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Banking and money
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UndercoverElephant



Joined: 10 Mar 2008
Posts: 9871
Location: south east England

PostPosted: Sat Jul 18, 2015 10:07 pm    Post subject: Reply with quote

OK...could we temporarily forget about Greece for one post and establish how the UK banking system works?

In the UK, if a person goes to a bank to get a mortgage or loan, does the bank lend that person somebody else's savings that have been put into the bank, or is the money electronically created out of nowhere at the point the bank makes the loan?
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peaceful_life



Joined: 21 Sep 2010
Posts: 544

PostPosted: Sat Jul 18, 2015 10:11 pm    Post subject: Reply with quote

johnhemming2 wrote:
UndercoverElephant wrote:
OK. So you are in agreement that when a person loans money from a bank, the bank just creates that money electronically, yes? It has nothing to do with anybody-else's savings.

No. The ECB linked bank has coins, notes and its Target 2 account. It can only settle payments that it has cash for. (mainly on Target 2).

For all that it matters you might as well assume that the banks only really settle payments through Target 2.

The cash has to come from somewhere for this to happen. With Greece it was coming from the ECB as ELA.

Its liquidity (Free cash essentially target 2) comes from deposits, money market transactions, senior bonds, junior bonds, preference shares and common equity.

The balance sheet balances because for every debit entry there is a credit entry. The balance sheet looks at assets and liabilities, but there is also a calculation as to liquidity.


John, my friend,come see....

https://www.youtube.com/watch?v=I12o_eUOUIM


'Backbench Business

Money Creation and Society'

http://www.publications.parliament.uk/pa/cm201415/cmhansrd/cm141120/debtext/141120-0001.htm#14112048000001

'11.18 am

Steve Baker (Wycombe) (Con): I beg to move,

That this House has considered money creation and society.

The methods of money production in society today are profoundly corrupting in ways that would matter to everyone if they were clearly understood. The essence of this debate is: who should be allowed to create money, how and at whose risk? It is no wonder that it has attracted support from across the political spectrum, although, looking around the Chamber, I think that the Rochester and Strood by-election has perhaps taken its toll. None the less, I am grateful to right hon. and hon. Friends from all political parties, including the hon. Members for Clacton (Douglas Carswell) and for Brighton, Pavilion (Caroline Lucas) and the right hon. Member for Oldham West and Royton (Mr Meacher), for their support in securing this debate.

One of the most memorable quotes about money and banking is usually attributed to Henry Ford:

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did I believe there would be a revolution before tomorrow morning.”

Let us hope we do not have a revolution, as I feel sure we are all conservatives on that issue.

How is it done? The process is so simple that the mind is repelled. It is this:

Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”

I have been told many times that this is ridiculous, even by one employee who had previously worked for the Federal Deposit Insurance Corporation of the United States. The explanation is taken from the Bank of England article “Money creation in the modern economy”, and it seems to me it is rather hard to dismiss'.


Sorry UE, missed previous two posts~
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johnhemming2



Joined: 30 Jun 2015
Posts: 2159

PostPosted: Sat Jul 18, 2015 10:26 pm    Post subject: Reply with quote

There are different definitions of money. However, if you take Steve Baker's example for the bank concerned to actually pay out the credit balance that is created by the mortgage agreement there needs to be liquidity (which comes from somewhere else and is not created by a clearing bank - it is created by the central bank).

This is the narrow money supply M0 which is the cash outside the BoE and banks' operational accounts with the BoE. That is for England.

https://en.wikipedia.org/wiki/Money_supply#United_Kingdom

Personally I think the broader measures can be misleading as they do not take into account commercial credit. They look at the gross credit balances ignoring the debit balances.

M1 is the EZ equivalent.
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UndercoverElephant



Joined: 10 Mar 2008
Posts: 9871
Location: south east England

PostPosted: Sat Jul 18, 2015 10:30 pm    Post subject: Reply with quote

johnhemming2 wrote:
There are different definitions of money. However, if you take Steve Baker's example for the bank concerned to actually pay out the credit balance that is created by the mortgage agreement there needs to be liquidity (which comes from somewhere else and is not created by a clearing bank - it is created by the central bank).

This is the narrow money supply M0 which is the cash outside the BoE and banks' operational accounts with the BoE. That is for England.

https://en.wikipedia.org/wiki/Money_supply#United_Kingdom

Personally I think the broader measures can be misleading as they do not take into account commercial credit.

M1 is the EZ equivalent.


I am so talking to a politician.

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

Quote:

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 is through commercial
banks making loans.
Whenever a bank makes a loan, it
simultaneously creates a matching deposit in the
borrower’s bank account, thereby creating new money
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johnhemming2



Joined: 30 Jun 2015
Posts: 2159

PostPosted: Sat Jul 18, 2015 10:34 pm    Post subject: Reply with quote

It remains, however, that for the bank to pay away the credit balance to someone else (at another bank) it has to have the liquidity. (ie the M0/M1 sort of money).

