100% reserve banking
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alanjjohnstone wrote:I've said enough times i have not the economic understanding that others possess in the Party
If a socialist doesn't understand what we are talking about then what are the chances of attracting the average worker to the forum?
I've never claimed to be an expert on every aspect of Marxian economics (or any other Marxist topic) but i do have a rudimentary comprehension of the basics – sufficient to make me class-conscious and that is adequate for any worker striving for socialism. I have never taken the Speakers Test. And i don't possess a PhD or even a Desmond TutuAnd anyway I made a comparative statement.
Quote:i have not the economic understanding that others possess in the PartyIn the context of this thread, i think we need to use our most informed members with the clearest grasp of economics to engage someone of Steve Keen's calibre. I have no wish to embarrass the Party by revealing the gaps in my own knowledge of how banking works.On the broader issue, for complex parts of the socialist and Marxist case, it is the Party's task to explain them as simply as we can for both members and non-members. When a visitor arrives on the forum with genuine curiosity and questions, we indeed begin with the ABCs and make our posts an educational experience.
dms wrote:The question is whether the money supply is expanded and contracted by private businesses/individuals taking out and repaying loans from commercial banks. It sounds to me like it is and I think the ECB article backs me up on this.I don't think anyone argues against this, so long as you're talking about the broad money supply, or if they do I've not heard it.The question is whether or not commercial banks can infinitely go on extending credit without eventually getting into trouble.Or another question concerns the questions of the nature of economic crises in capitalism. Is the cause of these always and only to do with the money supply?
DJP wrote:I don't think anyone argues against this, so long as you're talking about the broad money supply, or if they do I've not heard it.The question is whether or not commercial banks can infinitely go on extending credit without eventually getting into trouble.Not even Positive Money argue that
Quote:Or another question concerns the questions of the nature of economic crises in capitalism. Is the cause of these always and only to do with the money supply?ive been listening to Yanis Varoufakis’ new book “Talking to my daughter about the economy” and he too describes money creation by commercial banks as “out of thin air”. A number of times, actually (maybe he’d be a better person to debate?) and he talks at length about how commercial banks collapse despite this. If anyone has the book and can help me out with the specific passage that’d be great. As I say, it’s an audio book so it’s tough.
The arguments between Keen, Krugman, Positive Money, etc are all about how to stop bank lending getting out of hand in a boom. Not an issue in which socialists need to take sides, especially as we think none of them are going to work as it's not something that governments can do much about. They might as well try to stop all capitalist firms making profits while the sun shines in a boom. Banking lending expands in a boom because capitalist businesses are prepared to borrow more to expand production.The boom is driven by profitable production (that will eventually lead to overproduction and economic downturn) not by bank lending. How could a government stop that without bursting the bubble prematurely?The issue is what is the nature of banking and banks, and can banks create credit or money out of thin air. The answer is that banks are financial intermediaries borrowing money at one rate of interest and lending it at a higher rate, the difference being their income out of which they must pay their workers and covers their expenses, what's left being their profits. They are not conjuring money out of thin air and making a profit out of lending it. If they could, they be getting a higher rate of profit than the rest of capitalist business, but they don't. Ok, they are now linked together with the central bank in a single monetary system (Keen's point) but that doesn't make any essential difference to what commercial banks are and can (and cannot) do.
ALB wrote:The issue is what is the nature of banking and banks, and can banks create credit or money out of thin air. The answer is that banks are financial intermediaries borrowing money at one rate of interest and lending it at a higher rate, the difference being their income out of which they must pay their workers and covers their expenses, what's left being their profits. They are not conjuring money out of thin air and making a profit out of lending it. If they could, they be getting a higher rate of profit than the rest of capitalist business, but they don't. Ok, they are now linked together with the central bank in a single monetary system (Keen's point) but that doesn't make any essential difference to what commercial banks are and can (and cannot) do.If commercial banks can’t create money then they can’t increase the money supply, and I can’t seem to find a single article that supports that. Even the Encylopedia Brittannica says that they can https://www.britannica.com/topic/commercial-bank , indeed they use the Zeitgeist Movement point that the loan from one bank can boost the reserves of another so you get that multiplier effect. I think what’s confusing everything is that you make it sound like they borrow the whole amount that they lend out, and that’s not the case as I understand it. They only borrow what they need to meet the reserve requirements
It's the "out of thin air" or "at the stroke of a pen" part that's important. It's only because bank deposits are included in the defintion of broad money that the money supply rises and falls with loans being issued and repayed. You have to bear in mind that the type of 'money' that is created by a commercial bank is different from the base money that is created by the central bank. To understand how the money system works you have to appreciate the different measures of money M0, M1, M3 etc.
