# Taking on the currency cranks



## Jean-Luc (Aug 21, 2012)

People who blame the banks for everything are all over the internet. Here's an example:



A bank can lend out £9900 when only £100 has been deposited with it? How can anybody believe that banks have the power to create money out of thin air like this? If is true, tell me how I can open a bank.

Those who propound such nonsense are being taken on at this meeting in Central London at 7pm on Wednesday 5 September.


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## SpineyNorman (Aug 22, 2012)

I started a thread on a similar theme a couple of months ago. Some of the posts and links on there might be useful.


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## ayatollah (Aug 22, 2012)

Jean-Luc said:


> People who blame the banks for everything are all over the internet. Here's an example:
> 
> 
> 
> ...



Bloody hell Jean-Luc, where you been man ? This topic has been so thrashed to death in the previous thread its positively sadistic ! And no you bloody well can't open up a bank... you're far too COMMON !

Yes banks can, and indeed do, constantly "create money" (add to the money supply) through the mechanism of being able to lend out more than they hold as deposits held in their vaults ("fractional Reserve Banking") , but of course they don't and can't create new real "value" out of nothing --------- on the previous thread the various (as usual, splenetic) debators simply couldn't come to a common view as to what "out of nothing" or"out of thin air" actually meant. ( Some may see the extra money emerging "from nothing" but others ,taking a more global , perhaps more "marxist"/systemic model approach, saw the entire surrounding web of capitalist social and market / commodity/money circulatory relations underpinning the system as negating the idea of real "nothingness" out of which Fractional Reserve Banking "creates" its extra cash), So the debate IMO, founders on completely different frames of reference being held to on the two sides. I actually think BOTH are correct according to their different frames of reference. WHAT A LIBERAL !. So we better simply "not go there" AGAIN ! As SpineyNorman suggests -- see the previous thread. But I have to advise you it "aint (complete)nonsense".. not at a surface level anyway its " Financial Capitalism in everyday action" - It underpins part of the banking sector's ability to make superprofits out of capitalism as a system and get very, very, rich .it just isn't the whole picture.

Gawd. I've started  it up again !!!!!


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## love detective (Aug 22, 2012)

ayatollah said:


> But I have to advise you it "aint (complete)nonsense".. not at a surface level anyway


 
what use is analysis that is confined to the surface level?

a reliance on analysis at the surface level suggests an analysis that does not seek to understand actually why something that appears to happen actually happens

it dispenses with the use of science (hard or 'soft') as a way of understanding the world - and instead just describes back appearances at the surface level and then ascribes those observations as cause

money is created by commercial banks out of thin air
stones fall towards the ground because stones have a tendency to fall towards the ground
those cows in the distance really are very small, because they look really small
interest grows out of money because that what appears to happen

vulgar political economy (or vulgar science in the case of the cows & stones) of this sort tells us nothing about the world around us, and reduces everything to the kind of demented bishop berkleyism that is usually peddled by the likes of dwyer and other idiots


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## Jean-Luc (Aug 23, 2012)

SpineyNorman said:


> I started a thread on a similar theme a couple of months ago. Some of the posts and links on there might be useful.


Thanks, yes they were, but I was just drawing attention to a public meeting on the same subject.

On their website Positive Money make the following claim:


> Positive Money believes that the root cause of many of our current social, economic and environmental problems lies in the way that we allow money to be created. We campaign for fundamental reform of a system that is fueling debt, poverty and our economic and environmental crises.


A highly debatable claim, surely, that needs refuting.


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## Random (Aug 23, 2012)

love detective said:


> a reliance on analysis at the surface level suggests an analysis that does not seek to understand actually why something that appears to happen actually happens.
> it dispenses with the use of science (hard or 'soft') as a way of understanding the world - and instead just describes back appearances at the surface level and then ascribes those observations as cause



The usury campaigners often do have a deeper analysis. the reason they think it's important to show that banks create money is because it shows that banks are in control. And banks are just a front for the secret circle of families that control the world.

Just de-friended a Green party councillor on Facebook, for posting up a photo that said the Rothschilds are behind all the recent invasions of Muslim countries. Iran doesn't have a Rothschild bank!


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## love detective (Aug 23, 2012)

that's not a deeper analysis though, that's just a deeper agenda

or an agenda led analysis rather than an analysis led agenda


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## phildwyer (Aug 25, 2012)

love detective said:


> what use is analysis that is confined to the surface level?
> 
> a reliance on analysis at the surface level suggests an analysis that does not seek to understand actually why something that appears to happen actually happens
> 
> ...


 
The point is though, you twerp, that society is organized around the idea that money is valuable in itself, without reference to what it represents.

When an entire society "lives a lie" of this nature, there is a sense in which the lie becomes true: empirically true, though not of course logically true.

I understand that you are unfamiliar with the notion that there can be different kinds of truth.  But that is your problem innit?


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## love detective (Aug 25, 2012)

as i said above, what use is analysis that is *confined* to the surface level?

This is what is required:-


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## TruXta (Aug 25, 2012)

I've got all sorts of issues with that diagram. "Real world" vs "Abstract Thought"? Really.


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## love detective (Aug 25, 2012)

possibly the diagram in & by itself, out of context, doesn't convey that well what it is meant to - was taken from this discussion here about methodology  




			
				from earlier thread said:
			
		

> Moment 1 is the observation of the concrete and the appropriation of the material in detail
> 
> Moment 2 sees that material used to develop first simple abstract concepts and then on to more complex/richer concepts to establish a 'totality of thoughts', it's the logical construction of the essence and the interconnected organic whole, i.e. the understanding of the inner connections and them as a totality
> 
> ...


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## TruXta (Aug 25, 2012)

Right. Still pretty hmmmm but completely O/T so I'll leave that for another time.


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## love detective (Aug 25, 2012)

it's not off topic at all

it's exactly on the topic of distinguishing between:-

i) an analysis that is confined to describing back what appears to us (and ascribing that as cause), or

ii) going somewhat deeper to find out why something appears in the way it does and discovering the essence of those phenomenal forms

the first category is that which is employed by currency cranks, racists, conspiracy theorists, vulgar political economists, jazz, dwyer - all different types of people but united in an agenda led analysis

the second category is employed by those who prefer to have an analysis led agenda


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## Greebo (Aug 25, 2012)

love detective said:


> it's not off topic at all
> 
> it's exactly on the topic of distinguishing between:-
> 
> ...


And your analysis of who falls into which camp is no way agenda led, is it?


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## love detective (Aug 25, 2012)

got it in one sweetie


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## ayatollah (Aug 25, 2012)

love detective said:


> what use is analysis that is confined to the surface level?
> 
> a reliance on analysis at the surface level suggests an analysis that does not seek to understand actually why something that appears to happen actually happens
> 
> ...


 
This is a very fair point/series of points, love detective. My view is that economics as a "science" is akin to , say, Newtonian Physics, as compared to Einsteinian Physics. Both are looking at "real" world phenomena, but are looking at aspects of reality from different frames of reference, trying to explain different aspects of reality - but neither are "wrong". The brilliant science fiction writer Terry Pratchett has collaborated with scientists on a couple of "history of science" novels using his Discworld as a magic-based contrast with our world of physics. Pratchett picks up on this differentiation of frames of reference as between , say, Newtonian, Einsteinian, and Quantum schools of physics , by saying their various explanations are each "True to a certain value of truth".

In the economic field, consider "supply and demand theory - and "positive", bourgeois economics generally. Now we all know that at a deeper theoretical level, according to "marxist" theory there are underlying "real labour values" underlying the incredibly distorted money values of goods and services in the capitalist market place. But at this level of abstraction, what use is this to , for instance, a businessman trying to assess the best value to sell his goods at, in order to sell them ? No use at all. He needs to employ bourgeois supply and demand economics -- the deeper "nature of value - its relation to real prices" issue is of no use and no interest to the businessman -- or to a trades union leader trying to negotiate a pay rise for his particular group of workers -- it's the "surface reality" of the particular firm's profitability and that group of workers "apparent real current wage level" which matters -- not the "deep level reality" of the "real" surplus value being derived by the capitalist system from that group of workers -- because, frankly it is such an abstract (but still very real) concept that it has no operational meaning in the limited reality everyday world of trades union wage negotiations.

I accept that a lot of the people arguing about "money creation" by banks and "finance capital" are really talking about the Far Right fantasy of the "Jewish Banker conspiracy" and all the numerous spin offs, and varients - "back to gold", "end fractional reserve banking" - most lead back to conspiracy theories -- rather than to an acceptance that its all just Capitalism, and to get rid of the "oppressive power of Money" it is capitalism itself that has to go as an integrated system. However, this doesn't invalidate the simple fact that "Fractional Reserve Banking" as a perfectly valid, and meaningful, reality does "Create money" day in, day, out. If actual production fails to move in concert with this (in a "chicken and egg" relationship of course.. neither need "happen first -- as you say its a "process" as part of an integrated capitalist system), you get inflation, if production moves in general "sync" with this money supply expansion, you get a dynamic expansionery capitalist system. I think one has to be prepared to move backwards and forwards from the "deeper" level explanations , which are so abstract it's practically impossible to directly measure them - they have to be "inferred" from the impact on the surrounding system (like Quantum physics), "the falling rate of profit" being a prime example -- and the "surface level" observable realities -eg, the speculative banking frenzy that , at least at a surface level, drove the system into the 2008 Great Crash...... to get a meaningful multi level picture of what is happening in the capitalist system at various "levels of reality".


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## Greebo (Aug 25, 2012)

love detective said:


> got it in one sweetie


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## TruXta (Aug 25, 2012)

love detective said:


> it's not off topic at all
> 
> it's exactly on the topic of distinguishing between:-
> 
> ...


 
That's not what I meant by hmmm, I've got issues with the epistemological assumptions being made as to the various categories/processes that make up the boxes, which is a bit OT for this thread IMO.


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## goldenecitrone (Aug 25, 2012)

TruXta said:


> That's not what I meant by hmmm, I've got issues with the epistemological assumptions being made as to the various categories/processes that make up the boxes, which is a bit OT for this thread IMO.


 
Norwegian swan.


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## Jean-Luc (Aug 25, 2012)

ayatollah said:


> the simple fact that "Fractional Reserve Banking" as a perfectly valid, and meaningful, reality does "Create money" day in, day, out. If actual production fails to move in concert with this (in a "chicken and egg" relationship of course.. neither need "happen first -- as you say its a "process" as part of an integrated capitalist system), you get inflation, if production moves in general "sync" with this money supply expansion, you get a dynamic expansionery capitalist system.


If you define money as including bank loans then of course banks "create money" -- by definition. All it is saying is that banks lend money, which is not controversial. The real question is, where do they get the money to lend from? Do they conjure it up out of thin air, as the currency cranks claim? Or are they simply lending money that has been deposited with them or which they have themselves borrowed?

The claim that bank loans can cause inflation (a rise in the general price level) is dubious. Why should it if all that banks are doing is redistributing already existing purchasing power?


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## free spirit (Aug 25, 2012)

if that was what they were doing there would have been no financial crisis, as they'd all have had the capital to meet their debts.

they didn't have that capital because they'd loaned money out in advance on the assumption they'd always be able to either package up and sell off those debts later, or borrow money to cover them if they needed to at a lower rate than they were charging the people for borrowing the money.

While the money remains simply a loan created by the bank and nominally transfered into the customers bank account within the same bank, then that bank has no requirement to actually fund that loan with either it's own reserves, or with money borrowed from elsewhere. Only at the point that the customer takes that money out of the bank and transfers it to another bank does the bank actually need to fully fund the loan it made, and if the person the money is being transferred to also happens to also be a customer of the same bank, then that's happy days for the bank, as they still don't need to actually fund that transaction from hard currency. 

Can't be fucked to have this debate again though with people who should know better.


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## ayatollah (Aug 25, 2012)

Jean-Luc said:


> If you define money as including bank loans then of course banks "create money" -- by definition. All it is saying is that banks lend money, which is not controversial. The real question is, where do they get the money to lend from? Do they conjure it up out of thin air, as the currency cranks claim? Or are they simply lending money that has been deposited with them or which they have themselves borrowed?
> 
> The claim that bank loans can cause inflation (a rise in the general price level) is dubious. Why should it if all that banks are doing is redistributing already existing purchasing power?


 
Jean-luc.. for goodness sakes, this is "o" level Commerce -- from the dawn of banking, the bankers discovered that their depositors never, as a whole, asked to draw out more than , say 10%, of their deposited cash... so the banks found they were able to lend out the remaining 90% to sundry people seeking cash to carry out a range of projects - and obviously charge these borrowers interest on these loans. The borrowers will often , in turn, deposit at least part of the loan back in the bank for safekeeping, so again the bank can lend out , say, 90% of this new deposit too. And so it goes on, with each bank building an "inverted  pyramid of loans"  on the basis of a tiny  real, available, base of cash in their vaults.

As long as there isn't a "Northern Rock" type crisis of depositor confidence, and they don't all rush to the bank at once to get all their money out , everything is fine. If there IS a "run on the bank" then the bank or banks are in deep shit... because the cash aint there -- it's mostly been leant out to borrowers. In the USA in the 1930's small local banks, not able to pull in funds from branches in other states to deal with a "bank run" , went bust quite often.  In very simplified terms that is the basis of "Fractional Reserve Banking".. that's what the term means ! That's how it works. That's what economic textbooks  mean by "banks create money" or "increase the money supply"  out of nothing. Now as LoveDetective says, its much more complicated than that ... the banks aren't operating in a vacuum, but as an integrated component of the capitalist system .. but nevetheless as well as responding to the demand from potential borrowers for  cash, often to employ to increase production, the offering of loans by banks also attracts/stimulates capitalists to employ more capital and labour to increase the production of real goods and services - hence "soaking" up the extra goods and services produced with spending power generated through the extra money supply. If the "new money" generated via fractional Reserve Banking fails to stimulate or fund the production of extra goods and services, then the extra money supply brought about through the Fractional Reserve Banking process merely produces "inflation" as more and more money (spending power) pursues a static , or even declining, volume of real goods and services.

 The phenomenum of money supply increase via Fractional Reserve Banking, is REAL Jean-luc, even though, as lovedetective's posts have argued, it is part of a much larger, much more complex, integrated  capitalist process. It isn't the whole picture, and the "currency cranks" often link it in with lots of anti-semitic conspiracy theory and/or "back to the Gold Standard" nonsense --- but its no good dismissing the money supply increasing role  of Fractional Reserve Banking in its entirety -- just seeing its place in the bigger picture.


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## kenny g (Aug 25, 2012)

ayatollah said:


> The phenomenum of money supply increase via Fractional Reserve Banking, is REAL


 





No it isn't. Why don't you pull back that curtain and see what is really happening here? Or are you content to just be another one of these Mass Media fed sheeple. Wake up man!


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## taffboy gwyrdd (Aug 26, 2012)

I hope this angle of debate isn't falling victim to the absolutist "dead right" V "dead wrong" froth I see on the rise just about everywhere, always present but even more so in the age of 140 Chrs.

The truth is that fractional reserved banking is both basically predicated on fraud but serves functions as well. I'm not for the industrial capitalist model as was practiced most of last century but it's true that it, with FR banking chugged along quite functionarily alongside degrees of regulation.

I'm aware that my analysis (partial de coupling critique of industrial from finance captial)can be accused of being bourgeois, but whatever. It holds some water I think.

Also FR has shifted in a generation from human scale of 5 to 10 to one, to often 30 + and rehypothicated to infinity.

Further, trades have gone in a generation from being human driven to 70% + computer executed and quite computer driven. £450m was lost in 45 minutes the other week because one of the programmes went tits up. Separately, I think we can expect more fuckups as seen with customer access to money that have happened recently - they systems are not sustainable in this environment and that is partly why we here noises of charging overtly for current accounts.

In some ways blaming "the banks" is a distraction. the banks exist. I am for the state being sole creator of credit but most are not, so no thanks to me the private banks will be in on the fraud.

It's their job to be. Anyone in the finance sector not caught up in this will probably get the sack.

The reward / risk ratio of fraud is gargantuan. The politicians let that be known. That's the business model.

Yes, the elite have ripped us off, but who allowed it? Where were the "leaders", the press?
They turned around and said "no one saw it coming" just because they didn't see it coming (which in many cases I don't believe.

Are the "leaders" and press owned by the elite? To a greater or lesser extent I daresay, but I find this libertarian crowd a bit of a pain in the arse as many here probably do.

But on the other hand, I don't like all this dick waving on all sides.

LOOK EVERYONE ITS A PILE OF SHIT. LOOK HOW MUCH I KNOW!!!!

LOOK EVERYONE THEIR REASONING FOR WHY ITS SHIT IS SHIT I KNOW EVEN MORE!!!!

The anger with which all this is often expressed (very alpha male) is an indicator of a much poorer heat:light ration than one ought to expect from such intelligent people.

It's also (I believe) a product of our ultimate dis-empowerment. Whoever has the right analysis, the chances of someone important acting on what you say is pretty tiny.

Fuck all of real note has changed since Autumn 2008, for all any of us or the libertarians / anti-fed types say.

Personally I'd happily settle now for a localised version of European Social Democracy as a fairly stable workable model that would be acceptalish to very many. Indicators are that human satisfaction was pretty high then.

We can understand economics and have answers for when more do listen, we can engage in such platforms as espoused by the (doubtless imperfect) Syriza. But really I wonder if we should be focussing on growing the food etc.

A means of exchange will be with us for the forseeable, it's best to keep it as simple and accountable as possible, but with 7 billion it aint going to be ALL that simple.

Self and community co reliance reduces, could even negate, surplus value.

One last thing : Critique of the banking system may be hijacked by a small number of nefarious scumbag bigots who just about any fool can see through, but in the main it is not synonymous with anti-semitism, "structural" or otherwise.

The "Windsor" family have a great hand in all the lunacy, with huge ownership of global means of production. Any critique of them (institutional behaviour more than personal foibles) does not and should not equate with bigotry against Germans or Christians.


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## Jean-Luc (Aug 26, 2012)

ayatollah said:


> Jean-luc.. for goodness sakes, this is "o" level Commerce -- from the dawn of banking, the bankers discovered that their depositors never, as a whole, asked to draw out more than , say 10%, of their deposited cash... so the banks found they were able to lend out the remaining 90% to sundry people seeking cash to carry out a range of projects - and obviously charge these borrowers interest on these loans.


This is true and is, as you say, the basis of banking. Banks are not safety deposit boxes and don't have to keep all the money deposited with them as cash. If the law lays down or their own prudent judgement decides that they should keep 10% of deposits as cash (as in your example), then, if they receive a deposit of £100, they can lend out £90 at interest. But this is not how the currency cranks interpret it so-called "fractional reserve banking": they think that if a bank receives a deposit of £100 that means, with a 10% cash reserve, it can lend out £900. Look again at the short video I posted at the beginning of the thread and hear the nutty professor there try to argue that, with a cash reserve requirement of 1%, a bank receiving a deposit of £100 can then lend out £9900! (Clearly you don't need O level Commerce to get a PhD in economics).



ayatollah said:


> The borrowers will often , in turn, deposit at least part of the loan back in the bank for safekeeping, so again the bank can lend out , say, 90% of this new deposit too. And so it goes on, with each bank building an "inverted pyramid of loans" on the basis of a tiny real, available, base of cash in their vaults.


This is true too, but the loans are not being made out of thin air but out of the new deposits. At the end of the process, when loans totalling £900 will have been made by the various banks it will be found that deposits will total £1000. The fact that the same sum of money has been used to make multiple deposits is no more amazing than that a pound coin can be used and re-used to buy things many times its value.

It comes back to the same question: is the money that banks lend new money they have created out of nothing or is it only already existing money that they are circulating (from savers who don't want to spend it for the time being)? The answer given to this question determines whether someone is a currency crank or not.


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## ayatollah (Aug 26, 2012)

A textbook example for you Jean-Luc. It doesn't tackle the "deeper level" marxist model, but is nevertheless "true". The currency cranks are cranks precisely because they think a dynamic free enterprise (rather than state capitalist) capitalist economic system can operate without the essential money supply increasing function of fractional reserve banking, and /or by returning to the economic straightjacket of the Gold Standard -- and the cranks often think finance capital is all a plot by "The Jews". But then they are bonkers - Fractional Reserve Banking is just a normal part of capitalism, and is neither better or worse than capitalism as a whole. I'm afraid you are proving yourself to be another type of "currency crank" by denying this perfectly normal function of the capitalist banking system.

Example of deposit multiplication
The table below displays the mainstream economics relending model of how loans are funded and how the money supply is affected. It also shows how central bank money is used to create commercial bank money from an initial deposit of $100 of central bank money. In the example, the initial deposit is lent out 10 times with a fractional-reserve rate of 20% to ultimately create $500 of commercial bank money. Each successive bank involved in this process creates new commercial bank money on a diminishing portion of the original deposit of central bank money. This is because banks only lend out a portion of the central bank money deposited, in order to fulfill reserve requirements and to ensure that they always have enough reserves on hand to meet normal transaction demands.
The relending model begins when an initial $100 deposit of central bank money is made into Bank A. Bank A takes 20 percent of it, or $20, and sets it aside as reserves, and then loans out the remaining 80 percent, or $80. At this point, the money supply actually totals $180, not $100, because the bank has loaned out $80 of the central bank money, kept $20 of central bank money in reserve (not part of the money supply), and substituted a newly created $100 IOU claim for the depositor that _acts equivalently to and can be implicitly redeemed for_ central bank money (the depositor can transfer it to another account, write a check on it, demand his cash back, etc.). These claims by depositors on banks are termed _demand deposits_ or _commercial bank money_ and are simply recorded in a bank's accounts as a liability (specifically, an IOU to the depositor). From a depositor's perspective, commercial bank money is equivalent to central bank money – it is impossible to tell the two forms of money apart unless a bank run occurs (at which time everyone wants central bank money).[2]
At this point in the relending model, Bank A now only has $20 of central bank money on its books. The loan recipient is holding $80 in central bank money, but he soon spends the $80. The receiver of that $80 then deposits it into Bank B. Bank B is now in the same situation as Bank A started with, except it has a deposit of $80 of central bank money instead of $100. Similar to Bank A, Bank B sets aside 20 percent of that $80, or $16, as reserves and lends out the remaining $64, increasing money supply by $64. As the process continues, more commercial bank money is created. To simplify the table, a different bank is used for each deposit. In the real world, the money a bank lends may end up in the same bank so that it then has more money to lend out.
Table Sources:
Individual BankAmount DepositedLent OutReserves
A 100 80 20
B 80 64 16
C 64 51.20 12.80
D 51.20 40.96 10.24
E 40.96 32.77 8.19
F 32.77 26.21 6.55
G 26.21 20.97 5.24
H 20.97 16.78 4.19
I 16.78 13.42 3.36
J 13.42 10.74 2.68
K 10.74
*Total Reserves:*
89.26
*Total Amount of Deposits:* *Total Amount Lent Out:* *Total Reserves + Last Amount Deposited:*
457.05                                  357.05                                                       100






The expansion of $100 of central bank money through fractional-reserve lending with a 20% reserve rate. $400 of commercial bank money is created virtually through loans.
Although no new money was physically created in addition to the initial $100 deposit, new commercial bank money is created through loans. The 2 boxes marked in red show the location of the original $100 deposit throughout the entire process. The total reserves plus the last deposit (or last loan, whichever is last) will always equal the original amount, which in this case is $100. As this process continues, more commercial bank money is created. The amounts in each step decrease towards a limit. If a graph is made showing the accumulation of deposits, one can see that the graph is curved and approaches a limit. This limit is the maximum amount of money that can be created with a given reserve rate. When the reserve rate is 20%, as in the example above, the maximum amount of total deposits that can be created is $500 and the maximum increase in the money supply is $400.
For an individual bank, the deposit is considered a _liability_ whereas the loan it gives out and the reserves are considered _assets_. Deposits will always be equal to loans plus a bank's reserves, since loans and reserves are created from deposits. This is the basis for a bank's _balance sheet_.
Fractional reserve banking allows the money supply to expand or contract. Generally the expansion or contraction of the money supply is dictated by the balance between the rate of new loans being created and the rate of existing loans being repaid or defaulted on. The balance between these two rates can be influenced to some degree by actions of the central bank.
This table gives an outline of the makeup of money supplies worldwide. Most of the money in any given money supply consists of commercial bank money.[23] The value of commercial bank money is based on the fact that it can be exchanged freely at a bank for central bank money.[23][24]
The actual increase in the money supply through this process may be lower, as (at each step) banks may choose to hold reserves in excess of the statutory minimum, borrowers may let some funds sit idle, and some members of the public may choose to hold cash, and there also may be delays or frictions in the lending process.[26] Government regulations may also be used to limit the money creation process by preventing banks from giving out loans even though the reserve requirements have been fulfilled.


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## Jazzz (Aug 26, 2012)

Jean-Luc said:


> If you define money as including bank loans then of course banks "create money" -- by definition. All it is saying is that banks lend money, which is not controversial. The real question is, where do they get the money to lend from? Do they conjure it up out of thin air, as the currency cranks claim? Or are they simply lending money that has been deposited with them or which they have themselves borrowed?
> 
> The claim that bank loans can cause inflation (a rise in the general price level) is dubious. Why should it if all that banks are doing is redistributing already existing purchasing power?


Well no, that's not true. If we had full reserve banking, then banks wouldn't be creating money with their loans. If I lent you £1000, I wouldn't be creating £1000. There would only be £1000 in the system circulating. And with full reserve banking it would be the same for the banks.

But with fractional reserve banking, if a bank lends £1000 then there is a new £1000 circulating in the system. The new money is created at the point the loan is made. It is created by someone typing in numbers into a computer.

To understand this it is helpful to take the end point and consider all the banks acting together. The vast majority of money in circulation is created by the commercial banks.


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## Jazzz (Aug 26, 2012)

It is really not the case at all that banks are lending out deposits: from wikipedia http://en.wikipedia.org/wiki/Money_creation

_In practice, because banks often have access to lines of credit, and the money market, and can use day time loans from central banks, there is often no requirement for a pre-existing deposit for the bank to create a loan and have it paid to another bank._



*^* "Disyatat, P. 2010 The bank lending channel revisited.". Bank for International Settlements. "Page 2. the concept of the money multiplier is flawed and uninformative in terms of analyzing the dynamics of bank lending. Page 7 When a loan is granted, banks in the first instance create a new liability that is issued to the borrower. This can be in the form of deposits or a cheque drawn on the bank, which when redeemed, becomes deposits at another bank. A well functioning interbank market overcomes the asynchronous nature of loan and deposit creation across banks. Thus loans drive deposits rather than the other way around."
*^* "Paul Tucker, Money and credit: Banking and the Macroeconomy". Bank of England. " banks....in the short run.....lever up their balance sheets and expand credit at will....Subject only but crucially to confidence in their soundness, banks extend credit by simply increasing the borrowing customer's current account.....This 'money creation' process is constrained by their need to manage the liquidity risk from the withdrawal of deposits and the drawdown of backup lines to which it exposes them."
In translation, this means "banks create money out of thin air to the extent that they expect to get away with it".


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## Jean-Luc (Aug 26, 2012)

Jazzz said:


> It is really not the case at all that banks are lending out deposits: from wikipedia http://en.wikipedia.org/wiki/Money_creation
> 
> _In practice, because banks often have access to lines of credit, and the money market, and can use day time loans from central banks, there is often no requirement for a pre-existing deposit for the bank to create a loan and have it paid to another bank._
> (...)
> In translation, this means "banks create money out of thin air to the extent that they expect to get away with it".


No, it doesn't. This is still saying that a bank has to have (or get very quickly, i.e the same day) the money to lend. It is true that not all of this has to come from deposits from outside, but can also come from the bank borrowing it (from "lines of credit", "the money market" and "day time loans from central banks"). This is not "creating" money from "thin air" but borrowing already-existing money to re-lend it.

Here's the view of Paul Krugman on this:



> As I read various stuff on banking — comments here, but also various writings here and there — I often see the view that banks can create credit out of thin air. There are vehement denials of the proposition that banks’ lending is limited by their deposits, or that the monetary base plays any important role; banks, we’re told, hold hardly any reserves (which is true), so the Fed’s creation or destruction of reserves has no effect.
> This is all wrong, and if you think about how the people in your story are assumed to behave — as opposed to getting bogged down in abstract algebra — it should be obvious that it’s all wrong.
> First of all, any individual bank does, in fact, have to lend out the money it receives in deposits. Bank loan officers can’t just issue checks out of thin air; like employees of any financial intermediary, they must buy assets with funds they have on hand.


 
And of Glen Arnold, in his FT Guide to _Financial Markets_, after describing the textbook "deposit multiplier" (which, incidentally, assumes that every new loan is preceded by a new deposit) set out by Ayotollah:



> The central bank is the only player here which can create money out of thin air and pump it into the system if the system is at equilibrium. (p. 126)


In other words, a commercial bank can't. That a central bank — as a State institution — can create money at will ("out of thin air by a stroke of the pen", if you want to put it that way) is not controversial. That a commercial bank can is.


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## Jazzz (Aug 27, 2012)

Jean-Luc said:


> No, it doesn't. This is still saying that a bank has to have (or get very quickly, i.e the same day) the money to lend. It is true that not all of this has to come from deposits from outside, but can also come from the bank borrowing it (from "lines of credit", "the money market" and "day time loans from central banks"). This is not "creating" money from "thin air" but borrowing already-existing money to re-lend it.


No, you missed the second quote, the Paul Tucker one published by the Bank of England:

_"banks in the short run lever up their balance sheets and expand credit at will"_

when they extend a loan, they simply type in the numbers into a computer. That is the new money. The point is precisely that the money doesn't come from anywhere. They create it. If you do think it has to come from somewhere else, I invite you to describe the ledger entries, which I did on the thread in World Politics.



> Here's the view of Paul Krugman on this:
> 
> And of Glen Arnold, in his FT Guide to _Financial Markets_, after describing the textbook "deposit multiplier" (which, incidentally, assumes that every new loan is preceded by a new deposit) set out by Ayotollah:
> 
> In other words, a commercial bank can't. That a central bank — as a State institution — can create money at will ("out of thin air by a stroke of the pen", if you want to put it that way) is not controversial. That a commercial bank can is.


well in my last post I explained precisely why the 'deposit multiplier' model is misleading. deposits do not drive loans - it is the other way around.

The Paul Krugman article as far as I can see simply contests the notion that commercial bank money creation is not constrained by the (central bank) monetary base. Well that's as maybe, indeed it would seem that we can go at least 30 times greater, but his argument ignores the possibility that the monetary base policy is adapted to fit the lending of the banks, and not the other way around. What was happening with quantitative easing and the $trillions bailout? were the central banks holding firm with their monetary base?


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## Jean-Luc (Aug 27, 2012)

Jazzz said:


> No, you missed the second quote, the Paul Tucker one published by the Bank of England:
> _"banks in the short run lever up their balance sheets and expand credit at will"_


I think rather that you have not understood the meaning of "lever up", i.e. borrow more. So he is not saying, as you seem to have misunderstood, that banks can simply expand their loans at will, but that they can expand their borrowing at will and therefore their lending. Nobody denies that banks can do this (if the state of the economy permits it). In fact it confirms my point that a commercial bank can't create money "out of nothing" but can only lend what it has previously got (either from deposits or from borrowing). Also, note that throughout his talk Tucker assumes that banks are essentially "intermediaries" between savers and borrowers.



Jazzz said:


> when they extend a loan, they simply type in the numbers into a computer. That is the new money. The point is precisely that the money doesn't come from anywhere. They create it. If you do think it has to come from somewhere else, I invite you to describe the ledger entries, which I did on the thread in World Politics.


This is just basic double-entry book-keeping but this is not "simply" all they do: they also have to make the money available and so have to have it. So, yes, when they make a loan banks do type numbers into a computer. On the one side they record the loan as a liability, on the other side they record the borrower's promise to re-pay as an asset. They do the same when somebody deposits money with them (or when they themselves borrow money). On the one side they record the money deposited (or borrowed) as an asset, on the other they record their debt to the depositor (or borrower) as a liability. So what? This is just an accounting convention which has no bearing on how a bank operates economically, as an intermediary between savers and borrowers.



Jazzz said:


> well in my last post I explained precisely why the 'deposit multiplier' model is misleading. deposits do not drive loans - it is the other way around.


Ayatollah, it looks like you and me are on the same side here against Jazzz. Like you I can accept (with reservations as to whether it would work that perfectly in the real world) that, with a 10% cash reserve requirement, if someone deposits £100 in one bank, that bank can lend £90 which will probably end up after being spent in another bank, which can then lend out £81, and so on in decreasing amounts till total loans of £900 have been made (corresponding to total deposits of £1000). Jazzz rejects this for the very reason I'm prepared to accept it: because it implies that before any new loan can be made a new deposit has to have been received.

I don't know if he goes as far as Professor Werner in the opening video and argue that, in this case, when a bank receives a deposit of £100 it can then immediately lend out £900. In fact, he works with a 1% cash reserve and so argues that a bank receiving a £100 deposit can then lend out £9900. Here, transcribed, is what he said:


> The key example surely in textbooks is where you have the bank required to have a reserve with the central bank. And so if there's a new deposit with a bank, say a £100, and if the reserve requirement for the sake of argument is around 1% — which is sort of realistic, in many countries it is around 1% — then the textbook will say, ok, it receives a £100, it takes £1, gives it to the central bank as a reserve and now lends out £99. Well, actually this is not what the bank's going to do. In reality the bank will take the entire 100 deposit, give them to the central bank and say "that's my 1% reserve". 1% out of 10,000. 10,000 minus the 100 leaves you 9900 the bank is allowed to lend. So actually the 100 new deposit will lead to 9900 in what is called new loans. That's realistic as an explanation of what banks actually do. (...) The bank is allowed to do this and this means actually that the bank is creating 9900 out of nothing.


This is the purest currency crankism.


