to attract and retain savers has enabled us to help a recordnumber of borrowers in 2015"So, basically, money remains plentiful and in fact savings are increasing, leading to more competition in the borrowing market.Also, note their business model: "The Society borrows from Savers" "Net interest margin(Secure)The difference between interest received on assets and interest paid on liabilities, measured as a percentage of mean assets. This is the Society’s main source of income." 1.62%, quite a margin, but they do have to pay for 1,300 staff. That is £207 million, off about £13 billion of assets.
alanjjohnstone wrote:An ideal opportunity to write a reply to a letter by a Oliver Healey in this weeks WW on 100% reserve banking and banks creating money http://weeklyworker.co.uk/worker/1096/letters/Scroll down to the letter here headed "It's the System:http://weeklyworker.co.uk/worker/1097/letters/
Refuting those who think banks can create money to lend out of nothing is too easy. Here's an item from yesterday's Times:
Quote:Profits surge ahead at college-owned bankA start-up bank half-owned by a Cambridge University college has reported a fourfold rise in annual pretax profits to more than £10 million in its fourth year since opening. Cambridge & Counties Bank, which is 50 per cent owned by Trinity Hall, right, said that it had made a profit of £10.2 million last year as deposits rose by 21 per cent to £472 million.The Leicester-based lender focuses on small and medium-sized companies across Cambridgeshire and Leicestershire, attracting more than 1,600 business customers. At the end of last year, It had total assets of more than £500 million, with its loan book growing 66 per cent year-on-year to £416 million.Just do the maths. It's up to the currency cranks to produce evidence of a bank lending more than it has in deposits from outside and what it's borrowed from the money market.
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