David Andolfatto recently published "Reconciling Orthodox and Heterodox Views on Money and Banking," which discusses the theoretical split between recent mainstream thinking and heterodox views on banking. From my perspective, he is addressing heterodox critiques of mainstream thinking that I am not particularly interested in; in fact, based on his criteria, I would be closer to "mainstream" than "heterodox" -- as would possibly be Hyman Minsky. I would view the problem with mainstream modelling as resulting from a blind spot regarding the business sector. The fact that Andolfatto's proposed model used to structure the debate does not include a business sector might be used as evidence of my claim about that blind spot....Bond Economics
Heterodox/Mainstream Views On Banking
Brian Romanchuk
Banks do not in fact lend reserves -- they lend their deposit liabilities (which are incidentally made redeemable for cash). (Fullwiler, 2012)
ReplyDeleteThey do neither; instead banks CREATE additional liabilities for fiat when they "lend."
Someone needs to take a basic accounting course.
Andrew Anderson is correct. Banks create loan money out of thin air.
ReplyDeleteBank loan money is gradually destroyed (i.e. zeroed out) as the bank loan is paid off. This is the principal of the loan. Banks make their profit on the interest paid on top of the principal.
If you take a $200,000 fixed rate mortgage loan from a bank on a 30-year term, then at the end of the 30 years the $100,000 principle will be destroyed, while the bank will have collected an additional $294,000 in interest, which is profit for the bank.
In fact, during your first ten years, almost two thirds of each monthly payment will be interest alone.
It's quite insane.
If you don't keep paying the bank for 30 years, the bank takes your property. As the new owner of the property, the bank is supposed to pay property taxes, but banks have bribed politicians so that banks don't have to pay property taxes.
TRIVIA: When the National Socialists took power in Germany, they embarked on a house-building spree. The Reichsbank offered Germans a 4% fixed rate mortgage on a house, with the proviso that for every child a German family had, a full 25% of the couple's mortgage was cancelled. If a couple had four children (or produced four while living in the house) their mortgage was annulled entirely. The National Socialists did this to boost the German population, solve the housing crisis, and keeps workers happy and industrious (i.e. not crippled by debt bondage).
It is one reason why the neoliberal Western Empire calls National Socialist Germany "pure evil."
And almost everyone buys into neoliberal lies.
Just now I checked my mortgage calculator and I realized that my numbers (above) were off.
ReplyDeleteAssume a $200,000 fixed rate mortgage at 5.25%. At the end of 30 years you will have paid a total of $397,587, of which 197,587 (half of the total paid) will be interest -- i.e. bank profit.
Averaged out over 360 months, this means the bank collects $548.85 in profit each month, for loan money that the bank creates out of thin air.
I left a comment after Brian's article - for the benefit of the two people and three cockroaches who are interested in my views....:-)
ReplyDelete