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## love detective (Aug 27, 2012)

there's as much truth in the statement that:-

_'borrowers create money out of thin air' _

as there is in the statement that:-

_'commercial banks create money out of thin air'_

there's also as much truth in the statement that 

_'when you fill your car up with petrol, you simply pull the lever on the hose and petrol is created'_

as there is in (Jazz's) statement that:-

_'when they extend a loan, they simply type in the numbers into a computer [and money is created]'_

and so on and so forth.....zzz


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## kenny g (Aug 27, 2012)

taffboy gwyrdd said:


> I hope this angle of debate isn't falling victim to the absolutist "dead right" V "dead wrong" froth I see on the rise just about everywhere, always present but even more so in the age of 140 Chrs.


 
It isn't really good enough though to suggest that up to 2008 everything was alright and if only we could all get along a consensus could be reached where we return to the days where the Bourgeoisie were ripping off the people and planet in an "almost sustainable" manner. The fuse was very short prior to 2008, all that's happened is it has got a lot shorter. You may have felt alright but a lot of people didn't, and after what has happened in the meantime those with wealth and power feel that little bit more insecure so are far more willing to control and steal to protect themselves.

To the main point- I do think economics can be a painful distraction at times. After all the question is not to understand how this pile of shit works, but how to change it, right comrades?

The SPGB does have a historical connection to a particular position partly due to the late Edgar Hardcastle's work. http://en.wikipedia.org/wiki/Edgar_Hardcastle I am a bit wary that it may have become liturgical dogma though. The meeting should be very interesting as an interface between some elements of the "new radicals"/ almost conspiraloon rightists and the rich fountain of ideas represented by the SPGB.


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## love detective (Aug 27, 2012)

kenny g said:


> After all the question is not to understand how this pile of shit works, but how to change it, right comrades?


 
couldn't disagree more - without first understanding the true exploitative nature & essence of capitalist social relations, you are blind as to what you need to change to get rid of it

And this whole money crank stuff is a classic example of this - when all the focus is put on something that is but a particular manifestation/expression of an underlying essence, and the idea that if you change or somehow suppress that expression then you are tackling the root of the problem

how often do you ever hear the likes of Jazz speak out against wage labour and/or the exploitation of labour by capital? not once, and the reason being is because he doesn't understand how this pile of shit works, and therefore doesn't actually have a problem with the essence of capitalist social relations, he just wants to tinker with one particular expression of it


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## kenny g (Aug 27, 2012)

love detective said:


> couldn't disagree more - without first understanding the true exploitative nature & essence of capitalist social relations, you are blind as to what you need to change to get rid of it
> 
> And this whole money crank stuff is a classic example of this - when all the focus is put on something that is but a particular manifestation/expression of an underlying essence, and the idea that if you change or somehow suppress that expression then you are tackling the root of the problem
> 
> how often do you ever hear the likes of Jazz speak out against wage labour and/or the exploitation of labour by capital? not once, and the reason being is because he doesn't understand how this pile of shit works, and therefore doesn't actually have a problem with the essence of capitalist social relations, he just wants to tinker with one particular expression of it


 
I was only paraphrasing Marx:-

Theses on Feuerbach para X1



> The philosophers have only interpreted the world, in various ways; the point is to change it.


http://www.marxists.org/archive/marx/works/1845/theses/theses.htm

You are indulging in the fallacy of claiming because someone doesn't partake in your particular descriptive language game they have no understanding. "The likes of Jazz" is pure tar brushing- not very useful.


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## Jean-Luc (Aug 27, 2012)

It was also Marx's position:


> A bank represents a centralisation of money-capital, of the lenders, on the one hand, and on the other a centralisation of the borrowers. Its profit is generally made by borrowing at a lower rate of interest than it receives in loaning.(Capital, Volume III, chapter 25)


For Marx, wealth and purchasing power arise through production, not the sphere of circulation and exchange. Banking profit does not, in Marx’s view, arise mystically out of financial conjuring, but as a portion of the surplus value created when the working class of wage and salary earners is exploited. This surplus value is then turned into industrial profit, ground rent, and banking interest.


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## love detective (Aug 27, 2012)

kenny g said:


> I was only paraphrasing Marx:-
> 
> Theses on Feuerbach para X1
> 
> ...


 
the quote from marx is a call to first understand, then change it (his whole life time of work was predicated on this principle of first having to understand something before setting out to do something about it) - so i wouldn't say you were paraphrasing him, more directly contradicting him and his method

as to your last sentence, it seems to suggest that you think this whole discussion/argument is reducible to semantics and language, which seems a bit odd


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## love detective (Aug 27, 2012)

Jean-Luc said:


> It was also Marx's position:
> For Marx, wealth and purchasing power arise through production, not the sphere of circulation and exchange. Banking profit does not, in Marx’s view, arise mystically out of financial conjuring, but as a portion of the surplus value created when the working class of wage and salary earners is exploited. This surplus value is then turned into industrial profit, ground rent, and banking interest.


 
exactly - and that is the anchor/elastic that always ensures that whenever finance capital tries to move too far away from its 'material' base of labour & value, the 'material' base will always win out and assert its dominance over that movement and bring it all crashing back in again through crisis so the whole thing can start over again


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## kenny g (Aug 27, 2012)

love detective said:


> it seems to suggest that you think this whole discussion/argument is reducible to semantics and language, which seems a bit odd


 


love detective said:


> how often do you ever hear the likes of Jazz speak out against wage labour and/or the exploitation of labour by capital? not once, and the reason being is because he doesn't understand how this pile of shit works


 
I thought that your point about Jazz was a linguistic one. You say he doesn't speak in a certain way because he has no understanding. It may just be that he has indulged in different ways of speaking. Pre-marx there were plenty of outlandish speakers - see "The world turned upside down" - who may well have had an understanding of their world every bit as interesting and rich as someone who has swallowed a leftist phrase book.


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## love detective (Aug 27, 2012)

kenny g said:


> I thought that your point about Jazz was a linguistic one. You say he doesn't speak in a certain way because he has no understanding. It may just be that he has indulged in different ways of speaking. Pre-marx there were plenty of outlandish speakers - see "The world turned upside down" - who may well have had an understanding of their world every bit as interesting and rich as someone who has swallowed a leftist phrase book.


you're not making much sense

the point was that Jazz doesn't 'speak out' against the exploitation of labour by capital because his wonky surface level analysis doesn't see that this is the essence of capitalist social relations and that therefore it is this that needs to be obliterated to achieve real change

at best he has no idea of the role of exploitation of labour within the system he is nominally opposed to (capitalism) and at worst he does, but for reasons beknown only to him chooses to support the labour/capital relation and system of wage-labour & labour exploitation, while remaining nominally opposed to capitalism. In his world everything would be OK if we tinkered with the money system and left the capital/labour relation (that produced this particular manifestation of it) in place

so, even if he had a correct understanding of how money, credit and the financial system worked - a focus on combatting that would still miss the point

so it's nothing to do with linguistics, semantics or 'ways of speaking' - it's about the substantive content of his analysis (or more correctly, the lack of it)


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## Jazzz (Aug 27, 2012)

love detective said:


> there's also as much truth in the statement that
> 
> _'when you fill your car up with petrol, you simply pull the lever on the hose and petrol is created'_
> 
> ...


This is precisely the issue.

With petrol obviously the petrol came from somewhere. When you pull the lever, your car fills up, but the place where the petrol came from - that is not there any more. There is no additional petrol in the system. It is a 'full reserve' system.

But with fractional reserve banking, when a bank makes a new loan - and let's use the money multiplier model, so suppose someone deposits £100 in the bank, and the bank then lends out £90, which is drawn on - leaving a ten-percent reserve - *The original £100 is still there*. It exists as a book-keeping entry, a liability of the bank to the original depositor. It is money and the game is that the bank is prepared for it to be drawn on at any time. The bank doesn't say, "sorry mr depositor, you can't have your £100 tomorrow" which is precisely what you or I would have to do if we tried the trick.

It is the case that whenever a bank makes a new loan, new money is created, and when the loans are paid back, money is destroyed.


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## love detective (Aug 27, 2012)

you misunderstand again

the point is to demonstrate that just like pressing a lever on a petrol hose doesn't create petrol, the simple act (in and off itself) of pressing a key on a keyboard in a commercial bank doesn't create money

anyway, i'm off out for the day, leave you to it


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## Jazzz (Aug 27, 2012)

Jean-Luc said:


> I think rather that you have not understood the meaning of "lever up", i.e. borrow more. So he is not saying, as you seem to have misunderstood, that banks can simply expand their loans at will, but that they can expand their borrowing at will and therefore their lending.


No, the quote was that in the short run they can expand credit at will - they don't have to borrow it first. All they do is type in the numbers! For a comparison, it is like a casino 'creating' money by loaning chips to a player.


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## Jazzz (Aug 27, 2012)

love detective said:


> the point is to demonstrate that just like pressing a lever on a petrol hose doesn't create petrol, the simple act (in and off itself) of pressing a key on a keyboard in a commercial bank doesn't create money


Except it does. How else do you think 97% of the money in circulation is created?


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## love detective (Aug 27, 2012)

it's created through the act of circulation, a process that by definition can not be done by one party in isolation

as i said above

there's as much truth in the statement that:-

_'borrowers create money out of thin air' _

as there is in the statement that:-

_'commercial banks create money out of thin air'_

now, bye


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## kenny g (Aug 27, 2012)

love detective said:


> you're not making much sense
> 
> the point was that Jazz doesn't 'speak out' against the exploitation of labour by capital because his wonky surface level analysis doesn't see that this is the essence of capitalist social relations and that therefore it is this that needs to be obliterated to achieve real change
> 
> ...


 
The only sense I can make of that is that you are engaged in a web of tautology. The essence of capitalist social relations may well be the exploitation of labour but that is by definition. I am not sure that Jazz has argued for the  capital/labour relations currently in place.


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## kenny g (Aug 27, 2012)

As an aside, do you know how many times Capitalism is mentioned in the communist manifesto? The answer is none. Engels refers to it once in the intro of 1893. The word capitalist does arise and is used to refer to the class of individuals, the bourgeoisie.  The leftist waffle of the kind espoused by Love Detective is not the source of a solution for the world, but is rather the drifting stench from the previous century's leftist failures.


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## Jean-Luc (Aug 27, 2012)

Jazzz said:


> No, the quote was that in the short run they can expand credit at will - they don't have to borrow it first. All they do is type in the numbers!


That may be your view but you can't call "Paul Tucker, Bank of England Executive Director and member of the Monetary Policy Committee" to the witness box to testify in your favour. What he said in that speech was:


> Well, much that I have said about banks - *their capacity, in the short run, to lever up their balance sheets and expand credit at will*; their role in providing liquidity insurance to investment vehicles and corporates - turns precisely on their liabilities being money. (p 9. Emphasis added)


This is saying that in the short run they can expand credit at will, but only if they first "lever up their balance sheets", i.e if they borrow more. It is not saying that they can expand credit at will just by typing in some numbers. Don't you understand the meaning of "lever up"?


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## SpineyNorman (Aug 27, 2012)

kenny g said:


> As an aside, do you know how many times Capitalism is mentioned in the communist manifesto? The answer is none. Engels refers to it once in the intro of 1893. The word capitalist does arise and is used to refer to the class of individuals, the bourgeoisie. The leftist waffle of the kind espoused by Love Detective is not the source of a solution for the world, but is rather the drifting stench from the previous century's leftist failures.


 
Yeah, Marx and Engels never really talked about the relationship between wage labour and capital did they? And the Manifesto was a piece of propaganda, a pamphlet. If you were to read the serious philosophical stuff, expecially that relating to economics, you'd find that it's right at the core - that relationship is probably the most important and oft emphasised aspect of their social and economic analysis.

And previous century's leftist failures? You're SPGB aren't you? LOL


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## kenny g (Aug 27, 2012)

SpineyNorman said:


> Yeah, Marx and Engels never really talked about the relationship between wage labour and capital did they? And the Manifesto was a piece of propaganda, a pamphlet. If you were to read the serious philosophical stuff, expecially that relating to economics, you'd find that it's right at the core - that relationship is probably the most important and oft emphasised aspect of their social and economic analysis.
> 
> And previous century's leftist failures? You're SPGB aren't you? LOL


 
You are displaying your ignorance  on all counts I am afraid.  I am aware of the "serious political stuff", the labour theory of value and so forth. You are right  to some extent, capitalism is mentioned, for example, four times, within volume II of Capital. I think the world would have been a far better place if Marx had not wasted his time on a lot of his economic writings but had rather put a bit more energy into an analysis of power. His critique of the Bourgeoisie hints at this but unfortunately he was sidetracked by economic theory. The "propaganda pamphlet" of the manifesto is a work of brilliance, his later Engel's sponsored works are best read in synopsis.  I have followed this belief by not putting a great deal of time into his economic writings - I think they are to some extent irrelevant to preparing for a true revolutionary change. 

For the avoidance of doubt.I am Kenny G rather than SPGB. I left them quite a long time ago. However, to return to the OP, I expect the meeting will be very worthwhile and of interest.


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## SpineyNorman (Aug 27, 2012)

You're the one displaying ignorance. Nobody said the Manifesto was anything but a work of brilliance. But it's not, and can't be, read as a substitute for the real hard task of getting to grips with their works as a whole. For a start the term capitalism itself became widely used as a result of Marx and Engels' writings. And if you'd read Marx's more historical works - the 18th Brumaire, Class struggles in France etc. and Engels work on the state you'd see that the reason why they considered an analysis of the relations of production so vital was precisely because they rightly understood their importance with regards to power dynamics. Interestingly, some accounts claim that Marx was wanting to study anthropology once all 7 planned volumes of Capital were finished, which suggests that the vulgar base/superstructure interpretation is a nonsense and that he was well aware of the way cultural and linguistic factors could be put to use both in maintaining and changing the status quo.

Maybe if you'd not been so lazy and actually bothered to read it rather than dismiss it you'd have realised this.


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## kenny g (Aug 27, 2012)

SpineyNorman said:


> You're the one displaying ignorance. Nobody said the Manifesto was anything but a work of brilliance. But it's not, and can't be, read as a substitute for the real hard task of getting to grips with their works as a whole. For a start the term capitalism itself became widely used as a result of Marx and Engels' writings. And if you'd read Marx's more historical works - the 18th Brumaire, Class struggles in France etc. and Engels work on the state you'd see that the reason why they considered an analysis of the relations of production so vital was precisely because they rightly understood their importance with regards to power dynamics. Interestingly, some accounts claim that Marx was wanting to study anthropology once all 7 planned volumes of Capital were finished, which suggests that the vulgar base/superstructure interpretation is a nonsense and that he was well aware of the way cultural and linguistic factors could be put to use both in maintaining and changing the status quo.
> 
> Maybe if you'd not been so lazy and actually bothered to read it rather than dismiss it you'd have realised this.


 
Well, for all your reading and your, "real hard task of getting to grips with their works", you are about as politically relevant as any piss stained bloke who has wasted their life studying racing form.

I am fully aware that the term capitalism became widely used as a result of M and E's writings, and what a cul-de-sac that has been! Another -ism that adds very little to any kind of understanding. If Marx had got to the Anthropology  rather than wasted so many words  on the volumes he would have done the world a service.

Do you think coming  to grips with the volumes is a pre-requisite for meaningful revolutionary political discourse?


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## SpineyNorman (Aug 27, 2012)

Yes.

You know nothing of my life and my political relevance so I can only imagine that you're projecting your own inadequacies, presumably social ones, onto me.

And that's post-modernist bollocks.

In order to generate "meaningful revolutionary discourse" it is first necessary to understand the mutually re-enforcing links between the prevailing hegemonic discourse and real material power relations. A new or revolutionary discourse that cannot tap into and resonate with these power relations and the social phenomena they produce will never gain traction in the real world. This goes back to what ld was saying about analyses that don't scratch below the surface.

That's not to say that you have to have read all three volumes of Capital (and I'd be a hypocrite to say you did - I haven't read all of volume 2 myself) to have anything worthwhile to say but to suggest that it's irrelevant or a cul-de-sac is just ignorant bollocks.

E2A: isms maaan, don't label me dude!


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## kenny g (Aug 27, 2012)

SpineyNorman said:


> Yes.
> 
> And that's post-modernist bollocks.
> 
> ...


 
So we are agreed that in order to understand the mutually re-enforcing links between meaningful revolutionary discourse and real material power relations you do not need to have read the complete works of Marx. Nor, I would suggest, do you have to express your political beliefs in purely marxian terms.

I think you misunderstand me. I was not suggesting that the volumes of Capital are a cul-de-sac or irrelevant, rather that the word capitalism is. I don't think it particularly helps us understand the real nub of the problem. Marx's earlier emphasis on the Bourgoisie and Capitalists is far more relevant to the real issues of control, exploitation and domination, both of the planet and of us.

It is interesting that I have moved from being SPGBer to a post-modernist in your eyes. I await the next pigeon hole.


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## TruXta (Aug 27, 2012)

SpineyNorman said:


> Yes.
> 
> You know nothing of my life and my political relevance so I can only imagine that you're projecting your own inadequacies, presumably social ones, onto me.
> 
> ...


 
All begs the question tho - most people are gonna want to vomit when they hear the kind of language LD (and you, and me for that matter) generally use when discussing these things. Hegemonic discourse? Fuck off.


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## cesare (Aug 27, 2012)

TruXta said:


> All begs the question tho - most people are gonna want to vomit when they hear the kind of language LD (and you, and me for that matter) generally use when discussing these things. Hegemonic discourse? Fuck off.



One doesn't vomit when learned people are talking about important things like Marx and Capitalism, comrade. But one might move swiftly on, on account of being excluded.


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## TruXta (Aug 27, 2012)

cesare said:


> One doesn't vomit when learned people are talking about important things like Marx and Capitalism, comrade. But one might move swiftly on, on account of being excluded.


 
If anyone tried to comrade me IRL I'd either laugh, spit or slap them.


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## cesare (Aug 27, 2012)

TruXta said:


> If anyone tried to comrade me IRL I'd either laugh, spit or slap them.



You dislike "comrade" more than me agreeing with your point? But yes, it's another example of what can be implied by the use of a word even when the use is ironic.


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## TruXta (Aug 27, 2012)

cesare said:


> You dislike "comrade" more than me agreeing with your point? But yes, it's another example of what can be implied by the use of a word even when the use is ironic.


 
Sorry, that wasn't directed at you - I got the irony. You don't strike me as the comrading sort.


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## cesare (Aug 27, 2012)

TruXta said:


> Sorry, that wasn't directed at you - I got the irony. You don't strike me as the comrading sort.



There shouln't be anything wrong with it as a term, but there's a sense of "club" about it.


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## love detective (Aug 27, 2012)

kenny g said:


> I am fully aware that the term capitalism became widely used as a result of M and E's writings, and what a cul-de-sac that has been!


 
If only anti-capitalists could get over this ruddy obsession with capitalism


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## kenny g (Aug 27, 2012)

SpineyNorman said:


> You know nothing of my life and my political relevance so I can only imagine that you're projecting your own inadequacies, presumably social ones, onto me.
> 
> E2A: isms maaan, don't label me dude!


 
"Projecting" - you appear to be more than happy to throw vitriol around. And yes, I do think chucking labels at someone is a pretty poor approach to an argument. But heh, you have read most of Marx and "come to grips" with it, so we better believe your analysis heh? Pity that it comes across as someone trying to justify their reading rather than find any kind of solution.


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## kenny g (Aug 27, 2012)

love detective said:


> If only anti-capitalists could get over this ruddy obsession with capitalism


 
Pretty much proves my point. The high point of "anti-capitalism" was June 18th 1999, and that was hi-jacked by trots within weeks.

In any effective war, it isn't a good idea to allow yourself to be defined by what you are against.


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## love detective (Aug 27, 2012)

kenny g said:


> As an aside, do you know how many times Capitalism is mentioned in the communist manifesto? The answer is none. Engels refers to it once in the intro of 1893. The word capitalist does arise and is used to refer to the class of individuals, the bourgeoisie. The leftist waffle of the kind espoused by Love Detective is not the source of a solution for the world, but is rather the drifting stench from the previous century's leftist failures.


 
out of interest what was this leftist waffle i was apparently espousing?


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## love detective (Aug 27, 2012)

kenny g said:


> In any effective war, it isn't a good idea to allow yourself to be defined by what you are against.


 
true - when you're at war, the last thing you want to be doing is worrying and fussing about your enemy and what they're upto


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## SpineyNorman (Aug 27, 2012)

TruXta said:


> All begs the question tho - most people are gonna want to vomit when they hear the kind of language LD (and you, and me for that matter) generally use when discussing these things. Hegemonic discourse? Fuck off.


 
Well quite. I don't use that kind of language when I'm talking to the lads in the pub! 

But that's no reason not to understand it yourself is it? I've a fair bit of faith in the intellectual capabilities of ordinary people and my experiences of everyday conversations with people who aren't politics geeks like me suggests that although they (probably quite sensibly ) can't be arsed to spend the amount of time reading that I do they are smart enough to understand the conclusions. And if those conclusions are grounded in a serious analysis (not post-modernist claptrap kenny seems so keen on) it's fairly easy to back them up when people disagree. It also helps when we're trying to work out what's going to happen in the future, which makes it easier to work out what kind of tasks we should prioritise.

But for anyone who wants to understand the way society, and especially the economy, works and how to best go about changing it then an understanding of Marx is absolutely indespensible IMO.


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## SpineyNorman (Aug 27, 2012)

kenny g said:


> So we are agreed that in order to understand the mutually re-enforcing links between meaningful revolutionary discourse and real material power relations you do not need to have read the complete works of Marx. Nor, I would suggest, do you have to express your political beliefs in purely marxian terms.
> 
> I think you misunderstand me. I was not suggesting that the volumes of Capital are a cul-de-sac or irrelevant, rather that the word capitalism is. I don't think it particularly helps us understand the real nub of the problem. Marx's earlier emphasis on the Bourgoisie and Capitalists is far more relevant to the real issues of control, exploitation and domination, both of the planet and of us.
> 
> It is interesting that I have moved from being SPGBer to a post-modernist in your eyes. I await the next pigeon hole.


 
It's possible to be both. And if someone starts claiming that discourse is more important for social power than material factors (eg economic realtions) then it's fair to say they're putting forward a post-modernist view.

What's wrong with the term capitalism? It's hardly Marxist jargon is it? Everyone I know has a good idea what it is (and most think it stinks too).

And I don't even know what this bit: "Marx's earlier emphasis on the Bourgoisie and Capitalists is far more relevant to the real issues of control, exploitation and domination, both of the planet and of us." is supposed to mean. How can you speak of capitalists without speaking of capitalism?

You're a bit all over the place if you ask me.


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## SpineyNorman (Aug 27, 2012)

cesare said:


> One doesn't vomit when learned people are talking about important things like Marx and Capitalism, comrade. But one might move swiftly on, on account of being excluded.


 
I wouldn't use such terms in everyday conversation but when someone's trying to rubbish Marx's works is it not safe to assume they'd understand some of the key concepts?


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## SpineyNorman (Aug 27, 2012)

kenny g said:


> "Projecting" - you appear to be more than happy to throw vitriol around.


*cough*


kenny g said:


> you are about as politically relevant as any piss stained bloke who has wasted their life studying racing form.


 


kenny g said:


> And yes, I do think chucking labels at someone is a pretty poor approach to an argument. But heh, you have read most of Marx and "come to grips" with it, so we better believe your analysis heh? Pity that it comes across as someone trying to justify their reading rather than find any kind of solution.


 
When did I say I'd read "most of Marx"? I haven't. And better to justify reading than wilful ignorance.


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## cesare (Aug 27, 2012)

SpineyNorman said:


> I wouldn't use such terms in everyday conversation but when someone's trying to rubbish Marx's works is it not safe to assume they'd understand some of the key concepts?



Aye. But other people are reading too, so using accessible language is more likely to encourage other people to join in. That said, I've seen far worse


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## SpineyNorman (Aug 27, 2012)

cesare said:


> Aye. But other people are reading too, so using accessible language is more likely to encourage other people to join in. That said, I've seen far worse


 
Point taken comrade.



kenny g said:


> Pretty much proves my point. The high point of "anti-capitalism" was June 18th 1999, and that was hi-jacked by trots within weeks.
> 
> In any effective war, it isn't a good idea to allow yourself to be defined by what you are against.


 
Fuck the fuck off you cunting cunt. /accessible


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## cesare (Aug 27, 2012)

SpineyNorman said:


> Point taken comrade.
> 
> 
> 
> Fuck the fuck off you cunting cunt. /accessible


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## cesare (Aug 27, 2012)

I've only ever been to one political meeting, and the ICC turned up. Never again 

Edit. I lied, I've just remembered another one which was totally fine, tbf.


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## kenny g (Aug 27, 2012)

SpineyNorman said:


> You're the one displaying ignorance. Nobody said the Manifesto was anything but a work of brilliance. But it's not, and can't be, read as a substitute for the real hard task of getting to grips with their works as a whole. For a start the term capitalism itself became widely used as a result of Marx and Engels' writings. And if you'd read Marx's more historical works - the 18th Brumaire, Class struggles in France etc. and Engels work on the state you'd see that the reason why they considered an analysis of the relations of production so vital was precisely because they rightly understood their importance with regards to power dynamics. Interestingly, some accounts claim that Marx was wanting to study anthropology once all 7 planned volumes of Capital were finished, which suggests that the vulgar base/superstructure interpretation is a nonsense and that he was well aware of the way cultural and linguistic factors could be put to use both in maintaining and changing the status quo.
> 
> Maybe if you'd not been so lazy and actually bothered to read it rather than dismiss it you'd have realised this.


 



SpineyNorman said:


> *cough*
> 
> When did I say I'd read "most of Marx"? I haven't. And better to justify reading than wilful ignorance.


 
When did I justify wilful ignorance? I haven't. I just said that I thought I had used my time more productively by reading a synopsis of Marx's economic theory,( I now recall getting through a few extracts and attending a uni course) rather than ploughing through Capital. My main interest in his thoughts at the time I looked into it was the Materialist Conception of History and Gerry Cohen's work on it. Apparently this is all evidence that I am an SPGB post modernist lazy pig ignorant etc. 

The argument on here  that Marx is great because it gives you the basis to win any argument is probably the reason why "Marxists", especially of the trot variety, are quite often best avoided. They are all too often boring know it alls who prefer to speak than to listen. In my vast experience of political discourse SPGB meetings can most certainly hold their heads high in this respect. Decent people providing space for workers to actually work through their ideas.


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## kenny g (Aug 27, 2012)

love detective said:


> true - when you're at war, the last thing you want to be doing is worrying and fussing about your enemy and what they're upto


 
If you know your enemy is fussing about what you are up to then you can start to determine their actions by your own.

Intel is necessary but not sufficient. It is certainly NOT a good idea to think that in order to defeat the enemy you must fully understand it. That is why Marx's reference to Capitalists and their synonym the Bourgeoisie as being the object of class struggle, rather than Capitalism, in the Communist Manifesto is so important. He identifies the enemy.

It is his later work which is  so remarkably ineffective in terms of being a weapon of change, however well it may describe the exploitation of labour in economic terms. Many "Marxists" assume that once people understand they are exploited they will want to overthrow the system of exploitation which is termed Capitalism. Therefore, these Marxists say, revolutionaries just need to educate workers  as to the exploitative nature of capitalism and a revolutionary consciousness will follow. It is a tactic that has been proved wrong time and time again. Any number of Capital reading groups have just led to any number of know-it-all bores. Knowledge of exploitation doesn't cause a revolution.


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## love detective (Aug 27, 2012)

I agree with your criticisms of Marxists, how much of this blame can be laid at Marx's door however is debatable

Anyroads, the majority of these 'Marxists' of which you speak are more likely to have read the Communist Manifesto and not Capital (i would imagine something like around 90% of 'Marxists' haven't read Capital, yet 90% of them would have read the Communist Manifesto), so that puts your argument that the Communist Manifesto is a more effective 'weapon of change' than Capital on very shaky ground, given how ineffective Marxists and Marxism have been over the last hundred and fifty years in effecting change

You are right though, knowledge of exploitation doesn't cause a revolution - not sure who here has argued that it does though. You however seemed to think that knowledge, theory or analysis was not only not sufficient but not even necessary either - which is somewhat in contradiction with how Marx saw things around the time he helped to write the Communist Manifesto 




			
				Marx in Critique of Hegel’s Philosophy of Right said:
			
		

> The weapon of criticism cannot, of course, replace criticism of the weapon, material force must be overthrown by material force; but theory also becomes a material force as soon as it has gripped the masses. Theory is capable of gripping the masses as soon as it demonstrates ad hominem, and it demonstrates ad hominem as soon as it becomes radical. To be radical is to grasp the root of the matter.


 



			
				Marx in Critique of Hegel’s Philosophy of Right said:
			
		

> As philosophy finds its material weapon in the proletariat, so the proletariat finds its spiritual weapon in philosophy. And once the lightning of thought has squarely struck this ingenuous soil of the people, the emancipation of the Germans into men will be accomplished.


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## SpineyNorman (Aug 27, 2012)

kenny g said:


> When did I justify wilful ignorance? I haven't. I just said that I thought I had used my time more productively by reading a synopsis of Marx's economic theory,( I now recall getting through a few extracts and attending a uni course) rather than ploughing through Capital. My main interest in his thoughts at the time I looked into it was the Materialist Conception of History and Gerry Cohen's work on it. Apparently this is all evidence that I am an SPGB post modernist lazy pig ignorant etc.
> 
> The argument on here that Marx is great because it gives you the basis to win any argument is probably the reason why "Marxists", especially of the trot variety, are quite often best avoided. They are all too often boring know it alls who prefer to speak than to listen. In my vast experience of political discourse SPGB meetings can most certainly hold their heads high in this respect. Decent people providing space for workers to actually work through their ideas.


 
The evidence that you're SPGB came from your admission that you were some time ago - now you say you're not and I accept that. The evidence for your post-modernism is your elevation of the importance of discourse to levels that it really doesn't justify. And it's nothing to do with winning an argument - unless we understand a problem we cannot change it. Fires are hot. So what we need to do to stop fires is to make stuff colder - that's the kind of solution your vulgar surface level analysis would bring you to. Someone who looks below the surface sees that fire requires oxygen, fuel and ignition and takes one of these out of the equation. And when I'm discussing politics with people I never use jargon when there's a "normal" word or set of words I can use instead. Marx and Marxism, for me, is about me working out what's going on in the world. Without this I can't ever hope to address the problems I see.

And this all started, if you remember, with you claiming that Capital wasn't worth reading and that you could get all you needed from the Manifesto. So stop being silly and trying to misrepresent people.


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## Jazzz (Aug 27, 2012)

love detective said:


> it's created through the act of circulation, a process that by definition can not be done by one party in isolation


No, this is not really correct. The money is created at the point the loans are made. It exists in the borrower's account before it travels anywhere.



> as i said above
> 
> there's as much truth in the statement that:-
> 
> ...


Agreed! As I have previously said, money is simply an expression of debt between one party and another. And amazingly it is actually the borrower who really creates the money when he/she signs the promissory note for the loan contract.


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## Jazzz (Aug 27, 2012)

Jean-Luc said:


> That may be your view but you can't call "Paul Tucker, Bank of England Executive Director and member of the Monetary Policy Committee" to the witness box to testify in your favour. What he said in that speech was:
> This is saying that in the short run they can expand credit at will, but only if they first "lever up their balance sheets", i.e if they borrow more. It is not saying that they can expand credit at will just by typing in some numbers. Don't you understand the meaning of "lever up"?


When a bank makes a loan, both its assets and liabilities increase by the amount of the loan. This is 'levering up' the balance sheet. It is simply bookkeeping entries.

from your link:

"Subject only but crucially to confidence in their soundness, banks extend credit by simply increasing the borrowing customer’s current account, which can be paid away to wherever the borrower wants by the bank ‘writing a cheque on itself’. That is, *banks extend credit by creating money*. This ‘money creation’ process is constrained: by their need to manage the liquidity risk – from the withdrawal of deposits and the drawdown of backup lines – to which it exposes them.15 Adequate capital and liquidity, including for stressed circumstances, are the essential ingredients for maintaining confidence.16" "

As I said, this translates as "banks create money out of thin air to the extent that they can get away with it"


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## TruXta (Aug 28, 2012)

Actually this quote of Marx'


> theory also becomes a material force as soon as it has gripped the masses. Theory is capable of gripping the masses as soon as it demonstrates ad hominem, and it demonstrates ad hominem as soon as it becomes radical. To be radical is to grasp the root of the matter.


could easily be used to argue that _pace_ kenny we should and could start with a critique of discourse, of the language used to divide and conquer, and then proceed from that to show how that language is rooted in social and material conditions that reproduce these selfsame divisions and subjugations. Like in that other thread about the perils of giving/receiving compliments - would you rather start with an examination of the language/discourse or would you jump straight into an "explanation" of why and how these patterns of language and interaction have come to exert such a hold?


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## Jean-Luc (Aug 28, 2012)

Jazzz said:


> When a bank makes a loan, both its assets and liabilities increase by the amount of the loan. This is 'levering up' the balance sheet. It is simply bookkeeping entries.


Once again, that is your interpretation but it is not Paul Tucker's. In that speech he says:


> Well, much that I have said about banks -- their capacity, in the short run, to lever up their balance sheets and expand credit at will ...


So, he's referring to something he had said earlier in his speech. What he was referring to were some views expressed by another economist:


> Hyun Shin has argued that balance sheet management of this kind amplifies the credit cycle. That sounds like the 'financial accelerator' model, except that Shin's position is that the outcomes can exceed those warranted by fundamentals. *His argument is that in the upswing of a business cycle, the rise in asset values increases the accounting net worth of banks and other intermediaries, enabling them to leverage up their balance sheets*. *This expands credit*; and increases the liquidity in capital markets, reducing liquidity premia embodied in asset prices; and so on. And when the music stops, the process can be reversed as falls in asset values, leverage and liquidity feed on each other.


I would have thought that this was clear enough: because in a boom the value of their assets increases this means banks can both borrow and lend more (and that in a slump it's the other way round). It's not at all a case of banks creating money out of thin air but of them being able to borrow more from which to lend.


