And price gouges to boot. Cost to profit ratio for a high street bank pre-crash was between 30-40%. Not many businesses can go on making over 50% profit on their deals. Nice protectionist laws preventing other people from entering the marketplace are required.kenneal - lagger wrote: The real injustice of this system is the fact that the bank charges you interest, and gets very rich, on money that it never had in the first place.
The future of money
Moderator: Peak Moderation
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biffvernon
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No, I don't often read the Spectator.its value is rocketing. A month ago — out of interest, rather than a desire for heroin, Mum — I bought £100 of Bitcoin. Two weeks ago, like, I said, it was worth £157. Today, it’s worth £213.
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marknorthfield
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One of the many points 'Where Does Money Come From?' makes is that, in the authors' assessment of the evidence available, the economics textbook 'money-multiplier' theory is outdated and inaccurate. They argue that banks are not simply intermediaries, that central banks do not have control of the money supply, and that banks are not mathematically limited by a reserve ratio from base money, at least not in the UK.
Their reasoning for this is that the traditional theory suggests banks need depositors, and the reality is they don't. They rely purely on their own confidence in the capacity of the borrower to repay the loan. They quote Paul Tucker (Deputy Governor of BoE and MPC member) from 2007:
(In a later chapter on regulation, the book gives more detail on the abolition of these compulsory reserve ratios over time: from 32% in 1947 when the BoE was nationalised, to 27% in 63, 12.5% in 71, to nothing at all in 81. They also mention in said chapter the - defunct as of today - FSA bringing in 'stress-testing' for the potential of 100 per cent outflows of liabilities over two weeks without access to wholesale funding, but that they would wait until the recession was over and banks balance sheets had improved before imposing the rules. I don't know what the situation is with this now.)
Back in the money-multiplier chapter I first quoted, they say:
'This lack of control can be seen empirically over the last few decades. Prior to the crisis, the ratio between commerical bank money and base money increased so much that in 2006 there was £80 of commercial bank money for every £1 of base money.' (BoE statistics - ratio of M4 to M0)
and
'The current arrangements are not inevitable, however. The Bank of England or the Government could intervene in order to influence or control money created by commercial banks, as they did in the past... The authorities are not free of responsibility for results produced by the largely unchecked behaviour of the banking sector.'
and
'When banks create credit, and hence expand the money supply, whether the money is used for GDP or non-GDP transactions is crucial for determining the impact on the economy. Unproductive credit creation (for non-GDP transactions) will result in asset price inflation, bursting bubbles and banking crises as well as resource misallocation and dislocation... Historical evidence suggests that, left unregulated, banks will prefer to create credit for non-productive financial or speculative credit, which often maximises short-term profits.'
Taking the wider view, it's interesting that this whole era of increasingly laissez-faire banking has gone hand in hand with globalisation and an explosion in the use of tax havens, not to mention the rise of the unregulated shadow banking system. You may not be thrilled to know that the latter is most definitely thriving again after a brief blip for the financial crisis. Meanwhile, the rest of us mortals are wallowing around in our 'necessary' austerity.
That a sector responsible for financial 'innovations' causing so much economic damage is 'worth' more than ever before is testament to how little has really been done these past five years. That tiny measures like the financial transaction tax (0.01% for derivatives - OMG etc) are so fiercely opposed by the UK's current leadership demonstrates exactly where their priorities lie in tackling this.
In my more optimistic moments, I like to think that as energy constraints force us to localise things once more, we might escape from this 'race to the bottom' of global finance. But of course there'll be all manner of other costly problems to deal with, and life will undoubtedly be harder work in all manner of ways, so it's a double edged sword if ever there were. And I also have no doubt that the financial industry will look to consolidate its unjustified advantages at all times. We can but try to educate ourselves and others, and act accordingly.
Their reasoning for this is that the traditional theory suggests banks need depositors, and the reality is they don't. They rely purely on their own confidence in the capacity of the borrower to repay the loan. They quote Paul Tucker (Deputy Governor of BoE and MPC member) from 2007:
As of the time of writing (it's a second edition from last year), in the UK there are currently no direct compulsory cash-reserve requirements placed on banks or building societies to restrict their lending. The wikipedia page on this subject puts this in context with other countries.'Subject only (but crucially) to confidence in their soundness, banks extend credit simply by increasing the borrowing customer's current account, which can be paid away to wherever the borrower wants by the bank 'writing a cheque on itself'. That is, banks extend credit by creating money.'