Yes, if you define bank loans as money then in making a loan a bank is ceating money (by definition). If they extra loans over and above those being repaid then they expand the "money supply" (by definition). But the question remains: where does the money to make the loans, and the extra loans, come from? Is it simply conjured up out of thin air or is it money that the banks have borrowed from depositors, other banks and financial institutions, and/or the central bank? I don't think Zeitgeist is a reliable source of information on how banks work. Maybe they have learnt something in the meantime, but at the beginning they were out-and-out thin-airists. See:http://www.worldsocialism.org/spgb/socialist-standard/2000s/2009/no-1253-january-2009/banks-money-and-thin-air
ALB wrote:Yes, if you define bank loans as moneyI think everyone is. Perhaps this is the key point? I take a loan out from a bank (otherwise known as "borrowing money") and can use it to buy good and services, pay taxes, whatever without ever withdrawing it as cash.
Quote:then in making a loan a bank is ceating money (by definition). If they extra loans over and above those being repaid then they expand the "money supply" (by definition).Well then we agree? With me, Varoufakis, Wikipedia and the encyclopedia britannica.
Quote:But the question remains: where does the money to make the loans, and the extra loans, come from? Is it simply conjured up out of thin air or is it money that the banks have borrowed from depositors, other banks and financial institutions, and/or the central bank?It's partly conjured up out of thin air, and partly money that the banks have borrowed from depositors, other banks and financial institutions. They do this because they have to meet their reserve requirement.
Quote:I don't think Zeitgeist is a reliable source of information on how banks work. Maybe they have learnt something in the meantime, but at the beginning they were out-and-out thin-airists. See:http://www.worldsocialism.org/spgb/socialist-standard/2000s/2009/no-1253-january-2009/banks-money-and-thin-airI was just making the point that the Britannica makes the same point as Zeitgeist. Look, I'm more than happy to be wrong and I've been looking around for any sources that back up what you're saying, I just haven't found any and youv'e not offered any. All I've seen is newspaper clipping proving that banks borrow from other banks, which was never in dispute.
dms wrote:It's partly conjured up out of thin air, and partly money that the banks have borrowed from depositors, other banks and financial institutions. They do this because they have to meet their reserve requirement.Not according to the European Central Bank you yourself cited earlier in this discussion. They say it is wholly backed by "private credit" (without a cubic centimetre of thin air):
European Central Bank wrote:Commercial banks can also create so-called “inside” money, i.e. bank deposits – this happens every time they issue a new loan. (….). Inside money (….) is named this way because it is backed by private credit.https://www.ecb.europa.eu/explainers/tell-me-more/html/what_is_money.en.htmlALB wrote:dms wrote:is named this way because it is backed by private credit.https://www.ecb.europa.eu/explainers/tell-me-more/html/what_is_money.en.htmlAbsolutely, but they didn't end there with a full stop, did they? It is a colon because it's misleading if they left the sentance as you left it. They went on a bit longer than that :
ECB wrote:is named this way because it is backed by private credit: if all the claims held by banks on private debtors were to be settled, the inside money created would be reversed to zero.They qualified after the colon "backed by private credit" to mean that the money they create is backed by the liability on the debtor to pay it back. That they're able to do it as it's temporary. They then go on :
ECB wrote:So, it is one form of currency that is createdIn all this latest discussion, what is being over-looked is the crucial point – All wealth is created by labour – The Marxist Labour Theory of Value.In a keystroke or a balance-sheet ledger, no matter how money is defined, does it create wealth?