Jazzz said:


> from your link:
> "Subject only but crucially to confidence in their soundness, banks extend credit by simply increasing the borrowing customer’s current account, which can be paid away to wherever the borrower wants by the bank ‘writing a cheque on itself’. That is, *banks extend credit by creating money*. This ‘money creation’ process is constrained: by their need to manage the liquidity risk – from the withdrawal of deposits and the drawdown of backup lines – to which it exposes them.15 Adequate capital and liquidity, including for stressed circumstances, are the essential ingredients for maintaining confidence.16" "
> 
> As I said, this translates as "banks create money out of thin air to the extent that they can get away with it"


Here Tucker is merely saying that banks create money when they make a loan, i.e. that their IOUs (to members of the public, firms and governments) function as money in that they are accepted as means of payment. Saying that bank IOUs are money (or, for the purists, quasi-money) does not imply that they create the money they lend out of thin air. In fact it is not saying anything about where the money for the loan comes from. It applies equally when they are lending money they already have (from outside deposits and what they themselves have borrowed). And, presumably, would apply to bank loans if your so-called "100% reserve banking" was to ever come in.


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## love detective (Aug 28, 2012)

TruXta said:


> we should and could start with a critique of discourse, of the language used to divide and conquer, and then proceed from that to show how that language is rooted in social and material conditions that reproduce these selfsame divisions and subjugations
> 
> would you rather start with an examination of the language/discourse or would you jump straight into an "explanation" of why and how these patterns of language and interaction have come to exert such a hold?


 
It's almost as if we need some kind of methodological approach which starts with an appropriation and examination of the concrete and surface level detail as the starting point.

Then moves behind those empirical/phenomenal like surface forms to examine and develop a hypothesis about the deeper roots & conditions which not only give rise to those surface like forms, but point to why those surface forms must appear in the way that they do

And then some kind of bundling together of that essence & appearance, in some kind of 'concept of reality' which in turn can then be validated to see if it's of any analytical worth by an ongoing testing of the results of that concept against the kind of concrete detail that gave us our starting point.

If only some kind of diagram encapsulated this process







Arguments about diagrams aside, I agree with what you say above about the approach, but I think you'll find the Kenny is arguing against such an approach. He thinks an understanding of what your're fighting against is not only not sufficient, not even not necessary, but actually detrimental to effectively fighting against it.

As per Spiney Norman's analogy Kenny (and Jazz) seems to be happy to go around trying to put out fires by trying to make them colder - an understanding of where the hotness of that fire comes from could only get in the way of putting out these fires in his mind.

Which is somewhat Ironic as both Kenny and Jazz display exactly the same approach to this, yet are on opposing sides of the debate talked about in the OP


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## kenny g (Aug 28, 2012)

love detective said:


> As per Spiney Norman's analogy Kenny (and Jazz) seems to be happy to go around trying to put out fires by trying to make them colder - an understanding of where the hotness of that fire comes from could only get in the way of putting out these fires in his mind.


 
People were, and are, very successfully extinguishing fires without having a full knowledge of the physics involved. If people had waited until they understood the causes of fire before putting flames out I expect the whole world would have burnt. Plenty of other analogies in medical science and germ theories.


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## TruXta (Aug 28, 2012)

love detective said:


> It's almost as if we need some kind of methodological approach which starts with an appropriation and examination of the concrete and surface level detail as the starting point.
> 
> Then moves behind those empirical/phenomenal like surface forms to examine and develop a hypothesis about the deeper roots & conditions which not only give rise to those surface like forms, but point to why those surface forms must appear in the way that they do
> 
> ...


 
Fuck, you're in love with that diagram aren't you?


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## cesare (Aug 28, 2012)

Jazzz, is this meeting being publicised in your circles? It could be very entertaining for audience.


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## love detective (Aug 28, 2012)

TruXta said:


> Fuck, you're in love with that diagram aren't you?


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## Jean-Luc (Aug 28, 2012)

cesare said:


> Jazzz, is this meeting being publicised in your circles? It could be very entertaining for audience.


It does seem to be:

http://www.meetup.com/Positive-Money/events/79704292/

http://www.positivemoney.org.uk/2012/08/banking-reform-or-abolition-of-capitalism-central-london/

There's also this from here:


> AB: The left appear to be wilfully blind about this most important of issues; according to the Socialist Party of Great Britain (in an attack on the Social Credit proposals of Major Douglas): “[banks] are essentially only financial intermediaries, borrowing money at one rate of interest from people with cash to spare and lending this at a higher rate to those needing money to spend or invest, their profits coming from the difference between the two interest rates”. As you pointed out in your critique of Bob Diamond last year, this is not true. Worse than that, it is an outright lie, because now it is generally accepted that banks do create credit _ex nihilo_. Why do so-called socialist organisations peddle such lies and toe the banks' line?
> BD: It's the ideological attachment to getting rid of capitalism that blinds them to seeing how things really work.



​


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## SpineyNorman (Aug 28, 2012)

kenny g said:


> People were, and are, very successfully extinguishing fires without having a full knowledge of the physics involved. If people had waited until they understood the causes of fire before putting flames out I expect the whole world would have burnt. Plenty of other analogies in medical science and germ theories.



Jesus. They succeeded in putting out those fires first, in primitive times, through observation and trial and error. And these days people can put out fires because people who do understand the physics have shown them.  What they didn't do was see it was hot and try and cool it down with a fucking fridge. You appear now to be arguing against the scientific method.


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## cesare (Aug 28, 2012)

Jean-Luc said:


> It does seem to be:
> 
> http://www.meetup.com/Positive-Money/events/79704292/
> 
> ...



Thanks Jean-Luc, that's helpful. I was wondering about Jazzz's fellow conspiracy theorists as well.


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## kenny g (Aug 29, 2012)

SpineyNorman said:


> Jesus. They succeeded in putting out those fires first, in primitive times, through observation and trial and error. And these days people can put out fires because people who do understand the physics have shown them. What they didn't do was see it was hot and try and cool it down with a fucking fridge. You appear now to be arguing against the scientific method.


 
You are correct that learning to put fires out may well have come about through trial and error. However, it would be surprising if the process of trial and error involved any knowledge of oxygen or the physics of combustion. It may have involved a mirad of theories about gods, stars, or perhaps no great over-arching theories at all. Solutions can be arrived at by trial and error without knowledge of the underlying physics, that is why I mentioned germ theories. The ancient Egyptians had learnt to build towns away from fetid swamps and had various explanations for why, none of which involved germ theories. Up until the late 19th century miasma theories based on ideas of fetid air were prevalent http://en.wikipedia.org/wiki/Miasma_theory_of_disease Even 19th century cholera outbreaks in London were acted upon and the causes prevented prior to a fully developed germ theory. http://en.wikipedia.org/wiki/1854_Broad_Street_cholera_outbreak (excuse the wiki) My point is not against the advancement of knowledge but rather that it is not a pre-requisite for effective action that full knowledge of the causes of something is available. In fact believing that the pursuit of knowledge is a pre-requisite can hinder effective action. If something appears to work it is entirely reasonable to do it before you even understand how it works. This approach is commonplace in practical sciences such as medicine. For a more recent case look at the BSE outbreaks of the 1990's which were acted upon prior to a knowledge of prions.


Your point, "And these days people can put out fires because people who do understand the physics have shown them" kind of helps my position as it exposes the flaw in your position. Is it really the case that people need people who understand the physics of fire to show them how to put it out? If this analogy applies to revolutionary struggle, are you really suggesting that the Marxist theorist is as necessary for an effective revolution as a physicist is for fire fighting? If so, then it would appear that the Marxist theorist isn't very necessary at all.

What is necessary for effective change is an awareness of the problem, the fire, and knowledge of how to put it out. The problem is the capitalists who should be extinguished by being provided with the choice of defection or jail.  The choice will be theirs, the people giving them the option will be us.


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## Jazzz (Aug 29, 2012)

Jean-Luc said:


> Once again, that is your interpretation but it is not Paul Tucker's. In that speech he says:


 
When a bank makes a loan, its assets increase by the value of the loan, and its liabilities also increase by the value of the loan. Are you really denying this? You can see that both must rise equally, as there is no profit realised before interest is taken. Again, this alone is 'levering up' the balance sheet, it is all that Tucker is referring to.



> So, he's referring to something he had said earlier in his speech. What he was referring to were some views expressed by another economist:


No, he states how banks make loans as fact and not an 'argued' position.


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## Jazzz (Aug 30, 2012)

more quotes

"_[Banks] can lend simply by expanding the two sides of their balance sheet simultaneously, creating (broad) money." _Paul Tucker again

_"__The essence of the contemporary monetary system is creation of money, out of nothing, by private banks’ " _Martin Wolf, Financial Times

_"Banks it is often said take deposits from savers (for instance households) and lend it to borrowers (for instance businesses) with the quality of this credit allocation process a key driver of allocative efficiency within the economy.  But in fact they don’t just allocate pre-existing savings, collectively they create both credit and the deposit money which appears to finance that credit." _Adair Turner, Chairman of the FSA


_*"*__The process by which banks create money is so simple the mind is repelled."_ John Kenneth Galbraith, former Harvard professor of Economics


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## Jean-Luc (Aug 30, 2012)

Jazzz said:


> more quotes


Jazzz, the trouble is that you, like many currency cranks, are interpreting quotes from bankers and economists in a different way to what they mean. When they say banks "create money" you interpret this as meaning that banks create it "out of nothing". But this does not follow. Banks are said to "create money" when they issue an IOU which is then generally accepted for payments. The IOU is for lending money. You say that they don't have to have the money that they lend. Virtually all those authorities you quote take it for granted that banks lend out of funds they have, either from outside depositors or from what they have borrowed on the money market. So, just because someone says that "banks create money" does not mean that they think that banks do this out of nothing.




> "_[Banks] can lend simply by expanding the two sides of their balance sheet simultaneously, creating (broad) money." _Paul Tucker again


Yes, that's what banks do when they grant a loan. It's called double-entry book-keeping and doesn't imply that they create "broad money" out of nothing




> _"__The essence of the contemporary monetary system is creation of money, out of nothing, by private banks’ " _Martin Wolf, Financial Times


It would have been helpful if you had given the full quote which actually ends "by private banks' often foolish lending". At least you didn't cut it short, as some other currency cranks do, after "out of nothing". I think it is unfortunate that Wolf used these words as he was bound to be misunderstood in the way he has been of saying that private banks create money out of nothing. So it's his own fault that he has been. From his other writings, it is clear that this is not want he meant. His actual position is that it is the whole "contemporary monetary system", *which includes the central bank*, that can do this. His view is that banks can sometimes make a loan without having the money, in the knowledge that at the end of day (literally, when banks clear their mutual payments) the central bank will lend it any money it lacks to cover the loan. A central bank can of course create money out of nothing. That central banks do behave in this automatic and passive way in response to "private banks' often foolish lending" is a controversial theory not shared by all economists (not by Paul Krugman, for instance), but it is not a theory that a bank can create money out of nothing on its own. If any institution is creating money out of nothing here it would be the central bank and not a private bank. But nobody denies that a central bank can do this.




> _"Banks it is often said take deposits from savers (for instance households) and lend it to borrowers (for instance businesses) with the quality of this credit allocation process a key driver of allocative efficiency within the economy. But in fact they don’t just allocate pre-existing savings, collectively they create both credit and the deposit money which appears to finance that credit." _





> Adair Turner, Chairman of the FSA


The use of the word "collectively" suggests that he is describing the "deposit multiplier" you have already rejected, which assumes an original deposit which is the basis of the first loan, which when spent finds its way into one or other bank which can therefore make a another loan, and so on. In any event, he does not think that an individual bank can create money out of thin air, nor that it can lend more than has been deposited with it (or which it has itself borrowed). And he is saying that banks do allocate pre-existing savings. Full speech is here.




> _*"*__The process by which banks create money is so simple the mind is repelled."_ John Kenneth Galbraith, former Harvard professor of Economics


This is a passage from Chapter 3 of his 1975 book _Money_. The use of the word "repelled" is not to be taken in its meaning of "disgusting" but rather in its meaning of "taken aback" as the next sentence makes clear ("Where something so important is involved, a deeper mystery seems only decent"). In any event, the passage tells us nothing about what he thinks the process is. For that, you have to read the next two paragraphs. In the first one he describes how the Bank of Amsterdam decided to lend money that had been deposited with not as coins but by opening an account for the borrower from which he could draw coins. In the second, he describes how early American banks granted loans in the form of bank notes which were redeemable against coins that had been deposited with it. In other words, he is not saying that banks simply create the borrower's deposit or the bank notes out of thin air, but on the basis of a pre-existing deposit.

Thanks for providing an opportunity to demolish some cherished currency crank quotes. Have you any more?


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## love detective (Aug 30, 2012)

Jazzz said:


> When a bank makes a loan, its assets increase by the value of the loan, and its liabilities also increase by the value of the loan.


 
Yes you're exactly right here - and what causes the liabilities to increase is the fact that they have had to fund the loan either from the circulation back to it of customer deposits, borrowing in the wholesale markets, or borrowing/repoing from central banks (all things you deny actually happen)

So that after the loan has been made & drawn on, the bank has a liability representing the amount owed by the bank to the party it funded it from and an assest representing the amount owned to the bank by the party borrowing

so you describe the outcome correctly, yet deny the process that causes that outcome

you claim that bank's don't have to fund their lending - if this was true the outcome of this on a bank's balance sheet would be that the asset side would rise representing the loan the bank has made to the customer, but there would be no corresponding rise in liabilities because the bank has magiced the money out of thin air - which is absurd as i) the whole point of a balance sheet is that it erm...balances, and ii) is contradicted by yourself above


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## Jazzz (Aug 31, 2012)

Jean-Luc said:


> Thanks for providing an opportunity to demolish some cherished currency crank quotes. Have you any more?


I am sorry jean-luc, but you are simply waffling and continuing to display the fact that _you haven't got it. _Your 'demolishing' is simply in your head. You do not understand the fundamental trick by which money is created by private banks. It's as both you and love detective think what is going on is full-reserve banking and I don't think you understand fractional reserve at all. How on earth do you think that 97% of our currency (which exists in form of bank liabilities) is created if you think that it can all paid with the 3% of central bank money? You describe a mathematicaI impossibility.

I find it exceptionally trying attempting discourse. It's really fine not to understand this - I have spent years getting my head around it. But to continually make out that you understand when you patently do not - that is exasperating.

The quotes are very clear - private banks create money.


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## Jazzz (Aug 31, 2012)

love detective said:


> Yes you're exactly right here - and what causes the liabilities to increase is the fact that they have had to fund the loan either from the circulation back to it of customer deposits, borrowing in the wholesale markets, or borrowing/repoing from central banks (all things you deny actually happen)
> 
> So that after the loan has been made & drawn on, the bank has a liability representing the amount owed by the bank to the party it funded it from and an assest representing the amount owned to the bank by the party borrowing
> 
> ...


No, incorrect, the 'liability' represents the loan. It is the thing that the customer can draw on. I have already explained in the other thread very carefully - your bank account is a liability account on the bank's books. The 'money in your bank account' is a simply a liability of the bank to you. That is all the money is: a liability from one party to another. In a sense, you could say that there is no actual money. It is all promises!

When a bank makes a loan, it need not get funds from anywhere else. _It simply adjusts its books_. Assets and liabilities increase by the value of the loan.

"_So that after the loan has been made & drawn on"_

This is precisely the point about fractional reserve banking. At any one time, considering depositors as a whole, only a fraction of people with 'money in the bank' come to draw it out. All the bank has to do - as was very carefully described by Paul Tucker - is have enough access to central bank funds to cover the tiny percentage that it expects depositors to withdraw at any one time. The rest - it can make up out of nothing.


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## love detective (Aug 31, 2012)

Jazzz said:


> No, incorrect, the 'liability' represents the loan.


 
nonsense - you clearly have never looked at, let alone understood, the report & accounts of a bank



> It is the thing that the customer can draw on.


 
As i said in my post:-

_



			
				me said:
			
		


*So that after the loan has been made & drawn on*, the bank has a liability representing the amount owed by the bank to the party it funded it from and an assest representing the amount owned to the bank by the party borrowing
		
Click to expand...

_i.e. - after the loan has been drawn on (i.e. used to buy something/pay someone), the bank has an asset representing the money due back from the customer and a liability representing whatever method that loan was funded by in the first place (customer deposit, wholesale lending, subordinated debt, share capital, borrowing from central bank etc..)



> I have already explained in the other thread very carefully - your bank account is a liability account on the bank's books.


 
yet more nonsense - your bank account is only a liability to the bank if you have money in it, once the loan has been drawn and used to buy something/pay someone, the only thing left in terms of the bank/customer relationship, is the customers liability to the bank (i.e. the bank's asset). The corresponding rise in the bank's balance sheet liability at that point in time represents the liability to whoever or whatever party/method funded the loan (customer deposit, wholesale lending etc..)



> The 'money in your bank account' is a simply a liability of the bank to you.


 
this is correct, but as noted above - once the loan has been used, the money 'isn't in the borrowers bank account' anymore - and this is where your lack of knowledge as to how things work is shown up for what it is



> When a bank makes a loan, it need not get funds from anywhere else. _It simply adjusts its books_. Assets and liabilities increase by the value of the loan.


 
keep telling yourself that, meantime in the real world things go on somewhat differently to how you would like it to.

If things worked like how you think they do, you have to explain why eurozone banks had to borrow just over a trillion euros from the european central bank between december 2011 and february 2012 to help them fund their lending activities and repay maturing debt. If the world really was like how you think it is, why would these banks borrow a trillion euros (which involves paying interest on it and putting up collateral for it) to fund their activities/lending, when, according to you, they can just make a few accounting entries and magic that money into existence? If you make one reply to this post, make sure it's an attempt to answer to that question, and i say attempt as that is all that it will be, as you cannot reconcile your own theory with the facts as we know them


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## Jazzz (Sep 2, 2012)

love detective said:


> nonsense - you clearly have never looked at, let alone understood, the report & accounts of a bank


Not nonsense. The loan is a liability of the bank to the customer. This is what money is!



> As i said in my post:-
> 
> i.e. - after the loan has been drawn on (i.e. used to buy something/pay someone), the bank has an asset representing the money due back from the customer and a liability representing whatever method that loan was funded by in the first place (customer deposit, wholesale lending, subordinated debt, share capital, borrowing from central bank etc..)


Well firstly, the loan might not be drawn on. It could be paying off an overdraft. It might simply stay in the customer's account. Or, it could be paid to someone else with a bank account at the same bank. In which case, there is absolutely no additional liability with the central bank.

But even more to the point, it is necessary to consider the banking system as a whole, because just as you might claim money created by private banks 'leaves' when it is drawn on to another bank, it arrives when the reverse happens. Suppose we have four major high st banks, each of them make a loan of £10,000 to one of their customers. Now suppose each of these customers draws their loan by paying someone at another bank, so each bank has given one loan and been paid by another. What is the overall position? None of the banks has any change in their position with the central bank. The banking system as a whole has created £40,000, out of thin air, by keystrokes on a computer.



> yet more nonsense - your bank account is only a liability to the bank if you have money in it, once the loan has been drawn and used to buy something/pay someone, the only thing left in terms of the bank/customer relationship, is the customers liability to the bank (i.e. the bank's asset). The corresponding rise in the bank's balance sheet liability at that point in time represents the liability to whoever or whatever party/method funded the loan (customer deposit, wholesale lending etc..)


None of which changes the fact that your bank account is a liability account on the bank's books. As above you are again mistaken to think that there is any 1-1 relationship with 'funding' of the loan. The loan is created out of nothing.



> this is correct, but as noted above - once the loan has been used, the money 'isn't in the borrowers bank account' anymore - and this is where your lack of knowledge as to how things work is shown up for what it is


Well of course not, if it couldn't circulate it wouldn't be money.



> keep telling yourself that, meantime in the real world things go on somewhat differently to how you would like it to.


Absolutely true, do you really think I approve of the system I am describing?



> If things worked like how you think they do, you have to explain why eurozone banks had to borrow just over a trillion euros from the european central bank between december 2011 and february 2012 to help them fund their lending activities and repay maturing debt. If the world really was like how you think it is, why would these banks borrow a trillion euros (which involves paying interest on it and putting up collateral for it) to fund their activities/lending, when, according to you, they can just make a few accounting entries and magic that money into existence? If you make one reply to this post, make sure it's an attempt to answer to that question, and i say attempt as that is all that it will be, as you cannot reconcile your own theory with the facts as we know them


 
Anyone can create currency. The 'trick' is confidence. In the case of the private banks, it is the confidence that they can exchange it for central bank money on demand. Indeed, when you create your money by way of a promissory note, the banks will only change it up for you if they are confident you are good for it. Likewise, we only accept that their numbers on a screen are worth anything if we are confident that we can change it up for central bank funds. So this is what happens with a run on the bank. Everyone demands that the bank changes it up.

So we come to fractional reserve lending. It started with the goldsmiths, who realised that they could more receipts for gold than they actually had gold, because the paper was serving better as money and the gold was best left in the vault. So they could loan paper money at interest by creating money out of thin air, backed on their promise that the paper could be redeemed for gold at any time. This is exactly what is happening with the private banks. And is why they are scared of 'the run', and it's why they need central bank credit.

The current fraction is around 3% central bank funds to the 97% money created by the high st banks. So, if the banks borrowed a trillion euros, one could expect that to be supporting the creation of thirty trillion euros, money which is created by keystrokes on a computer.


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## Jean-Luc (Sep 2, 2012)

Jazzz said:


> So we come to fractional reserve lending. It started with the goldsmiths, who realised that they could [issue?]more receipts for gold than they actually had gold, because the paper was serving better as money and the gold was best left in the vault. So they could loan paper money at interest by creating money out of thin air, backed on their promise that the paper could be redeemed for gold at any time.


What is your historical evidence that goldsmiths ever issued more receipts for gold than the amount of gold (actually at the time they existed, 17th century London, it was silver) than had been deposited with them? Or that they made loans in the form of "paper money" ?

Both deposits _and loans_ were made in actual coins. Naturally, depositors were issued with a paper receipt confirming the amount deposited and entitling them to get their money back on demand (but these weren't loans). The goldsmith bankers learned that they did not need to keep all the coins deposited with them as coins but could safely lend out some of them.

Richard Cantillon, in chapter VI of Part III of his _Essay on the Nature of Trade in General_, written in the 1730s, explained how the goldsmiths bankers of 17th century London worked (and they only existed at that time and there):


> If a hundred economical gentlemen or proprietors of land, who put by every year money from their savings to buy land on occasion, deposit each one 10,000 ounces of silver with a goldsmith or banker in London, to avoid the trouble of keeping this money in their houses and the thefts which might be made of it, they will take from them notes payable on demand. Often they will leave their money there a long time, and even when they have made some purchase they will give notice to the banker some time in advance to have their money ready when the formalities and legal documents are complete.
> In these circumstances the banker will often be able to lend 90,000 ounces of the 100,000 he owes throughout the year and will only need to keep in hand 10,000 ounces to meet all the withdrawals. He has to do with wealthy and economical persons; as fast as one thousand ounces are demanded of him in one direction, a thousand are brought to him from another. It is enough as a rule for him to keep in hand the tenth part of his deposits.
> There have been examples and experiences of this in London. Instead of the individuals in question keeping in hand all the year round the greatest part of 100,000 ounces the custom of depositing it with a banker causes 90,000 ounces of the 100,000 to be put into circulation. This is primarily the idea one can form of the utility of banks of this sort. The bankers or goldsmiths contribute to accelerate the circulation of money.


This can be said to be the origin of "fractional reserve banking", i.e. persons who accept deposits needing retain only a "fraction" of this amount as "cash" and lending out the rest (as cash). In the case of "gentlemen and proprietors of land", Cantillon says that this fraction (the cash reserve ratio) could be about 10%. For "merchants and undertakers" he recorded that this had to be much higher, from one-third up to 50%.

Note that, with a cash reserve of 10%, they could lend out 90% of what had deposited with. It does not mean that if total deposits amounted to 100,000 ounces of silver that the goldsmith-banker could then lend out 9 times this, or 900,000 ounces. That of course would be physically impossible. Nor did they issue "paper notes" to that amount (or, at this time, of any amount). That would have been madness.

They did not issue more receipts/notes than the amount of money deposited with them, but of course because some of the silver coins had been lent out the total number of receipts would be greater than the amount of silver kept in the bankers' vaults. But that's normal and what banking is all about (and would still apply under your "100% reserve banking" scheme). Cantillon explained that what the circulation of receipts meant was that the banker need not keep so much as a cash reserve:


> They lend it out at interest at their own risk and peril, and yet they are or ought to be always ready to cash their notes when desired on demand. If an individual has 1000 ounces to pay to another he will give him in payment the banker's note for that amount. This other will perhaps not go and demand the money of the banker. He will keep the note and give it on occasion to a third person in payment, and this note may pass through several hands in large payments without any one going for a long time to demand the money from the banker. It will be only some one who has not complete confidence or has several small sums to pay who will demand the amount of it.


That "fractional reserve banking" means that banks can lend more than has been deposited with them is not only theoretically wrong. It has never happened, certainly not in the case of the 17th century London goldsmith bankers.

These early bankers in fact practised what you call "100% reserve banking". At least I think this is what you mean by this. You can't be saying, can you, that under your system banks will have to keep 100% of what is deposited with them as cash? In which case they wouldn't be banks, but safe-deposits because they wouldn't be able to lend. But, if they will only need to keep as cash what they judge their customers will ask to withdraw as cash, wouldn't that be "fractional reserve banking"?


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## SpineyNorman (Sep 2, 2012)

Oh dear.



kenny g said:


> You are correct that learning to put fires out may well have come about through trial and error. However, it would be surprising if the process of trial and error involved any knowledge of oxygen or the physics of combustion.


 
So what? Observation comes first, then when enough observations have been made we try and integrate them into a theory that hopefully makes intuitive sense but most importantly helps us to make accurate predictions. It's called science.



kenny g said:


> It may have involved a mirad of theories about gods, stars, or perhaps no great over-arching theories at all. Solutions can be arrived at by trial and error without knowledge of the underlying physics, that is why I mentioned germ theories. The ancient Egyptians had learnt to build towns away from fetid swamps and had various explanations for why, none of which involved germ theories. Up until the late 19th century miasma theories based on ideas of fetid air were prevalent http://en.wikipedia.org/wiki/Miasma_theory_of_disease Even 19th century cholera outbreaks in London were acted upon and the causes prevented prior to a fully developed germ theory. http://en.wikipedia.org/wiki/1854_Broad_Street_cholera_outbreak (excuse the wiki) My point is not against the advancement of knowledge but rather that it is not a pre-requisite for effective action that full knowledge of the causes of something is available. In fact believing that the pursuit of knowledge is a pre-requisite can hinder effective action. If something appears to work it is entirely reasonable to do it before you even understand how it works. This approach is commonplace in practical sciences such as medicine. For a more recent case look at the BSE outbreaks of the 1990's which were acted upon prior to a knowledge of prions.


 
So what? Since we've come to understand germ theory and the physics behind fires have we become worse or better at fighting same?




kenny g said:


> Your point, "And these days people can put out fires because people who do understand the physics have shown them" kind of helps my position as it exposes the flaw in your position.


 
No it doesn't.



kenny g said:


> Is it really the case that people need people who understand the physics of fire to show them how to put it out? If this analogy applies to revolutionary struggle, are you really suggesting that the Marxist theorist is as necessary for an effective revolution as a physicist is for fire fighting? If so, then it would appear that the Marxist theorist isn't very necessary at all.


 
They also used to pray in order to prevent forest fires. Now we have people who do understand the physics of fires we can use dry powder, carbon monoxide and so on. Without an understanding of the physics, or at least instructions from those who do have an understanding, it would seem perfectly sensible to put out a chip pan fire with water. Once you've seen someone try that you won't try it again but then it's probably too late. And when you're dealing with whole societies, possibly even the whole world, we don't really have the luxury of trial and error. Especially when the errors can be so grave - let's not forget that the last time the kind of surface level analysis we're discussing on this thread was used as the basis for an "anti-capitalist" movement it didn't end very well.














kenny g said:


> What is necessary for effective change is an awareness of the problem, the fire, and knowledge of how to put it out. The problem is the capitalists who should be extinguished by being provided with the choice of defection or jail. The choice will be theirs, the people giving them the option will be us.


 
I agree with the first sentence. But your unwillingness to bother reading anything beyond the manifesto has led you to misidentify the problem (though I'd suggest you've also misread the manifesto but that's another question altogether). The problem isn't the capitalists. It's the social relations of capitalism. To pin it on individuals, rather than the system, leads precisely to the above kind of movement, or if you're lucky you might get the Luddites. Lessons from the interwar period apply all the more when the blame is placed on only one type of capitalist - the banker, a profession that has been associated with one particular religious/ethnic group and so is ripe for use in scapegoating. Just getting rid of the baddies won't help because the dynamics of the system will ensure that new baddies will quickly emerge to take their place. The problem isn't capitalists, it's capital.

Capitalism is the enemy. And the more you know about the enemy the better equipped you are to identify its weaknesses, to predict its behaviour and ultimately to defeat it. Just as fires have weak points (aiming extinguisher at the base and so on) so too does capitalism - and an understanding of the system offers an understanding of the weaknesses. The best example of this I can think of right now, specifically because it is very clear on how the theory was derived from _Capital, _is Harry Cleaver's _Reading Capital Politically. _

But there are really too many to mention. In my view, the error the left, and more specifically those who call themselves Marxists, have made (or rather one of them - abandoning class politics and embracing every liberal fad going is another) has been to _not _do this for themselves. Instead preferring to use the works of dead Russians, who were interpreting and using Marx for entirely different times, places and conditions, as a blueprint. And so not only are they using strategies formulated for completely different struggles, they also transfer any theoretical errors and misinterpretations, along with conclusions that may have been arrived at more as the result of personal political ambition than a hard nosed assessment of what's going on.

I'm not saying everyone has to read every word of _Capital_, or even that everyone _should_ read _Capital. _What I'm saying is that it's a valuable tool and that a theoretical understanding of the problems we face is one of the necessary conditions for solving them, especially as the "error" part in trial and error isn't exactly attractive when you consider that it's human lives, maybe even the future of humanity itself, we're talking about.


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## kenny g (Sep 2, 2012)

Thank you for the response. Slightly desperate to post up the entrance of Auschwitz though. Godwin's law and all that. Most of the rest of your response is a misrepresentation, including your apparent knowledge of my reading habits - Marx wrote more than Capital and the Manifesto you know.

I have not selected one type of Capitalist more than another so your straw man argument is irrelevant. Revolutionary change will occur when it becomes morally and socially reprehensible to be a Capitalist, with a legal framework constructed to reflect this. The result will be either mass defections of capitalists or their imprisonment. People don't accept that murders are merely a social relation, they go after murderers, and equally we should go after the Capitalists. If they don't want to be Capitalists then they are welcome to defect, if not they will be dealt with by a full legal process.

People who state Capitalism is the enemy generally seem to believe "getting to grips" with some economic text is half the battle. There is no necessity for people to have an understanding of Marxist economic theory in order for there to be an effective revolution.  It may help to have an understanding of Capital but it probably would help to have an understanding of any number of areas, photoshop springs to mind.

Marx helped identify the enemy as Capitalists, the Bourgeoisie. Lock them up or let them defect rather than wasting time trying to understand the intricacies of their mechanisms of exploitation and control.


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## SpineyNorman (Sep 2, 2012)

Jesus, on a thread where we're taking on precisely the kind of surface level pseudo-analysis the Nazis took advantage of I think those paralels can be made without evoking Godwin. And this thread does single out one type of capitalist - and it's criticisms of this surface level pseudoanalysis that provoked your comments so yes, it is perfectly apropriate.

It was you yourself as much as said the manifesto was all you needed so I don't think that's a misrepresentation, especially as in all Marx's works he was careful to point out that the problem was systemic rather than the result of individual agency.

The most important task is organising in communities and workplaces to resist whatever shit gets thrown at us and to learn the most effective modes of collective action whilst demonstrating in practice to others that these methods work. But you can do that _and _read a book or two.

Theory helps us understand where the weaknesses are in the system - in other words where to push and prod if we ever want to get to the stage where we can lock them up or force them to defect. Your suggestions are idealist, not mine - the materialist conception of history (and even that's contested ground - some place more emphasis on structure, others on collective and individual agency) posits that before capitalism can be overthrown - before we can lock them up or force them to defect - other processes must first be completed. Theory helps us at times to ensure these processes take place and at others to speed them up. To go back to the physics analogy, imagine capitalism as a heavy boulder. Even if we all push at it we can't get it rolling if it's not in the right position. But a single person with a knowledge of levers can get it moving that first difficult inch, after which everyone's pushing can get it rolling down the hill and out of the way. You'd have us all pushing at the boulder and getting hernias.

And the more people that try and get their heads around this stuff the better - reduces the chances of some self-elected vanguard putting itself at the head of the movement and ensures that there will be an informed debate over tactics, which is always a good thing.

It's not one or the other - we need action and understanding.

That's it for me now on this though, I've wasted far too much time that could have been better spent ensuring the inevitability of communism by reading Marx's original notes from the _Grundrisse_


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## love detective (Sep 3, 2012)

Jazzz said:


> Not nonsense. The loan is a liability of the bank to the customer. This is what money is!


 
absolute nonsense

a loan is a financial obligation created between lender & borrower following the passing on of money from the former to the later, obligating the later to pay back that money with interest at some point in the future. The loan is an asset in the book's of the lender/bank and a liability in the books of the borrower.

The cash that was passed on which resulted in the creation of the loan obligation is an asset in the books of the borrower until such time that this money is used to pay someone/buy something, at which point the money moves from their account and the only relationship left between the bank and the borrower is the loan obligation - which is an asset in the books of the bank/lender and a liability in the books of the borrower




> Well firstly, the loan might not be drawn on. It could be paying off an overdraft. It might simply stay in the customer's account.


