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Financial crisis ! whats your opinion and why :)

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    (Original post by py0alb)
    This is true. It is also true that almost all their assets are promised to someone else.
    Nooooooooooo. This is not how the system works. It is so obvious the system does not work like that when you consider how much more debt there is to banks than there is savings with banks.

    The banks only need savers to meet their reserve requirements, not to hand out money to debtors (this is how I actually want the system to work, that what you think is true, is actually true). And even the banks can just get the reserves straight from the bank of england or from other banks if needs be. It is a complete illusion to think that the debts of debtors equates to the assets of savers.


    eg: my credit card bill currently stands at £250. So that is an "asset" of my bank. But my debit account stands at £1250. So that is my "assets".

    So in total, I have £1000 of assets and my bank... has nothing.
    The bank has a liability of £1000 in total. And you have an asset of £1000 to balance it out. You do not have £1000, you have a promise to £1000.
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    (Original post by py0alb)
    B Their "business" is to transfer credit around the economy
    Again, this is the problem. They do not redistribute existing money (credit) around the economy. They actively create credit and inject it into specific parts of the economy.
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    (Original post by Classical Liberal)
    Nooooooooooo. This is not how the system works. It is so obvious the system does not work like that when you consider how much more debt there is to banks than there is savings with banks.

    The banks only need savers to meet their reserve requirements, not to hand out money to debtors (this is how I actually want the system to work, that what you think is true, is actually true). And even the banks can just get the reserves straight from the bank of england or from other banks if needs be. It is a complete illusion to think that the debts of debtors equates to the assets of savers.
    You clearly don't understand how banks or the money multiplier works, either in theory or real life. I don't know where you've got your ideas from, but I think you have read some weird propaganda and you just can't shake off these bizarre ideas.

    Go on then, how much money is there deposited in banks, and how much is their loaned out? Give us some figures and explain how it works. Assume a reserve ratio of 0.1.



    The bank has a liability of £1000 in total. And you have an asset of £1000 to balance it out. You do not have £1000, you have a promise to £1000.
    Which is a completely negligible difference. Money is simply a tool to buy real goods. I can buy real goods identically with £1000 in bank credit or £1000 in cash (government credit) or £1000 in gold.

    The only meaningful difference is that the first only requires a small plastic card, the second requires a huge pocket full of notes, and the third requires a van, and probably wouldn't be accepted anyway.
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    (Original post by Classical Liberal)
    Again, this is the problem. They do not redistribute existing money (credit) around the economy. They actively create credit and inject it into specific parts of the economy.
    No they don't, not in the way you mean. They never lend out more than they have deposited, they can't, they don't have the money. My god, is this what you think the money multiplier means? :facepalm2:

    Loans = Deposits - reserves. This is an iron clad identity.
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    (Original post by py0alb)
    and the third requires a van,
    A van to carry around an ounce? You lazy git.
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    Banks stretch assets into extra liquidity.

    Adrian has £1000. He puts it in the bank. The bank puts £100 in reserves and lends £900 to Brian.
    Brian buys a car off Colin.
    Colin puts it in the bank. The back put £90 in reserves and lend £810 to David
    David buys a car off Edward
    Edward puts it in the bank etc etc etc.

    Anyway, eventually you get £1000 in reserves, £10,000 deposited, and £9,000 loaned out.

    So as you can see, loans = deposits - reserves.

    The only real assets still belong to Adrian. But liquidity has allowed the economy to function.
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    (Original post by py0alb)
    You clearly don't understand how banks or the money multiplier works, either in theory or real life. I don't know where you've got your ideas from, but I think you have read some weird propaganda and you just can't shake off these bizarre ideas.
    Might be because your sources are referring to a mythical land that does not exist.

    Go on then, how much money is there deposited in banks, and how much is their loaned out? Give us some figures and explain how it works. Assume a reserve ratio of 0.1.
    Well right now I don't have the time to get the data.

