Writing the unthinkable in the Telegraph

[stumuzz]

]Oh please, you really will have to do better than that. As you well know, UE was merely making the point, by way of mild facetiousness, the level of very real disgust that he and many others have for a particular class of high-rolling, WE ARE DODGY investment bankers.

Ahh, it was a joke. OK. Thanks for that.

You're pathetic

Abuse! result.

[Little John]

Only central banks can create money......

Actually they don’t. They create imaginary money against a bond issued by the government and has to be paid back. the money is lent to commercial banks at the base rate and then multiplied by fractional reserve banking and lent to industry.

Industry creates the real money and pays back the banks leaving most of the real money in circulation. Some is kept by the commercial banks and some is kept by the central banks, the bond is paid off and the imaginary money destroyed.

The real money needs energy for its creation and a growth in this economy needs a growth in energy use. Hence the problem with banks now we are at peak oil (use, demand, supply, geological constraints.. whatever...)

Therefore

Money = Energy

Exactly.

There is an old journalistic maxim that states you should "follow the money" if you want to know the truth of a story. However, that maxim is really only derivative as opposed to axiomatic. If you really want to know the truth, you should "follow the resources", the most crucial off all being energy itself. Real wealth is thus embodied in natural resources that are extracted from the earth in some way. That embodied wealth is then given added value by the the further work done by man on those resources. Take any pound sterling and follow all of the transactions that it has ever been involved in and you will end up in a field somewhere.

All of the wealth, mentioned above, is thus symbolically represented in the form of "money". This link between money and the things it represents can either be direct, as in the case of money that is directly backed by a commodity such as gold. Or, it can be an indirect link via fractional-reserve-banking whereby the money is a-priori lent into existence based on an expectation of how much real stuff is out there and/or an expectation of how much stuff is going to be out there at some point in the future and it is this last point on which all the trouble rests.

Too much money lent into existence based on unreasonably inflated expectations of how much the economy will grow in the future inevitably leads to economic disaster. In that respect, the current crisis is no different to many that have gone before. What makes this crisis different, though, is that all of the previous crises were eventually resolved by future growth catching up with and swallowing the unreasonable promises to pay, thus bringing the money supply back into line with the economy's capacity to deliver on those promises. This time, the economy cannot grow due to resource constraints. This time, the promises cannot be honoured. The debt's can never be repaid. Either the debts will be extinguished via default or they will be rendered worthless via currency debasement. Or both.

Everything else is details.

[jonny2mad]

http://www.telegraph.co.uk/finance/comm ... nkers.html

One could slash private debt by 100pc of GDP, boost growth, stabilize prices, and dethrone bankers all at the same time. It could be done cleanly and painlessly, by legislative command, far more quickly than anybody imagined.

The conjuring trick is to replace our system of private bank-created money -- roughly 97pc of the money supply -- with state-created money. We return to the historical norm, before Charles II placed control of the money supply in private hands with the English Free Coinage Act of 1666.

Specifically, it means an assault on "fractional reserve banking". If lenders are forced to put up 100pc reserve backing for deposits, they lose the exorbitant privilege of creating money out of thin air.

The nation regains sovereign control over the money supply. There are no more banks runs, and fewer boom-bust credit cycles. Accounting legerdemain will do the rest. That at least is the argument.

Some readers may already have seen the IMF study, by Jaromir Benes and Michael Kumhof, which came out in August and has begun to acquire a cult following around the world.

[continues]

Well, well, well....

Well last time someone threw off the international bankers issued their own money it worked for a while, then they got bombed flat the country got divided with a great big wall down the center, and the bankers came back.

So yes its possible to do, yes its a good idea, but some group wants the present system

[emordnilap]

The recession and banking debacle was caused by an oil price spike and the greed of ordinary everyday people.

A greed created and encouraged by the political culture. You might not like regulation but, properly written and enforced, it lessens harm.

[Little John]

Ahh, it was a joke. OK. Thanks for that.

You're pathetic

Abuse! result.

Okay, since I am unacquainted with you personally I am not in a position to say whether or not you are personally pathetic and so I retract the specific assertion.

However, your cheap, rhetorical strategy to project faux-offence in order to circumvent, undermine and misdirect the substance of debate on this topic is pathetic.

[JavaScriptDonkey]

Probably not a good idea to put me and an investment banker in the same room.

Fractional reserve banking means that for every £1 you have deposited at your bank, you can magic another £9 (for example) into existence. Describing it as JSD has done makes no difference to the reality, as explained in the Telegraph article. It is an exorbitant priviledge, and it has been abused to the extent that the priviledge must now be withdrawn.

