Saturday, April 25, 2020

Fractional Reserve Banking Debate - Question

I've been in debate with an ex CEO of a bank. He says banks lend out deposits and called me a conspiracy theorist.

Anyway, two interesting articles

Banks do not create money out of thin air, by Pontus Rendahl, Lukas B. Freund


In recent years, some have claimed that banks create money ‘ex nihilo’. This column explains that banks do not create money out of thin air. From an economic viewpoint, commercial banks create private money by transforming an illiquid asset (the borrower’s future ability to repay) into a liquid one (bank deposits); they would quickly be insolvent otherwise. In addition to bank solvency representing a constraint on private money creation, banks require access to liquid reserves in order to be able to engage in money creation.

Banks do not create money out of thin air



Pontus Rendhl and Lucas B. Friund debunked.



What answer can I give to this tweet below? Does anyone have a good article I can read on it.


Its a daft idea that banks lend out of reserves, because reserves are what retail banks lend to the central bank.
Banks lend out of deposits. If you don't agree then explain why deferred spending in the form of deposits is always slightly greater than loans granted.

9 comments:

Matt Franko said...

kevin,

The regulatory leverage ratio for banks is (A-L)/A = 0.1

its a positive number...

So Liabilities (where Deposits are coded) are always going to be LESS than total Assets (where Loans are coded)..

If it ever goes negative like this guy says, then Liabilities will be in excess of Assets and that is called youre busted out... and the bank is going to be closed down by regulators...

You did say he was an EX ceo....

Matt Franko said...

Maybe he blew out his bank thinking this way?

Kevin, see what Degree the guy has...

Kaivey said...

He did. But I'm not the only one debating him. We even put out the Bank of England statement saying that banks create the money, but he said they were wrong too.

hoonose said...

Question - Does it matter whether the bank is a Federal Reserve member?

Joe said...

Maybe this helps?
https://www.theaustralian.com.au/business/business-spectator/news-story/the-imf-gets-radical/0d087d6ae933773463ce5ebcc957b77c

from an IMF working paper
"The critical feature of our theoretical model is that it exhibits the key function of banks in modern economies, which is not their largely incidental function as financial intermediaries between depositors and borrowers, but rather their central function as creators and destroyers of money. A realistic model needs to reflect the fact that under the present system banks do not have to wait for depositors to appear and make funds available before they can on-lend, or intermediate, those funds. Rather, they create their own funds, deposits, in the act of lending. This fact can be verified in the description of the money creation system in many central bank statements, and it is obvious to anybody who has ever lent money and created the resulting book entries."

Ralph Musgrave said...

The first article mentioned above (by Rendahl and Freund) is nonsense. First, they say two or three times in the article that commercial banks DO CREATE money, while the basic thrust of the article is to argue that they don’t!

Second, the definition of money given in every dictionary of economics is along the lines of “Anything widely accepted in payment for goods and services or in settlement of a debt”.

When a commercial bank credits its home made dollars to your account because it has just loaned you some money, the undeniable reality is that those home made dollars are “widely accepted…..”. Ergo those home made dollars are money. QED. End of argument.

Incidentally, I just put an article on the Medium site putting an argument for converting to a system (i.e. full reserve banking) where private money creation is banned. See:

https://medium.com/@ralph_47183/the-crucial-flaw-in-the-bank-system-2b1d36b194de


Matt Franko said...

"obvious to anybody who has ever... created the resulting book entries."

That 'anybody' would be a person trained in Accounting Science...

Then the trained Artists (not qualified in Accounting or Science) dont understand this so they think the figurative language "money!" is LITERAL language ...

This is known by cognitive scientists as a "reification error"...

Then you see these Artists in platonistic dialog (thesis vs anti-thesis) back and forth about how the figurative "money!" is CREATED... like "money!" is REAL or something...

ie morons...

Matt Franko said...

Then eventually the Artists die off... and the next generation of Artists surviving them will synthesize the opposing Theses of the deceased into a new Thesis and then others like them will create anti-Thesis in opposition to the new Thesis which is a synthesized product of former Thesis and anti-Thesis of the dead Artists...

Rinse and repeat...

That is why we never get anywhere in the discipline of Economics.....

Science does not operate this way AT ALL...

Kaivey said...

Thanks. I'll have a look.