JavaScriptDonkey wrote:You have that reasoned backwards.
First I deposit £1000 then the bank can loan out £900 and just keep £100 to cover their liability to me. 10% fractional reserve banking. They keep a FRACTION of the RESERVES they need to cover their liabilities.
The clue is in the name.
So long as their accounts show that should they should be able to cover their positions then the BoE allow them to carry on trading.
If banks could just magic up 100x the money on deposit then there would never have been a banking crisis as the debt would have self inflated to fill the void.
The banking crisis was a crisis of cash flow. There was too much money tied up in buying oil and servicing debt and not enough left sloshing around to do everything else money has to do.
That is wrong. Or at least, it's only partially right about the wrong thing.
You are correct in arguing that UK domestic banks cannot lend simply money into existence because of fractional-reserve-ratio regulations. However, only a part of the "money" they lend out comes from actual deposits of their customers. A significant proportion of it comes from money they have borrowed from
commercial banks. The commercial banks do not have such fractional reserve ratio regulation placed upon them and so they really
can lend money into existence. Given that a commercial bank and a domestic bank are, in many instance simply different arms of the same overarching international financial organisation, this means that it can essentially circumvent and make a mockery of fractional reserve ratio regulations.
Now, of course it is true that the commercial banks must ultimately go to their central banks and make their books balance after-the-fact by borrowing it of the central bank overnight. Thus, the central bank, after the fact, lends such credit into existence (I refer to it as credit here because, in truth, that's what it really is). The central bank covers these lending by issuing bonds that they must repay in the future. Often these bonds are paid for on maturity by the issuance of even more bonds and so the ponzi-scheme grow on a global scale.
It was all bound to end in tears, The central banks could have put a stop to all of this nonsense, of course, by letting the commercial banks know, in advance, that they were going to begin to limit the amount of credit they were going to lend out into the banking system. Given that they didn't, this meant that if any one of the commercial banks had unilaterally refused the cheap and easy credit, their competitors, who did take the funny money, would have gained significant commercial advantage and so their shareholders would have booted them out and replaced them with board members who
did take the cheap credit.
The central banks, in lending this money into existence at interest, did so on the back of an expectation that tomorrow's economy would be bigger than today's. It has to be bigger, of course, to allow both the repayment of the capital plus the repayment of the interest. The problem is that tomorrow’s economy is
not going to be bigger than today's. In fact, it is going to be smaller. Thus, the debt's embodied in a massive proportion of our credit based money supply can
never be repaid.
There are essentially only two ways out of this crisis;
Either
1) the debts must be allowed to be defaulted on, in which case, a significant proportion of our "money" supply goes up in a poof of smoke with all of the deflationary consequences that follow.
Or
2) they print the money, push it out into the economy and make good on all of the debts. In which case, the money supply is trashed into inflationary oblivion.
Or
3) Issue loads of bonds, and rack up massive sovereign debt in the hope that somebody will figure out how to pay them back at some point long after they have retired form politics (otherwise known as "kicking the can down the road")
What our illustrious leaders appearing to be attempting to implement is a slow motion version (2) with a significant dollop of (3) thrown in for good measure. All of which is designed to avoid (1).
If they "succeed", they will fail and I think it likely they won't even succeed. Gravity will have it's way, in the end.
