> In the simple ILF model, bank loans represent the intermediation of real savings, or loanable funds, between non-bank savers and non-bank borrowers. Lending starts with banks collecting deposits of real resources from one agent, and ends with the lending of those resources to another agent. In the real world, however, banks never intermediate real loanable funds,
> Rather, the key function of banks is the provision of financing, meaning the creation of new monetary purchasing power through loans ... The bank therefore creates its own funding, deposits, through lending. It does so through a pure bookkeeping transaction that involves no real resources
Read the whole thing. Digest it and don't get caught just trying to win an argument with a guy on the internet.
We are now through 2 layers of falsehoods.
Layer 1: there is a fixed amount of money
Layer 2: reserves and money multipliers
From the end of the article:
> To summarize, banks are not intermediaries of real loanable funds, they do not collect new deposits from non-bank savers. Instead they provide financing, they create new deposits for their borrowers. This involves the expansion or contraction of gross bookkeeping positions on bank balance sheets, rather than the channelling of real resources through banks.
A lot of the confusion comes from the fact that there are two sorts of money that are in circulation: base money and bank money. This blog post is only talking about bank money, and does not reference base money.
Base money (dollar bills, Euro notes, pound notes etc.) is controlled entirely by the central bank and base money can be created and destroyed by the central bank, whenever they like. Think of it as like digging some more gold or creating some more bitcoins.
Bank money is created by people either depositing base money with a bank, or indeed by a bank issuing a loan as described in the blog post. A deposit can be seen as a loan to the bank: all deposits are loans, all loans are deposits when looked at from the other PoV. Anyway, bank money has similar characteristics to base money - it can be used by purchase goods, it stores value etc.
I can buy a book with base money, by handing the merchant a few dollar bills. Or I can buy the book with bank money, by handing my bank card to the merchant and after some settlement magic my bank will stop owing me some money and will instead owe it to the merchant. The IOU is the bank money, it is a claim on base money that was previously deposited. Base money and bank money act similarly from my PoV, they are both denominated in dollars (or Euros or pounds or...) and they are normally interchangeable at a 1:1 rate. Sometimes they are not.. e.g. if my bank was nearly going bankrupt with no deposit insurance, I might be happy to get my base money back at 80 cents on the dollar from my bank money. Bank money has credit risk of the bank, base money has no counterparty risk.
Banks do need to have reserves of base money relative to the amount of bank money they are allowed to create; this is called Capital Adequacy and is a primary restraint on bank money creation. A bank has a limited amount of capital (its own real base money that is not owed to anyone else) and it cannot easily create more capital. If a bank is lending out too much to borrowers, then its Capital Adequacy Ratio will get out of line and it will have to stop lending.
Base money is 3% of all money. Go ahead pull the lot out. It won't matter. Only parking meters that can't take cards will feel it.
Reserves are unconstrained as banks lend to each other after creating credit via deposits from borrowers. If two banks create 400k and then each borrower buys land with this 400k and the seller then deposits the fresh "money" with one another's bank they have 400k credit. Demand is pulled forward and the credit will be destroyed only when it is paid down.
Money supply since the end of the gold standard (I'm not a goldbug) has rocketed. What constrained the near vertical rise? Nothing.
Capital is absolutely not unconstrained! It is one of the most difficult things for a bank to increase its capital base.
Base money is a low percentage compared to bank money - its true - but all bank money is a claim on base money. Pull out the base money and every bank has a liquidity crisis and would in turn have to recall every loan. More than parking meters would feel it; a bank cannot issue a loan without appropriate capital base, and only high quality liquid unencumbered assets can be considered capital, which cannot be created by a bank (a new loan/deposit is not an unencumbered asset). In practice capital can only be increase by a new share issue or by retaining profits over years.
I read the bank underground blog post. It is fine and interesting, but it is talking entirely about bank money creation (loans/deposits) and not about base money or capital ratios. That's OK, no reason for an article to talk about everything. But just because one article doesn't talk about capital in the point it is making, doesn't mean that capital is not an important constraint in banking.
There is a reason why bank CEOs have been in recent years judged heavily on their Tier 1 capital ratios, and why they consider it difficult to adjust these ratios. Issuing a new loan makes the bank's capital ratio worse not better.
It's very frustrating to discover that everything you've learned in college was either very wrong or completely wrong. This is why I tell people that parties and social time are so much more important than classes, for which I get called an idiot.
I've almost never had a bank loan. Banks have traditionally refused to lend to me. Thus we can't have me start with the FMC model; I've always lived in the ILF model.
If banks aren't reliant for central banks or others for their money, then why are there not more banks? Why don't we see poor people just set up their own bank, loan money to each other, then use that money to go and buy food and shelter?
If banks create money, then where do Bitcoin come from, and why are they valued? What happens if everyone stops using other currencies and use Bitcoin instead? And how does the world of Finance plan to stop this?
What? You want the plebs at the front of the queue? You need a banking license. Go set up your own bank that is not an intermediary but instead issues dollars. I bet the cops come to see you faster than if you were murdering a person on the hour every hour.
Speak to others about bitcoin. It doesn't interest me, it's not "state" money. The state can guarantee it can pay you back by squeezing citizens. Bitcoin can't do this.
For more info go see my other link or just google. It's all out there if you look, and I'm not talking zerohedge conspiracy lunacy as demonstrated by my url to the BoE's own blog.
> Go set up your own bank that is not an intermediary but instead issues dollars.
Wait, wait, wait. There are different types of banks? How many different types? Let's start again, talking about all of these types. How do they interact? Got any good links?
http://bankunderground.co.uk/2015/06/30/banks-are-not-interm...
> In the simple ILF model, bank loans represent the intermediation of real savings, or loanable funds, between non-bank savers and non-bank borrowers. Lending starts with banks collecting deposits of real resources from one agent, and ends with the lending of those resources to another agent. In the real world, however, banks never intermediate real loanable funds,
> Rather, the key function of banks is the provision of financing, meaning the creation of new monetary purchasing power through loans ... The bank therefore creates its own funding, deposits, through lending. It does so through a pure bookkeeping transaction that involves no real resources
Read the whole thing. Digest it and don't get caught just trying to win an argument with a guy on the internet.
We are now through 2 layers of falsehoods.
Layer 1: there is a fixed amount of money
Layer 2: reserves and money multipliers
From the end of the article:
> To summarize, banks are not intermediaries of real loanable funds, they do not collect new deposits from non-bank savers. Instead they provide financing, they create new deposits for their borrowers. This involves the expansion or contraction of gross bookkeeping positions on bank balance sheets, rather than the channelling of real resources through banks.