We have two very different things here.

I say that a bank must have money on deposit and then it can lend that money out, retaining only a fraction of what was originally on deposit in case of withdrawals.
That is fractional reserve banking.

You say that a bank can simply lend more money than it has.

In my case the total amount of value of the held reserves plus the lent out capital is the same as the amount originally deposited.

In your case the total reserves and loans held by the bank is 10x the original deposit.

The distinction is very, very important.

[RogueMale]

Probably not a good idea to put me and an investment banker in the same room.

Fractional reserve banking means that for every £1 you have deposited at your bank, you can magic another £9 (for example) into existence. Describing it as JSD has done makes no difference to the reality, as explained in the Telegraph article. It is an exorbitant priviledge, and it has been abused to the extent that the priviledge must now be withdrawn.

We have two very different things here.

I say that a bank must have money on deposit and then it can lend that money out, retaining only a fraction of what was originally on deposit in case of withdrawals.
That is fractional reserve banking.

You say that a bank can simply lend more money than it has.

In my case the total amount of value of the held reserves plus the lent out capital is the same as the amount originally deposited.

In your case the total reserves and loans held by the bank is 10x the original deposit.

The distinction is very, very important.

The way fractional reserve banking works is this.

Someone deposits $1000 with bank A. Bank A can then lend out most (say, 90%) of this money to someone else, keeping a fraction (10%) in reserve. The $900 lent by bank A can then be deposited in bank B, which can lend $810. And so the process repeats itself.

The banks have kept $100 + $90 + $81 + ... on deposit, a total of $1000. Meanwhile, out of thin air, they have created $900 + $810 + ..., a total of $9000. Not only that, but they're charging interest (let's say 5% APR) on the $9000 they lend, so they get $450. And they pay, say 4% interest on deposits, i.e. $40. That's a net profit of $450. A nice little earner.

[kenneal - lagger]

Probably not a good idea to put me and an investment banker in the same room.

Fractional reserve banking means that for every £1 you have deposited at your bank, you can magic another £9 (for example) into existence. Describing it as JSD has done makes no difference to the reality, as explained in the Telegraph article. It is an exorbitant priviledge, and it has been abused to the extent that the priviledge must now be withdrawn.

We have two very different things here.

I say that a bank must have money on deposit and then it can lend that money out, retaining only a fraction of what was originally on deposit in case of withdrawals.
That is fractional reserve banking.

You say that a bank can simply lend more money than it has.

In my case the total amount of value of the held reserves plus the lent out capital is the same as the amount originally deposited.

In your case the total reserves and loans held by the bank is 10x the original deposit.

The distinction is very, very important.

The loan agreement that you sign for your £1000 loan becomes an asset on the books of the bank against which they can borrow.

Everybody thinks that is the way things work in banking, JSD, and it's probably the way *ankers would like us all to think, but it's wrong.

[extractorfan]

What I don't understand when there's talk about how banks loan out 100's of percent of depostis we can have a table like this from the ft:
http://www.ft.com/cms/s/0/b3446c56-a58f ... z2ArcHqe22

The table at the above linke says in 2011, HSBC (for example) had a loan to deposit ratio of 83.35%, surely if they'd lent out multiples it would be over 100, as some of the ratio's are but not in multiples of 100.

I can see how banks can lend to other banks, and have heard the phrase "inter-bank lending rate" for obvious reasons but this is more to do with required liquidity as none of these banks seem to holde enough cash in reserve. There would be no point only lending money top each other in order to inflate the money supply or there would be hyper inflation yet no money in the economy.

The other thing I can't get my head around, although it seems plausable that banks can in theory lend out 999% (or whatever) of a deposit, if they were all in cahoots, why then did quantative easing; aka bank of england printing money not work. They could have just balanced all their books over night.

I have watched money as debt and a load of other internet documentaries about money. Oh, and if a bank can lend out 90% of my £100 and charge interest on it then they are in effect creating money out of thin air, so private banks can indeed create money, just not on the scale (I don't believe) that is alleged by many anti bankers.

I'm sure this post is very rambling, it's hard to articulate something that you admit you don't fully understand.

[kenneal - lagger]

What I don't understand when there's talk about how banks loan out 100's of percent of depostis we can have a table like this from the ft:
http://www.ft.com/cms/s/0/b3446c56-a58f ... z2ArcHqe22

I got through to a request for payment for a subscription with that URL.

