Sunday Mail discovers how banks work

November 2024 Forums General discussion Sunday Mail discovers how banks work

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  • #251953
    ALB
    Keymaster

    Ever since central banks decided to raise the rate of interest they charge commercial banks to borrow money from them (the bank rate) the financial pages of the papers have provided a continual stream of evidence to expose the Thin Air School of Banking as, well, a load of hot air.

    Here’s an example from today’s Times:

    “The Financial Conduct Authority, which is the industry regulator, also warned the industry last July that ‘the pace and scale at which firms pass through higher interest rates to savers needs to improve’.
    Banks have responded to this pressure by improving their savings rates, while depositors have also become more active in managing their money by moving their cash to accounts that pay better rates of interest.
    (….)
    These deposit trends, combined with more intense competition in the mortgage market, are putting downward pressure on banks’ margins after a period of rapid expansion.
    Lloyds Banking Group said in its first-quarter results last week that its net interest margin, which reflects the difference between what it charges for loans and pays on deposits, fell to 2.95 per cent from 3.22 per cent a year earlier.
    Similarly, NatWest’s first-quarter margin slid to 2.05 per cent from 2.25 per cent in the same period in 2023.”

    Of course banks need deposits — people or institutions lending them money — to function. That’s what they do — borrow money at one rate of interest and lend it at a higher rate. To suggest that banks can, and do, just create out of thin air the money that they lend is just ridiculous.

    #254393
    ALB
    Keymaster

    Here’s a demolition job on the Thin Air School of Banking in the tradition of Edwin Cannan an updated version of which was published in March this year:

    https://www.cato.org/sites/cato.org/files/2024-04/working-paper-80-updated-2.pdf

    Ok, it is published by the Cato Institute which is a US free-marketeer think tank but then Cannan too was a Classical Liberal economist. And it doesn’t alter the fact that many classical political economists had a better understanding of how banking works than most modern economists.

    In any event, all the arguments are there that we have deployed to refute the theory that banks create money out of thin air.

    #255096
    ALB
    Keymaster

    This weekend’s i paper has an article entitled “Banks accused of ‘ripping off’ savers over interest rates”. Amongst those making this accusation is the Positive Money:

    “Simon Youel, head of policy and advocacy at research and campaign group Positive Money, said: ‘Banks have made record profits from increasing interest rates for borrowers while paying depositors insultingly small rates on their savings.’”

    https://inews.co.uk/inews-lifestyle/money/saving-and-banking/banks-rip-off-mortgage-costs-savings-rates-3392987#:~:text=Campaigners%20have%20now%20urged%20banks,small%20rates%20on%20their%20savings.”

    This is true but it is odd coming from an organisation which denies that banks are financial intermediaries borrowing from some at one rate (savers) and lending to others at a higher rates (eg mortgages) and claims that banks can create money out of thin air simply by making a loan.

    If this claim was true then banks could make even bigger profits by simply creating the money to loan so avoiding having to attract and pay interest to savers. But the fact that they do need to attract savers shows that the claim is not true.

    But then currency cranks are nothing if not illogical.

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