(In a later chapter on regulation, the book gives more detail on the abolition of these compulsory reserve ratios over time: from 32% in 1947 when the BoE was nationalised, to 27% in 63, 12.5% in 71, to nothing at all in 81. They also mention in said chapter the - defunct as of today - FSA bringing in 'stress-testing' for the potential of 100 per cent outflows of liabilities over two weeks without access to wholesale funding, but that they would wait until the recession was over and banks balance sheets had improved before imposing the rules. I don't know what the situation is with this now.)
Back in the money-multiplier chapter I first quoted, they say:
'This lack of control can be seen empirically over the last few decades. Prior to the crisis, the ratio between commerical bank money and base money increased so much that in 2006 there was £80 of commercial bank money for every £1 of base money.' (BoE statistics - ratio of M4 to M0)
and
'The current arrangements are not inevitable, however. The Bank of England or the Government could intervene in order to influence or control money created by commercial banks, as they did in the past... The authorities are not free of responsibility for results produced by the largely unchecked behaviour of the banking sector.'
and
'When banks create credit, and hence expand the money supply, whether the money is used for GDP or non-GDP transactions is crucial for determining the impact on the economy. Unproductive credit creation (for non-GDP transactions) will result in asset price inflation, bursting bubbles and banking crises as well as resource misallocation and dislocation... Historical evidence suggests that, left unregulated, banks will prefer to create credit for non-productive financial or speculative credit, which often maximises short-term profits.'
Taking the wider view, it's interesting that this whole era of increasingly laissez-faire banking has gone hand in hand with globalisation and an explosion in the use of tax havens, not to mention the rise of the unregulated shadow banking system. You may not be thrilled to know that the latter is most definitely thriving again after a brief blip for the financial crisis. Meanwhile, the rest of us mortals are wallowing around in our 'necessary' austerity.
That a sector responsible for financial 'innovations' causing so much economic damage is 'worth' more than ever before is testament to how little has really been done these past five years. That tiny measures like the financial transaction tax (0.01% for derivatives - OMG etc) are so fiercely opposed by the UK's current leadership demonstrates exactly where their priorities lie in tackling this.
In my more optimistic moments, I like to think that as energy constraints force us to localise things once more, we might escape from this 'race to the bottom' of global finance. But of course there'll be all manner of other costly problems to deal with, and life will undoubtedly be harder work in all manner of ways, so it's a double edged sword if ever there were. And I also have no doubt that the financial industry will look to consolidate its unjustified advantages at all times. We can but try to educate ourselves and others, and act accordingly.
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Little John
There's not much we can do in terms of actions Mark. The money lenders have got it all sewn up, from the politicians down. The only action we, the people, could do that would make any difference would be to put a wall against their backs because that is the only thing the bastards will ever understand; the only thing that will recover this world from the hegemony of the money lenders.marknorthfield wrote:One of the many points 'Where Does Money Come From?' makes is that, in the authors' assessment of the evidence available, the economics textbook 'money-multiplier' theory is outdated and inaccurate. They argue that banks are not simply intermediaries, that central banks do not have control of the money supply, and that banks are not mathematically limited by a reserve ratio from base money, at least not in the UK.
Their reasoning for this is that the traditional theory suggests banks need depositors, and the reality is they don't. They rely purely on their own confidence in the capacity of the borrower to repay the loan. They quote Paul Tucker (Deputy Governor of BoE and MPC member) from 2007:As of the time of writing (it's a second edition from last year), in the UK there are currently no direct compulsory cash-reserve requirements placed on banks or building societies to restrict their lending. The wikipedia page on this subject puts this in context with other countries.'Subject only (but crucially) to confidence in their soundness, banks extend credit simply by increasing the borrowing customer's current account, which can be paid away to wherever the borrower wants by the bank 'writing a cheque on itself'. That is, banks extend credit by creating money.'
(In a later chapter on regulation, the book gives more detail on the abolition of these compulsory reserve ratios over time: from 32% in 1947 when the BoE was nationalised, to 27% in 63, 12.5% in 71, to nothing at all in 81. They also mention in said chapter the - defunct as of today - FSA bringing in 'stress-testing' for the potential of 100 per cent outflows of liabilities over two weeks without access to wholesale funding, but that they would wait until the recession was over and banks balance sheets had improved before imposing the rules. I don't know what the situation is with this now.)
Back in the money-multiplier chapter I first quoted, they say:
'This lack of control can be seen empirically over the last few decades. Prior to the crisis, the ratio between commerical bank money and base money increased so much that in 2006 there was £80 of commercial bank money for every £1 of base money.' (BoE statistics - ratio of M4 to M0)
and
'The current arrangements are not inevitable, however. The Bank of England or the Government could intervene in order to influence or control money created by commercial banks, as they did in the past... The authorities are not free of responsibility for results produced by the largely unchecked behaviour of the banking sector.'
and
'When banks create credit, and hence expand the money supply, whether the money is used for GDP or non-GDP transactions is crucial for determining the impact on the economy. Unproductive credit creation (for non-GDP transactions) will result in asset price inflation, bursting bubbles and banking crises as well as resource misallocation and dislocation... Historical evidence suggests that, left unregulated, banks will prefer to create credit for non-productive financial or speculative credit, which often maximises short-term profits.'