There are two transactions. The first transaction creates a commercial loan. The second one pays away the credit balance. The second is constrained by liquidity. Otherwise why have the Greek banks had any problem if they can simply create money. They can create as many deposits with matching debit accounts as they wish, but they are limited as to what they can pay to other banks.
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peaceful_life



Joined: 21 Sep 2010
Posts: 544

PostPosted: Sat Jul 18, 2015 10:37 pm    Post subject: Reply with quote

johnhemming2 wrote:
There are different definitions of money. However, if you take Steve Baker's example for the bank concerned to actually pay out the credit balance that is created by the mortgage agreement there needs to be liquidity (which comes from somewhere else and is not created by a clearing bank - it is created by the central bank).

This is the narrow money supply M0 which is the cash outside the BoE and banks' operational accounts with the BoE. That is for England.

https://en.wikipedia.org/wiki/Money_supply#United_Kingdom

Personally I think the broader measures can be misleading as they do not take into account commercial credit. They look at the gross credit balances ignoring the debit balances.

M1 is the EZ equivalent.


John, it's ok to be wrong, it's a learning process.
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peaceful_life



Joined: 21 Sep 2010
Posts: 544

PostPosted: Sat Jul 18, 2015 10:40 pm    Post subject: Reply with quote

johnhemming2 wrote:
It remains, however, that for the bank to pay away the credit balance to someone else (at another bank) it has to have the liquidity. (ie the M0/M1 sort of money).

There are two transactions. The first transaction creates a commercial loan. The second one pays away the credit balance. The second is constrained by liquidity. Otherwise why have the Greek banks had any problem if they can simply create money. They can create as many deposits with matching debit accounts as they wish, but they are limited as to what they can pay to other banks.


Greece is beholden, in terms of sovereignty to the ECB...and others, but.....you know this.

John, stop.
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johnhemming2



Joined: 30 Jun 2015
Posts: 2159

PostPosted: Sat Jul 18, 2015 10:41 pm    Post subject: Reply with quote

No-one has explained to me how the second transaction which pays away the credit balance on the mortgage loan account can occur without liquidity. That is because it cannot occur without liquidity. Liquidity is not created by clearing banks only by the central bank.
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johnhemming2



Joined: 30 Jun 2015
Posts: 2159

PostPosted: Sat Jul 18, 2015 10:43 pm    Post subject: Reply with quote

Clearing banks can only create broad money. The cannot create narrow money. It is narrow money that is needed for liquidity.
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peaceful_life



Joined: 21 Sep 2010
Posts: 544

PostPosted: Sat Jul 18, 2015 11:10 pm    Post subject: Reply with quote

johnhemming2 wrote:
Clearing banks can only create broad money. The cannot create narrow money. It is narrow money that is needed for liquidity.


John, as far as you're aware, what IS money?...in your opinion.
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Tarrel



Joined: 29 Nov 2011
Posts: 2447
Location: Ross-shire, Scotland

PostPosted: Sat Jul 18, 2015 11:41 pm    Post subject: Reply with quote

peaceful_life wrote:
johnhemming2 wrote:
Clearing banks can only create broad money. The cannot create narrow money. It is narrow money that is needed for liquidity.


John, as far as you're aware, what IS money?...in your opinion.


I've given up trying to answer that one. Now just pursuing a life-strategy around trying to need as little of it as possible (whatever "it" is!)
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peaceful_life



Joined: 21 Sep 2010
Posts: 544

PostPosted: Sat Jul 18, 2015 11:59 pm    Post subject: Reply with quote

Tarrel wrote:
peaceful_life wrote:
johnhemming2 wrote:
Clearing banks can only create broad money. The cannot create narrow money. It is narrow money that is needed for liquidity.


John, as far as you're aware, what IS money?...in your opinion.


I've given up trying to answer that one. Now just pursuing a life-strategy around trying to need as little of it as possible (whatever "it" is!)


Based on the irony that you've now afforded yourself the head-space to feel so indifferent to it, temporarily.

Breath brother....and think a while, people and planet are suffering for this shit.

Did you test the nitrogen levels from the gorse decomposition btw?
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Catweazle



Joined: 17 Feb 2008
Posts: 2230
Location: Little England, over the hills

PostPosted: Sun Jul 19, 2015 12:02 am    Post subject: Reply with quote

It strikes me that whenever someone uses fancy terms for "debt" someone else is going to get screwed.

Mr Hemming, as an aspiring politician, perhaps you would do well to talk to voters in language they understand.
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UndercoverElephant



Joined: 10 Mar 2008
Posts: 9871
Location: south east England

PostPosted: Sun Jul 19, 2015 12:59 am    Post subject: Reply with quote

johnhemming2 wrote:
It remains, however, that for the bank to pay away the credit balance to someone else


The borrower pays the principal back to the bank, and the bank destroys it, keeping the interest.
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3rdRock
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PostPosted: Sun Jul 19, 2015 5:03 am    Post subject: Reply with quote

John, I'd suggest you watch this video which will help you to appreciate how money works.
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