 
Ah i see, so your theory of how the credit & money system works only applies to situations where people borrow money from bank's but then don't actually use that money for anything! Not a particularly useful theory, given that the reason people borrow in the first place is because they need the money to do something with it.

And even if it's paying off an overdraft the end situations remains the same as i described - if you have a grand overdraft on your account, it means that previously you've paid a grand out to someone, if you then take out a loan to pay the overdraft off, you are left in the same situation i described, i.e. the bank having an asset in their books representing the money due back and the customer having a liability in their representing their future obligation to pay the money back



> None of which changes the fact that your bank account is a liability account on the bank's books


 
again, absolute nonsense - a bank account can have a positive or negative balance - and it is this which determines whether the balance on that account represents an asset on the bank's books or a liability on the bank's books. It's determined by the quantitative magnitude, not the qualitative aspect. therefore a bank account with a minus balance is an asset in the books of the bank, and vice versa



> As above you are again mistaken to think that there is any 1-1 relationship with 'funding' of the loan.


 
At the total level there is actually, the total of a bank's lending must be matched by an equivalent amount of funding (that funding can be made up a variety of sources, the customer deposits you referred to, wholesale lending if customer deposits are not enough to make it up, central bank borrowing or repoing etc..)



> The loan is created out of nothing.


 
No (and as you pretty much admitted earlier) the loan is created out of the coming together of a variety of independent factors, namely the opportunity or need for the potential borrower to do something with the money, the ability of the bank to fund it's overall lending position if the loan is made, and the willingness of both parties to conduct the transaction on terms that they are both in agreement with. If all those independent factors come together then the loan is made - hardly what I would call 'out of nothing'.

To say this is all created out of nothing is as useful as saying something like 'education is created out of thin air by teachers' i.e. it is of no analytical use whatsoever in understanding the process of education



> Absolutely true, do you really think I approve of the system I am describing?


 
You misunderstand - it's not about whether I think you approve of the system you are describing. It's about the fact that you have to bend the real world to fit in with your rigid and inappropriate theories of it. When I say you'd like the world to be like that i don't mean you support such a world, i mean you'd like it to be like that because it would give you theories some credence, but it isn't so they don't




> The current fraction is around 3% central bank funds to the 97% money created by the high st banks. So, if the banks borrowed a trillion euros, one could expect that to be supporting the creation of thirty trillion euros, money which is created by keystrokes on a computer.


 
As i suspected, you were unable to answer the simple question.

So in the middle of the biggest credit crunch the world has ever seen, where credit is severely contracting year on year, where banks are unwilling or unable to lend, private individuals and business are paying down debts rather than taking more on because of the dismal prospects for the economy, you are suggesting that banks have recently made new loans to the tune of thirty trillion euros in the space of a few months! This is equivalent to 50% of Global GDP!

Who has borrowed thirty trillion euros in the last few months Jazz? what did they do with it? 30 trillion euros of new borrowing would represent an enormous monetary boost to the economy (as noted equivalent to 50% of Global GDP) that would temporarily set of a new short term boom and could literally wipe out unemployment overnight - that you think this is happening shows that you don't pay attention to what is actually going on in the real world around you, and of course you can't pay attention to the real world as if you did you wouldn't hold the fuckwited theories that you do

Absolute and patent nonsense from you Jazz - and yet again shows how you have to make up 'facts' about the real world to fit in with your inappropriate theories about how the world works (instead of adapting your theories when it's clear they are of no use to explain real world events)

The real explanation as to why the eurozone banks had to borrow a trillion euros from the ECB is that large chunks of the the borrowing they had made previously to support their lending (something you claim doesn't happen) is coming up for maturity in the coming year and due to the freezing up of the wholesale lending markets, they would be unable to refinance/roll it over in the normal wholesale markets, so the ECB had to step in to, to temporary avoid another crisis and provide funding that the markets had in previous years provided. Of course, you deny that this funding was even required in the first place (you just need to look at any report & accounts of a bank however to see it), so I can see why you can't admit the real world facts as they would once again pull the rug out from underneath your unfit for purpose theories on the money & credit system


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## TruXta (Sep 3, 2012)

I'm continually amazed that you can be bothered, ld.


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## love detective (Sep 3, 2012)

guess i free up time by not continually talking about what i've had for my tea and the like


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## kenny g (Sep 3, 2012)

SpineyNorman said:


> That's it for me now on this though, I've wasted far too much time that could have been better spent ensuring the inevitability of communism by reading Marx's original notes from the _Grundrisse_


 
Fair enough. Thank you for taking the time to respond to my points. Helped to clarify some of my ideas. To return to the OP - the meeting this Wednesday should be quite an event. I hope Jazz can attend.


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## TruXta (Sep 3, 2012)

love detective said:


> guess i free up time by not continually talking about what i've had for my tea and the like


 
Oh the burn.


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## butchersapron (Sep 4, 2012)

Hello, weirdo.


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## Jazzz (Sep 5, 2012)

Jean-Luc said:


> What is your historical evidence that goldsmiths ever issued more receipts for gold than the amount of gold (actually at the time they existed, 17th century London, it was silver) than had been deposited with them? Or that they made loans in the form of "paper money" ?
> 
> Both deposits _and loans_ were made in actual coins. Naturally, depositors were issued with a paper receipt confirming the amount deposited and entitling them to get their money back on demand (but these weren't loans). The goldsmith bankers learned that they did not need to keep all the coins deposited with them as coins but could safely lend out some of them.
> 
> ...


 
Thanks for the thoughtful and researched post Jean-Luc. However, Cantillon is just describing the origins of fractional reserve banking. Maybe he didn't even fully grasp what was going on? Precisely the things you describe as 'impossible' and 'madness' did occur, and are the basis for fractional reserve banking today. I ask you - why are they 'impossible' and 'madness'?

From lending out someone else's coins - and giving the original depositor a non-transferable receipt - it was simply one further step to issuing the original depositor a transferable receipt "payable to bearer" which then functions as money - much easier to move around, as I think Cantillon noted - and it is one further step then to simply issuing these promissory notes as loans without ever having had a matching deposit.

I've given away my copy of "where does money come from", which I think had some good references on this, but I have these links:

_



			Of these media the promissory note originated a receipt given by the goldsmith for money, which he took charge of for a customer but was not allowed to use. Such a note was really a warehouse voucher which could not be assigned. When, however, it became a receipt for a money deposit, which the goldsmith was allowed by the depositor to use for the purposes of making advances to his customers, it developed into an assignable instrument. *Ultimately such notes were issued by the goldsmiths in the forms of loans and were not necessarily backed by gold or bullion*. When this stage was reached the goldsmith had become a duly recognised purveyor of currency.
		
Click to expand...

_The Early History of Banking in England, Richard D. Richards - google books

also



> *The Bank of England*
> The Bank of England was founded in 1694, primarily to raise money for the war with France. Its founders were to provide the Government with a loan of £1,200,000 and the interest was to be £100,000 per year. In exchange the bank was to have a Royal Charter and the loan was not to be repaid before 1706.
> 
> The founders intended to do no more than the kind of business goldsmiths were doing already.* Like the pioneer goldsmiths the Bank of England was a bank of issue, printing their own notes and lending money of their own creation*. The power granted to the Bank of England in respect of note issue drove others out of circulation until they remained the only bank of note issue. However, other English bankers found that it was possible for deposit banking to be profitable with the right of note issue.


A History of English Clearing Banks, British Banking History Society http://www.banking-history.co.uk/history.html

Of course, for an example of a promissory note promising to repay silver which isn't there - you have only to open your wallet.


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## mrs quoad (Sep 5, 2012)

Jazzz said:


> Of course, for an example of a promissory note promising to repay silver which isn't there - you have only to open your wallet.


Do you have different bank notes to the ones in my wallet, then?

Admittedly I've only got a twenty and a fiver (think I've got a 1990s fiver somewhere, too) but neither of them make any reference to silver. Or gold. Or platinum. Or hen's teeth, tbh.

Were you under the impression that we're still working with the silver standard?


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## free spirit (Sep 5, 2012)

actually, I think you're making Jazz's point there.

as in the notes still bear the legend 'promise to pay the bearer on demand the sum of 5 pounds', but we've gone so far down the cycle that we've now not even got any idea wtf this 5 pounds they speak of actually is.

Originally it meant something, and on demand the bank of england would need to have given you 5 pounds worth of something in exchange for that note, now it's gone so far down the line that they'd just hand you another fiver and look baffled if you wanted that £5 in gold, silver or anything else.

or maybe that's a different point entirely, I've given up trying to keep up with who's trying to make what point on this thread or the other one.


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## Jazzz (Sep 5, 2012)

love detective said:
			
		

> absolute nonsense a loan is a financial obligation created between lender & borrower following the passing on of money from the former to the later, obligating the later to pay back that money with interest at some point in the future. The loan is an asset in the book's of the lender/bank and a liability in the books of the borrower. The cash that was passed on which resulted in the creation of the loan obligation is an asset in the books of the borrower until such time that this money is used to pay someone/buy something, at which point the money moves from their account and the only relationship left between the bank and the borrower is the loan obligation - which is an asset in the books of the bank/lender and a liability in the books of the borrower


You assume 'cash was passed on'. Until the 'cash is passed on', the 'money in the account' is a credit entry in a liability account of the bank. If that is then converted to cash, the cash represents a liability of the central bank to the borrower. The liability is the money. You can't exchange it for precious metals anymore.



> Ah i see, so your theory of how the credit & money system works only applies to situations where people borrow money from bank's but then don't actually use that money for anything! Not a particularly useful theory, given that the reason people borrow in the first place is because they need the money to do something with it. And even if it's paying off an overdraft the end situations remains the same as i described - if you have a grand overdraft on your account, it means that previously you've paid a grand out to someone, if you then take out a loan to pay the overdraft off, you are left in the same situation i described, i.e. the bank having an asset in their books representing the money due back and the customer having a liability in their representing their future obligation to pay the money back


You fail to address the point being made, which is that the loan created by the bank can stay and indeed circulate within the bank entirely with no change in the lending bank's position with the central bank or indeed any other bank. This does not mean that 'my theory' relies on this happening at all - I am simply giving a contrary example.



> again, absolute nonsense - a bank account can have a positive or negative balance - and it is this which determines whether the balance on that account represents an asset on the bank's books or a liability on the bank's books. It's determined by the quantitative magnitude, not the qualitative aspect. therefore a bank account with a minus balance is an asset in the books of the bank, and vice versa


You are really agreeing with me - a 'bank account' with a credit balance is a liability of the bank. I have no problem with you describing 'negative' liabilities as assets.



> At the total level there is actually, the total of a bank's lending must be matched by an equivalent amount of funding (that funding can be made up a variety of sources, the customer deposits you referred to, wholesale lending if customer deposits are not enough to make it up, central bank borrowing or repoing etc..)


Again let me quote Adair Turner of the FSA:
"Banks it is often said take deposits from savers (for instance households) and lend it to borrowers (for instance businesses) with the quality of this credit allocation process a key driver of allocative efficiency within the economy. But in fact they don’t just allocate pre-existing savings, collectively they create both credit and the deposit money which appears to finance that credit." - the money which the banks create is funded by the money which the banks create.



> No (and as you pretty much admitted earlier) the loan is created out of the coming together of a variety of independent factors, namely the opportunity or need for the potential borrower to do something with the money, the ability of the bank to fund it's overall lending position if the loan is made, and the willingness of both parties to conduct the transaction on terms that they are both in agreement with. If all those independent factors come together then the loan is made - hardly what I would call 'out of nothing'. To say this is all created out of nothing is as useful as saying something like 'education is created out of thin air by teachers' i.e. it is of no analytical use whatsoever in understanding the process of education


I think it is really important to say that banks create money whenever they make a new loan, and I think we disagree on quite how freely the banks can do it.



> As i suspected, you were unable to answer the simple question. So in the middle of the biggest credit crunch the world has ever seen, where credit is severely contracting year on year, where banks are unwilling or unable to lend, private individuals and business are paying down debts rather than taking more on because of the dismal prospects for the economy, you are suggesting that banks have recently made new loans to the tune of thirty trillion euros in the space of a few months! This is equivalent to 50% of Global GDP! Who has borrowed thirty trillion euros in the last few months Jazz? what did they do with it? 30 trillion euros of new borrowing would represent an enormous monetary boost to the economy ...


Your main question was that why are central bank funds needed when banks can 'create money out of nothing'. You completely the main point of my reply, which was that it is not that simple, the banks can create as much money as they wish while maintaining confidence that it can be changed for central bank funds.

You are right that I posted hastily about the thirty trillion. Thank you. However it is because the money system is as I describe that the ECB has had to make such extraordinary moves while the possibility of Greek bankruptcy threatened to pull down the house of cards - the house being the fact that the bank loans are greatly in excess of central bank funds.

That it is possible that the ratio can be 30:1, that doesn't mean it necessarily is so, and central banks may not be able to increase the lending (and money creation) of private banks by increasing reserves (pushing on a string - as I have earlier said the money multiplier model is inadequate). Hence the extraordinary move in order to maintain confidence. I do not claim to be any expert on macroeconomics and the dynamics involved - however I do understand that the system is inherently unstable precisely because of our fractional reserve debt-based money system.


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## love detective (Sep 5, 2012)

Sorry Jazz, but we've reached the stage where the validity of your theories have been exposed as useless

I'm going to give up on arguing the detached theory side with you as it's just going round in circles, i want to focus however on the usefulness of your theory in helping to understand the world around us

I gave you an opportunity to use your theory to explain why eurozone banks had to borrow a trillion euros in the space of a few months from the ECB in later 2011/early 2012. Your initial response to this shows that you have no real interest in actually understanding what goes on in the world. That you were forced to offer an absurd reason for the 1 trillion borrowing so that your theory would stay 'intact' shows that you have no real desire to understand how the real world works, you instead just want to try and distort what is happening in the real world to fit your rigid & inappropriate theory.

Even worse however, is when pulled up on your huge mistake, you don't take the opportunity to reflect on the fact that your theories are not fit for purpose and offer no understanding of how the money & credit system works. You instead then resort to a general _'the ECB is doing what it is because my theories are correct'_ - which is even more absurd that your original attempt to explain it. The ECB's action are in complete contradiction to your theories Jazz, you claim that bank's don't need to fund loans that they make, in which case they should have no need to borrow a trillion from the ECB to fund the loans that they have made. Even more worse however, as it becomes increasingly clear, even to you, that the world as it really is is diametrically opposed to what the world 'should' look like according to your theories, you then claim not to be an 'expert' on the dynamics of the system that you have spent pages and pages telling us we are all wrong about.

You can't have it both ways, you can't ponce around here authoritively telling us this is how the money & credit system works and that we are all wrong, and then when asked a simple question as to why your theories are totally contradicted by real life dynamics, you then say '_i can't explain that because i'm not an expert on it'_

All theories and hypothesis about how the world works need to be validated against the real world to test their worth (there's a nice diagram somewhere that shows that continual process in action) - yours falls over at the first hurdle, what your theory suggests should happen is the complete opposite from what is actually happening, and when pressed on it, you dig yourself into a stuttering hole which leaves you with pure faith in your belief as the only thing that supports your theories


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## Jean-Luc (Sep 5, 2012)

Jazzz said:


> Precisely the things you describe as 'impossible' and 'madness' did occur, and are the basis for fractional reserve banking today. I ask you - why are they 'impossible' and 'madness'?


What I described as impossible was lending out 90,000 ounces of silver coins when only 10,000 had been deposited. Anybody who could do this would be entitled to a Nobel Prize for Alchemy. What I described as madness was issuing promissory notes convertible on demand into silver to a value of 90,000 ounces when only 10,000 had been deposited with you. Anybody who did this would soon go bankrupt. What actually happened historically was that 1.000 oz would have been retained and the remaining 9,000 loaned out either as silver coins or as promissory notes convertible into them.


Jazzz said:


> Of course, for an example of a promissory note promising to repay silver which isn't there - you have only to open your wallet.


That's today, but up until WWI if you presented a £5 Bank of England note to the Bank of England you would have been legally entitled to the equivalent amount in gold such as 5 gold sovereigns.


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## Jazzz (Sep 5, 2012)

love detective said:


> You can't have it both ways, you can't ponce around here authoritively telling us this is how the money & credit system works and that we are all wrong, and then when asked a simple question as to why your theories are totally contradicted by real life dynamics, you then say '_i can't explain that because i'm not an expert on it'_


 
LD I have discussed this extremely patiently with you. I have provided countless quotes, and very patiently dealt with all your queries. When you completely fail to respond to points I make, I haven't gone on about it. So now you are making a great deal of the fact that I am actually willing to take being corrected if I do post something amiss - when the entire rest of the time I have been correcting you. And you go for the old trick of claiming that everyone else is on your side of the debate, when that is certainly far from the case. Bad show old chap.

Of course, if the eurozone banks limited themselves to lending out money that they already 'funded', there could not possibly be the need for such massive interventions to prop the system up. You might wish to think about that.


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## cesare (Sep 5, 2012)

Did you go to this meeting (y'know, the point of the thread) this evening, Jazzz?


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## Jazzz (Sep 5, 2012)

Jean-Luc said:


> What I described as impossible was lending out 90,000 ounces of silver coins when only 10,000 had been deposited. Anybody who could do this would be entitled to a Nobel Prize for Alchemy. What I described as madness was issuing promissory notes convertible on demand into silver to a value of 90,000 ounces when only 10,000 had been deposited with you. Anybody who did this would soon go bankrupt. What actually happened historically was that 1.000 oz would have been retained and the remaining 9,000 loaned out either as silver coins or as promissory notes convertible into them.
> That's today, but up until WWI if you presented a £5 Bank of England note to the Bank of England you would have been legally entitled to the equivalent amount in gold such as 5 gold sovereigns.


No, it is precisely that they could lend out promissory notes equivalent to 90,000 ounces when only 10,000 had been deposited! Because as we have discussed only a fraction of people would come to withdraw the metal at any one time, while the notes circulated as money in their own right - with no need for the metal every to be withdrawn. The bigger the ratio, the bigger the gamble - and many early banks did indeed have runs and go bust.

As I quoted in the last post, from "Early History of Banking in England" - surely, it is clear?
_*Ultimately such notes were issued by the goldsmiths in the forms of loans and were not necessarily backed by gold or bullion*. When this stage was reached the goldsmith had become a duly recognised purveyor of currency._​​ 
If you wish to buy a gold certificate today, wikipedia warns you that you might lose your gold if you aren't careful - nothing has changed there: 

"Unallocated gold certificates are a form of fractional reserve banking and do not guarantee an equal exchange for metal in the event of a run on the issuing bank's gold on deposit.[1] "


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## Delroy Booth (Sep 6, 2012)

SpineyNorman said:


> To pin it on individuals, rather than the system, leads precisely to the above kind of movement, or if you're lucky you might get the Luddites.


 
You leave the Luddites alone. They were a million times better than anything we've got today, and certainly a lot more politically sophisticated than merely having a problem with the individuals who were making them unemployed. Read chapter 3 of EP Thompson's Making of the English Working Class, "An Army of Redressers" for the best historical view on the Luddites actual role in trade union history, rather than buying into this establishment discourse that simply dismisses "Luddite" as a synonym for "backward ignorant provincial machine-wreckers scared of progress" because the truth is very different to that.

Otherwise, excellent posts.


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## love detective (Sep 6, 2012)

Jazzz said:


> Of course, if the eurozone banks limited themselves to lending out money that they already 'funded', there could not possibly be the need for such massive interventions to prop the system up. You might wish to think about that.


 
It gets even more absurd - so after pages & pages of telling us how banks don't need to borrow to fund their lending, your explanation is now that the borrowing was made to fund their lending!

Eurozone banks, like all others, had limited themselves to lending out money that they already funded, as that is how the system works. The ECB borrowing was necessary, in the main, to replace shorter term market funding that had been previously sourced from the wholesale lending markets to fund previous lending activity (exactly the same situation as Northern Rock incidentally). Simply put, bank's have to fund any lending they make.

It's been a real eye opener watching you flap around trying to explain real world events not realising that every attempt you make to explain them either involves an absurd making up of what is actually happening in the real world (thirty trillion of new lending being made!) to bend it back to your theory, or an explanation that is diametrically opposed to what your theory says should happen. All that points towards someone who either doesn't understand or doesn't even concern themselves with what actually happens in the real world, which of course is a god send for you given how hopeless your theories are of explaining it


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## gosub (Sep 6, 2012)

Did anyone actually go? Was it just a history of the Basel Accords?


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## SpineyNorman (Sep 6, 2012)

Delroy Booth said:


> You leave the Luddites alone. They were a million times better than anything we've got today, and certainly a lot more politically sophisticated than merely having a problem with the individuals who were making them unemployed. Read chapter 3 of EP Thompson's Making of the English Working Class, "An Army of Redressers" for the best historical view on the Luddites actual role in trade union history, rather than buying into this establishment discourse that simply dismisses "Luddite" as a synonym for "backward ignorant provincial machine-wreckers scared of progress" because the truth is very different to that.
> 
> Otherwise, excellent posts.


 
I know, I thought bad example as I typed it, but although they weren't just lashing out - I've read Thompson too - it can't be denied that machine breaking in and of itself was never going to be a solution. I'm sorry if you feel that I've subjected them to "the enormous condescension of posterity"


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## SpineyNorman (Sep 6, 2012)

kenny g said:


> In my vast experience of political discourse SPGB meetings can most certainly hold their heads high in this respect. Decent people providing space for workers to actually work through their ideas.


 
Sorry, missed this first time around


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## Delroy Booth (Sep 6, 2012)

SpineyNorman said:


> I know, I thought bad example as I typed it, but although they weren't just lashing out - I've read Thompson too - it can't be denied that machine breaking in and of itself was never going to be a solution. I'm sorry if you feel that I've subjected them to "the enormous condescension of posterity"


 
True, machine-wrecking wasn't going to be a solution, but of course what started out as machine-wrecking ended up becoming an insurrection, one of the last great armed revolts in British history. That might have been a solution.

And excuse me for being snippy, I'm very defensive of the Luddites, it pisses me off no end when I hear the word just bandied around to mean reactionary technophobe. The lads who were hung at York in 1812 for attacking various mills and carrying out assassinations on people were mainly young unemployed men from huddersfield between 18 and 25 years old, so I can't help but feel an enormous amount of sympathy for them.

It also pisses me off that it's such a completely ignored piece of history, coz arguably it's of way more historical significance than the Tolpuddle Martyrs or Peterloo massacre. I remember reading Rosa Luxemburgs stuff on the 1905 Strike in Russia, which is very interesting, and has whole passages dedicated too how a narrow economic dispute can escalate into a wider, political, dispute that in theory can unite an entire class. It's a period of history all the lefty groups cover, there's a discussion on Luxemburg and this sort of topic at Marxism every year pretty much, and of course there's nothing wrong with that.

But what's worth noting is the Luddites is a historical example that demonstates _the exact same thing_, how the political, technological and economic can combine into the same class struggle, 100 years before Luxemburg's time, that took place on our fucking doorsteps, and yet hardly anyone knows about it. Why do we import our socialist heritage from other places when we have such an overwhelming abundance of it here on our doorsteps? Is it more exotic just because it's from abroad or something? I know that makes me sound like a little-englander, which I don't mean to, but it just leaves me flabbergasted. Anyway, rant over, good work comrade I'll put it in the minutes


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## butchersapron (Sep 6, 2012)

I agree with what you say apart from the fact that it's not known on the left beyond being used a short-hand for destructive and pointless wrecking - it's a bog standard part of the left's repertoire today. You may be interested in something along the same lines but substituting Swing for the luddites and Tolpuddle for the general strike (or for the rhetorical veneration of it): Tolpuddle and Swing: The Flea and the Elephant


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## Delroy Booth (Sep 6, 2012)

butchersapron said:


> I agree with what you say apart from the fact that it's not known on the left beyond being used a short-hand for destructive and pointless wrecking - it's a bog standard part of the left's repertoire today. You may be interested in something along the same lines but substituting Swing for the luddites and Tolpuddle for the general strike (or for the rhetorical veneration of it): Tolpuddle and Swing: The Flea and the Elephant


 
Cheers for that, much obliged, and yes since Thompson it's obviously a big part of the left's repetoire, but historically it's been overlooked so badly. Doesn't even get mentioned in the Webb's History of British Trade Unionism, Eric Hobsbawm barely mentions it at all in The Age of Revolution (although he did coin the phrase _collective bargaining by riot_, which I quite like) and even recently, for example the People's History Museum in Manchester had some event commemorating the roots of the trade union movement and didn't't mention them at all, so the local anarchists over here went over and protested it's exclusion, Richard Jones' article in History Today published only a few months ago to commemorate the 200th anniversary is amazingly dismissive and scornful for something written in this day and age. I even heard a Tory minister name-dropping the Luddites to describe people who were opposed to greenbelt building projects ffs, it sticks in my crawe. So there's still work to do I reckon.

I've bought the book Captain Swing by Eric Hobsbawn recently, I've not read it, but there seems like a huge amount of similarity between the two events, I wish I knew more about the Swing riots tbh, it's only geography that's kept me away from it.


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## kenny g (Sep 6, 2012)

butchersapron said:


> I agree with what you say apart from the fact that it's not known on the left beyond being used a short-hand for destructive and pointless wrecking - it's a bog standard part of the left's repertoire today. You may be interested in something along the same lines but substituting Swing for the luddites and Tolpuddle for the general strike (or for the rhetorical veneration of it): Tolpuddle and Swing: The Flea and the Elephant


 
 What is the rhetorical veneration you refer to?


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## butchersapron (Sep 6, 2012)

TUC off it's knees, general strike now, stuff talked about in DB's post. 

Did you, as passenger to the future go last night?


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## Jean-Luc (Sep 7, 2012)

Jazzz said:


> No, it is precisely that they could lend out promissory notes equivalent to 90,000 ounces when only 10,000 had been deposited! Because as we have discussed only a fraction of people would come to withdraw the metal at any one time, while the notes circulated as money in their own right - with no need for the metal ever to be withdrawn. The bigger the ratio, the bigger the gamble - and many early banks did indeed have runs and go bust.


I know the meeting's been and gone, but this can't be left unchallenged. I am not denying that the situation did exist where the old goldsmith-bankers had more promissory notes circulating than the had silver in their faults. The question is still whether, with a 10% cash ratio, on receipt of 10,000 oz they can lend out 9,000, retaining only 1,000 as a reserve in case of withdrawals (as I contend) or whether they can keep the whole 10,000 oz and lend out 90,000 in paper money (as you contend). The quote you give from the "Early History of Banking in England" would apply in either case.

That banks never have enough cash in reserve to repay all depositors is what banking is all about. They are lending out money, and so keeping it circulating, of people who don't want to spend it for the time being, based on the assumption that only a minority will be withdrawing their cash at any time. This would still be the case under your "100% reserve banking" too, wouldn't it, as I'm sure you don't mean that banks will then have to keep as cash reserves 100% of what's been deposited with them? Or do you?
​


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## Jazzz (Sep 8, 2012)

Jean-Luc said:


> I know the meeting's been and gone, but this can't be left unchallenged. I am not denying that the situation did exist where the old goldsmith-bankers had more promissory notes circulating than the had silver in their faults. The question is still whether, with a 10% cash ratio, on receipt of 10,000 oz they can lend out 9,000, retaining only 1,000 as a reserve in case of withdrawals (as I contend) or whether they can keep the whole 10,000 oz and lend out 90,000 in paper money (as you contend). The quote you give from the "Early History of Banking in England" would apply in either case.
> 
> That banks never have enough cash in reserve to repay all depositors is what banking is all about. They are lending out money, and so keeping it circulating, of people who don't want to spend it for the time being, based on the assumption that only a minority will be withdrawing their cash at any time. This would still be the case under your "100% reserve banking" too, wouldn't it, as I'm sure you don't mean that banks will then have to keep as cash reserves 100% of what's been deposited with them? Or do you?
> ​


It doesn't matter - even in your instance, you can see clearly that money is being created.

If the original depositor is given a bearer on demand promissory note for £10000 - entitling him to his gold back at any time; and a loan is made for £9000 by promissory note: then the goldsmith has £10000 in gold, and there are two promissory notes out totalling £19000 where has only £10000 in gold. Now the key point is that these promissory notes serve as _good as gold._ They are money. So there is already £19000 in circulation ('goldsmith/high st bank' money) where only £10000 of gold exists ('nature/central bank' money).

Of course it is key that the original depositor is given a transferable on demand promissory note - but this is what happened with the goldsmiths (what was to stop them?), and it is parallel to what happens now with general banking deposits.

From wikipedia:

*Full-reserve banking*, also known as *100% reserve banking*, is a banking practice in which the full amount of each depositor's funds are kept in reserve, as cash or other highly liquid assets. In other words, funds deposited are not lent out by the bank as long as the depositor retains the legal right to withdraw their funds.[_citation needed_] Generally, proposals for full reserve banking systems do not place such restrictions on deposits that are not available on demand, where savers can entrust their money with a bank in time deposits or in 'investment' accounts.[1] This allows banks to continue to act as intermediaries between savers and borrowers.[_citation needed_]


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## cesare (Sep 8, 2012)

How might economies move to full reserve banking, and what do you suppose the effects would be during that transition, Jazzz?


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## JimW (Sep 9, 2012)

Delroy Booth said:


> Cheers for that, much obliged, and yes since Thompson it's obviously a big part of the left's repetoire, but historically it's been overlooked so badly. Doesn't even get mentioned in the Webb's History of British Trade Unionism, Eric Hobsbawm barely mentions it at all in The Age of Revolution (although he did coin the phrase _collective bargaining by riot_, which I quite like) and even recently, for example the People's History Museum in Manchester had some event commemorating the roots of the trade union movement and didn't't mention them at all, so the local anarchists over here went over and protested it's exclusion, Richard Jones' article in History Today published only a few months ago to commemorate the 200th anniversary is amazingly dismissive and scornful for something written in this day and age. I even heard a Tory minister name-dropping the Luddites to describe people who were opposed to greenbelt building projects ffs, it sticks in my crawe. So there's still work to do I reckon.
> 
> I've bought the book Captain Swing by Eric Hobsbawn recently, I've not read it, but there seems like a huge amount of similarity between the two events, I wish I knew more about the Swing riots tbh, it's only geography that's kept me away from it.


Read a good book ages ago called The Land of Lost Content which gives them the full treatment they deserve: http://www.tandfonline.com/doi/abs/10.1080/08109028708629468

ETA: One point I recall he makes and I think hence the title is that their was little social distinction between master and apprentice under the old system, whereas being merely a hired hand was clearly different, so there was quite an explicit class consciousness involved.


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## kenny g (Sep 9, 2012)

butchersapron said:


> TUC off it's knees, general strike now, stuff talked about in DB's post.
> 
> Did you, as passenger to the future go last night?


 
Forgot about it 'till it was too late, so no.


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## Jazzz (Sep 18, 2012)

From wikipedia - "Money Supply". My bold.


> The different forms of money in government money supply statistics arise from the practice of fractional-reserve banking. *Whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of money is created*. This new type of money is what makes up the non-M0 components in the M1-M3 statistics. In short, there are two types of money in a fractional-reserve banking system[16][17]:
> 
> central bank money (obligations of a central bank, including currency and central bank depository accounts)
> commercial bank money (obligations of commercial banks, including checking accounts and savings accounts)


 
Whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of money is created.


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## cesare (Sep 18, 2012)

cesare said:


> How might economies move to full reserve banking, and what do you suppose the effects would be during that transition, Jazzz?


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## love detective (Sep 18, 2012)

Jazzz said:


> From wikipedia - "Money Supply". My bold.
> 
> 
> Whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of money is created.


 
who here has argued that the money supply isn't increased when a bank who is able and willing to lend, lends to someone who wants to borrow? this is simply circulation doing what circulation does

the above is a long shot away from your base assertion that banks independently create money out of thin air

while i'm here - have a look at this from the front page of yesterdays companies & markets section of the FT



> *European banks are failing to wean themselves off central bank money*, even though steep falls in the cost of collateralised borrowing over the summer mean some now have the option of *funding via public markets.*
> 
> Like their US counterparts, European banks can now *fund certain loans more cheaply* than at any time in four years by bundling them into so-called asset-backed securities (ABS) and selling them to investors with interest backed by cash flow from repayments on products such as credit cards, car loans or mortgages.


 
See your missing a trick here Jazz, these banks that are going about funding the loans that they make clearly don't realise that they shouldn't need to go to the bother of doing all that when, according to you, they can simply create money out of thin air to lend on.

It's surprising they have not made contact with you yet so you can advise them how they can independently create money out of thin air so as to not have to do what they are doing at the moment - something you deny that they have to do - which is having to ensure they are able to fund the loans that they make.And if they are unable to fund loans, they can't lend.

I wonder why it is that what you claim that banks can do is not even being done by banks themselves

You should get in touch with some of them Jazz, do a few seminars telling them not to bother continuing to fund themselves in the markets or via central bank funding to fund their loan portfolios, you could show them how they can create money out of thin air and dispense with all that old fashioned funding nonsense that they insist on doing at the moment. I would love to be in the room when you did that


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## Jazzz (Sep 19, 2012)

love detective said:


> who here has argued that the money supply isn't increased when a bank who is able and willing to lend, lends to someone who wants to borrow? this is simply circulation doing what circulation does


This is obvious nonsense.

No, it's not 'simply circulation'. How can it be? As I have pointed out already, if I pass you a banana, I don't have the banana anymore. There is only one banana. There is no increase in the 'banana supply'.

Similarly, if banks simply lent out what they received in deposits, with the depositors not being able to reclaim their money whilst lent out (full reserve banking), then there would of course be no increase in the money supply when banks made loans.

However, at present when a bank makes a loan, there is an increase in the money supply, to the value of the loan._ As the money supply has increased, it must be the case that the bank has created money_. And clearly there is something far stranger going on.

I have already patiently explained more than once why banks cannot simply make do with their own currency alone. Please see my earlier posts.