    But suppose the monetary base was £100,000. And the reserve requirement is 0.1.

    Then the maximum total amount of money would be £1111,111.11.
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    (Original post by Classical Liberal)
    Might be because your sources are referring to a mythical land that does not exist.



    Well right now I don't have the time to get the data.

    But suppose the monetary base was £100,000. And the reserve requirement is 0.1.

    Then the maximum total amount of money would be £1111,111.11.
    Well that depends on public cash. And I assume you mean M1 money supply by maximum total amount of money.

    M0 = R + PC
    M1 = R/a + PC
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    (Original post by py0alb)
    No they don't, not in the way you mean. They never lend out more than they have deposited
    The deposits need not come savers though. They can get the base money straight from the central bank. The BoE will automatically give them money, at a charge, if they (the bank) exceeds its reserve requirements.

    Banks do not lend out existing money of savers though. They lend out credit, on the basis of deposits, which was originally a promise to pay from another bank. The deposits are promises to pay, not the actual money.
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    It's getting rid of the crappy businesses, forcing us all to be utilizing the way we all live and be increasingly savvy with our money.

    It's only a good thing long term.
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    (Original post by Classical Liberal)
    The deposits need not come savers though. They can get the base money straight from the central bank. The BoE will automatically give them money, at a charge, if they (the bank) exceeds its reserve requirements.

    Banks do not lend out existing money of savers though. They lend out credit, on the basis of deposits, which was originally a promise to pay from another bank. The deposits are promises to pay, not the actual money.
    Money is a promise to pay. Read what it says on a £10 note. What do you think money is? There is no difference between "lending out existing money of savers" and "lending out credit on the basis of deposits". Those two sentences mean exactly the same thing.

    I think the point you're perhaps missing is that the loans that banks make are all immediately redeposited - the money actually never leaves the bank - otherwise they would be part of public cash and therefore wouldn't be affected by the money multiplier. Money is just extended credit.
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    (Original post by py0alb)
    This has been a good revision session for my upcoming exams!
    Just to get this straight, are you arguing that the money multiplier model is correct?

    That the amount of lets call it, central bank money, and the reserve requirement, determines the maximum amount of money in the economy?
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    (Original post by Classical Liberal)
    Just to get this straight, are you arguing that the money multiplier model is correct?

    That the amount of lets call it, central bank money, and the reserve requirement, determines the maximum amount of money in the economy?
    It has its acknowledged flaws, but certainly nothing that you've brought up so far, which seems to resolve around the assumption that banks have their own printing presses for £20 notes.

    Banks create extra credit within the economy, they don't create extra cash.
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    (Original post by py0alb)

    Banks create extra credit within the economy, they don't create extra cash.
    Which for all intents and purposes, is cash. I can't remember the last time I bought something on credit and somebody said

    "Nahh mate, I want something from the Mint"

    Infact, commercial bank money, is probably more like money than actual cash today. Unless you are a money launderer you are unlikely to make payments of above, say, £200 in cash.

    It has its acknowledged flaws, but certainly nothing that you've brought up so far, which seems to resolve around the assumption that banks have their own printing presses for £20 notes.
    What are those flaws in your opinion?
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    (Original post by Classical Liberal)
    Which for all intents and purposes, is cash. I can't remember the last time I bought something on credit and somebody said

    "Nahh mate, I want something from the Mint"

    Infact, commercial bank money, is probably more like money than actual cash today. Unless you are a money launderer you are unlikely to make payments of above, say, £200 in cash.


    What are those flaws in your opinion?
    Well there is obviously a little flexibility there, seeing as banks are able to borrow from the LOLR through the discount window to make up any short falls in overnight reserve requirements. But this is never more than a couple of %. Obviously loans from other banks are irrelevant because its the system as a whole that counts.

