Zoe Williams — How the actual magic money tree works

Shock data shows that most MPs do not know how money is created. Responding to a survey commissioned by Positive Money just before the June election, 85% were unaware that new money was created every time a commercial bank extended a loan, while 70% thought that only the government had the power to create new money.

The results are only a shock if you didn’t see the last poll of MPs on exactly this topic, in 2014, revealing broadly the same level of ignorance. Indeed, the real shock is that MPs still, without embarrassment, answer surveys.

Yet almost all our hot-button political issues, from social security to housing, relate back to the meaning and creation of money; so if the people making those choices don’t have a clue, that isn’t without consequence....

The Guardian
How the actual magic money tree works

Zoe Williams

Pam and Russ Martens — Federal Bank Regulator Drops a Bombshell as Corporate Media Snoozes

Last Monday, Thomas Hoenig, the Vice Chairman of the Federal Deposit Insurance Corporation (FDIC), sent a stunning letter to the Chair and Ranking Member of the U.S. Senate Banking Committee. The letter contained information that should have become front page news at every business wire service and the leading business newspapers. But with the exception of Reuters, major corporate media like the Wall Street Journal, Bloomberg News, the Business section of the New York Times and Washington Post ignored the bombshell story, according to our search at Google News.

What the fearless Hoenig told the Senate Banking Committee was effectively this: the biggest Wall Street banks have been lying to the American people that overly stringent capital rules by their regulators are constraining their ability to lend to consumers and businesses. What’s really behind their inability to make more loans is the documented fact that the 10 largest banks in the country “will distribute, in aggregate, 99 percent of their net income on an annualized basis,” by paying out dividends to shareholders and buying back excessive amounts of their own stock.

Hoenig writes that the banks are starving the U.S. economy through these practices and if “the 10 largest U.S. Bank Holding Companies were to retain a greater share of their earnings earmarked for dividends and share buybacks in 2017 they would be able to increase loans by more than $1 trillion, which is greater than 5 percent of annual U.S. GDP.”...

Hoenig also urged in his letter that there be a “substantive public debate” on what the biggest banks are doing with their capital rather than allowing this “critical” issue to be “discussed in sound bites.”

Much more in the post.

Wall Street On Parade
Federal Bank Regulator Drops a Bombshell as Corporate Media Snoozes
Pam Martens and Russ Martens

Peter Cooper — Short & Simple 13 – Private Credit Creation

We have seen that a national currency enters the economy when government spends, and that the recipients of the government spending can use the currency for various purposes, including to purchase goods and services. Government is therefore an original source of funds.

There is another original source of funds that gives people the ability to make purchases. This other source is private credit creation. Put simply, a household or firm can borrow from a bank or other financial institution and use the funds to spend....

The key for now is just to understand that our capacity to make purchases comes from two original sources – government spending and private credit creation.

heteconomist
Short & Simple 13 – Private Credit Creation
Peter Cooper

Warren Mosler — Credit check, Atlanta Fed

Still no signs of an upturn in US domestic private credit.

The Center of the Universe
Credit check, Atlanta Fed
Warren Mosler

JP Koning — Money in an economy without banks

Most of the world's money is currently in the form of deposits created by banks. After the 2008 credit crisis, which instilled a strong suspicion of banks among the public, it became fashionable to ask what money would look like in an economy without these organizations. Burn them to the ground or shutter them, what rises in their place? One vision is to pursue pure centralization: have the state monopolize all money creation, say by providing universally-available accounts at the nation's central bank. Positive Money is an example of this. Another alternative, by way of Satoshi Nakamoto, is to pursue radical decentralization: replace bank IOUs with digital commodity money in the form of bitcoin and other private cryptocoins.

I'm going to provide a few historical examples that sketch out a third option for replacing banks; bills of exchange. A system underpinned by bills of exchange is capable of converting illiquid personal IOUs into money using a distributed method of credit verification, as opposed to a centralized method patched through a banking organization. Unlike bitcoin, however, these are IOUs, not mere bits of digital ledger-space. While few people these days are familiar with the bill of exchange, in its hey day this instrument was responsible for executing a large chunk of the Western world's transactions.

Moneyness
Money in an economy without banks
JP Koning

EconMatters — Bank Loans Taking A Dive...

I am compelled to correct a report posted on Zerohedge about the cliff-dive going on in commercial, industrial and consumer loans....

EconMatters
Bank Loans Taking A Dive...

The Arthurian — This is the problem that topples nations

Art Shipman puts his finger on it, and it is endemic in capitalism with a monetary production economy in which most of the money is created through private lending.

However, this doesn't entirely absolve governments. It's not the spending, though but the lending. Where this is no central bank as the lender of last resort, excessive lending leads to boom-bust cycles that liquidate bad debt and this prevents extended periods of inflation as a tradeoff for recurrent depressions and panics. When central banking and the lender of last resort function is added, deep depressions are prevented but private debt is never deeply liquidated and the result can be demand-driven inflation.

While Austrian economic recommends liquidation of excessive debt, the powers that be have decided that recurrent depressions, panics and the potential for financial breakdown is too costly socially, politically and economically, and so have opted for central banking and the lender of lasts resort function. To counter inflation central banks are given politically independent control of monetary policy on the assumption that inflation can be controlled through managing the interest rate, the discount rate, and the reserve ratio.

Abba Lerner recommended using functional finance to manage fiscal policy instead of relying on "sound money" and monetary policy.

These are the principal approaches being put forward today, with central banking and monetary policy being dominant.

What Art doesn't mention is that while monetary policy might be able to contain inflation theoretically, historically it has affected the value of assets more than wages and prices. So the Fed's attempt to stoke some price inflation after the crisis in order to head of a deflation, the result has been largely a run up in financial asset markets, which are more sensitive interest rates than wages, prices, firm investment, or household consumption. 

So while the measures of inflation based on price level are almost unchanging in spite of the monetary "stimulus," what some would call "asset inflation" has been hot as asset valuation exceeds economic performance, which asset values are supposed to reflect. May be we need to start talking about "asset inflation" rather than the single category of asset appreciation regardless of circumstances.

The New Arthurian
This is the problem that topples nations
The Arthurian

Art has been working on this for some time. Download his paper, The New Arthurian Economics, 2009, at MPRA.

Peter Martin — Loan repayments destroy credit money. Right? Wrong. They don’t.

It is important to distinguish between the IOU of the borrower held by the bank when the loan is issued, which is indeed destroyed on repayment of the loan and the credit money issued by the bank, which is not destroyed.

Modern Monetary Theory: Real Economics
Loan repayments destroy credit money. Right? Wrong. They don’t.
Peter Martin

Loan demand surges as gov't spending slows under debt limit

In the last two weeks of 2012, total loans and leases at commercial banks in the US surged by $82 bln. That was sharpest two week increase in four years. What is happening here? One likely explanation is that vendors and other recipients of government payments may be getting bank loans to cover day-to-day operating expenses as government payments slow to a crawl under the debt ceiling. This is resulting in a temporary surge in bank credit as seen here and it could, potentially, dampen some of the negative impact of the current fiscal stalemate. However, you see how government "saving" is now just translating into non-government dissaving (debt growth). Too bad the clowns in Washington don't understand this.

Steve Randy Waldman — What is a bank loan?

When a bank makes a loan, does it create money “from thin air“? Are banks merely intermediaries, where “if people are borrowing, other people must be lending“? I consider these sorts of questions less and less helpful. Let’s just understand what a bank loan is, in terms of real resources and risk.

Read it at Interfluidity
What is a bank loan?
by Steve Randy Waldman