Taking the wider view, it's interesting that this whole era of increasingly laissez-faire banking has gone hand in hand with globalisation and an explosion in the use of tax havens, not to mention the rise of the unregulated shadow banking system. You may not be thrilled to know that the latter is most definitely thriving again after a brief blip for the financial crisis. Meanwhile, the rest of us mortals are wallowing around in our 'necessary' austerity.
That a sector responsible for financial 'innovations' causing so much economic damage is 'worth' more than ever before is testament to how little has really been done these past five years. That tiny measures like the financial transaction tax (0.01% for derivatives - OMG etc) are so fiercely opposed by the UK's current leadership demonstrates exactly where their priorities lie in tackling this.
In my more optimistic moments, I like to think that as energy constraints force us to localise things once more, we might escape from this 'race to the bottom' of global finance. But of course there'll be all manner of other costly problems to deal with, and life will undoubtedly be harder work in all manner of ways, so it's a double edged sword if ever there were. And I also have no doubt that the financial industry will look to consolidate its unjustified advantages at all times. We can but try to educate ourselves and others, and act accordingly.
The trouble is, they know that themselves and so they keep us occupied with bread and circuses and just enough crumbs from the top table to make us think we had better keep our heads down and mouths shut for fear of losing what little we have. Oh, and they make sure to encourage us to turn on each other by laying the blame on the chavs, the dole scroungers, the single mothers, the old, the young, the immigrants (insert your scapegoat of choice here).
Things have to get a lot worse before they have a hope of getting better Mark.
Last edited by Little John on 01 Apr 2013, 14:17, edited 2 times in total.
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marknorthfield
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JavaScriptDonkey
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- Location: SE England
Once upon a time banks were indeed built on an asset base raised from depositors comprised of mainly gold backed currency guaranteed by the state.
This has not been the case for some time and instead they are built on assets that float in the market.
The former rested on the ability of the state to fix and set the gold price. The latter rests on the value of those assets as determined by the market.
The problem we had was that those assets were circular in that they were (indirectly) stocks in other banks who in turn were funded by stocks in other banks.
If the banks were underpinned by cash and stocks in non-banking companies then the problem is diminished.
Unfortunately our banks are getting heavily into Government bonds which may yet turn out to be a very bad thing indeed.
They are not creating money anymore than you are when the value of your house goes up.
This has not been the case for some time and instead they are built on assets that float in the market.
The former rested on the ability of the state to fix and set the gold price. The latter rests on the value of those assets as determined by the market.
The problem we had was that those assets were circular in that they were (indirectly) stocks in other banks who in turn were funded by stocks in other banks.
If the banks were underpinned by cash and stocks in non-banking companies then the problem is diminished.
Unfortunately our banks are getting heavily into Government bonds which may yet turn out to be a very bad thing indeed.
They are not creating money anymore than you are when the value of your house goes up.
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Little John
Do I really need to explain the money-multiplier again?JavaScriptDonkey wrote:Once upon a time banks were indeed built on an asset base raised from depositors comprised of mainly gold backed currency guaranteed by the state.
This has not been the case for some time and instead they are built on assets that float in the market.
The former rested on the ability of the state to fix and set the gold price. The latter rests on the value of those assets as determined by the market.
The problem we had was that those assets were circular in that they were (indirectly) stocks in other banks who in turn were funded by stocks in other banks.
If the banks were underpinned by cash and stocks in non-banking companies then the problem is diminished.
Unfortunately our banks are getting heavily into Government bonds which may yet turn out to be a very bad thing indeed.
They are not creating money anymore than you are when the value of your house goes up.
Also, you have not yet addressed my immediately previous post to you on the special nature of money and how the relative demand destruction from oversupply in other commodities does not occur with money. Indeed, quite the opposite. The more money is produced, the greater will be the consequent demand for it.
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Snail
How to Train a Stubborn Donkey:Do I really need to explain ... again?
Many of us associate training a donkey to getting kicked, as these animals are known to be infamously stubborn. But this self-preserving part of their nature is only for defense. Otherwise, donkeys are social and intellectual animals that can be trained to follow simple commands.
Things You'll Need:
- Carrots
- Halter
- Soft broom ... http://www.ehow.com/how_2081811_train-donkey.html
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UndercoverElephant
- Posts: 13523
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- Location: UK
For somebody who is clearly intelligent on many/most topics, you are unbelievably slow when it comes to this one.JavaScriptDonkey wrote:Once upon a time banks were indeed built on an asset base raised from depositors comprised of mainly gold backed currency guaranteed by the state.