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## love detective (Sep 19, 2012)

Jazzz said:


> This is obvious nonsense.
> 
> No, it's not 'simply circulation'. How can it be? As I have pointed out already, if I pass you a banana, I don't have the banana anymore. There is only one banana. There is no increase in the 'banana supply'.


 
I'm surprised that someone like yourself who is such an expert on these matters has never come across the concept of velocity of money before - maybe you should look it up on wikipedia then come back and pretend to be an expert on it like you do with everything else

If we have a banana based money economy, and you have a banana and use it to buy something from me with it, then i use it to buy something from someone else with it and so on and so on - the effective level of money/banana supply in this economy is many multiples of the original banana. That one banana has effected the exchange of goods & services, many times the value of the actual base banana as it circulates throughout the economy. Money supply increases mainly through velocity, you should know this as you are the one whose constantly going on about only 3% of the money supply being represented by base central bank money.

Likewise if you have a banana and lend it to me, then i lend it to someone else and so on and so on - in all our respective banana balance sheets (apart from the first in the chain) - we have an asset of a banana representing the banana we are owed from the person we lent it to and a liability of a banana representing the banana that we owe to the person who lent us the banana. So add up the gross assets & liabilities of the balance sheets at the total level and the total loans and deposits are many multiples of the original banana.

More importantly however, I see you were unable to even address my point as to why is it in the real world the things that you claim happen, don't actually happen

It was probably a wise move from you not to try and address the point, as the last time I asked you to explain things that were happening in the real world with reference to your theories of money & credit, you ended up coming out with all manner of absurdities to try and square your crank theories with what is happening in the real world.

So if your position now is that you refuse to engage with what is happening in the real world as that is too much of an inconvenient truth for your crank theories, then fair enough. But again I have to ask, what use is a theory such as yours that is unable to explain anything that actually goes on in the real world. Your theory only holds true in hypothesis form (well to be honest, it doesn't even hold true in that form), but when exposed to the concrete real, it crumbles into nothing

I'll try again though, why is it Jazz that these banks go about funding the loans that they make when you tell us all that they don't have to, that they can just create this money out of thin air. Why are they going to the considerable cost & expense of paying for funding for their lending, when they can just magic the money out of thin air? Why do some bank's even go under because they can't gain access to funding to fund their lending, when according to you they don't have to do this? Why do you avoid these questions?


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## Jazzz (Sep 19, 2012)

love detective said:


> If we have a banana based money economy, and you have a banana and use it to buy something from me with it, then i use it to buy something from someone else with it and so on and so on - the effective level of money/banana supply in this economy is many multiples of the original banana. That one banana has effected the exchange of goods & services, many times the value of the actual base banana as it circulates throughout the economy. Money supply increases mainly through velocity, you should know this as you are the one whose constantly going on about only 3% of the money supply being represented by base central bank money.
> 
> Likewise if you have a banana and lend it to me, then i lend it to someone else and so on and so on - in all our respective banana balance sheets (apart from the first in the chain) - we have an asset of a banana representing the banana we are owed from the person we lent it to and a liability of a banana representing the banana that we owe to the person who lent us the banana. So add up the gross assets & liabilities of the balance sheets at the total level and the total loans and deposits are many multiples of the original banana.


 
No, this is nonsense. You cannot increase the total number of bananas by lending them out. Of course in our example, payment is required in actual bananas. The total money supply is thus precisely the total number of bananas. No matter how many times a banana is lent out, it still totals one banana.

This is the difference between full-reserve and fractional reserve banking. In our full-reserve system, if you deposit with me a banana, and I lend it out, then _you cannot reclaim your banana until I have had it returned_. But in a fractional reserve system, where currency is either bananas or paper redeemable to bananas, you deposit your banana with the bank, it gives you (say) paper redeemable to one banana on demand, lends your banana out, and now there are double the currency in circulation, because you can trade with your banana bill. The bank gets away with it because only a fraction of people come to get their bananas at any time. The bank has created one (paper) banana, out of nothing.

Again, see my earlier posts for the reason why banks cannot simply rely on their own money creation.


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## JimW (Sep 19, 2012)

You've added to the totality of bananas in the world without needing even one real one, so fair play.


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## ayatollah (Sep 20, 2012)

I simply cannot believe the fact that now on two threads a whole load of presumeably otherwise  intelligent people have been spending their time denying the simple economic fact , taught correctly to all schoolchildren studying the most basic economics or commerce, that via fractional reserve banking the banking system constantly increases the money supply in all capitalist economies -- and benefits dramatically as a sector of course, by charging interest on the extra money they lend out.

It's simply the way the system operates guys, and Jazz is correct in his descriptioons as to how it operates.. This doesn't presuppose that this is a "good thing", and it certainly doesn't in itself unveil the deeper operating factors "beneath the surface" of the capitalist money economy, which Marxist economics looks at in detail ... the class realities, and ownership inequalities, the ways value  and prices and surplus value are created and distributed, which the money system conceals, fetishises, distorts, and reproduces. But nevertheless , on a day to day basis, via fractional reserve banking, the ordinary commercial banks day in, day out, do create new money.... not directly new value, but new money. Whether this new money supply leads directly or indirectly to additional production of goods and services, or merely increases the amount of money chasing an existing volume of goods and services, determines whether this new money produces inflation -- or supports and/or drives the entire system in  its expansion .

There is nothing in itself  "cranky" about recognisiong the role of fractional reserve banking in increasing the money supply. The crankiness arises in claiming it is "the Jews"  or "the Illuminati" behind  banking, or believing society would be better off returning to  the fetishistic straightjacket of the Gold Standard .  Fractional reserve banking is just a normal part of capitalism.. and a key component of its ability to expand in good times.. and often suffer serious "bank runs" and hyper inflation in very bad times.

Arguing whether the phenomenum exists at all strikes me as distinctly "cranky". Recognising the existence of "money creation" by banks via fractional reserve banking in no way requires that anyone believes that  banks, or states, can therefore simply print unlimited amounts of money to get out of trouble. Who thinks this ? Noone.. it is a Straw Man. It is also obviously the case that unless the new money created via fractional reserve banking is both employed generally to increase the production of goods and services, inflation results... and if the extra money loans enabled via fractional reserve banking are lent to people or businesses who prove unable to service or repay those loans, then financial disaster also results -- as with so much of bank lending during the pre 2008 Crash "speculative/credit Bubble".

What's so hard to understand about this ?

Yet another simplified example of the process at work:

Jones deposits $1,000 at bank A. With a 0.1 reserve ratio, bank A can lend out $900 of that deposit and keep $100 on hand as reserves. Let us say they lend out $900 and it makes its way to Smith – either he borrowed it, or the real borrower used it to pay him. Smith now has $900 that he deposits at another bank, B. Bank B, in turn, keeps $90 as reserve (10% of $900) and lends out $810 to someone else. This $810 is spent and deposited at bank C, which keeps $81 as reserves and lends out $729 to someone else. As this process continues, the total amount lent out by the various banks in the system adds up: $900 + $810 + $729 + …. The sum of this series is $9,000. The total held in reserve also adds up: $100 + $90 + $81 + $72 … = $1,000. Thus $9,000 of lending is supported by $1,000 in reserves. This is why most commentators will state that fractional reserve banking allows the lending of multiples of reserves. Technically, it is not the bank that received the initial deposit that can lend out a multiple, but rather the system as a whole creates it through the process described above.

The practice of fractional reserve banking expands the money supply (cash and demand deposits) beyond what it would otherwise be. Due to the prevalence of fractional reserve banking, the broad money supply of most countries is a multiple larger than the amount of base money created by the country’s central bank.


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## love detective (Sep 20, 2012)

ayatollah said:


> I simply cannot believe the fact that now on two threads a whole load of presumeably otherwise intelligent people have been spending their time denying the simple economic fact , taught correctly to all schoolchildren studying the most basic economics or commerce, that via fractional reserve banking the banking system constantly increases the money supply in all capitalist economies -- and benefits dramatically as a sector of course, by charging interest on the extra money they lend out.
> 
> It's simply the way the system operates guys, and Jazz is correct in his descriptioons as to how it operates.. This doesn't presuppose that this is a "good thing", and it certainly doesn't in itself unveil the deeper operating factors "beneath the surface" of the capitalist money economy, which Marxist economics looks at in detail ... the class realities, and ownership inequalities, the ways value and prices and surplus value are created and distributed, which the money system conceals, fetishises, distorts, and reproduces. But nevertheless , on a day to day basis, via fractional reserve banking, the ordinary commercial banks day in, day out, do create new money.... not directly new value, but new money. Whether this new money supply leads directly or indirectly to additional production of goods and services, or merely increases the amount of money chasing an existing volume of goods and services, determines whether this new money produces inflation -- or supports and/or drives the entire system in its expansion .
> 
> ...


 
Once again you claim that Jazz is correct but then argue against what he says in your examples

In the above 'Jones' example you correctly demonstrate that for fractional reserve banking to work, the money has to circulate and come back to other banks (or the same bank) in the form of deposits before it can be lent out again. If in the example above Smith took the $900 loan from Bank A and put in under his mattress, the chain stops and Bank B can't lend out a thing because it has no deposits/funding coming into it to fund any onwards spiral. As has been said constant times in the past, money circulates, there's nothing magic or conspiratorial about that.

Jazz argues the exact opposite of this hwoever. If you've been paying attention, which you obviously haven't, you'd see Jazz argue that this process of circulation, which fractional reserve banking is rooted in and dependent on, doesn't actually need to happen. In Jazz's make believe world, circulation doesn't need to happen and bank's don't need to fund their lending. In his world, bank's just magic money out of thin air independently of everything and anyone else. He's even argued a few posts above that this type of circulation (that you refer to above) doesn't even increase the money supply because he thinks that velocity & circulation don't actually have an impact on the money supply.


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## Jean-Luc (Sep 20, 2012)

ayatollah said:


> Yet another simplified example of the process at work:
> 
> Jones deposits $1,000 at bank A. With a 0.1 reserve ratio, bank A can lend out $900 of that deposit and keep $100 on hand as reserves. Let us say they lend out $900 and it makes its way to Smith – either he borrowed it, or the real borrower used it to pay him. Smith now has $900 that he deposits at another bank, B. Bank B, in turn, keeps $90 as reserve (10% of $900) and lends out $810 to someone else. This $810 is spent and deposited at bank C, which keeps $81 as reserves and lends out $729 to someone else. As this process continues, the total amount lent out by the various banks in the system adds up: $900 + $810 + $729 + …. The sum of this series is $9,000. The total held in reserve also adds up: $100 + $90 + $81 + $72 … = $1,000. Thus $9,000 of lending is supported by $1,000 in reserves. This is why most commentators will state that fractional reserve banking allows the lending of multiples of reserves. Technically, it is not the bank that received the initial deposit that can lend out a multiple, but rather the system as a whole creates it through the process described above.


As Love Detective has pointed out, this is not what Jazzz is arguing. He argues that if Jones deposits $1,000 at bank A. With a 0.1 reserve ratio, bank A can lend out $9,000 with the $1,000 being kept on hand as reserves. If this were the case, then if Smith deposited the $9,000 in Bank B, Bank B, in turn keeps this as its cash reserve and lends out $81,000. Bank C receives this and then can lend out $729,000. This process never ends but the "money supply" extends exponentially. Clearly this doesn't happen. It's absurd.

But even in your version (the standard textbook version) it is not just "the banking system as a whole" that multiplies an initial deposit of $1,000. It also depends on "the public" continually re-depositing the money, even if in decreasing amounts. At the end of the process, it will be found that the total loans of $9,000 are matched by total deposits of $10,000. But, again as LD has pointed out, this is an example of money circulating. This has been known for ages. In Volume 3 of Capital (chapter 25) Marx quotes from an anomymous work published in 1854 by an English banker called _The Currency Theory Reviewed_:



> It is unquestionably true that the £1,000 which you deposit at A today may be reissued tomorrow, and form a deposit at B. The day after that, reissued from B, it may form a deposit at C ... and so on to infinitude; and that the same £1,000 in money may thus, by a succession of transfers, multiply itself into a sum of deposits absolutely indefinite. It is possible, therefore, that _nine-tenths of all the deposits in the United Kingdom may have no existence beyond their record in the books of the bankers_ who are respectively accountable for them ... Thus in Scotland, for instance, currency (mostly paper money at that) has never exceeded £3 million, the deposits in the banks are estimated at £27 million....


So what's new? That's how banking (lending from other people's deposits) works, and the only way it can work.



> The practice of fractional reserve banking expands the money supply (cash and demand deposits) beyond what it would otherwise be. Due to the prevalence of fractional reserve banking, the broad money supply of most countries is a multiple larger than the amount of base money created by the country’s central bank.


I'm not quite sure what you mean by "what it might otherwise be". What would it "otherwise be"? And what's the problem if it is? It's partly a question of definition anyway. If you define bank loans as part of "the money supply", then as what banks do is make loans (from deposits) then of course they "expand" it beyond the amount of "base money" (currency, cash or whatever you want to call what the central bank or government issues). But, from another angle, what the banks are doing is economising on the use of "base money"

And wouldn't it also happen if you had so-called "full reserve banking"? Unless you're going to ban banking (lending money) altogether, bank loans are always going to be spent and find their way back into the banking system as a deposit. So "broad money" is always going to exceed "base money".


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## Jazzz (Sep 21, 2012)

love detective said:


> Once again you claim that Jazz is correct but then argue against what he says in your examples
> 
> In the above 'Jones' example you correctly demonstrate that for fractional reserve banking to work, the money has to circulate and come back to other banks (or the same bank) in the form of deposits before it can be lent out again. If in the example above Smith took the $900 loan from Bank A and put in under his mattress, the chain stops and Bank B can't lend out a thing because it has no deposits/funding coming into it to fund any onwards spiral. As has been said constant times in the past, money circulates, there's nothing magic or conspiratorial about that.


 
Christ, Ayatollah is really trying to help you and you are simply concerned with him not being on my side!

_"In the above 'Jones' example you correctly demonstrate that for fractional reserve banking to work"_ - your logic is really appalling. Ayatollah described his explanation as "a simplified example".

I note that you completely ignored my last, really quite detailed post about the difference between full reserve and fractional reserve banking. I am not very impressed with this. It seems you are unable to engage with any proper debate except to twist my words and repeat yourself.

_"money circulates, there's nothing magic or conspiratorial about that."_ not at all, however it is absolutely meaningless to describe that money is created simply through 'circulation'. Who mandates the new money into existence? The circulation in itself creates nothing.


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## Jazzz (Sep 21, 2012)

from Jean Luc's post


> It is unquestionably true that the £1,000 which you deposit at A today may be reissued tomorrow, and form a deposit at B. The day after that, reissued from B, it may form a deposit at C ... and so on to infinitude; and that the same £1,000 in money may thus, by a succession of transfers, multiply itself into a sum of deposits absolutely indefinite. It is possible, therefore, that _nine-tenths of all the deposits in the United Kingdom may have no existence beyond their record in the books of the bankers_ who are respectively accountable for them ... Thus in Scotland, for instance, currency (mostly paper money at that) has never exceeded £3 million, the deposits in the banks are estimated at £27 million....


Again, the key point is this:

_If I lend you £1000, and you l__end it again, I cannot get my £1000 back until you have had it returned. (full-reserve banking)._

_If I deposit £1000 in a fractional-reserve bank, I am fully entitled to withdraw it on demand, whatever loans the bank may then make. _This is not 'circulation'.


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## Jazzz (Sep 21, 2012)

Let me repeat an example which lovedetective failed to comment on before.

_Bank A loans Andrew £1000, who draws on it by giving it to Bertie, who has an account in Bank B._

_Simultaneously, Bank B lends Bill £1000, who draws on it by giving it to Anthony, who has an account in Bank A._

What has happened? I challenge lovedetective or Jean-Luc to describe the accounting entries in Bank A, Bank B, and the central bank, the change in total money supply, and where it came from.


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## free spirit (Sep 21, 2012)

Jean-Luc said:


> But even in your version (the standard textbook version) it is not just "the banking system as a whole" that multiplies an initial deposit of $1,000. It also depends on "the public" continually re-depositing the money, even if in decreasing amounts. At the end of the process, it will be found that the total loans of $9,000 are matched by total deposits of $10,000. But, again as LD has pointed out, this is an example of money circulating. This has been known for ages. In Volume 3 of Capital (chapter 25) Marx quotes from an anomymous work published in 1854 by an English banker called _The Currency Theory Reviewed_:


firstly, nobody's said this is a new practice, so it being known for ages isn't exactly an explanation for why you and others have spent 2 threads arguing that it's not like this.

Secondly, there's not been $10,000 deposited. There's been $1000 dollars deposited in total in hard currency, but out of this $1,000 of total hard currency that actually exists in all these transactions, the banks have managed to create loans of £9,000 and matching nominal deposits of £9,000, all from just $1000 of actual hard cash.

as for what's the problem... well, nothing as long as everyone's confident in the banks ability to look after their cash and pay out when the need it. As soon as there's a problem though, and depositors decide they all want to take their cash out, or even just the economy tanks and people need to withdraw more than 10% of their savings, and the loan repayments start defaulting... well at that point there's major problems, as the cash never existed, so the bank has to borrow that money to cover its liabilities, and then other banks start getting nervous about lending to that bank, and then we end up with a credit crunch situation, and then the governments have to either let the banks fail, or bail them out with enough new hard cash to allow them to continue paying out to their customers, and persuade them to lend to each other again etc. Sound familiar?


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## love detective (Sep 21, 2012)

Jazzz said:


> Christ, Ayatollah is really trying to help you and you are simply concerned with him not being on my side!
> 
> _"In the above 'Jones' example you correctly demonstrate that for fractional reserve banking to work"_ - your logic is really appalling. Ayatollah described his explanation as "a simplified example".


 
Your logic is non existent

Circulation is at the very basis of the ability of fractional reserve lending to exist - yet you deny that circulation is required for fractional reserve lending to happen. This shows that you have no understanding of either concept, let alone any handle on the reality of how they work. Fractional reserve lending is nothing but the circulation of loans back into banks as deposits for onward circulation. Therefore fractional reserve lending can be characterised as two things i) circulation and ii) banks funding further lending through deposits received as part of this spiral. You deny that both of these things happen in the money creation process. This is absurd. This is like saying that in order for something to happen that something mustn't happen in order for it to happen. Hatstand.



> I note that you completely ignored my last, really quite detailed post about the difference between full reserve and fractional reserve banking. I am not very impressed with this. It seems you are unable to engage with any proper debate except to twist my words and repeat yourself.


 
given that you've ignored every direct question i've put to you asking you to explain real world events within the framework of your crank theory, then don't expect detailed replies to every single little bit of shit that comes out of you. It's already been made very clear that you are incapable of using any of your shit theory to explain events in the real world. Your first attempt at doing this resulting in the mother of all absurdities (30 trillion of new lending apparently taking place in a matter of months!), and since then you've rather sensibly just avoided any question of the real world whatsoever as it exposes your theory for the shit that it is. It's pretty clear that it would be far easier for you to ride two horses in two different directions at once than for you to give a credible explanation of what's happening in the real world using your shit theory as a framework to explain it in.



> The circulation in itself creates nothing.


 
remove circulation from any example of fractional reserve lending and you're left with nothing, nada

for the final time

i) bank's do not create money out of thin air
ii) bank's are not the independent actor in all this
iii) banks play a dependent role in the expansion of the money supply (i.e. they are subordinate to other conditions in the money creation process)
iv) this means that bank's can only play a part in the expansion of the money supply if all the other conditions that allow them to do so are present, they can't magic them into existence
v) at present therefore, bank's play a 'necessary' but not a sufficient role in the process of increasing the money supply
vi) it's just as much true to say that borrowers create money out of thin air, as it is to say that banks create money out of thin air - neither of these statements are true, but each are equally untrue

And by the way Jazz, you see those cows way over there in the distance - they actually aren't tiny in real life you know


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## Jean-Luc (Sep 21, 2012)

Jazzz said:


> Let me repeat an example which lovedetective failed to comment on before.
> 
> _Bank A loans Andrew £1000, who draws on it by giving it to Bertie, who has an account in Bank B._
> 
> ...


Happy to accept the challenge. Here's how an American economist who starts from the same premiss as you (that a bank can make a loan without first having the money) -- but who accepts that if a bank does this it has to cover the loan by the end of the day, literally -- explains what happens:





> Let’s start with a basic bank and its customer and do T-accounts for both. The bank creates a loan and a deposit “out of thin air,” and the customer has now a new liability (the loan) and an asset (the deposit) as shown in Figure 1.
> 
> 
> As is well known, and by the logic of double-entry accounting, the bank does make a loan out of thin air—no prior deposits or reserves necessary. (...)
> ...


(The only thing I'd object to in this description is saying that Bank A creates the loan "out of thin air" when what is meant is that a bank can make a loan independently of the central bank and so the central bank can't control banking lending (which is true). It would be better if it was expressed this way.)

*It's the "+ borrowings" that you miss out.* You're forgetting that, at the end of the day, any loan does have to be covered by a real asset, not by a mere book-keeping entry.


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## littlebabyjesus (Sep 21, 2012)

Jean-Luc said:


> *It's the "+ borrowings" that you miss out.* You're forgetting that, at the end of the day, any loan does have to be covered by a real asset, not by a mere book-keeping entry.


I'm not sure Jazzz is missing that, tbh. You're right, of course, but it should also be remembered that it is the loan itself that creates the 'real asset' - the loan creates an equal and opposite deposit. IMO, that is the crucial point here, one that both sides on this thread have missed or are ignoring.


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## Jean-Luc (Sep 21, 2012)

Jazzz said:


> Again, the key point is this:
> 
> _If I lend you £1000, and you l__end it again, I cannot get my £1000 back until you have had it returned. (full-reserve banking)._
> 
> _If I deposit £1000 in a fractional-reserve bank, I am fully entitled to withdraw it on demand, whatever loans the bank may then make. _This is not 'circulation'.


If I have understood "full reserve banking" properly, what it would mean that under it banks would only be able to lend from non-instant-access savings accounts ("time-deposits"). This could work (even if the arguments used to justify in are based on a fallacy), but it wouldn't stop what you call "money-creation" by banks. Suppose that customer 1 makes a one-year deposit of £1,000 in Bank A, which bank A lends to customer 2 for one year or less. If any part of this £1,000 finds its way into a time-deposit in another bank, then on your theory money has been created!

Also, because banks know that not all its outside current account depositors are not going to withdraw all of their money at once, it can treat the "fraction" that they are not likely to withdraw as if it was a time-deposit. To that extent banks already practice "full reserve banking". Not allowing banks to lend money from current accounts would indeed restrict the amount of bank lending, probably to below what the capitalist economy needs to function properly.  So, "full reserve banking" could make things worse.


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## Jean-Luc (Sep 21, 2012)

free spirit said:


> Secondly, there's not been $10,000 deposited. There's been $1000 dollars deposited in total in hard currency, but out of this $1,000 of total hard currency that actually exists in all these transactions, the banks have managed to create loans of £9,000 and matching nominal deposits of £9,000, all from just $1000 of actual hard cash.


Of course $10,000 in total has been deposited. The additional $9000 are not "nominal". They result from part of the original (you say  cash) deposit of $1000 circulating, as money does. Next you'll be arguing that if I spent a 10-dollar bill to buy something and the shopkeeper then uses it to pay to restock his store, the shopkeeper's purchase is only "nominal".


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## love detective (Sep 21, 2012)

i'm gonna ask my bank today to break down my bank account balance into nominal pounds and real/hard currency pounds - i don't want none of that nominal shit finding it's way in and mixing itself up with any of the hard stuff that may or may not happen to be in there as well

detective free spirit may be required to go in and sort out the wheat from the chaff


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## free spirit (Sep 21, 2012)

love detective said:


> i'm gonna ask my bank today to break down my bank account balance into nominal pounds and real/hard currency pounds - i don't want none of that nominal shit finding it's way in and mixing itself up with any of the hard stuff that may or may not happen to be in there as well
> 
> detective free spirit may be required to go in and sort out the wheat from the chaff


unless you've got a massive bank balance I doubt they're going to have a problem paying you in cash.

If every customer went in and withdrew their money though they'd not have anything like sufficient reserves to pay out in cash, and would have to attempt to then borrow the hard currency from elsewhere in order to pay out.

If the other banks / sources of finance lose their faith in that banks ability to repay those loans with interest in short order, they're then going to stop lending to that bank, meaning that either the government has to bail it out, or it will fail and those customers will find out exactly how real the numbers on the balance sheets were (or apparently the government will step in and pay out anyway, so it's all hunky dory).

If a similar thing happens to all or most banks though, then there's nobody left to provide the short term lending of hard currency to the banks that needs it, and you get a credit crunch situation that can only be eased via the release / printing of vast quantities of new hard currency just to meet the banks existing liabilities.


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## love detective (Sep 21, 2012)

quantitative easing has nothing to do with 'meeting the banks existing liabilities' 

and the credit crunch wasn't caused by people withdrawing money from banks (this can be seen as one of the minor _effects_ _of_ the credit crunch for certain banks, but it certainly was a _cause_ of it)


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## Jazzz (Sep 24, 2012)

Jean-Luc said:


> Happy to accept the challenge. Here's how an American economist who starts from the same premiss as you (that a bank can make a loan without first having the money) -- but who accepts that if a bank does this it has to cover the loan by the end of the day, literally -- explains what happens:


I confess I was after a short answer to the question I posed, not a long C&P to a different one. I have no problems with the quote you made, which let's note was very much against Krugman, who you quoted earlier in the thread!

So please do have a go. It's not that difficult.




> _Let me repeat an example which lovedetective failed to comment on before.
> 
> Bank A loans Andrew £1000, who draws on it by giving it to Bertie, who has an account in Bank B.
> 
> ...


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## Jazzz (Sep 24, 2012)

Jean-Luc said:


> If I have understood "full reserve banking" properly, what it would mean that under it banks would only be able to lend from non-instant-access savings accounts ("time-deposits"). This could work (even if the arguments used to justify in are based on a fallacy), but it wouldn't stop what you call "money-creation" by banks. Suppose that customer 1 makes a one-year deposit of £1,000 in Bank A, which bank A lends to customer 2 for one year or less. If any part of this £1,000 finds its way into a time-deposit in another bank, then on your theory money has been created!


No it hasn't. There is only ever £1000 in circulation.



> Also, because banks know that not all its outside current account depositors are not going to withdraw all of their money at once, it can treat the "fraction" that they are not likely to withdraw as if it was a time-deposit. To that extent banks already practice "full reserve banking".


I don't really understand what you mean here. If you are saying that the banks can create new loans corresponding to the fraction of (demand) deposits that is not likely to be withdrawn, and get away with it then that is simply fractional-reserve banking.

If they are to treat the deposits as time-deposits, that means that they will not allow the original depositor to withdraw his money on demand. In which case, if the original depositor made a demand deposit, the bank is in dishonour; if he made a time-deposit, this is full-reserve banking.



> Not allowing banks to lend money from current accounts would indeed restrict the amount of bank lending, probably to below what the capitalist economy needs to function properly. So, "full reserve banking" could make things worse.


It would certainly restrict high-street bank lending (money created as debt) and I say that would be a extremely good thing. There is no reason why we cannot create the money we need another and far better way.

IMF working paper supports full reserve banking


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## Jazzz (Sep 24, 2012)

love detective said:


> i'm gonna ask my bank today to break down my bank account balance into nominal pounds and real/hard currency pounds - i don't want none of that nominal shit finding it's way in and mixing itself up with any of the hard stuff that may or may not happen to be in there as well
> 
> detective free spirit may be required to go in and sort out the wheat from the chaff


Your bank account balance is simply a book-keeping entry.


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## free spirit (Sep 24, 2012)

love detective said:


> quantitative easing has nothing to do with 'meeting the banks existing liabilities'


really. So it's not been partly used by the banks to build up their capital reserves to meet the government's new requirements for the proportion of capital reserves to liabilities the banks must hold in order to ensure they can meet a greater proportion of their existing liabilities?

no, obviously it's all been used just as the bank of england say it should be used to boost lending to businesses, as there's loads of evidence of that level of cash injection into the business sector having happened

It's just bailing the banks out by the back door instead of the front door really, though technically you're right that it's not actually been needed to meet the banks existing liabilities as any potential run on the banks has been diverted and confidence restored as the banks have taken the increased liquidity supplied by QE, and added it to their balance sheets, in the process giving their investment arms a huge pot of new money to play with in the commodities market where they've managed to inflate another huge speculative bubble that'll burst at some point in the not too distant future, plunging the financial sector back into chaos... but it's helped to fund another round of short term profit taking and bonuses for the bankers, so it's all good really, and they now know they're seen as being too big to fail, so why wouldn't they wrecklessly use it to build up another bubble?



love detective said:


> and the credit crunch wasn't caused by people withdrawing money from banks (this can be seen as one of the minor _effects_ _of_ the credit crunch for certain banks, but it certainly was a _cause_ of it)


I didn't actually say that it was, I was merely following on from your statement, to say that if we all did it then it could cause a similar situation to the credit crunch if it happened to an extent that it impacted on market confidence in the bank (or banks) and the market then stopped lending to those banks to finance their liabilities to their customers.

I'm not entirely sure it's accurate to describe it as just being an effect of the credit crunch though. It's more complex than that, as it's effectively a feed back loop interconnected with general confidence levels in that bank / the banking system in general, so the markets get spooked about a bank and stop lending to it, then the public get spooked and start trying to pull their money out as happened with Northern Rock, and at this point the government has to step in or the bank went bust because it can't finance its liabilities in the event that the bank run continues. And once you've had one bank run, the market gets spooked and start to be even more wary about lending money to any of the other banks, leading to the system ending up on the brink of systemic collapse without government intervention. At the end of the day, it's all a confidence trick anyway, so as soon as confidence goes in the banks from both the markets and the public, they're screwed.


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## love detective (Sep 24, 2012)

free spirit said:


> really. So it's not been partly used by the banks to build up their capital reserves to meet the government's new requirements for the proportion of capital reserves to liabilities the banks must hold in order to ensure they can meet a greater proportion of their existing liabilities?


 
Sorry to be blunt but the above could only be written by someone who doesn't understand what quantitative easing is nor how it is transmitted (not to mention no understanding whatsoever as to how requirements for capital reserves work)

I'm guessing you think that quantative easing involves the central bank printing/creating money and just giving it to banks, therefore the net asset position of the banks are increased as a result of this. This is simply wrong. QE involves the creation of money which is then used to buy (usually govt) existing owned debt securities from the banks. The net impact on a bank of QE is that they have swapped one highly liquid asset (govt securities) for another (money). It's essentially about liquidity, not solvency/capital/reserves as you seem to suggest in your quote above.

The net impact does not change the bank's liability, asset or net asset/reserve position one bit - it merely shifts around the constituent parts of its assets (i.e. it has more cash and less highly liquid govt securities - the hope then that they do something 'productive' with that cash, which is of course nonsense but that's another matter). Therefore your assertion that QE is used by banks to "_build up their capital reserves to meet the government's new requirements for the proportion of capital reserves to liabilities the banks must hold in order to ensure they can meet a greater proportion of their existing liabilities" _is utter nonsense. No offence but the combination of phrases used in that sentence could only be used by someone who doesn't understand what they mean.

Furthermore capital requirements legislate that banks have to hold a certain amount of capital in relation to the (risk adjusted) *assets* of the bank, not their *liabilities*.

I don't mean to be rude here, but you are throwing around terms and processes here that you simply don't understand. There's nothing wrong with not understanding what these things are or how they work, but you cross a line when you start making daft assertions that are grounded on that misunderstanding

There's been a lot written on here about QE over the last few years - have a look at this thread which goes into the details of how it works

edit: just to add, just because i criticise your portrayal of what QE is and what you think it does, this doesn't mean I am in anyway supportive of it or those who carry it out, or that I think it has a hope in hells chance of doing what those who carry it out think it will do. And your comments about a by-product of it it fuelling other bubbles elsewhere i agree with. I've been writing about this and criticising the hopelessness & base logic of these kind of monetary policy tools since the first round of QE started in the UK nearly 4 years ago



> so the markets get spooked about a bank and stop lending to it, *then the public get spooked and start trying to pull their money out as happened with Northern Rock,* *and at this point the government has to step in* or the bank went bust because it can't finance its liabilities in the event that the bank run continues.


 
Are you aware that the customer/public bank run on Northern Rock was a _result_ of the announcement that the state had stepped in with an emergency loan of £30 odd billion, not its cause? It became public knowledge that the state was stepping in with emergency funding for NR on the evening of September 13 2007, the run started the following day on September 14 2007. So the order of events is actually the opposite to what you assert above.

The impact of the money market funding route freezing up on NR was many many many times the multiple of the impact of customers transferring a couple of billion in money held with northern rock to another bank within the system. The public withdrawl was something like 1-2 billion, the markets refusing to lend any more to NR (something that Jazz laughably claims doesn't have to happen at all) which was the thing that triggered their downfall, was something like £30bn


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## SpineyNorman (Sep 24, 2012)

Jazzz said:


> No it hasn't. There is only ever £1000 in circulation.


 
You need to explain yourself there Jazzz. Jean-Luc has made a perfectly logical and coherent case for the opposite to what you're arguing. You can't just assert that he's wrong without explaining why. Well I guess you can but don't be surprised if this results in yet another round of laughing and pointing.


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## gosub (Sep 24, 2012)

Bad day? I don't think fs was that far off.
Equity ratios are how much assets a bank can make off its liabilites. Its not just a government think, its global (Basel accords -UK rep Merv King) and while it is an entirely separate to QE lowering the ratios at the same as QE pretty much negated it.