dms wrote:ALB wrote:dms wrote:is named this way because it is backed by private credit.https://www.ecb.europa.eu/explainers/tell-me-more/html/what_is_money.en.htmlAbsolutely, but they didn't end there with a full stop, did they? It is a colon because it's misleading if they left the sentance as you left it. They went on a bit longer than that :
ECB wrote:is named this way because it is backed by private credit: if all the claims held by banks on private debtors were to be settled, the inside money created would be reversed to zero.They qualified after the colon "backed by private credit" to mean that the money they create is backed by the liability on the debtor to pay it back. That they're able to do it as it's temporary. They then go on :
ECB wrote:So, it is one form of currency that is createdIf that's what the ECB meant (and you could be right, though "backed" would be an odd word to use in that context) then all they are describing is double-entry bookkeeping where every new asset has to be balanced in the accounts by a new liability and every new liability by a new asset. In the case of a bank loan, the loan is the liability that is balanced by an asset (an IOU from the borrower). But this still does not explain where the bank got the money to lend from in the first place. Some say it's from thin air but in fact it's from money the bank has itself borrowed or will soon have to borrow, as the Bundesbank explained:
Quote:The banks also keep a constant eye on the costs that may incur by granting loans and creating book money. For example, if the customer uses the new credit balance to transfer money to an account at another bank, from the bank's point of view money will be flowing out. The bank then often has to recover this money, for example by taking out a loan from another bank, or by "refinancing" itself with a loan from the central bank. Alternatively, it can persuade savers to invest cash or credit balances at the bank in the form of savings or fixed-term deposits.The often (mis)quoted 2014 article from the Bank of England makes the same point:
Quote:Figure 1 showed how, for the aggregate banking sector, loans are initially created with matching deposits. But that does not mean that any given individual bank can freely lend and create money without limit. That is because banks have to be able to lend profitably in a competitive market, and ensure that they adequately manage the risks associated with making loans. Banks receive interest payments on their assets, such as loans, but they also generally have to pay interest on their liabilities, such as savings accounts. A bank’s business model relies on receiving a higher interest rate on the loans (or other assets) than the rate it pays out on its deposits (or other liabilities). (…) The commercial bank uses the difference, or spread, between the expected return on their assets and liabilities to cover its operating costs and to make profits. The banks also keep a constant eye on the costs that may incur by granting loans and creating book money. For example, if the customer uses the new credit balance to transfer money to an account at another bank, from the bank's point of view money will be flowing out. The bank then often has to recover this money, for example by taking out a loan from another bank, or by "refinancing" itself with a loan from the central bank. Alternatively, it can persuade savers to invest cash or credit balances at the bank in the form of savings or fixed-term deposits.(see: https://www.worldsocialism.org/spgb/socialist-standard/2010s/2014/no-1317-may-2014/cooking-books-harry-graeber-and-magic-wandIt also doesn't distinguish a bank from a payday loan company or even a pawnbroker. The money they lend is also balanced by an IOU from the debtor, so why are they not said to create new money, whether out of thin air or elsewhere? Actually, a bank is similar to them, and all lenders of money, in that they have to have (or quickly obtain) the money they lend. What all these and other financial institutions are involved in is the mere circulation of money. They are not, as Alan has just pointed out, creating any new wealth for money to buy.
Of course, the problem is that anyone can whistle an IOU out of thin air,a nd that IOU can circulate. I could write one today, and it would be accepted as long as the people it was passed around reasonably believed that if they presented it to me, I would honour it. I wouldn't even have to have the money on my person, as long as I had a reasonable expectation that I would soon have the funds to be able to honour it (or could find them at a pinch).The great story of fractional reserve banking works just as well for a shoe shop as it does for a bank: if the shop sells on credit, you can play the same story through (so does that mean shoe shops create money?).Varoufakis does state that banks create loans out of thin auir, but suggests they are 'borrowing from the future' i.e. based on the assumption of actual production. That does pick up the key point, banks don't create wealth, and one way or another their loans need to be covered by wealth from somewhere else, either through savers or through repayments.
This topic is not going to go away and the debate will be forever recurring in some shape or form.I think YMS point about a shop's credit facility is very too the point and is indeed what is needed and what i have hoped for – easier analysis to understand.But once more (risking accusations of placing burdens upon others' shoulders) we do require something of substance and definitive to refer people to.
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