This has not been the case for some time and instead they are built on assets that float in the market.
The former rested on the ability of the state to fix and set the gold price. The latter rests on the value of those assets as determined by the market.
The problem we had was that those assets were circular in that they were (indirectly) stocks in other banks who in turn were funded by stocks in other banks.
If the banks were underpinned by cash and stocks in non-banking companies then the problem is diminished.
Unfortunately our banks are getting heavily into Government bonds which may yet turn out to be a very bad thing indeed.
They are not creating money anymore than you are when the value of your house goes up.
"We fail to mandate economic sanity because our brains are addled by....compassion." (Garrett Hardin)
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kenneal - lagger
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So JSD is slower to learn than a horse! I've noticed that. But then you can lead a horse to water but if it doesn't want to drink it won't. According to that piece donkeys are more stubborn than horses so I suppose we are wasting our time trying to teach him anything.
Action is the antidote to despair - Joan Baez
Having bought the money multiplier story hook line and sinker myself in the past, I'm now forced to acknowledge that JSD (and erstwhile opponent DominicJ) are correct and it's a gross oversimplification that yields the wrong result. Not only is all money that was created destroyed again when the loans are repaid, but the interest on the loans also remains in circulation through bank costs and dividends and the like and can be used to repay... the interest on loans that is meant to lead to exponential growth of the supply.
Money supply should be about the same as economic activity - obviously there's this whole concept of velocity of money and money paid in interest is more likely to sit in a bank or stockholder's safe than money loaned out but the constant growth money-multiplier effect I see referenced here is just dead wrong.
Money supply should be about the same as economic activity - obviously there's this whole concept of velocity of money and money paid in interest is more likely to sit in a bank or stockholder's safe than money loaned out but the constant growth money-multiplier effect I see referenced here is just dead wrong.
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marknorthfield
- Posts: 177
- Joined: 24 Nov 2005, 11:09
- Location: Bracknell
You may not wish to believe it, but the Deputy Governor of the Bank of England appears not to back you up (and I might add that Where Does Money Come From? has extensive references). Credit created electronically by banks in accounts is used as money and is counted in the broad money (M4) figure as defined by the Bank of England. The majority of transactions (by volume) are made electronically, so the numbers on the screen are all that matter in terms of the process.JavaScriptDonkey wrote: They are not creating money anymore than you are when the value of your house goes up.
As I've mentioned earlier, the authors believe there should be much greater constraints on this process by government, because history shows banks cannot be trusted to act in the interest of economic stability without some considerable degree of compulsion. I'm inclined to agree. The credit bubble of recent decades has created a massive financial headache for us all.
If you could provide a credible source for your claim, that would be useful for us to understand where you're coming from.
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marknorthfield
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That may well be a desirable state of affairs, but the available statistics don't back it up. According to figures from the BoE, a comparison of M4 and GDP indexed from 1970 show the two in step until the early/mid 80s, and then M4 began to gradually pull away from GDP until - at the time of the financial crisis - it was over 2.5 times greater. The gap hasn't closed very much since.AndySir wrote: Money supply should be about the same as economic activity
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Little John
Of course the money multiplier, taken by itself, is a simplification of a complex system. But that does not mean it is not in existence nor that it is not a significant driver of the money supply. Also, the money multiplier process does not deny that if the loans are repaid, the multiplied money in the system is extinguished via that repayment. However, the interest is another matter that really. The only way that is accounted for is by the issuance of new base money. Also, the whole point about the money multiplier is that it is never extinguished because as the money is being repaid, this allows the banks to re-stock their reserve ratio and so lend it back out again. In other words as long as there is a certain amount of base money in circulation, there will always be a certain multiple of that base money in circulation as bank cheque money.AndySir wrote:Having bought the money multiplier story hook line and sinker myself in the past, I'm now forced to acknowledge that JSD (and erstwhile opponent DominicJ) are correct and it's a gross oversimplification that yields the wrong result. Not only is all money that was created destroyed again when the loans are repaid, but the interest on the loans also remains in circulation through bank costs and dividends and the like and can be used to repay... the interest on loans that is meant to lead to exponential growth of the supply.
Money supply should be about the same as economic activity - obviously there's this whole concept of velocity of money and money paid in interest is more likely to sit in a bank or stockholder's safe than money loaned out but the constant growth money-multiplier effect I see referenced here is just dead wrong.
What exactly do you understand the money multiplier to mean Andy? I need to ask this before I decide whether I need to explain what it is or whether I need to look at my own understanding.