Save your ire for Jazz and his suicidal ideas for 100% reserve banking


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## love detective (Sep 24, 2012)

gosub said:


> Bad day? I don't think fs was that far off.
> Equity ratios are how much assets a bank can make off its liabilites. Its not just a government think, its global (Basel accords -UK rep Merv King) and while it is an entirely separate to QE lowering the ratios at the same as QE pretty much negated it.
> 
> Save your ire for Jazz and his suicidal ideas for 100% reserve banking


 
you could do with re-reading your posts before you post them - the above is almost incomprehensible

this however:-



> Equity ratios are how much assets a bank can make off its liabilites.


 
is nonsense

basel type capital ratios dictate how much capital a bank must hold in relation to their (risk adjusted) assets. If their core/tier 1 capital is below that level they have to either raise more capital (increase the numerator) or decrease/shed some of their assets (decrease the denominator). the later can be done either by actually physically disposing of certain assets, or doing some regulatory arbitrage to reduce the risk adjusted level of those assets, even though the underlying assets themselves still remain on the bank's balance sheet. Either way, capital ratios are everything to do with bank's (risk adjusted) assets, not liabilities.

to say equity ratios 'are how much assets a bank can make off its liabilities' is absurd, they say nothing about 'how much assets a bank can make' (whatever that actually means)


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## gosub (Sep 24, 2012)

definitely a bad day,

The liabilities are unlikely to change (where are all the extra depositors to come from?) so you have to reduce the number assets which is what they did, though instead of foreclosing on loans to individuals and companies the  Government paid off some its loans using QE


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## love detective (Sep 24, 2012)

is english your first language?

either way, and regardless as to how you express it, you're all over the place

the govt did not pay off 'some its loans using QE' (the ownership of that debt merely changed hands, through a transfer in the secondary market, the debt itself still exists)) and anyway why are you talking about govt loans when capital ratios apply not to government borrowing/liabilities but to bank lending/assets?

your post above is totally meaningless - you don't appear to understand the first thing about capital adequacy regulations


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## gosub (Sep 24, 2012)

I'd love to here your explanation as to where all the QE money went 


CUNT!


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## love detective (Sep 24, 2012)

Banks sold govt debt that they were holding to the bank of england in the secondary markets and received in exchange for this, money that the bank of england created

Some of this money was then used by banks to speculate on commodites and other high risk assets, a tiny dribble probably went towards new customer lending although the bulk has not circulated to anything like what the central bank thought it might, which is why the bulk of it is sat back on deposit with the central bank, stimulating nothing

So on that narrow basis alone, the banks swapped one asset category of their books (govt debt) that was paying a yield of around 3-4% for another asset (cash) that pays a yield of around 0.5% - hence the fact that central banks who have been engaged in QE over the last few years have made huge profits as a result (UK and US for example) - as the central bank gets the flip side to this, they get an asset (govt debt) that pays them a yield of 3-4% but only have to pay out around 0.5% on the money that was created to buy this with

Feel free to actually try and address some of my points above though, instead of just posting random unrelated and barely comprehensible nonsense


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## happie chappie (Sep 24, 2012)

love detective said:


> Some of this money was then used by banks to speculate on commodites and other high risk assets, a tiny dribble probably went towards new customer lending although the bulk has not circulated to anything like what the central bank thought it might, which is why the bulk of it is sat back on deposit with the central bank, stimulating nothing


 
If this is right (and I’m not saying it isn’t btw, just a genuine question) why would a bank swap an asset (ie Govt debt) paying 3-4% for money from the BoE created under QE, and then send the money back to the BoE to earn a minimal amount of interest?

If the banks had “spare” money (ie, money created under QE but either not being lent out, or speculated with) wouldn’t it make more sense to buy back from the BoE the assets they had originally exchanged for cash?

I fully accept your point about liquidity, but wouldn’t it make more sense for banks to simply have the facility (ie the option) to swap Govt debt for cash created by the BoE under QE, but not actually draw on it unless absolutely necessary. 

I recognise that this may not necessarily be in the BoE’s interest if it earns 3-4% on the assets it’s acquired but only pay 0.5% on the money sent back to it from the banks, but why would the banks agree to swap assets on this basis, but then not swap them back as soon as they were in a position to do so?

Hope this makes sense - my brain is hurting at the moment!


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## love detective (Sep 24, 2012)

happie chappie said:


> If this is right (and I’m not saying it isn’t btw, just a genuine question) why would a bank swap an asset (ie Govt debt) paying 3-4% for money from the BoE created under QE, and then send the money back to the BoE to earn a minimal amount of interest?


for liquidity purposes, cash is king after all in an uncertain environment, bird in the hand is worth two in the bush etc. etc.. - northern rock for example didn't go under because it was insolvent, it went under because it didn't have enough liquidity to fund itself and its ongoing operations. so an increased yield on an asset in the future is no use if you don't have the cash flow to fund yourself today

it's exactly the same as when banks get financing from central banks - the central bank doesn't just give the money to banks on an unsecured basis, the bank has to provide collateral for the loan, and the most common form of this collateral is govt debt or reasonably low risk corporate debt, the yield on these are always going to be more than straight cash would give - so the bank gives up the yield on a slightly less liquid asset in order to gain access to a slightly higher liquid asset - the rational for doing so is that liquidity in these kind of situations trumps yield (meaning that the number one priority is to ensure sufficient liquidity to survive, then only once that is ensured do they focus on the yield)



> If the banks had “spare” money (ie, money created under QE but either not being lent out, or speculated with) wouldn’t it make more sense to buy back from the BoE the assets they had originally exchanged for cash?


a lot of the banks who were holding govt debt were able to make a capital gain on the price that the central bank bought the securities from them - the whole point (or at least one of them) of QE is to force interest rates in general down by being a deep pocketed buyer of govt debt securities in particular (as lots of interest rates are linked, either directly or indirectly, to the yield on govt debt which goes down as its price goes up). So while they lose out on the income stream in terms of holding a lower yielding asset, they did make a bit of a capital gain on the price. So the inflated price of govt debt now (maintained by the central bank's continuing QE program) would cancel out most of the benefits from the increased yield it offers. However that's probably incidental to the main reason for not buying them back, which is in times of uncertainty and when banks don't know if they will be able to raise cash/fund themselves in the market, having a lower yielding cash asset is preferable to having a higher yielding less liquid asset.




> I fully accept your point about liquidity, but wouldn’t it make more sense for banks to simply have the facility (ie the option) to swap Govt debt for cash created by the BoE under QE, but not actually draw on it unless absolutely necessary.


they pretty much do have this as well - the bank of england for example has pre-approved various types of assets that banks can use as collateral to borrow from the central bank against. the recent £80bn 'funding for lending' scheme that was announced is also along these lines. the point is though that when a central bank enters the market wanting to buy, the deepness of its pockets (along with the uncertainity element in holding govt debt which could start to tank at some point due to 'market vigilantism' etc) means that the central bank can offer prices that allow banks to make a quick capital gain on selling, even though they give up the right to the future income stream that holding onto that asset would have brought


another reason is that relying purely on a undrawn govt facility brings more attention and reputational damage to banks who are forced to draw on it to get them out of sticky situations, as that kind of thing can be monitored and used to judge which banks are fairing worse when times are bad, which in turn puts downwards pressure on share price etc - so the benefit of having the cash 'in hand' so to speak, ready to draw on as and when its required is a big advantage to banks. Also they all seem to genuinely think that an upturn is just around the corner and when it happens they want to be ready to start another credit fueled bubble




> I recognise that this may not necessarily be in the BoE’s interest if it earns 3-4% on the assets it’s acquired but only pay 0.5% on the money sent back to it from the banks, but why would the banks agree to swap assets on this basis, but then not swap them back as soon as they were in a position to do so?


this has pretty much been covered in the responses above - but if you look at the two links I put in the post above about extraordinary profits being made at central banks as a result of this, you will see that it is actually happening.

also the 1 trillion euros that the ECB has dished out between November last year and February this year was done on exactly the same basis - the banks themselves go access to guaranteed long term funding at cheap rates, but they still had to pledge collateral in order to get that funding - and the yield they would have 'earned' on that collateral will be given up in order to access that funding.


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## happie chappie (Sep 24, 2012)

love detective said:


> for liquidity purposes, cash is king after all in an uncertain environment, bird in the hand is worth two in the bush etc. etc.. - northern rock for example didn't go under because it was insolvent, it went under because it didn't have enough liquidity to fund itself and its ongoing operations. so an increased yield on an asset in the future is no use if you don't have the cash flow to fund yourself today
> 
> it's exactly the same as when banks get financing from central banks - the central bank doesn't just give the money to banks on an unsecured basis, the bank has to provide collateral for the loan, and the most common form of this collateral is govt debt or reasonably low risk corporate debt, the yield on these are always going to be more than straight cash would give - so the bank gives up the yield on a slightly less liquid asset in order to gain access to a slightly higher liquid asset - the rational for doing so is that liquidity in these kind of situations trumps yield (meaning that the number one priority is to ensure sufficient liquidity to survive, then only once that is ensured do they focus on the yield)
> 
> ...


 
Thanks for that - really helpful.


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## love detective (Sep 24, 2012)

i edited a couple of more bits in after you replied - typed in a bit of a rush, but hopefully some of it made sense to you


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## happie chappie (Sep 24, 2012)

love detective said:


> i edited a couple of more bits in after you replied - typed in a bit of a rush, but hopefully some of it made sense to you


 
Yes - all makes sense and your edit clarifies the position, especially relating to reputational damage, which did occur to me as one of the reasons no individual bank would want to be the first (or indeed any) financial institution drawing on a facility.


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## Jazzz (Sep 24, 2012)

SpineyNorman said:


> You need to explain yourself there Jazzz. Jean-Luc has made a perfectly logical and coherent case for the opposite to what you're arguing. You can't just assert that he's wrong without explaining why. Well I guess you can but don't be surprised if this results in yet another round of laughing and pointing.


I did explain why - no money has been created because there is still only £1000 in circulation. If you think that is mistaken, show me where and how the additional money exists and I will be happy to discuss that with you.


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## Jazzz (Sep 24, 2012)

love detective said:


> Are you aware that the customer/public bank run on Northern Rock was a _result_ of the announcement that the state had stepped in with an emergency loan of £30 odd billion, not its cause? It became public knowledge that the state was stepping in with emergency funding for NR on the evening of September 13 2007, the run started the following day on September 14 2007. So the order of events is actually the opposite to what you assert above.
> 
> The impact of the money market funding route freezing up on NR was many many many times the multiple of the impact of customers transferring a couple of billion in money held with northern rock to another bank within the system. The public withdrawl was something like 1-2 billion, the markets refusing to lend any more to NR (something that Jazz laughably claims doesn't have to happen at all) which was the thing that triggered their downfall, was something like £30bn


See again you are picking up on the trees and missing the wood. It doesn't really matter that the bank run was triggered by the emergency loan from the BofE and not the other way around - in fact, it completely negates your explanation that it was the failure of Northern Rock to get the loan they needed. They got the loan they needed: however, they also got a bank run, and that killed them, because like all other fractional reserve banks they were trading whilst insolvent. The only fuel a bank run needs to break the bank is a belief amongst depositors that it may occur.

_"something that Jazz laughably claims doesn't happen at all" - _please stop putting words into my mouth. 

Are you not going to have a crack at my problem? It's really not too complicated.



			
				Jazzz said:
			
		

> _Let me repeat an example which lovedetective failed to comment on before. B__ank A loans Andrew £1000, who draws on it by giving it to Bertie, who has an account in Bank B. __Simultaneously, Bank B lends Bill £1000, who draws on it by giving it to Anthony, who has an account in Bank A. __What has happened? I challenge lovedetective or Jean-Luc to describe the accounting entries in Bank A, Bank B, and the central bank, the change in total money supply, and where it came from._


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## Jazzz (Sep 24, 2012)

gosub said:


> Save your ire for Jazz and his suicidal ideas for 100% reserve banking


What's wrong with it gosub?


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## littlebabyjesus (Sep 25, 2012)

In this case, the pattern of value being transacted is as follows: Andrew buys 1000-worth of value from Bertie. Bill buys 1000-worth of value from Anthony. So Bertie and Anthony now have 1000 credits for future buying. Andrew and Anthony now have 1000 credits of debt that they have to pay back at some point. That's what money does - it allows some to consume now, and others to consume later; it allows you to do something for someone today, then have someone else do something for you tomorrow in return, and vice versa.

But that's all money is - the creation of promises, the creation of debts and credits. So you've created two sets of 1000 debts and two sets of 1000 credits. And by circulating, the money finds itself attached to real value - Andrew paid Bertie 1000 to paint his wall; Bill paid Anthony 1000 to fix his car. Money allows equivalences to be drawn between different commodities: painting the wall equals fixing the car, and both are worth 1000. And of course, it's an ongoing process - the reason both parties agree to the price is that they have an idea of what money is worth from past transactions and confidence that similar future transactions will be able to take place.

The endogenous theory of money creation would say that this is how it works - the loans are made and the banks lend to each other before the end of the accounting period so that their books all balance - each loan creates a deposit somewhere else to balance it, and interbank loaning sorts this out. Theoretically, this system could work without a central bank at all. Basically, the money supply is a reflection of demand for loans. But demand for loans can only come when you introduce real value. People will get into debt only if they are getting something real for that debt. In this case, you have two sets of 1000 loan/deposit on the banks' books, and they have only been able to appear because two sets of 1000-worth real things have changed hands. Without those real things, there would have been no demand for debt in the first place.


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## littlebabyjesus (Sep 25, 2012)

Jazzz said:


> What's wrong with it gosub?


If the loan-first model is right, fractional reserve lending is a fiction anyway. 100% reserve lending would not move, not in the way you describe it. There could be no loans or deposits. The whole thing would just sit still. There is nowhere for that first deposit to come from, basically.


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## gosub (Sep 25, 2012)

Jazzz said:


> What's wrong with it gosub?


 

100% reserve is command lead economies, the closest we got to that in the last 100 years was the communist systems of the soviets and China (not current China). What tech development did they contribute to sustainting a population above an arbitary figure of say 4 bil.They didn't. all development, be it agricutualaral, medical, engineering grew out of speculative captialism. It will be hard enough sustaining current population levels without abandoning the only framework that has helped keep Malthus in check?


eta yes the satelitte but even that that got souped up through speculative capitalism


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## gosub (Sep 25, 2012)

love detective said:


> Banks sold govt debt that they were holding to the bank of england in the secondary markets and received in exchange for this, money that the bank of england created
> 
> Some of this money was then used by banks to speculate on commodites and other high risk assets, a tiny dribble probably went towards new customer lending although the bulk has not circulated to anything like what the central bank thought it might, which is why the bulk of it is sat back on deposit with the central bank, stimulating nothing
> 
> ...


How does cash pay anything as an investment? Its not doing anything and is going down in relative value due to inflation ( made worse by central banks printing more of the stuff). They hold cash cos its a legal requirement. And the amounts they held help in their increased obligtions to meet their liabilites. And not holding goventment debts on their assest sheet also helped lower the ratio.


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## Jazzz (Sep 25, 2012)

gosub said:


> 100% reserve is command lead economies...


The baby is not the bathwater.

Have a look at positive money's list of famous economists in favour of full-reserve banking.

It is not to be sneezed at, taking in (if I have counted correctly) no less than five Nobel prize winners, including Irving Fischer, James Tobin, Milton Friedman, also including a former senior economist at the World Bank, and the latest support coming from our own guv'nor Mervyn King.

I don't think those guys were/are advocating planned economies.

LBJ - central banks/governments could create those deposits, they do already create the monetary base, there is no reason why they cannot create all the money the economy needs, and there are all kinds of ways it could be introduced.


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## free spirit (Sep 25, 2012)

love detective said:


> Sorry to be blunt but the above could only be written by someone who doesn't understand what quantitative easing is nor how it is transmitted (not to mention no understanding whatsoever as to how requirements for capital reserves work)
> 
> I'm guessing you think that quantative easing involves the central bank printing/creating money and just giving it to banks, therefore the net asset position of the banks are increased as a result of this.


no, I thought it meant exactly what you say it means


love detective said:


> QE involves the creation of money which is then used to buy (usually govt) existing owned debt securities from the banks.


 


love detective said:


> The net impact on a bank of QE is that they have swapped one highly liquid asset (govt securities) for another (money). It's essentially about liquidity, not solvency/capital/reserves as you seem to suggest in your quote above.


Actually, you're right about this, I meant to say cash reserve requirements, not the capital reserves.

eg in 2010 'banks told to double their cash reserves', then low and behold, the bank of england steps in and swaps hundreds of billions of pounds of cash with the banks in exchange for government gilts.

The point still stands though, in that if the banks hadn't been lending cash they didn't have then they'd not be needing to swap gilts for vast quantities of cash in order to build market confidence in their ability to meet any likely level of cash payments on demand, which essentially is what this was about.


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## Jazzz (Sep 25, 2012)

Thanks also for commenting on my question LBJ - I'll respond after giving lovedetective every opportunity, as he so far seems strangely unwilling to comment on it.


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## love detective (Sep 25, 2012)

Jazzz said:


> See again you are picking up on the trees and missing the wood. It doesn't really matter that the bank run was triggered by the emergency loan from the BofE and not the other way around


 
of course it matters, when you and free spirit try to claim that it was the bank run on northern rock that prompted the stepping in of the state. When it transpires that the stepping in of the state happened before the bank run, it kind of blows that assertion to smithereens. it's like saying that the appearance of firemen at a fire is a strong indication that it was the firemen who started the fire - cause & effect completely turned around on themselves, but you claim it makes no difference



> in fact, it completely negates your explanation that it was the failure of Northern Rock to get the loan they needed. They got the loan they needed: however, they also got a bank run, and that killed them


 
well make up your mind, first you are saying it makes no difference what way round it is

and as for your stupid logic that it completely negates my point - that is outstanding logic from you, absolutely oustanding. You clearly have no understanding, nor a desire to understand, the reality of the situation here (a common theme developing throughout most of your posts). I'll go through it once again slowly for you. When it became clear on 13th September 2007 that Northern Rock was no longer able to continue as a viable independent entity due to it not being able to fund itself in the markets, the state had to step in to plug the gap, from that point onwards it lost its independent company status and became a ward of the state. As a result of this news being made public, customers panicked and starting withdrawing some of their deposits. The bank run did not put NR under, the bank run did not result in NR being put into state ownership. NR going under and being put under effective state control, happened before the first person had withdrawn their first quid.

I know you are not interested in knowing or even understanding the reality of what happened however, as reality tends to get in the way of your fuckwited theories

_



			"something that Jazz laughably claims doesn't happen at all" -
		
Click to expand...

_


> please stop putting words into my mouth.


 
I've no need to put absurd words & phrases into your mouth, they literally pour out of it with no help whatsoever from me

You've argued consistently on here that banks don't have to fund their lending because they just magic the money out of thin air, so why are you getting uptight when I remind you of what you have argued? If you now agree you were wrong and that banks do have to fund their lending, meaning that they can't just magic money out of thin air, then fair enough, but you should at least have the decency to point out that you no longer believe your previous fuckiwttery



> Are you not going to have a crack at my problem? It's really not too complicated.


 
Two things in response to this:-

1. A few pages ago, I told you I was no longer going to waste my time engaging in your abstract/detached theory, and instead I was going to focus on how well your theory could explain real world events. Your initial attempt to use your theory to explain real world events was one of the most absurd things I have ever heard on this discussion board. This shows that you don't care about understanding the real world, you only care to twist real world events out of all attachment with reality so that you can attempt to explain them with reference to your daft theory.

2. You have consistently dodged further requests by me to explain real world events with reference to your theories of money & credit. This is probably a sensible move by you, given how badly your first attempt to do this went. However, until such a time that you respond to the various questions I have put to you, which point out the wide gap between how the world should work according to your theories and how the world does actually work, I have zero inclination to spend any time or effort responding to your questions, where there is a backlog of things that you consistently dodge, due to the inability of your theory to even go anywhere near explaining what actually happens in the real world


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## love detective (Sep 25, 2012)

gosub said:


> How does cash pay anything as an investment? Its not doing anything and is going down in relative value due to inflation ( made worse by central banks printing more of the stuff). They hold cash cos its a legal requirement. And the amounts they held help in their increased obligtions to meet their liabilites. And not holding goventment debts on their assest sheet also helped lower the ratio.


 
these questions have already been answered in the reply to happie chappie

and it's absurd to say that the only reason banks hold cash is because it's a legal requirement - the implication being that if that legal requirement was removed banks would have no reason to want to get access to money/cash? of course not

but anyway, i admire your ability to consistently dodge the crux of the discussions and come in with weird incomprehensible shit like this on a consistent basis


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## love detective (Sep 25, 2012)

free spirit said:


> no, I thought it meant exactly what you say it means
> 
> 
> 
> ...


 
Your initial point was that QE was to do with _'meeting the banks existing liabilities' _

The only way banks could get access to QE money was if they already had sufficient assets on their books that they could sell to get cash to then fund any upcoming liability payments. So in that sense the liabilities are already 'covered' through the fact that there are sufficient assets to cover them. That's the key distinction between a liquidity problem/issue and a solvency/capital issue - your initial posts seemed to mistake the former for the later

If a bank did not have sufficient assets (in any form) to cover its liabilities then it would be insolvent and no amount of QE would be any use to it in _'meeting the banks existing liabilities'_

Likewise a bank who did have sufficient assets to cover its liabilities could just as easily sell some gilts in the market to other buyers to get liquid cash to pay off any upcoming liabilities or they could use one of the myraid of funding schemes run by central banks (or other repo market participants) where they put the gilt up as collateral in return for funding for a set period.

So my point in response to your original point was that QE is nothing to do with what you claimed it was for. The reasons the state indulges in QE is that they think they can stimulate real activity in the economy purely through monetary shenanigans, and part of this reasoning is that by pushing down the yield on gilts (through artificially driving up the price of gilts through QE/Central bank purchases) and therefore pushing down market interest rates in general it will encourage people to 'do stuff'. All this is bullshit of course, but it is the driver behind it. The other, less publicised driver, is of course making sure there is plenty demand for state debt to ward off any 'market vigilantism' and whatever. But all in all, QE is not primarily something that is done to help the banks (although they clearly benefit from it) - there's plenty other non-qe avenues for banks to get any cash they need (if they have the sufficient collateral, and if they don't they go under), so it's a mistake to see the motivations & drivers of the elites behind QE as being a bank led thing, that is far too narrow a focus to view this kind of thing in.

To properly understand the wider context of all of this, this narrow focus on everything being down to the banks needs to be loosened somewhat as it blocks the ability to see the wider structural/framework in which all this sites. This is why I rail so much against the likes of Jazz who are unable, due to their infatuation with banks & money, to see the big picture. How often do you hear Jazz talk about Capital & Labour for example, or Exploitation or Value? Never


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## SpineyNorman (Sep 25, 2012)

Jazzz said:


> I did explain why - no money has been created because there is still only £1000 in circulation. If you think that is mistaken, show me where and how the additional money exists and I will be happy to discuss that with you.


 
Jean-Luc already has.



Jean-Luc said:


> Suppose that customer 1 makes a one-year deposit of £1,000 in Bank A, which bank A lends to customer 2 for one year or less. If any part of this £1,000 finds its way into a time-deposit in another bank, then on your theory money has been created!


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## littlebabyjesus (Sep 25, 2012)

love detective said:


> The other, less publicised driver, is of course making sure there is plenty demand for state debt to ward off any 'market vigilantism' and whatever. .


Don't you think this is probably the main driver? Pretty important to the state short-term at the moment.


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## frogwoman (Sep 25, 2012)

love detective said:
			
		

> To properly understand the wider context of all of this, this narrow focus on everything being down to the banks needs to be loosened somewhat as it blocks the ability to see the wider structural/framework in which all this sites. This is why I rail so much against the likes of Jazz who are unable, due to their infatuation with banks & money, to see the big picture. How often do you hear Jazz talk about Capital & Labour for example, or Exploitation or Value? Never


 
exactly


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## love detective (Sep 25, 2012)

littlebabyjesus said:


> Don't you think this is probably the main driver? Pretty important to the state short-term at the moment.


i think it's the main unspoken/unstated driver yes (it is effectively monetising the debt, but they can't admit to this) - having a deep pocketed buyer in the market for state debt when state debt is having to be issued at ever increasing amounts because austerity is increasing not decreasing the deficit, is incredibly useful in the short term

which does explain why we keep seeing round after round of QE in both the UK and US (now in the US it's not even another round it's QEternity), even though it's not really doing anything when judged on its surface level reasons for doing it. it may well be forcing market interest rates down and the central banks point to that as a sign of success, but that is kind of missing the point. Loads of people not borrowing at a lower rate of interest rather than not borrowing at a higher rate of interest doesn't really do much. Not that if they did start borrowing it would necessarily do anything anyway mind

edit: and as you say, the main benefit of all this QE is the state itself (or the govt in particular in terms of being able to temporarily sustain unsustainable austerity policies), not the banks, as quite a few on here seem to always suggest

it all has to unwind at some point though - and it won't be pretty


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## SpineyNorman (Sep 25, 2012)

gosub said:


> 100% reserve is command lead economies, the closest we got to that in the last 100 years was the communist systems of the soviets and China (not current China). What tech development did they contribute to sustainting a population above an arbitary figure of say 4 bil.They didn't. all development, be it agricutualaral, medical, engineering grew out of speculative captialism. It will be hard enough sustaining current population levels without abandoning the only framework that has helped keep Malthus in check?
> 
> 
> eta yes the satelitte but even that that got souped up through speculative capitalism


 
WTF is this? 

100% reserve = command economy? Technological innovation grew out of speculative capitalism? I don't even know where to start with that one. Internet = state developed. Computers = state developed. Nuclear power = state developed. In fact I challenge you to name a single major, revolutionary technological breakthrough that grew out of speculative capitalism. And I'd also be interested to hear why you think 100% reserves means a command economy.


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## Jean-Luc (Sep 25, 2012)

Jazzz said:


> _Let me repeat an example which lovedetective failed to comment on before.
> 
> Bank A loans Andrew £1000, who draws on it by giving it to Bertie, who has an account in Bank B.
> 
> ...


 
Bank A makes a payment out (a loan) which is covered by a payment in from Bank B. Bank B makes a payment out (another loan) which is covered by a payment from Bank A. I imagine this is happening all the time as banks make payments out and receive payments in. In fact it happens every day when at the end of the day banks clear payments each owes each other. What's so special about that?

As not all payments out are loans, your scenario works equally if Andrew asks Bank A to settle an invoice for £1000 from Bertie who then pays it into Bank B while Bank B pays an invoice for £1000 which Bill owes Anthony who pays it into Bank A. Or, more likely, this will all be done by electronic transfers.

The Bank of England is not involved in either case (but would be if, at the end of the day, a bank found itself in the red, whether this was due to making a loan or settling an invoice).

As to the change in the "money supply", since the assumption is that bank loans are counted as part of it, in your example this has increased by £2000, but there's some double-counting going on. But why isn't the "money supply" increased when the payments out are not loans but settling invoices?


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## love detective (Sep 25, 2012)

that's the point, it is increased - but jazz can't understand that, because he doesn't understand circulation

1 unit of currency circulating at a fast rate is the equivalent in money supply terms to 10 units of currency circulating at a slow rate

in Jazz's world though money supply isn't a flow but it's a static stock - so all he has in his money supply world is 11 units - he can't see or understand the impact of that money circulating at various different speeds and the impact that has on money supply (and demand, prices etc..)

so in the real world, 1 unit of currency circulating 100 times a day is the same (in money supply terms) as 100 units of currency circulating once a day. In jazz's world though there is no distinction between these, no recognition of the impact of flows, circulation, movement - just a static stock that he stock takes on and says, here's your money supply, all stored up in a shed somewhere in a static fixed state scenario. 

then to compound his idiocy, he claims circulation doesn't expand the money supply but fractional reserve lending does, even though fractional reserve lending is nothing more than circulation


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## Jean-Luc (Sep 25, 2012)

Jazzz said:


> > If I have understood "full reserve banking" properly, what it would mean that under it banks would only be able to lend from non-instant-access savings accounts ("time-deposits"). This could work (even if the arguments used to justify in are based on a fallacy), but it wouldn't stop what you call "money-creation" by banks. Suppose that customer 1 makes a one-year deposit of £1,000 in Bank A, which bank A lends to customer 2 for one year or less. If any part of this £1,000 finds its way into a time-deposit in another bank, then on your theory money has been created!
> 
> 
> No it hasn't. There is only ever £1000 in circulation.


So, suddenly, when "full reserve banking" is introduced, the money that is lent starts to circulate whereas it doesn't now!



Jazzz said:


> I don't really understand what you mean here. If you are saying that the banks can create new loans corresponding to the fraction of (demand) deposits that is not likely to be withdrawn, and get away with it then that is simply fractional-reserve banking.


Yes, that is what I'm saying, but I'd just call it "banking" as that's the principle on which banks operate.



Jazzz said:


> If they are to treat the deposits as time-deposits, that means that they will not allow the original depositor to withdraw his money on demand. In which case, if the original depositor made a demand deposit, the bank is in dishonour; if he made a time-deposit, this is full-reserve banking.


Banking is based on the assumption that depositors will be leaving most of their money in the bank and not withdrawing it. This is why most money deposited can be treated as if it were a "time-deposit" and lent out. There is nothing dishonourable or dishonest about this. Actually, what happens is that all the money deposited, whether in a current account or a time-deposit, goes into one pool out of which a bank makes loans and other payments.



Jazzz said:


> It would certainly restrict high-street bank lending (money created as debt) and I say that would be a extremely good thing. There is no reason why we cannot create the money we need another and far better way.


I imagine you think that any extra money needed will be done by the government or the central bank "printing" it. Hello (higher) inflation.


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## love detective (Sep 25, 2012)

to be fair there's nothing inherently more inflationary about govt/central bank creating money than the financial system increasing the money supply through circulation. In both these circumstances the money supply can increase far in advance of the ability of underlying value production to keep up with it,just as its also possible for value production to keep up with, or restrain, the creation of money (whether it's created internally within the system through frantic circulation or externally through base money creation pumped in)

look at QE as an example, hundreds of billions have been created but as it's not circulating in any great degree or doing that much it's not inflating anything (apart from perhaps some that have found its way into commodity speculation). Conversely look at the inflation in property prices that was caused by the increase in the money supply due to the internal extension of credit within the system and the frantic circulation of it around that system)

the money system left to itself without any central bank interference can have just as much disastrous inflationary (and deflationary) consequences as can one which is constantly 'interfered' with by the central bank/state

which brings it back to my wider point above that looking purely at money & credit is far too narrow a perspective to properly understand money & credits role in all of this


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## Jean-Luc (Sep 25, 2012)

love detective said:


> to be fair there's nothing inherently more inflationary about govt/central bank creating money than the financial system increasing the money supply through circulation.


i agree. It's just that, if it's left to the government to decide rather than to the spontaneous operation of economic forces, the chances of getting it wrong and issuing too much money are higher. Hope this doesn't sound too much like Hayek on BBC2 last night.


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## love detective (Sep 25, 2012)

i'd rather take my chances with the state than the 'spontaneous operation of economic forces'!

(cue pictures of wheel barrows of cash in zimbabwe & weimar germany etc. etc..)


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## gosub (Sep 25, 2012)

SpineyNorman said:


> WTF is this?
> 
> 100% reserve = command economy? Technological innovation grew out of speculative capitalism? I don't even know where to start with that one. Internet = state developed. Computers = state developed. Nuclear power = state developed. In fact I challenge you to name a single major, revolutionary technological breakthrough that grew out of speculative capitalism. And I'd also be interested to hear why you think 100% reserves means a command economy.


the diesel engine, the jet engine- government actually blocked Whittle, the steam turbine Parsons had to have fun at Spithead to get that to work, the integrated circuit -state built computers ended up in bits, cant think of any state lead big pharmaceuticals. The internet is a great example spectulative over command, bare bones may have been there but none of DMU's saw the potential for the all singing and dancing internet we have to day, that took the imaginations and energies with as few roadblocks as possible.

With 100% reserve,_ as outlined in Jazz's IMF working paper_. For a new venture, you go and see your bank and they then act as advocates to a government bureaucracy that has final say on whether the money is printed for the venture to go ahead. How can that not be a command economy?


Nuclear is a point to you, though if it was unplanned we'd have thorium reactors by now


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## JimW (Sep 25, 2012)

gosub said:


> the diesel engine, the jet engine- government actually blocked Whittle, the steam turbine Parsons had to have fun at Spithead to get that to work, the integrated circuit -state built computers ended up in bits, cant think of any state lead big pharmaceuticals. The internet is a great example spectulative over command, bare bones may have been there but none of DMU's saw the potential for the all singing and dancing internet we have to day, that took the imaginations and energies with as few roadblocks as possible.
> 
> With 100% reserve,_ as outlined in Jazz's IMF working paper_. For a new venture, you go and see your bank and they then act as advocates to a government bureaucracy that has final say on whether the money is printed for the venture to go ahead. How can that not be a command economy?
> 
> ...


There's several technical innovations happened during the collective era in China to my knowledge - new strains of high-yield rice, various stuff in medicine etc. I can look them all up if you really insist, but really the point is you're spotting the need capitalism has for constant innovation to keep the cycle going, and while we celebrate the few useful things that have come with that the vast bulk is new flavours of toothpaste style waste.


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## littlebabyjesus (Sep 25, 2012)

gosub said:


> With 100% reserve,_ as outlined in Jazz's IMF working paper_. For a new venture, you go and see your bank and they then act as advocates to a government bureaucracy that has final say on whether the money is printed for the venture to go ahead. How can that not be a command economy?


 
That's not a command economy, though. In a command economy, there is no space for individuals to ask banks for loans for new ventures - new ventures are decided upon by the government.

What you describe above is not very different from what happens now, except that you've substituted 'government bureaucracy' for 'private bureaucracy'. In our current system, you can only borrow money if you can convince the lender that you're good for it - and if you ask for a business loan, you have to present a business plan, etc.

But I'm not exactly clear what this '100% reserve' is really getting at. It seems an odd idea that negates many of the genuinely positive aspects of money as a concept.