    Most "criticisms" I read - I'm sure you've read the same ones - stem from an undergraduate level misunderstanding of the model. Many of them seem to think that it matters which time order the loans and deposits are made, lik the "loan first" model. Oh dear :facepalm2: Obviously it doesn't matter. The number of deposits and loans are constantly fluctuating on a minute by minute basis. But the numbers will still add up the same - without a printing press its impossible for them not to.
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    (Original post by Classical Liberal)
    Which for all intents and purposes, is cash.
    Well for the individual perhaps, but in terms of the monetary system its not. One is affected by the money multiplier and the other is not. I've already explained this. If all the money that people had was held in cash instead of in banks, our money supply would only be a fraction of what it is. So there is a big difference.
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    Topsy Turvy world..crooks/"banksters"/incompetent govts are spending our taxpayers' (+ future money).
    Those banksters are making money now and are laughing their way to the bank...poor taxpayers!

    Look at Spain now, they are to pay more (interest) at today's bonds auction. They're desperate.
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    (Original post by py0alb)
    Most "criticisms" I read - I'm sure you've read the same ones - stem from an undergraduate level misunderstanding of the model. Many of them seem to think that it matters which time order the loans and deposits are made, like the "loan first" model. Oh dear :facepalm2: Obviously it doesn't matter. The number of deposits and loans are constantly fluctuating on a minute by minute basis. But the numbers will still add up the same - without a printing press its impossible for them not to.
    That is not my primary criticism. My point, which I have not really made clear, is that the money multiplier analysis is pointless and things like the IS/LM model. The central bank does not influence, commercial bank, money supply to any significant extent. The banking system endogenously creates money, the system is not controlled by the central bank, the monetary base (central bank money), or the reserve requirement.

    Here is an example that knocks the money multiplier analysis out of the window.

    Suppose there are three parties. The Bank. The Man. The Woman. The Woman owns a Car worth £10,000. The Man wants the car, but does not have £10,000.

    The Man decides to take a loan out from the bank to buy the car. The Bank promises the the Man £10,000 and credits his account with £10,000. The Man in return promises to pay the bank £10,000 in the future (no interest in this example).

    Looking at the balance sheets, this has happened.

    _____________________The Man______________________

    __________Assets_____________|__ ________Liabilities___________
    __£10,000 [The Banks promise]__|_____£10,000 [Debt to the bank]_____
    ____________________________|___ ___________________________
    ____________________________|___ ___________________________


    _______________________The Bank________________________________


    ____________Assets____________|_ ___________Liabilities__________ _
    _£10,000 [The debt of The Man]___|__£10,000 [Promise to the Man]____
    _____________________________|__ __________________________
    _____________________________|__ ___________________________


    The Bank and the Man have in effected created £10,000 of commercial bank moeny. Now you are probably thinking that this is silly because I have not declared any reserves on the part of the bank and that the Bank will ask for central bank money to finance this. They do not need to. Observe the following.

    The Man then buys the car, with the £10,000 promise from the Bank, from the Woman. The Woman then deposits this £10,000 promise into the Bank.

    Looking at the balance sheets again, this has happened.

    _____________________The Man______________________

    __________Assets_____________|__ ________Liabilities___________
    __£10,000 [The Car]______|_____£10,000 [Debt to the bank]____
    ____________________________|___ ___________________________
    ____________________________|___ ___________________________


    _____________________The Woman______________________

    __________Assets_____________|__ ________Liabilities___________
    __£10,000 [The Banks promise]__|__________________________
    ____________________________|___ ___________________________
    ____________________________|___ ___________________________



    _______________________The Bank________________________________


    ____________Assets____________|_ ___________Liabilities__________ _
    _£10,000 [The debt of The Man]___|__£10,000 [The deposit from the Woman]____
    _____________________________|__ __________________________
    _____________________________|__ ___________________________



    Notice how the bank has met its own reserve requirements by lending the money. There is no need for central bank money. And the reserve requirement does nothing to stop the creation of commercial bank money. The money multiplier analysis is quite frankly, irrelevant.

