Aging_punk
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One last go, as we seen to be talking past each other, and I’m not sure how productive this is anymore.
1. The SPGB position is that banks are intermediaries only.
2. The counter position is that banks do not lend out money deposited with them by their customers, but instead make loans based on the creditworthiness of the customer.
3. Continuing this position: this is not some conjuring trick. The loan created is an asset to the bank. Furthermore, there are constraints on this creation, e.g. liquidity concerns.
4. SPGB position seems to be that yes, book money can be created without a prior deposit, but the bank needs to ensure that it seeks a deposit to cover this in full, perhaps also relying a bit on acquiring reserves/central bank money.
5. Counter position is that banks do not seek to attract deposits which they loan out, whatever the sequence is. Commercial banks simply need to be able to cover likely needs regarding bank transfers or cash withdrawals. That is, banks have to cover payments/transfers, not loans. Bank transfers clear, so the amount of reserves needed is like a kind of reverse multiplier (they hold a certain ratio against the book money they create) They do at the same time seek deposits, as part of this same liquidity management process – they’re not redundant, simply not the source of lending. This is not the same as receiving a deposit of £1000 and lending out £900, as an intermediary would, nor would they lend out £900 and seek deposits to the value of £1000 in some reverse version of fractional reserve banking. They just need to cover their arses, factoring in the wiping out of mutual obligations in bank transfers, the risk of defaults on loans etc. There are also central bank facilities and/or loans from other banks to meet any shortfalls. In effect they are loaning out £900 and seeking £90 (whether through deposits or central bank money or interbank lending) or whatever they calculate to be an adequate ratio necessary for the arse covering.
The key point here is that those £900 are not created from “thin air” but based on the success of capital to accumulate, that money now promises to be more money in the future, Alice’s credit worthiness – the other side of the double entry bookkeeping – and the Bank’s credit worthiness to be able to live up to any demands in cash against it.
[Replying to ALB’s post #234912, the link to an SPGB article on the Bundesbank paper]
The article linked to contains the same misunderstanding we’ve seen here:
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SPGB: “Banks are profit-seeking financial intermediaries that borrow money at one rate of interest (either ‘retail’ from individuals or ‘wholesale’ from the money market) and relend the money to borrowers at a higher rate. The spread between the two rates is the source of a bank’s income; after it has paid its operating costs, including staff wages, what remains is the bank’s profits.
Banks’ ‘inherent interest in profit maximisation’ affects how what the article describes as ‘the need for banks to find the loans they create’ is met. It means that they are going to seek to obtain the needed funding as cheaply as possible, i.e., at the lowest possible rate of interest:
‘Deposits play a major role in this regard, for while banks have the ability to create money – that is, to accumulate a stock of assets by originating liabilities themselves in the form of sight deposits – they need funding in the form of reserves.’[quoting the Bundesbank article]”
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This quote from the Bundesbank paper is not stating that banks must immediately seek to cover the full value of a loan that has been made from other deposits, interbank lending or the central bank. The sentence after the above quote reads: ‘This need for funding exists because, as outlined above, banks are always at risk of losing at least some of the deposits they have created by granting loans as a result of cashless payments or cash withdrawals’. What is necessary is the ability to cover the likely payments (after clearing) and cash withdrawals, not to cover the entire amount of each loan.
The Bundesbank makes this clear earlier in their paper:
‘But the central bank nonetheless has an important role to play as a producer of reserves. That is because bank A has to assume that customer X will use the loan amount for payment transactions, and these normally result in at least some of the sight deposits created by bank A being transferred to different banks with which the recipients of those payments have an account. If this occurs, bank A will usually need to have reserves with the central bank to settle the outflow of deposits, because a large proportion of cashless payments between banks are netted via the accounts they hold with the central bank’
That is, they do need to be able to cover transactions, but this is not the same as covering the full value of each loan they make, given these are ‘netted’.
“In the olden days — two hundred years ago — Barclays would have probably given a loan in the form of a bag of gold coins.”
I think here is one of the key misunderstandings in this thread, that money in the modern world is not the same as a bag of gold coins. To make use of Alice and Bob again:
Alice buys £1000 of beans from Bob. Alice banks with Bank A, Bob with bank B. Bob supplies Alice with the beans, and Bank A transfers £1000 to Bank B, who credit Bob’s account with £1000.
At the end of the day, by a weird quirk of fate, the mutual transfers between the two banks equal each other. No money needs to change hands between them. £1m of purchasing may have gone on, all with broad money initially created as a deposit.
A more likely scenario is that after cancelling out mutual transfers between the two banks, Bank A has to transfer a balance to bank B. This might be, say, 10% of the total value of payments from A to B.
Clearly Bank A has to ensure that it is able to meet such obligations. It might borrow from other banks, or the central bank – meaning new base money is created – but it does not need to cover its deposits on a 1:1 basis, and when new base money is created this follows rather than leads broad money (i.e. there is no money multiplier up from the amount of central bank money that is created – the reverse is true, banks seek to ensure that they can lay their hands on an adequate amount of base money, which will always be a percentage of their obligations, not the full amount).