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## gosub (Sep 25, 2012)

You've added an extra tier, and while you can ask banks aren't going to put stuff forward they know is going to get regected. Take the jet engine, UK government had examined the idea and dropped it in 1929 before Whittle went hang on this might work and got private investors to fund a prototype the government didn't know it wanted.  The other difference this tier makes is funneling, still using the jet engine, Whittle could apply to a multitude of investors some of whom were more taken than others but were able to take their own investment decision. Under this new system they may be taken with the idea but they have to apply to the same Deptartment of Investment: Aeronautics who can tell them ALL to fuck off, or let say HBOS do the Whittle route, so that when Lloyds turn up looking for funding for the Beryl route say we already have something similar going on.  (Modern jet engines owe more to the Beryl than the Whittle)


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## littlebabyjesus (Sep 25, 2012)

Ok. Still not a command economy in the sense of the old Soviet Union or present-day Cuba.


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## gosub (Sep 25, 2012)

JimW said:


> There's several technical innovations happened during the collective era in China to my knowledge - new strains of high-yield rice, various stuff in medicine etc. I can look them all up if you really insist, but really the point is you're spotting the need capitalism has for constant innovation to keep the cycle going, and while we celebrate the few useful things that have come with that the vast bulk is new flavours of toothpaste style waste.


Agriculture is an odd one, states have always prioritized seed devlopment, but I don't think the likes of Monsanto  came up with GM cos they were told to, I don't know anything about Chinese medicine.

I'm equally cynical that most development is inane and I'm sure any dept tasked with yay or naying would end even more so. But the sharper the bottleneck, the more Beatles you don't sign


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## gosub (Sep 25, 2012)

littlebabyjesus said:


> Ok. Still not a command economy in the sense of the old Soviet Union or present-day Cuba.


In terms of ownership, no, not intially. But then you'll need a mortgage, ok'd of course by the Deptartment of Investment: Housing


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## littlebabyjesus (Sep 25, 2012)

gosub said:


> IBut then you'll need a mortgage, ok'd of course by the Deptartment of Investment: Housing


But again, where is the essential difference between this and what happens now? We currently have mortgages cleared by the Department of Making the most amount of money out of us (the Bank) - and this operates in such a way as to rip us the fuck off. Housing and its financing is something eminently suitable to collective control, imo - involving as it does the distribution of an essential, limited resource.

I actually think state-controlled finance is an eminently sensible idea. Not nationalising the means of production, necessarily, but certainly nationalising the means of producing money.


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## free spirit (Sep 25, 2012)

love detective said:


> Your initial point was that QE was to do with _'meeting the banks existing liabilities' _
> 
> The only way banks could get access to QE money was if they already had sufficient assets on their books that they could sell to get cash to then fund any upcoming liability payments. So in that sense the liabilities are already 'covered' through the fact that there are sufficient assets to cover them. That's the key distinction between a liquidity problem/issue and a solvency/capital issue - your initial posts seemed to mistake the former for the later
> 
> If a bank did not have sufficient assets (in any form) to cover its liabilities then it would be insolvent and no amount of QE would be any use to it in _'meeting the banks existing liabilities'_


you're misrepresenting my point.

I was specifically talking about their cash liabilties, not whether on paper they had enough long term investments to match up with their customers bank balances or not.



> bail them out with enough new *hard cash* to allow them to continue paying out to their customers





> If a similar thing happens to all or most banks though, then there's nobody left to provide the short term lending of *hard currency* to the banks that needs it, and you get a credit crunch situation that can only be eased via the release / printing of vast quantities of *new hard currency* just to meet the banks existing liabilities


 
Unless you think people would readily accept being paid in a torn off strip of a government bond, or promisary note backed by interest payments on a loan they've made etc, the credit crunch was largely about lack of access to actual hard currency, both partly caused by the risk of, and at risk of fuelling the potential for a run on the banks of sufficient size for them to actually run out of the means to pay out in cash on request.

Also from a government and banks point of view, the situation would have rapidly got pretty dire if all the banks had tried flogging off a significant proportion of their government bonds / gilts on the open market at precisely the same time as the government was trying to release huge volumes of new bonds and gilts onto the same markets. It'd have resulted in interests rates rising massively for government borrowing, and the banks having to flog their lower yielding gilts and bonds off at a significant loss, which would then have impacted on their reserves ratio requirements.

Quantitative easing was therefore a win win for both sides, but the ultimate driving force for it IMO was the recognition of the need to inject huge quantities of hard cash into the banks, and that without QE the banks would be forced to achieve this in ways that would negatively impact on government's ability to borrow at low interest rates. I entirely acknowledge the potential that the politicians aren't even aware of this, and believe their own bullshit about getting the banks lending etc, but it is largely bullshit, as the figures on the ground clearly demonstrate.

The figures speak for themselves, with £275 billion QE injected upto the end of 2011, resulting in £100bn additional lending to business vs 2009, but still at only 2/3 of the rate in 2006... and 2012's lending rate currently running not that much above 2009.

The other £175 billion went on boosting the cash reserves, and helping to pump up the commodities market (and that's ignoring the multiplier affects discussed previously, and working on the basis that they actually did lend out £100 million on cash).

http://www.bankofengland.co.uk/publications/Documents/other/monetary/trendsJuly12.pdf


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## happie chappie (Sep 25, 2012)

I think (and LD is probably the best person to give a definitive view on this) is that there is a danger of placing too much emphasis on how much “cash” a bank holds at any particular time at the expense of looking at the overall state of its balance sheet.

As LD pointed out, Northern Rock sought BoE help before the run on the bank. The problem wasn’t caused because it didn’t have enough cash to pay out to customers (the run was simply a symptom) but because of the dire state of its balance sheet which meant it was technically insolvent. The root cause of this was a bad mortgage book emanating from its policy of lending to home buyers based on ridiculous multiples of their income (in some cases, self-certified). 

It wasn’t the BoE increasing liquidity that saved NR in the long-term, but the Government’s takeover which allowed the “toxic” loans to separated out, taken off the balance sheet, and then placed into a “bad bank”. NR then became solvent again and continued to trade with the taxpayer owning both the “good” and “bad” parts of the bank as separate entities, with the “good" bit later sold off to Virgin at a loss. (I assume the Govt still owns the “bad” bit, btw). 

The BoE pumping liquidity into NR wasn’t just to enable NR to pay out to any depositor queuing at the door, but to deal with the *short-term* problem of preventing a run spreading to all banks and the chaos that would have ensued. There was an argument that NR should have been allowed to go under as warning to other institutions not to be so reckless (hence the discussion about moral hazard and banks being "too big to fail"). 

The credit crunch wasn’t caused so much by how much “cash” any particular bank had at any particular time (which changes minute by minute, if not second by second) but by the banks collectively being unwilling to lend to each other as they couldn’t be sure whether the institution they were lending to was actually solvent. Who would want to lend to an insolvent firm? Under such circumstances NR would not have been able to raise cash on the wholesale markets at anything like a sensible interest rate, if at all.

If NR's balance sheet had been incredibly strong, but it had a short-term liqudity problem, it could have gone to the markets to borrow. But it wasn't, so it couldn't. In effect its solvency problem caused its liquidity problem, not the other way round. 

Then the BoE stepped on a short-term basis as a “lender of last resort". But this did not deal with the bank's longer-term structural problems, realting to the state of its balance sheet, which was sorted out by the Government at later date as outlined above. 

But LD would be able to correct me if I’m wrong (please fell free to do so) and add in any other relevant info.


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## love detective (Sep 25, 2012)

free spirit said:


> you're misrepresenting my point.


 
I'm sorry but i'm not misrepresenting anything. Im trying to make sense of what you are saying and respond to it accordingly. You've already admitted in a previous post that you were using terms that did not describe what you were trying to say, and even prior to that I pointed out that your posts on this matter come across like someone speaking authoritatively about something they have barely a tenuous grasp off.



> I was specifically talking about their cash liabilties, not whether on paper they had enough long term investments to match up with their customers bank balances or not.


 
what do you think a cash liability is?



> Unless you think people would readily accept being paid in a torn off strip of a government bond, or promisary note backed by interest payments on a loan they've made etc


 
you mean whether someone would accept one bit of paper (a pound sterling note for example), issued by the govt and backed by the govt's fiscal & monetary ability to stand behind it, or another bit of paper (a gilt), issued by erm the govt and backed by erm the govt's fiscal & monetary ability to stand behind it?



> the credit crunch was largely about lack of access to actual hard currency, both partly caused by the risk of, and at risk of fuelling the potential for a run on the banks of sufficient size for them to actually run out of the means to pay out in cash on request.


 
no it wasn't - the credit crunch was, as its name suggests, a crunch on the ability of banks to fund their lending (see Northern Rock, HBOS, etc.) - hence a contraction on lending activity by banks, which in turn caused a contraction in economic activity which in turn turned the financial crisis into an economic and sovereign crisis as tax revenues plummeted while things like unemployment benefit soared due to the doubling of unemployment etc... The issue of bank runs by customers withdrawing their deposits is largely irrelevant to the credit crunch, as stated earlier if anything they were a symptom after the big bang had happened, something of many times less the order of magnitude than the freezing up of the international money markets. Which banks went under or nearly went under due to actual or the risk of bank runs by customers by the way? None.



> Also from a government and banks point of view, the situation would have rapidly got pretty dire if all the banks had tried flogging off a significant proportion of their government bonds / gilts on the open market at precisely the same time as the government was trying to release huge volumes of new bonds and gilts onto the same markets.


 
QE brought about this very situation - everyone lined up to flog their gilts to the state who had deep pockets while the state was also issuing huge volumes of new gilts to fund the deficit



> It'd have resulted in interests rates rising massively for government borrowing, and the banks having to flog their lower yielding gilts and bonds off at a significant loss, which would then have impacted on their reserves ratio requirements.


 
So what actually happened was the reverse, the flogging off of gilts to the central bank pushed down interest rates

also you are mixed up when you say the banks would have 'lower yielding gilts' - if gilt prices fall because of say a glut on the market, then yields on them rise (the yield moves inversely to prices). you're also wrong when you say they would have to 'flog them off' - why would they have to flog them off? and which reserve ratio requirement are you talking about? liquidity, capital, other?



> Quantitative easing was therefore a win win for both sides, but the ultimate driving force for it IMO was the recognition of the need to inject huge quantities of hard cash into the banks, and that without QE the banks would be forced to achieve this in ways that would negatively impact on government's ability to borrow at low interest rates.


 
QE was win win for both sides (in the short term anyway, once it has to be unwound it won't look so clever). But you're simply wrong about the driving force being about it injecting huge quantities of hard cash into the banks in order that they could then 'meet the banks existing liabilities'. QE was not about swapping gilts for cash with the banks to give banks cash to meet their liabilities, it was about swapping gilts for cash with the banks in the hope that they would then create new assets in the shape of loans to customers/business with that money. This is where your focus on it being something to do with bank's liabilities is wrong. the focus was not about ensuring bank's could meet existing liabilities, it was about (on the surface) trying to get them to create new loans, in other words create new assets, and (unstated) about ensuring there was an ongoing demand for the issuance of state debt to give a fake credibility to the state's austerity programme.

The state has put in a place a myriad of various schemes other than QE which are there to prop up the banks liquidity & cash requirements (in addition to the schemes that already existed for this very purpose pre-crisis), if you've picked one of these and said what you are saying about QE I would have agreed with you, but you're way off with what you're saying here about QE.

This is another example of why I get so frustrated with this sole focus on the banks by so called radicals. It suggests that if that nasty banking system could just be sorted out then everything would be hunky dory. Which is bullshit. What we've seen since 2007 is the symptoms and manifestations of a deeper more structural crisis that goes way deeper than anything banks in particular do. That folk focus in on the banks as the cause of all evils takes away from the bigger picture. everything in the crisis is a symptom of the crisis in capitalism. Attempts to explain what went on with reference just to money & finance alone, is like trying to explain and understand the symptoms of cancer without recourse to the actual cancer that gives rise/life to those symptoms. This bank focussed approach barely manages to give an outline of a single tree, let alone see or have any ability to explain the existence of the forest.



> as the figures on the ground clearly demonstrate.
> 
> The figures speak for themselves, with £275 billion QE injected upto the end of 2011, resulting in £100bn additional lending to business vs 2009, but still at only 2/3 of the rate in 2006... and 2012's lending rate currently running not that much above 2009.
> 
> ...


 
The impacts of what was done don't give that good an indicator of what the reasons for doing it was. For example the impacts of a couple of hundred years of full scale capitalism has been to degrade the resources that keep the planet alive. To simply point to that outcome and say, see that was the intention behind it, doesn't tell us much.

You are correct that most of the money that was created by QE hasn't done much - i've said this countless times myself. But if you think that bank's are hoarding that money (and taking a significant loss on doing so - see the links to the extraordinary profits made by central banks as a result of the QE exchange) because they think they will need it when Mr & Mrs Smith appears at their door asking for the contents of their current account in cash, then you are wrong. Banks are hoarding it because they are scared to lend it and no one really wants to borrow it - the state through QE have chucked a big ball of money into the system that no one really wants or has any need for (which proves that monetary policy can't magic value production out of nowhere). That's why it's not inflationary, because it's not doing anything, not circulating, not stimulating anything. The only thing it's doing of note is artificially keeping demand for govt debt high, ensuring the price of govt debt remains high and it's yield/cost low - giving years and years of scope to continue with fuckwited austerity policies without it having an immediate devastating impact on society. yet.


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## love detective (Sep 25, 2012)

happie chappie said:


> I think (and LD is probably the best person to give a definitive view on this) is that there is a danger of placing too much emphasis on how much “cash” a bank holds at any particular time at the expense of looking at the overall state of its balance sheet.
> 
> As LD pointed out, Northern Rock sought BoE help before the run on the bank. The problem wasn’t caused because it didn’t have enough cash to pay out to customers (the run was simply a symptom) but because of the dire state of its balance sheet which meant it was technically insolvent. The root cause of this was a bad mortgage book emanating from its policy of lending to home buyers based on ridiculous multiples of their income (in some cases, self-certified).
> 
> ...


 
Will come back to you on this tomorrow, spent too much time on here today

Although I disagree with your initial premise about it being solvency and not liquidity which did it for NR - it was very much about funding or the lack of it that did it. NR had some toxic stuff on its books, but no more than many other banks (based on a percentage of their total mortgage book), and certainly not at the level that meant it had an unsustainable solvency problem.

NR's downfall (at the time) was more due a perfect storm between its somewhat cavalier balance sheet structure & approach to its funding mix which left it utterly exposed when international money markets froze up and were closed off to pretty much everyone in September 2007 (there was nothing specific that the market knew about NR at the time, it was more the case that everyone in the market had the total fear and didn't have a clue as to which banks would be impacted the most by the coming storm, so they froze up to everyone.

NR got caught out because their approach to funding its lending book was very aggressive & risky (in terms of huge reliance on money markets with no diversification of other funding methods, plus the way they funded very long term mortgage lending with very short term money market funding), which meant that they were much more exposed when the music stopped. Other banks weren't impacted to the same extreme because they had a much more conservative and diversified approach to their funding. The state had to take over because it was clear that without the state funding the bank was not a viable stand alone entity. It wasn't because it was insolvent in terms of it's capital adequacy or capital base at the time.

In general though you're right about the focus shouldn't be purely on just how much cash a bank has, but the focus should be between both liquidity & solvency/capital adequacy.

And in general I think you gave a pretty logical & structured overview of the situation (especially the description of the credit crunch), just the initial premise I don't agree with (NR balance sheet at the time was pretty strong in comparison with others who didn't go under, a few years late the 'bad bank' took quite a few write downs on some positions but no more than other banks did, and this was mainly due to the deterioration in the wider economy over those years rather than anything specifically chronic to NR in 2007, and the 'bad bank' is making healthy profits at the moment), which then filters through into your conclusions which I don't really agree with also. But you still got a lot of relevant and decent/correct points in there all the same


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## free spirit (Sep 25, 2012)

> it was about swapping gilts for cash with the banks in the hope that they would then create new assets in the shape of loans to customers/business with that money.


do you also believe in the tooth fairy?


eta - well ok, as I think I already acknowledged, this was one part of it, but it's a particularly inefficient means of achieving this, with only 40% of it making it back out of the banks as increased business loans, so I'd contend it'd be naive to say that this was the only, or even main reason for QE, even if it was the public justification used.


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## free spirit (Sep 25, 2012)

love detective said:


> I'm sorry but i'm not misrepresenting anything.


I beg to differ btw.

You quoted part of a sentence out of context, the rest of which made it clear that the point I was making was different to the point you were saying I was making, and I'd just explained the point I was making again in the post you were replying to.


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## Jazzz (Sep 25, 2012)

Jean-Luc said:


> Bank A makes a payment out (a loan) which is covered by a payment in from Bank B. Bank B makes a payment out (another loan) which is covered by a payment from Bank A. I imagine this is happening all the time as banks make payments out and receive payments in. In fact it happens every day when at the end of the day banks clear payments each owes each other. What's so special about that?
> 
> As not all payments out are loans, your scenario works equally if Andrew asks Bank A to settle an invoice for £1000 from Bertie who then pays it into Bank B while Bank B pays an invoice for £1000 which Bill owes Anthony who pays it into Bank A. Or, more likely, this will all be done by electronic transfers.
> 
> ...


Well indeed. There is an extra £2000 in circulation : £1000 in Bertie's account in Bank B, and £1000 in Anthony's account in Bank A.

No central bank money passes between the two banks. The two transactions negate each other during clearing.

The money supply has risen by £2000, simply created by the loans that the banks made.

The point of this example is to highlight the nature of the banking system as a whole. When you consider the high st banks as one, it is clear that they create money through loans, and that it is created from nothing.



> But why isn't the "money supply" increased when the payments out are not loans but settling invoices?


Because in that instance the total sum of the four client's bank accounts is exactly the same as before.


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## love detective (Sep 25, 2012)

free spirit said:


> I beg to differ btw.
> 
> You quoted part of a sentence out of context, the rest of which made it clear that the point I was making was different to the point you were saying I was making, and I'd just explained the point I was making again in the post you were replying to.


 
I did nothing of the sort - your initial assertion was that QE was about enabling the banks to meet their liabiliites (I replied that it wasn't and you replied that it was. You didn't say anything at the time about your posts being misrepresented or quoted out of context so seems odd to start now) 

which is and was nonsense, and as previously stated shows a fairly poor understanding of what QE is and how bank's work


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## love detective (Sep 25, 2012)

free spirit said:


> do you also believe in the tooth fairy?
> 
> eta - well ok, as I think I already acknowledged, this was one part of it, but it's a particularly inefficient means of achieving this, with only 40% of it making it back out of the banks as increased business loans, so I'd contend it'd be naive to say that this was the only, or even main reason for QE, even if it was the public justification used.


 
ah so i get accused of believing in the tooth fairy for saying it but then you claim you've already acknowledged/said it, presumably you believed what you said?

and who said it was the main reason for doing QE? I've specifically stated it's the main stated reason for doing it and i've also pointed out what is the main unstated reasons for doing it - none of which have anything to do with helping banks 'meet their liabilities'. Although I notice you make no comment on what I say is the main unstated reasons for doing it (although to be fair you make little comment on the majority of things said in reply to you, other than to come out with your tooth fairy shite)


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## Jazzz (Sep 25, 2012)

littlebabyjesus said:


> In this case, the pattern of value being transacted is as follows: Andrew buys 1000-worth of value from Bertie. Bill buys 1000-worth of value from Anthony. So Bertie and Anthony now have 1000 credits for future buying. Andrew and Anthony now have 1000 credits of debt that they have to pay back at some point. That's what money does - it allows some to consume now, and others to consume later; it allows you to do something for someone today, then have someone else do something for you tomorrow in return, and vice versa...


Quite, except there is one important catch. Bill and Andrew are not merely obliged to pay back 1000 credits each: they have to pay it back _with interest. _So they may have to pay 1100 credits each. Now, this is going to be difficult for our small society to repay 2200 credits to the banks when only 2000 were created. Now, if we have more money coming into circulation through new loans than is being destroyed (as the loans are repaid), then this is possible. However when the bubble bursts there are going to be big problems.


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## free spirit (Sep 25, 2012)

some numbers

In January 2006, total Cash reserves of all UK banks were £8.2 billion.

Total UK sight liabilities, repayable on demand (excluding other banks) was £629 billion

Total of all bank liabilities was £2.5 trillion

So the UK banks in total were operating on a cash ratio of 1.3% to UK sight liabilities, or 0.3% to all liabilties.

The banks were reliant on being able to bolster this cash reserve if required via either selling of their 'ready for sale securities', or by interbank lending against those assets.

The problem when the credit crunch came was that a large proportion of those assets suddenly went from being AAA rated to being toxic to the point where nobody wanted to touch them as they didn't trust the rating, plus there's likely to be limited market appetite / funds for buying serious quantities of these assets from multiple banks at the same time, and at the same time all the banks realised they needed to hoard their cash themselve, and not lend it to the other banks.... plus the fact that there was only £8.2 billion cash held in total between all the banks vs £629 billion total sight liabilities, so there wasn't enough within the entire banking system to stave off even a run on a relatively minor bank such as Northern Rock.

Saying that the government intervention preceded the bank run, and therefore the bank run wasn't the problem is idiotic. The bank run was coming with or without boe intervention, because the markets were clear that northern rock had severe problems, and the public would have picked up on this via the papers and the run would have happened. The bank of england intervention prior to it happening was a last gasp desperate attempt to prop the system up before the run really got going, but the reason for it was that the run was already virtually guaranteed to be starting the next day (or they'd have been very lucky to have escaped a run at some point in the next few days).


Page 204 of this link http://www.scribd.com/doc/75401866/...uidity-the-run-up-to-the-Northern-Rock-crisis


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## free spirit (Sep 26, 2012)

love detective said:


> what do you think a cash liability is?


From reading the document I've just linked to, the correct technical term would seem to be 'sight liabilities' or liabilities that are payable in cash on demand.

I may not have used exactly the correct technical term, but it was pretty obvious what I meant.


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## littlebabyjesus (Sep 26, 2012)

Jazzz said:


> Quite, except there is one important catch. Bill and Andrew are not merely obliged to pay back 1000 credits each: they have to pay it back _with interest. _So they may have to pay 1100 credits each. Now, this is going to be difficult for our small society to repay 2200 credits to the banks when only 2000 were created. Now, if we have more money coming into circulation through new loans than is being destroyed (as the loans are repaid), then this is possible. However when the bubble bursts there are going to be big problems.


On this point I agree with you. At any one moment, the total amount owed is more than the total amount that has been created through loans, because of interest. It cannot be otherwise. And yes, this has to mean that we are locked in a spiral of ever-growing loans.


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## free spirit (Sep 26, 2012)

love detective said:


> for liquidity purposes, cash is king after all in an uncertain environment, bird in the hand is worth two in the bush etc. etc.. - northern rock for example didn't go under because it was insolvent, it went under because it didn't have enough liquidity to fund itself and its ongoing operations. so an increased yield on an asset in the future is no use if you don't have the cash flow to fund yourself today


hold up, this is exactly the point I'm making, but then you have a go at me for arguing that the government buying hundreds of billions worth of government securities from the banks for cash is largely aimed at resolving this situation for the banks.




> If a similar thing happens to all or most banks though, then there's nobody left to provide the short term lending of hard currency to the banks that needs it, and you get a credit crunch situation that can only be eased via the release / printing of vast quantities of new hard currency just to meet the banks existing liabilities.


This seems to be the original post you objected to, and ok I should probably have qualified the liabilities as being 'sight liabilities' or on demand liabilities, but I thought that it was obvious enough what I meant, and you go on to say largely the same thing in other words a few posts later.


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## yield (Sep 26, 2012)

littlebabyjesus said:


> On this point I agree with you. At any one moment, the total amount owed is more than the total amount that has been created through loans, because of interest. It cannot be otherwise. And yes, this has to mean that we are locked in a spiral of ever-growing loans.


Not always if you account for inflation/depreciation/devaluation.


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## Riklet (Sep 26, 2012)

You should write a book about this love detective.

I'm not kidding, i'd buy it.  Shit, I bet even Jazz would.


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## JimW (Sep 26, 2012)

Riklet said:


> You should write a book about this love detective.
> 
> I'm not kidding, i'd buy it. Shit, I bet even Jazz would.


Then mine it for quotes to say something else entirely


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## free spirit (Sep 26, 2012)

love detective said:


> no it wasn't - the credit crunch was, as its name suggests, a crunch on the ability of banks to fund their lending (see Northern Rock, HBOS, etc.) - hence a contraction on lending activity by banks, which in turn caused a contraction in economic activity which in turn turned the financial crisis into an economic and sovereign crisis as tax revenues plummeted while things like unemployment benefit soared due to the doubling of unemployment etc.


The term credit crunch may have ended up popularly meaning this now, but when it was first coined it referred specifically to the seizing up of the interbank lending, and wholesale money market lending facilities the banks themselves relied on.

This then did lead on to the loss of credit facilities to business and consumers downstream of the banks, as you say, but it also led to the serious potential for a run on the banks to cause them to actually run out of hard cash as I said, which then necessitated multiple injections of cash into the banking system by a variety of means, as well as government guarantees of bank deposits etc all aimed at preventing an actual serious run on the banks.



> The reference to a "crunch" is the refusal of banks to lend to each other


[Guardian]


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## love detective (Sep 26, 2012)

free spirit said:


> hold up, this is exactly the point I'm making, but then you have a go at me for arguing that the government buying hundreds of billions worth of government securities from the banks for cash is largely aimed at resolving this situation for the banks.


 
No, your point was that the threat of a customer bank run, withdrawing their deposits was both a major cause of the credit crunch (wrong) and the reason that QE was implemented was so that the banks could meet those withdrawls in hard cash should they so require (wrong)

That banks had a demand for cash, was not the motivating factor behind QE - i've already explained what I see as being the main stated and unstated factors for the state doing QE. That the banks were willing to be the other side of the QE transaction and benefited from it in terms of additional access to liquidity is without doubt, this doesn't mean it was the motivating factor for doing so. As i've already explained, there are countless other state schemes in operation both then and now, which were directly aimed at ensuring banks were propped up with the liquidity that they needed, QE wasn't one of them

My point about NR was that it wasn't a customer bank run, or threat of a bank run that caused NR problems, it was its inability to roll over its short term funding in the money markets that it had been dependent on to fund its long term lending. When they, along with all other banks, were shut out of the money markets in September 2007, the state had to step in as the lender of last resort and put in something like £30bn to replace the funding that it had lost from the markets. Only at this point did customer bank run take place which resulted in a couple of billion being withdrawn from NR (and indirectly placed directly back with it, as that money withdrawn flowed into other banks, who at the time were shit scared to lend it to anyone, so they placed it on deposit with the central banks, who in turn had to increase their funding to NR to make up the shortfall - so in that sense bank runs on individual banks where a central bank exists, are self funding)

So can you tell me which number is bigger free spirit the £30bn of lost funding that NR suffered due to the money markets freezing up or the £2bn of lost funding that NR suffered due to customer withdrawls?

That you continually refer to the £2bn figure as being the reason for the downfall in light of all this is getting into Jazz like absurdity

Even the link that you provided says exactly this



> With hindsight, Northern Rock’s business model and particularly its reliance on wholesale funding have been deemed imprudent or even irresponsible....
> 
> ...A fair comment is that by this stage Northern Rock’s management hoped to meet any funding problem by the issue of further securities.


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## love detective (Sep 26, 2012)

free spirit said:


> The term credit crunch may have ended up popularly meaning this now, but when it was first coined it *referred specifically to the seizing up of the interbank lending, and wholesale money market lending facilities the banks themselves relied on.*
> 
> *The reference to a "crunch" is the refusal of banks to lend to each other*
> 
> [Guardian]


 
That's exactly what I said, i.e:-

_



			
				me said:
			
		


			the credit crunch was, as its name suggests, a crunch on the ability of banks to fund their lending
		
Click to expand...

_ 
The banks were no longer able to fund their lending activities in the money markets

This is in stark contrast to your characterisation of the credit crunch to which my post above was a response to, i.e.:-




			
				you said:
			
		

> the credit crunch was largely about lack of access to actual hard currency, both partly caused by the risk of, and at risk of fuelling the potential for a run on the banks of sufficient size for them to actually run out of the means to pay out in cash on request


 
So your description of a credit crunch was the banks lack of access to what you call 'actual hard currency' (presumably hard cash/bank of england issued money) and the risk of a customer bank run on them

Bank's borrowings in the money markets is not borrowing 'actual hard currency' 

i'm not sure you actually know what you mean when you use the phrase 'actual hard currency' either


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## love detective (Sep 26, 2012)

free spirit said:


> Saying that the government intervention preceded the bank run, and therefore the bank run wasn't the problem is idiotic. The bank run was coming with or without boe intervention, because the markets were clear that northern rock had severe problems, and the public would have picked up on this via the papers and the run would have happened. The bank of england intervention prior to it happening was a last gasp desperate attempt to prop the system up before the run really got going, but the reason for it was that the run was already virtually guaranteed to be starting the next day (or they'd have been very lucky to have escaped a run at some point in the next few days).


 
Look, before you found out that you had the order of events completely arse about tit - you were confidently telling us that it was the bank run that meant the state had to step in, and therefore the customer bank run was the reason NR went under.

Now you claim that it doesn't matter, which is absurd. You say that the bank run was coming with or without boe intervention, this is actually not true either. Without boe intervention NR would have been closed completely, there would be no bank left for it to have a run against. It was only the stepping in of the state to keep NR open and funded, that enabled the bank run to actually take place. You also say that the markets were clear that NR had severe problems. This is also incorrect, the money markets didn't just freeze up to NR, they froze up to everyone, the market was not there in effect. The money markets didn't stop lending to NR specifically because they knew it had severe problems, the money markets stopped lending to everyone which caused NR severe problems. Once again, you have the cause & effect arse about tit

The amount of liabilities that NR had in terms of money market funding dwarved that which they had in relation to customer deposits. So for you to continue to assert that it was the threat of the loss of its small deposit base rather than it's huge money market funding base is absurd

You continually seem to be suggesting that £2bn is a bigger figure than £30bn

This is one of the major reasons that NR got caught short at the time, because unlike most other banks it did not have a well diversified source of funding, and relied far too heavily on short term money market funding (as opposed to having a better balance of funding between customer deposits, short term market funding, long term market funding, loan notes, subordinated debt, share capital etc..)


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## Jean-Luc (Sep 26, 2012)

love detective said:


> i'd rather take my chances with the state than the 'spontaneous operation of economic forces'!
> 
> (cue pictures of wheel barrows of cash in zimbabwe & weimar germany etc. etc..)


Surely, it was the state central bank in Zimbabwe and Weimar Germany that printed all that money that fuelled the runaway inflation? Not that we have to decide what's the best way for capitalism to deal with monetary questions.

I don't think that "full reserve banking" does imply a command economy (even if a command economy would be practising a form of "full reserve banking"). Most of its supporters are "free marketeers". It would still allow personal loans and mortgages from private banks as now, except that these would have to come from a smaller pool of "time deposits". Those of its supporters who recognise that this pool might be smaller than the economy requires advocate that the shortfall should be made up by the government/central bank issuing more "basic" money, mainly in the first instance to the government (which they say the government can use to reduce taxes, their preference, or, if they are demagogic, to improve benefits). They try to build in various safeguards against the government abusing this (one is to leave the decision as to how much extra basic money to create to the Monetary Policy Committee of the Bank of England), but history suggests that this won't prove effective. But it could, in theory.


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## love detective (Sep 26, 2012)

well that was why i said 'cue pictures of zimbabwe and weimar germany' as i knew as soon as i said i'd rather take my chances with the state, that someone would be along to say what about zimbabwe and weimar germany

so yes of course it was the state, but my point is that there's nothing inherently more inflationary about a state trying to increase the money supply through printing/creating money than there is with an internal system creating price inflation due to the huge increase in the money supply brought about by the frantic circulation of money within it. Central banks can create/print vast quantities of money without it being inflationary and likewise the 'spontaneous operation of economic forces' can drive up the money supply to create huge inflationary pressures in relation to credit fuelled property price bubbles etc

so my point is that the defining factor isn't so much where the increase in money supply comes from or is generated from, it's about the underlying reasons for that increase - that is the key thing (for example if the money supply was expanding to keep up with the underlying production of value in the economy, then this wouldn't be inflationary, regardless if that increase came from a state/central bank controlled system or our hypothetical exiting in theory only 'free market' system


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## Jean-Luc (Sep 26, 2012)

Jazzz said:


> Quite, except there is one important catch. Bill and Andrew are not merely obliged to pay back 1000 credits each: they have to pay it back _with interest. _So they may have to pay 1100 credits each. Now, this is going to be difficult for our small society to repay 2200 credits to the banks when only 2000 were created. Now, if we have more money coming into circulation through new loans than is being destroyed (as the loans are repaid), then this is possible. However when the bubble bursts there are going to be big problems.


This is another currency crank fallacy. Interest on loans comes out of future production, either from the profits businesses make by using the loan or, in the case of personal loans, out of wages earned by working.

Some advocates of "full reserve banking" recognise this. For instancve Michael Reiss in his book _What Went Wrong with Economics_: 



> *But what about the interest?*
> 
> The question remains around the lending and repayment of money: what about the interest payments? The answer is that when a loan is paid back, the original money created by the loan disappears, but the bank is allowed to keep the interest repayments. This is how banks get their income.
> 
> ...


I leave you to settle this with your fellow full reserve banker.


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## love detective (Sep 26, 2012)

Jean-Luc said:


> This is another currency crank fallacy. Interest on loans comes out of future production, either from the profits businesses make by using the loan or, in the case of personal loans, out of wages earned by working.


 
yep - and this is why the currency cranks & money first freaks are never able to see the wider framework - they have zero interest in things like underlying value production and surplus vale extraction, which need to be taken into account to have any chance of getting a handle on how the monetary system which sits above, and is an expression of, it works

they treat the symptom of something as its underlying cause, and can't see past money, starting at the wrong end of the analysis chain and never moving one inch from it. they spend all day reassuring themselves that those cows in the distance really are small, and that's all they need to know


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## littlebabyjesus (Sep 26, 2012)

Ta for that, J-L. That's just cleared up an ongoing problem I've had with thinking about this.