The table at the above linke says in 2011, HSBC (for example) had a loan to deposit ratio of 83.35%, surely if they'd lent out multiples it would be over 100, as some of the ratio's are but not in multiples of 100.

If they count your loan note as a deposit they can loan another 83.55% of that as well. It is well known that savings in this country are historically low but lending and debt are historically high so banks cannot be lending only what they have on deposit or lending rates would be historically low as well.

I can see how banks can lend to other banks, and have heard the phrase "inter-bank lending rate" for obvious reasons but this is more to do with required liquidity as none of these banks seem to holde enough cash in reserve. There would be no point only lending money top each other in order to inflate the money supply or there would be hyper inflation yet no money in the economy.

The other thing I can't get my head around, although it seems plausable that banks can in theory lend out 999% (or whatever) of a deposit, if they were all in cahoots, why then did quantative easing; aka bank of england printing money not work. They could have just balanced all their books over night.

I have watched money as debt and a load of other internet documentaries about money. Oh, and if a bank can lend out 90% of my £100 and charge interest on it then they are in effect creating money out of thin air, so private banks can indeed create money, just not on the scale (I don't believe) that is alleged by many anti bankers.

I'm sure this post is very rambling, it's hard to articulate something that you admit you don't fully understand.

Banks need to have enough money in the vaults to cover any expected losses. As they are expecting the housing market, a very significant part of their asset base, to collapse they aren't lending much money until they have built their reserves to cover this event. As all the other banks have significant housing based assets they won't lend to each other case that other bank's portfolio is the first to go kaput.

And yes, private banks create money at the click of a computer keyboard, once you have signed on the dotted line to give them their asset to loan against.

[JavaScriptDonkey]

Everybody thinks that is the way things work in banking, JSD, and it's probably the way *ankers would like us all to think, but it's wrong.

No that IS the way it works. The alternative suggested is what the various YouTube educated activists have convinced themselves to be true as an alternative to dealing with their own failures.

Banks have to have money deposited with them before they can offer loans and the central bank regulate the risk exposures through more-or-less rigorous auditing.

You can argue about the effectiveness of that auditing and the level of risk exposure but I don't see the mileage in pretending Barclays for instance can generate an endless stream of cash by simply participating in a Peter/Paul lending circle with Lloyds.

[JavaScriptDonkey]

I got through to a request for payment for a subscription with that URL.

For those without a valid FT subscription the data comes from Standards & Poor.

\How loan-to-deposit ratios have changed (%)
Year Barclays HSBC Lloyds RBS
2005 98.48 88.88 133.47 125.24
2006 115.09 88.15 135.12 126.15
2007 125.05 84.87 134.02 127.87
2008 146.65 80.78 172.36 150.3
2009 137.27 82.66 168.91 133.89
2010 130.22 83.03 154.93 118.95
2011 124.00 83.35 139.35 111.11
Source: Standard & Poor’s database. Ratios differ from reported numbers. Note: Lloyds data prior to 2008 relates to Lloyds TSB Group PLC

[JavaScriptDonkey]

Show me the FRB regulations that limit the capacity of commercial banks to lend money they don't have

Sorry I missed this request Steve.

The BIS Basel 3 regulations should have that covered.

[SleeperService]

Show me the FRB regulations that limit the capacity of commercial banks to lend money they don't have

Sorry I missed this request Steve.

The BIS Basel 3 regulations should have that covered.

Column 3 Leverage Ratio is how money is 'created from nothing' What you've been confusing is The Liquidity coverage ratio. Capital Requirement is 'bank speak' for how much money they need to 'create'. In the case of a retail bank it's the sum they approach their merchant partner for.

In your figures 2008 Barclays shows loans at 146.65% of deposits which rather shoots your earlier waffle in the foot Despite S&P's footnote which translates as 'the best figure we could come up with based on the chicken entrails we consulted'.

BTW anybody who has taken any serious interest in events KNOW that figure to be low (It is believed to be close to 200% the figures suggest Lloyds were similar) reinforced by the slow decline after 2008 against a background of economic catastrophie.

[extractorfan]

BTW anybody who has taken any serious interest in events KNOW that figure to be low (It is believed to be close to 200% the figures suggest Lloyds were similar) reinforced by the slow decline after 2008 against a background of economic catastrophie.

Yes, but why weren't they all at it? And surely if the Internet documentaries were correct the ratios would be way above 200.

And if it's because they're all in cahoots then quantative easing would solve the problem, would it not?

Seems to me that these tables show irrisponsibility on an incredible scale, but don't back up the alleged lending out of non existent money, just the creation of money based on the expectation of growth.