    Magic like this is usually only seen on stage

    And once we add interest onto this, you can see that the banks are laughing.

    (Now I am going to assume you will think, what about multiple banks? Well it makes no difference. But for the time being I cannot be bothered to type it up).
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    (Original post by Classical Liberal)
    That is not my primary criticism. My point, which I have not really made clear, is that the money multiplier analysis is pointless and things like the IS/LM model. The central bank does not influence, commercial bank, money supply to any significant extent. The banking system endogenously creates money, the system is not controlled by the central bank, the monetary base (central bank money), or the reserve requirement.

    Here is an example that knocks the money multiplier analysis out of the window.

    Suppose there are three parties. The Bank. The Man. The Woman. The Woman owns a Car worth £10,000. The Man wants the car, but does not have £10,000.

    The Man decides to take a loan out from the bank to buy the car. The Bank promises the the Man £10,000 and credits his account with £10,000. The Man in return promises to pay the bank £10,000 in the future (no interest in this example).

    Looking at the balance sheets, this has happened.

    _____________________The Man______________________

    __________Assets_____________|__ ________Liabilities___________
    __£10,000 [The Banks promise]__|_____£10,000 [Debt to the bank]_____
    ____________________________|___ ___________________________
    ____________________________|___ ___________________________


    _______________________The Bank________________________________


    ____________Assets____________|_ ___________Liabilities__________ _
    _£10,000 [The debt of The Man]___|__£10,000 [Promise to the Man]____
    _____________________________|__ __________________________
    _____________________________|__ ___________________________


    The Bank and the Man have in effected created £10,000 of commercial bank moeny. Now you are probably thinking that this is silly because I have not declared any reserves on the part of the bank and that the Bank will ask for central bank money to finance this. They do not need to. Observe the following.

    The Man then buys the car, with the £10,000 promise from the Bank, from the Woman. The Woman then deposits this £10,000 promise into the Bank.

    Looking at the balance sheets again, this has happened.

    _____________________The Man______________________

    __________Assets_____________|__ ________Liabilities___________
    __£10,000 [The Car]______|_____£10,000 [Debt to the bank]____
    ____________________________|___ ___________________________
    ____________________________|___ ___________________________


    _____________________The Woman______________________

    __________Assets_____________|__ ________Liabilities___________
    __£10,000 [The Banks promise]__|__________________________
    ____________________________|___ ___________________________
    ____________________________|___ ___________________________



    _______________________The Bank________________________________


    ____________Assets____________|_ ___________Liabilities__________ _
    _£10,000 [The debt of The Man]___|__£10,000 [The deposit from the Woman]____
    _____________________________|__ __________________________
    _____________________________|__ ___________________________



    Notice how the bank has met its own reserve requirements by lending the money. There is no need for central bank money. And the reserve requirement does nothing to stop the creation of commercial bank money. The money multiplier analysis is quite frankly, irrelevant.

    Magic like this is usually only seen on stage

    And once we add interest onto this, you can see that the banks are laughing.

    (Now I am going to assume you will think, what about multiple banks? Well it makes no difference. But for the time being I cannot be bothered to type it up).

    Oh sweet jesus. You really don't understand how this works do you?


    So before the story started,

    the man had nothing, £0
    the woman had a car worth £10k
    the bank had nothing, £0

    after the story ended,

    the man had a car worth 10k - debt of 10k = £0
    the woman had credit of 10k with the bank = £10k
    the bank had debt of 10k + credit of 10k = £0

    So everyone has exactly the same assets as where they started.

    So where is this new money you keep banging on about? Answer: there is none.
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    (Original post by py0alb)
    the bank had debt of 10k + credit of 10k = £0

    So where is this new money you keep banging on about? Answer: there is none.
    Right ****ing there.

    And, if you add interest onto the debt of the Man then you see that the banks are now getting an income on money they manufactured out of thin air.

    The process by which banks create money is so simple the mind is repelled
    - John Kenneth Galbraith

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