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## littlebabyjesus (Sep 26, 2012)

love detective said:


> yep - and this is why the currency cranks & money first freaks are never able to see the wider framework - they have zero interest in things like underlying value production and surplus vale extraction, which need to be taken into account to have any chance of getting a handle on how the monetary system which sits above, and is an expression of, it works
> 
> they treat the symptom of something as its underlying cause, and can't see past money, starting at the wrong end of the analysis chain and never moving one inch from it. they spend all day reassuring themselves that those cows in the distance really are small, and that's all they need to know


Actually, they might just be making an honest mistake.


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## love detective (Sep 26, 2012)

littlebabyjesus said:


> Ta for that, J-L. That's just cleared up an ongoing problem I've had with thinking about this.


 
I was saying exactly the same thing to you LBJ over the previous years when you were making the same assertions as Dr Jazz

I constantly pointed out that you can't just look at money and the interest on it and say omgz how can it happen - i've been consistently saying you need to look at this in conjunction with underlying activity in the economy, value production in other words if you want to get a better handle on how the money system works

edit: and i've also been constantly pointing out that to look at the money suplply as a static stock, like the £10 in the island example, is not a useful way of understanding money, you have to look at it as flows, movement, circulation - i've been going on about both these things for years now on here


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## littlebabyjesus (Sep 26, 2012)

love detective said:


> I was saying exactly the same thing to you LBJ over the previous years when you were making the same assertions as Dr Jazz
> 
> I constantly pointed out that you can't just look at money and the interest on it and say omgz how can it happen - i've been consistently saying you need to look at this in conjunction with underlying activity in the economy, value production in other words if you want to get a better handle on how the money system works


Yes, you were. And I didn't understand your point. You get annoyed when people don't get you. But it isn't being done on purpose. Sometimes it just takes someone else to explain it using different words.


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## love detective (Sep 26, 2012)

yep fair enough, that's a fair point


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## love detective (Sep 26, 2012)

littlebabyjesus said:


> Actually, they might just be making an honest mistake.


 
like the medical researcher or scientist who refuses to look beyond the symptoms of a cancer, but claims they can understand everything about those symptoms including how to get rid of them? possibly a stupid honest mistake, but a very stupid one and one which makes their work next to useless in understanding what they are supposedly investigating


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## littlebabyjesus (Sep 26, 2012)

What do you want me to say?

You were right. I didn't understand your explanation for why you were right. I do now. I was wrong.

What else is there to say?


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## love detective (Sep 26, 2012)

i wasn't asking you to say anything, i acknowledged that you made a fair point in your post and that was that


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## littlebabyjesus (Sep 26, 2012)

Fair enough. I guess I took your post personally.


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## Monkeygrinder's Organ (Sep 26, 2012)

Riklet said:


> You should write a book about this love detective.
> 
> I'm not kidding, i'd buy it. Shit, I bet even Jazz would.


 
Yes, some excellent posts on this and the last thread about this, I've found it really interesting.

Anyway assuming the book isn't in the offing is there one you would recommend to read up on this stuff?


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## Jean-Luc (Sep 26, 2012)

Monkeygrinder's Organ said:


> Yes, some excellent posts on this and the last thread about this, I've found it really interesting.
> 
> Anyway assuming the book isn't in the offing is there one you would recommend to read up on this stuff?


There's this classic statement from 1921 of the case against banks having the power to create credit from nothing: http://theoryandpractice.org.uk/library/meaning-bank-deposits-edwin-cannan-1921

This pamphlet, from 1935, deals with "money bugs" and puts money and banking in the context of production: http://www.marxists.org/archive/keracher/1935/economics-for-beginners.htm

So does this one: http://www.worldsocialism.org/spgb/socialist-standard/1930s/1933/no-345-may-1933/douglas-scheme-pt1

Sorry, I can't think of anything more modern in that these are out-of-date being written when the currency was still tied to gold (even though that made it is easier to see what was going on) and before the "Keynesian revolution". Which goes to show the need for a pamphlet or book on the subject taking into account subsequent developments, especially managed currencies, inconvertible paper money and the redefinition of money by Keynes and economists generally.


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## free spirit (Sep 26, 2012)

.


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## free spirit (Sep 26, 2012)

love detective said:


> Bank's borrowings in the money markets is not borrowing 'actual hard currency'
> 
> i'm not sure you actually know what you mean when you use the phrase 'actual hard currency' either


of course it is.

The interbank lending market is entirely about banks being able to borrow actual hard currency from other banks to cover any short term liquidity issues. This and other similar wholesale money markets are what froze up.

wtf else do you think they'd be borrowing? Hi barclays, can I borrow that government gilt you've got and secure it against this government gilt we've got please?


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## love detective (Sep 26, 2012)

the way you used 'actual hard currency' previously gave the indication you believed it to be actual physical money that could be used if customers wanted to physically withdraw money in person - you talked about this in the context of a customer bank run

so if you actually mean that there is no difference in your definitions between 'actual hard currency' and 'money' then fair enough, but certainly the additions of 'actual' & 'hard' to the word currency gave a strong indication you were using it to mean something other than what you now claim you mean by it (a bit similar to in the past when you were banging on about capital reserves without having a clue what you were talking about or what they even where, and then laterly pointed out you meant something totally different to what the phrase you used actually meant)

why bother adding the words actual and hard if, under your definitions, they don't actually add any difference to the simple phrase of money?

edit: and by the way, well done on once again avoiding/dodging all the points made to you in my various replies over the last page - this is my last post on this, not worth the effort if you are unable to engage with, or at least acknowledge, the various responses to your posts


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## free spirit (Sep 27, 2012)

are you being deliberately obtuse here?

what the fuck else would I mean by 'actual hard currency'?

I was trying to clearly differentiate between that and other assets the bank may own, but which it can't use directly to pay out with.


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## Jazzz (Sep 27, 2012)

Jean-Luc said:


> So, suddenly, when "full reserve banking" is introduced, the money that is lent starts to circulate whereas it doesn't now!





Jean-Luc said:


> Yes, that is what I'm saying, but I'd just call it "banking" as that's the principle on which banks operate.
> 
> Banking is based on the assumption that depositors will be leaving most of their money in the bank and not withdrawing it. This is why most money deposited can be treated as if it were a "time-deposit" and lent out. There is nothing dishonourable or dishonest about this. Actually, what happens is that all the money deposited, whether in a current account or a time-deposit, goes into one pool out of which a bank makes loans and other payments.
> 
> I imagine you think that any extra money needed will be done by the government or the central bank "printing" it. Hello (higher) inflation.



_"Banking is based on the assumption that depositors will be leaving most of their money in the bank and not withdrawing it. "_

With respect, no, this isn't it - it's that they are not withdrawing _cash. _What the banks can expect is for vast amounts of transactions to other banks of broad (their created) money to be balanced by similarly vast amounts in the reverse direction, leaving a much smaller fraction to be cleared with the central bank. This was partly what my example was intended to highlight. Of course, if there is a run on a bank, then this doesn't happen - people might not be withdrawing cash, but just transferring their money to other banks. Big trouble!


I've already said, with full-reserve banking you must make a distinction between "demand" deposits as "time-deposits". If you accept time deposits, you cannot let the original depositor draw on them for a certain time, or they are not time-deposits. When you say that a

I don't think you have grasped the fundamental difference between full and fractional reserve. You may like to consider this. If a bank accepts a cash deposit as a "demand" deposit, and then "lends it out", then you could say that they have created the original demand deposit.


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## free spirit (Sep 27, 2012)

love detective said:


> No, your point was that the threat of a customer bank run, withdrawing their deposits was both a major cause of the credit crunch (wrong)


can I just check why you've added the word 'customer' to the beginning of 'bank run'?

It looks to me as if you're trying to make it look like I'd only been talking about customers withdrawing money over the counter or similar, whereas I'm referring to all type of liabilities that were payable on demand, of which the customers queuing outside the bank is just the highly visible tip of the iceberg.

But yes, the threat of a potential bank run (including any loan repayments) is what's largely problematic about the freezing up of the interbank lending markets and other sources of access to ready cash that a bank operating on something below a 1.3% cash reserve ratio to sight liabilities is highly reliant upon to prevent even minor runs on the bank from resulting in them running out of cash.



> That banks had a demand for cash, was not the motivating factor behind QE - i've already explained what I see as being the main stated and unstated factors for the state doing QE. That the banks were willing to be the other side of the QE transaction and benefited from it in terms of additional access to liquidity is without doubt, this doesn't mean it was the motivating factor for doing so. As i've already explained, there are countless other state schemes in operation both then and now, which were directly aimed at ensuring banks were propped up with the liquidity that they needed, QE wasn't one of them


OK, so you agree that cash reserves / liquidity were seriously problematic throughout the banking sector, and yet you also contend that a scheme that's resulted in £375 billion (IIRC) of government securities being swapped for newly printed cash wasn't the motivating factor behind QE, particularly when only £100 billion or so of that has ended up as increased business lending, which was the publicly stated aim.

This strikes me as being a rather peculiar position to take, hence my earlier comment.

Note that I'm not saying, and never have said, that it's the only reason, just that it's a significant unstated reason for it all that suits the purposes of both the BOE and the banks, but's seemingly not so good for the rest of us.



love detective said:


> My point about NR was that it wasn't a customer bank run, or threat of a bank run that caused NR problems, it was its inability to roll over its short term funding in the money markets that it had been dependent on to fund its long term lending. When they, along with all other banks, were shut out of the money markets in September 2007, the state had to step in as the lender of last resort and put in something like £30bn to replace the funding that it had lost from the markets. Only at this point did customer bank run take place which resulted in a couple of billion being withdrawn from NR (and indirectly placed directly back with it, as that money withdrawn flowed into other banks, who at the time were shit scared to lend it to anyone, so they placed it on deposit with the central banks, who in turn had to increase their funding to NR to make up the shortfall - so in that sense bank runs on individual banks where a central bank exists, are self funding)
> 
> So can you tell me which number is bigger free spirit the £30bn of lost funding that NR suffered due to the money markets freezing up or the £2bn of lost funding that NR suffered due to customer withdrawls?
> 
> ...


I've not referred to a £2bn figure once that I can remember, though the straw the broke the camels back analogy springs to mind.

I see from this that I was right about your use of the word 'customer' in front of bank run though, so I'll restate, that I wasn't differentiating between any forms of money that was able to be withdrawn from the bank on demand, merely stating that the problem occurs when more money in total is being withdrawn than the bank has cash reserves to meet, or the ability to rapidly raise via the sale of assets or interbank lending (or similar).

I'm also not saying that this was the root cause of northern rocks problems, obviously it wasn't, but at the end of the day, it's running out of actual cash, and being seen to have run out of cash, that would completely kill a bank. This is why it was at this stage that the BoE had to step in to provide emergency cash to the bank, as well as fairly soon afterwards increasing the guarantees to depositors with the bank, both of which were clearly designed at bolstering the banks ability to withstand a run on the bank / reduce the scale of any run on the bank.

btw, I think you've been inferring a lot of this from my post 153. Please note that this post was in response to your stupid post before it about you personally asking the bank to break down your account into nominal vs hard currency. In my post I wasn't talking about what actually did bring northern rock down, just the fact that one person isn't going to take the bank down, but if all the customers tried to take their money out at once then it would, particularly if the bank was being frozen out of the interbank lending markets. If you'd stop responding as if this post was actually describing what I think happened to Northern Rock I think it'd help move things along.


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## Jazzz (Sep 27, 2012)

Jean-Luc said:


> This is another currency crank fallacy. Interest on loans comes out of future production, either from the profits businesses make by using the loan or, in the case of personal loans, out of wages earned by working.
> 
> Some advocates of "full reserve banking" recognise this. For instancve Michael Reiss in his book _What Went Wrong with Economics_:
> 
> ...


 
I'm really not at all sure what the Steve Keen argument quoted has to do with the first part of your post. It makes me wonder if you actually read the quote you posted? Keen's argument has nothing to do with microeconomic considerations which can't possibly help here.

However, I must play the post. Keen's proof that the interest can be repaid doesn't answer all the questions for me. Suppose, instead of returning all the interest paid back into the economy, the bank's beneficiaries decide to let some of it stockpile. Then everything goes out of the window. We are left with everyone else overall owing more money than they have to pay it back with. The banks then get to gain another way, for they will seize real wealth through bankruptcies. After that, after the recession - well they still have the extra interest they stockpiled! It's not like they lost it by keeping it back for a while. Indeed, this rowing of the economy between boom and bust perfectly fits with experience.

As far as I can see, Keen's argument that interest can be repaid relies on assuming that banks will act altruistically. Whereas my understanding is that wealthy people like to see their wealth keep rising - stockpiling even! - and will not care too much whether others benefit. Isn't this just what happens?

This is claimed to be an infamous banking memorandum from the USA:


> _"On September 1st 1894 we will not renew our loans under any consideration. On September 1st we will demand our money._​_We will foreclose and become mortgages in possession. We can take two-thirds of the farms west of the Mississippi, and thousands of them east of the Mississippi as well, at our own price ... Then the farmers will become tenants as in England ... ,"_​1891 American Bankers Association, as printed in the Congressional Record of April 29, 1913.


 
http://www.iamthewitness.com/books/Andrew.Carrington.Hitchcock/The.History.of.the.Money.Changers.htm


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## free spirit (Sep 27, 2012)

love detective said:


> i'm gonna ask my bank today to break down my bank account balance into nominal pounds and real/hard currency pounds - i don't want none of that nominal shit finding it's way in and mixing itself up with any of the hard stuff that may or may not happen to be in there as well
> 
> detective free spirit may be required to go in and sort out the wheat from the chaff


btw, have you now sussed out what I was getting at on the other thread with nominal vs hard currency?

when you've got UK banks that only actually have 1.3% of their on demand liabilities held in actual cash reserves, or around 13% held in supposedly easily convertable forms such as government gilts etc, it should be pretty obvious that there's a significant difference between a £1,000,000,000 loan that's made in actual cash, and the same loan that's just made electronically by a bank extending you a line of credit electronically where only a small minority of that loan is actually fully funded.

99.9999% of the time both loans are of equal value, but in the event of a serious run on that bank, you could find that it wasn't actually able to either give you the cash, or even to transfer it electronically to another bank, though it possibly could still allow you to keep making purchases or payments against it with other customers of the same bank.

This is why they should be viewed differently IMO.

I've used a big number here to illustrate the point, but the same applies to a million £1000 loans, other than the fact they're less likely to all be withdrawn at once.


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## SpineyNorman (Sep 27, 2012)

Jazzz said:


> Suppose, instead of returning all the interest paid back into the economy, the bank's beneficiaries decide to let some of it stockpile. Then everything goes out of the window. We are left with everyone else overall owing more money than they have to pay it back with. The banks then get to gain another way, for they will seize real wealth through bankruptcies. After that, after the recession - well they still have the extra interest they stockpiled! It's not like they lost it by keeping it back for a while. Indeed, this rowing of the economy between boom and bust perfectly fits with experience.


 
Do you honestly believe this is what causes the cycle of boom and bust Jazzz? Cos that's clear, demonstrable bollocks.


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## love detective (Sep 27, 2012)

free spirit said:


> can I just check why you've added the word 'customer' to the beginning of 'bank run'?
> 
> It looks to me as if you're trying to make it look like I'd only been talking about customers withdrawing money over the counter or similar, whereas I'm referring to all type of liabilities that were payable on demand, of which the customers queuing outside the bank is just the highly visible tip of the iceberg.


 
Because the initial post that you made in response to my 'stupid post' which started off this whole discussion, was squarely in the realm of customers 'going in' and withdrawing money from banks and then the state having to step in if that happened, which you then used NR as an example of this in action (despite it being nothing of the sort). Here is what you said:-




			
				you said:
			
		

> unless you've got a massive bank balance I doubt they're going to have a problem paying you in cash.
> 
> *If every customer went in and withdrew their money* though they'd not have anything like sufficient reserves to pay out in cash, and would have to attempt to then borrow the hard currency from elsewhere in order to pay out.
> 
> ...


 
So you linked the reason for QE and the reason for the credit crunch (last paragraph) directly to the threat/potential of customers 'going in' and withdrawing money (first paragraph)

All throughout this discussion you seem to to take great offence at me responding to the words you've actually used to make your case and then moan at me for responding to things you have said, to which you then later claim that you didn't really mean what you said and you actually mean something different and I should be able to mind read so I can distinguish between what you mean and what you actually say.

Fair enough if you now say that you were referring to all types of liabilities that were payable on demand (which very little money market lending is, it's usually some kind of term, albeit fairly short term) _'of which the customers queuing outside the bank is just the highly visible tip of the iceberg_' then that makes more sense. However your post above which prompted my initial involvement in this discussion was very clearly talking about customers, you refer to customers, you refer to them 'going in' which clearly makes reference to customers going into high street bank branches and taking money out, and then the conclusion of all these 'customers' 'going in' was for you the credit crunch and the reason for QE.




> OK, so you agree that cash reserves / liquidity were seriously problematic throughout the banking sector, and yet you also contend that a scheme that's resulted in £375 billion (IIRC) of government securities being swapped for newly printed cash wasn't the motivating factor behind QE, particularly when only £100 billion or so of that has ended up as increased business lending, which was the publicly stated aim.
> 
> This strikes me as being a rather peculiar position to take, hence my earlier comment.


 
I've agreed from the very start that liquidity was a huge problem for the banking sector throughout the crisis. I disagree that the motivating factor for QE was to provide liquidity to banks for two reasons:-

1. The money markets started to freeze up in September 2007 with 2008 being the real crunch time. This period from late 2007 to 2009 was the real crunch point in terms of little or no liquidity being available in the open markets for banks. While from 2010 onwards the money markets have not went back to how they were pre 2007, they have certainly thawed a great deal. Anyway, the point is that in late 2007/early 2008 they froze completely, this is the time that if any bank was going to need assistance in liquidity, it was going to be then.

So at this stage we have serious liquidity problems for banks, and we both agree that they needed some kind of assistance to get by. You claim that QE was this assistance. The first batch of QE didn't get transacted until March 2009, and by September 2009, a full two years after the money markets had froze, the amount of QE was only £175bn. So you are saying that the motivating factor behind QE in 2009-2012 was a response to problems bank's were having as a result of the freezing up of money markets in 2007 to 2008. The nature of money market borrowing is that it is usually very short term, 1 week/1 month/3 months being the most popular terms. This means that when these 1 week/1 month/3 month loans expired and weren't able to be rolled over as they previously where, banks were then in a dire situation liquidity wise. A scheme starting a good year or so later and initially involving quite small amounts, is not a scheme that looks anything like a response to the liquidity problems of 2007/2008

So it's simply unfeasible to suggest that QE which was introduced nearly two years after the key freeze time, was a response to this liquidity seizure. Since 2011/2012 the banks have actually been able to fund themselves reasonably well in the money market, so those seizures in the money markets in 2008/2009 are simply not present at the moment. Yet in the last year alone another £175bn of QE has been transacted. So in short the timings alone of money market seizures and QE transactions are a glaring indicator that the later is not a response to the former. If it was, then it was a seriously daft response as it didn't do anything for a couple of years when the money markets froze up and banks were in desperate need of liquidity. And then once they had thawed & opened up again so that bank's weren't in desperate need of liquidity, it ramped up the QE transactions hugely. Surely you can see that this alone suggests that you are wrong to assert that bank liquidity problems are a primary driver for QE?

2. As i've previously mentioned, many timess, the state has stepped in with a myriad of liquidity schemes to help/bail out banks who were caught out when the money markets froze out. The biggest was the Bank of England's Special Liquidity Scheme which, unlike QE above, was launched in April 2008, right in the middle of the money market freezing up, and in a matter of month (not years like QE) provided near on £200bn of liquidity to banks (in exchange for collateral). Also in October 2008, again right in the middle of the key seizing up period, the Treasury's Credit Guarantee Scheme was launched, in contrast to the Special Liquidity Scheme which provided liquidity assistance directly to banks, this merely guaranteed any borrowings that the banks did in the market, so with a state backed guarantee, banks were able to access the money markets once again with the help of the state crutch. This scheme ended up guaranteeing around £250bn of credit and again was conducted in that key crunch time 2008/2009. So just these two schemes together provided over £400bn of liquidity assistance to banks in the period of 2008/2009. In contrast the first batch of QE of £75bn didn't appear until March 2009. There were also many other smaller schemes and in addition the regular normal open market operations that the BOE does in which liquidity is provided to banks.

So, once again it is simply absurd to say the motivating factor of QE was to provide liquidity to the banks. There were all manner of liquidity schemes in operation around 2008/2009 which were totally & utterly designed to provide liquidity to banks. QE was not one of them. QE wasn't done when banks did desperately need liquidity and was done when they didn't have any need for state assisted liquidity. So to say that QE is all about providing liquidity to banks is simply incorrect. I'm sorry if you don't like this being pointed out, but there is no empirical or rational reason to suggest that what you say is true.

The stated purpose of QE was not to provide liquidity to banks, but pretty much to take it away. In that the hope was that bank's would swap highly liquid gilts for cash and then use that cash to make longer terms loans to customers & business, which were less liquid and less immediately realisable than the gilts that they held. We all know that this was a fuckwited idea and never likely to work, but again it doesn't really matter as the main unstated reason was to ensure that there was an effective demand for new govt issued debt in the markets


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## love detective (Sep 27, 2012)

I'm not denying that QE has ended up with banks's having an additional way to get liquidity through selling their gilts and just hoarding the cash that they get for them. But this in no way indicates that this was the motivating factor behind the scheme. Bank's still have all manner of schemes in which they can get access to liquidity form the bank of england by putting their gilts up for collateral, so QE was not required from this perspective. That QE didn't work is a fair point, that the intended outcome of QE didn't materialise is a fair point. But to say that the purpose of QE was to provide liquidity to banks, is wrong. It shows a poor understanding of what actually happened, when it happened, and why it happened. And me saying this in no way means that I agree or support anything that the state/govt has done. I just want to respond to this lazy analysis that we see on the left that goes 'omgz printing money and giving it to the banks, the banks, the banks, the banks - it's all about the banks'

If we're not able to understand what is actually happening and why it is happening and the context of which it is happening in, then there's little chance of being able to even try and do something effective about it - this is why I spend so much time on threads like this countering shite from jazz and the like


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## Jean-Luc (Sep 27, 2012)

Jazzz said:


> However, I must play the post. Keen's proof that the interest can be repaid doesn't answer all the questions for me. Suppose, instead of returning all the interest paid back into the economy, the bank's beneficiaries decide to let some of it stockpile. Then everything goes out of the window. We are left with everyone else overall owing more money than they have to pay it back with. The banks then get to gain another way, for they will seize real wealth through bankruptcies. After that, after the recession - well they still have the extra interest they stockpiled! It's not like they lost it by keeping it back for a while. Indeed, this rowing of the economy between boom and bust perfectly fits with experience.
> 
> As far as I can see, Keen's argument that interest can be repaid relies on assuming that banks will act altruistically. Whereas my understanding is that wealthy people like to see their wealth keep rising - stockpiling even! - and will not care too much whether others benefit. Isn't this just what happens?


This is another currency crank fallacy: that all interest received by banks is pure profit. Actually it is only the bank's gross income, out of which must be paid the bank's running costs (buildings, computers, etc) as well as staff wages but also interest to those from who the banks have themselves borrowed money (according to Robert Peston, the "interest margin" between what banks charge for loans and what they pay out in interest is currently not much above 2%, ie if they charge borrowers 6% they pay lenders to them 4%). What's left is profit, out of which is paid dividends to shareholders, big bonuses to top executives or which is accumulated as more capital. Apart from the last, all the interest is distributed to people or institutions who will spend it and even the part transferred to the reserves as more bank will be spent in the sense of being invested in bonds. It won't be hoarded ("stockpiled"), as you seem to be suggesting. This is not banks behaving "altruistically" but the way they work.

You are on the right track in seeing crises as having something to do with profits being "stockpiled" (held in liquid form, ie as bills or bonds that can be quickly converted into money, rather than re-invested in production), but this doesn't apply just to banks but, more importantly, to businesses in the productive sector of the economy. They do this because the prospects for profit-making have fallen, which happens when one key sector of the economy overproduces in relation to the market for its products and this has a knock-on effect on the rest of the economy (including the stock exchange and banks). Crises and downturns are caused by events in the real economy, not by events in the banking sector which is secondary and subordinate to the real economy.


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## littlebabyjesus (Sep 27, 2012)

Jean-Luc said:


> Crises and downturns are caused by events in the real economy, not by events in the banking sector which is secondary and subordinate to the real economy.


That's a big statement. The sub-prime mortgage crisis could not have happened if the banking sector had not made it happen. Banking takes a leading, not subordinate, role in encouraging debt because that's their business - the bigger the debt, the bigger their profits. They can't create demand for loans on their own, but they're by no means passive.


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## littlebabyjesus (Sep 27, 2012)

> from Jazzz:
> _"On September 1st 1894 we will not renew our loans under any consideration. On September 1st we will demand our money._​_We will foreclose and become mortgages in possession. We can take two-thirds of the farms west of the Mississippi, and thousands of them east of the Mississippi as well, at our own price ... Then the farmers will become tenants as in England ... ,"_​1891 American Bankers Association, as printed in the Congressional Record of April 29, 1913.


 
This is an argument I've seen put before - that it is in the interests of banks to cause default on loans in order to seize the assets the loans were secured against. But I'm not entirely clear that this is a coherent argument. By doing this, the banks cause a collapse in confidence and the devaluing of those assets - and of course, they never get the money back from their loans as a result.


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## happie chappie (Sep 27, 2012)

FTW, here’s my (only semi-informed) analysis.

I think LD had clearly demonstrated the chronology of events and the link between the shortage of liquidity of the banks, and QE (ie, very little and only then tangentially).

It appears to me that the credit crunch (as relating to the operation of the money markets), didn’t stop lending completely, but it was severely restricted. Some money market lending was going on, but lenders were only willing to lend the limited amount of money available to organisations with a strong balance sheet and hence a good credit rating - put crudely those institutions lenders were (reasonably) sure could pay them back. 

The overall balance sheet is the key here - not liquidity. Indeed, there’d be little point in a bank which is sitting on huge piles of cash (ie, highly liquid far in excess of its day-to-day requirements) going to the markets to borrow lots more cash. All things being equal, it would be more likely to be a lender in such circumstances, not a borrower. 

Financially strong institutions (ie, those with a healthy balance sheet) would first in any queue for (the limited) money market funds. As the available funds for lending diminished prospective borrowers with relatively weaker balances sheet would be next in line (and presumably were charged a higher interest rate commensurate with a higher perceived risk) and so on down the line until lending stopped. 

As I mentioned previously, at the time the wholesale money markets were spooked as they couldn’t be sure of the value of the assets held by institutions looking for funding. Some of these assets were worth far less than appeared on the books and some highly complex ones probably weren’t worth the paper they were written on.

This meant that when NR went to the wholesale markets for short-terms borrowing to help with liquidity they were at the back of the queue because the wholesale markets either knew, or had a strong suspicion, that NR’s solvency could be in question because of it’s fundamentally flawed business model - high loan-to-value ratio mortgages on the back of unsustainable multiples of income. I’m sure this helped NR write lots of new business (and generate lots of bonuses for senior executives), but it ultimately brought the bank down, not a short-term liquidity problem.

As an aside, when the money markets returned to a semblance of normality, retail banks didn’t simply return to their previous lending model as they would have done if their problems were solely caused by a temporary shortage of liquidity. They stopped offering high loan-to-value mortgages and income multiples as a way of shoring up their balance sheets, not just their cash balances.

With NR unable to access funding on the wholesale markets, the BoE stepped in as lender of last resort to provide cash. 

So far so good – but it actually wasn’t. 

If NR’s only problem was one of liquidity (as LD says, borrowing on the wholesale markers in this respect is essentially short-term), the BoE stepping as lender of last resort would have dealt with the problem and it probably would have ended there.

The BoE is only one actor in state intervention re NR. The other is the Government. When BoE provided short-term liquidity NR to help it meet its day-to-day activities, it didn’t take ownership of the bank. The state only took _ownership_ when the Government steeped in to effectively nationalise it _after_ the BoE had provided emergency liquidity as a stop-gap measure.

The underlying solvency issue was a major problem that couldn’t just be spirited away until the wholesale money markets returned to normality, or by the BoE pumping in additional liquidity when the bank itself was insolvent (not just suffering from a lack of liquidity).

Anyway, if the wholesale markets had returned to normality in fairly short order, the cat would have been out of the bag and the rates that would have been charged to NR to raise liquidity form the markets would have been unsustainable, partly because it had already had to go the BOE for cash (not a great sign in itself) _and_ its fundamentally weak balance sheet - making a poor very risk indeed.

The Government nationalised NR to address the longer-term solvency problem by removing the toxic loans from the balance sheet – something that the BoE couldn’t do as it didn’t own NR at any time. Its role was simply to provide short-term funding as lender of last resort. Sorting out the balance sheet takes far, far, longer.

As LD goes on to demonstrate in his/her wider analysis of the macro-economic rational for QE, it had nothing to do with the “original” credit crunch, but was designed to remedy what later became the credit crunch in retail (as opposed to wholesale) lending. QE was designed primarily to increase bank lending to businesses, as a way of boosting economic activity. How effective it’s been is another matter entirely. 

Again, we come against the difference between the liquidity of an institution (which doesn’t really tell you about its fundamental strength), and its solvency, which is far more important. As a very simple example, the amount of cash I have in my pocket right now may tell you how liquid I am, but tells you nothing about my overall financial position. 

In post 180 Free Spirit links to Daily telegraph article about banks having to increase their cash reserves, ie their liquidity. That was the headline, but you have to read down to see the true picture. It relates to Basel III Regulations which dealt with the health of the banking system. The most onerous parts (and the bits the banks really squealed about) related to capital requirements, Basel III was about ensuring the overal sustainability of the banks’ balance sheets, not just their liquidity. 

Anyway, a result interesting thread with has derailed my lunch plans so I’ll have to stop for the time being and come back to edit it later.


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## happie chappie (Sep 27, 2012)

littlebabyjesus said:


> This is an argument I've seen put before - that it is in the interests of banks to cause default on loans in order to seize the assets the loans were secured against. But I'm not entirely clear that this is a coherent argument. By doing this, the banks cause a collapse in confidence and the devaluing of those assets - and of course, they never get the money back from their loans as a result.


 
It's not a coherent argument because it assumes the asset is always worth more than the loan.

Anyway a mortgage gives the bank a good income stream over many years. From memory, a house buyer pays back roughly twice the original amount borrowed over the life of the loan.

In terms of property, the banks already have first charge on the asset until the mortgage is redeemed. Therefore, all things being equal, it’s a good bet for the bank.


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## SpineyNorman (Sep 27, 2012)

happie chappie said:


> *Another reason it’s not a coherent argument is that it assumes the asset is always worth more than the loan. Again coming back to the NR example, it many cases it wasn’t.*
> 
> *Secondly, a mortgage gives the bank a good income stream over many years. From memory, a house buyer pays back roughly twice the original amount borrowed over the life of the loan. *
> 
> *In terms of property, the banks already have first charge on the asset until the mortgage is redeemed. Therefore, all things being equal, it’s a good bet for the bank. *


You seem to be having problems with the text format in your posts HC - if it goes all to cock you can reset it by highlighting the text then clicking the button at the top left of the reply box that looks a bit like a rubber eraser (next to where it says "font family").


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## happie chappie (Sep 27, 2012)

SpineyNorman said:


> You seem to be having problems with the text format in your posts HC - if it goes all to cock you can reset it by highlighting the text then clicking the button at the top left of the reply box that looks a bit like a rubber eraser (next to where it says "font family").


 
Thanks SN - I'll give it a go


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## Random (Sep 27, 2012)

Jazzz said:


> It is not to be sneezed at, taking in (if I have counted correctly) no less than five Nobel prize winners, including Irving Fischer, James Tobin, Milton Friedman, also including a former senior economist at the World Bank, and the latest support coming from our own guv'nor Mervyn King.


 Why should we care at all about such proposals from mainstream economists? Would the world really be even better if even more of Friedman's economic dreams were made reality?

I just don't see it as something even worth arguing about.


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## Blagsta (Sep 27, 2012)

littlebabyjesus said:


> That's a big statement. The sub-prime mortgage crisis could not have happened if the banking sector had not made it happen. Banking takes a leading, not subordinate, role in encouraging debt because that's their business - the bigger the debt, the bigger their profits. They can't create demand for loans on their own, but they're by no means passive.


 
Banks can't lend without having money to lend.  The money does not come from the bank, it comes from the actual productive economy.  This is ld's essential point I think - to look at what banks do in isolation from the rest of the economy is silly.


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## Jean-Luc (Sep 27, 2012)

littlebabyjesus said:


> That's a big statement. The sub-prime mortgage crisis could not have happened if the banking sector had not made it happen. Banking takes a leading, not subordinate, role in encouraging debt because that's their business - the bigger the debt, the bigger their profits. They can't create demand for loans on their own, but they're by no means passive.


I agree that perhaps the most common view is that the crisis was caused by the reckless and greedy behaviour of the banking sector, with the implication that if the bankers hadn’t been so reckless and so greedy there would not have been a slump.

Obviously the banks and other mortgage-lenders played a role but the crisis was brought about by overproduction in the house-building industry in the US

The financial crisis broke out in August/September 2008. Housing prices had started falling well over a year before this. So this rules out one explanation: that it was the financial crisis that caused housing prices to fall. So what did?

An increased demand for housing, fuelled by easy mortgages, brought forth an increased supply. Speculative builders took out loans to build more housing – and not just more houses and apartment blocks but also more shopping malls and the like. These loans were “speculative” in the sense that they were made to building firms to build houses, apartment blocks and shopping malls without having firm orders for them beforehand.

In the end, supply came to exceed demand and housing prices fell. It was a classic case of overproduction: a market was expanding; those supplying it assumed that it would go on expanding and produced (in this case built more housing) in anticipation of this expansion continuing. The end result was that more came to be produced than could be sold.

The housing market was “oversupplied”. Prices fell. Building firms went under. The banks that had lent them money suffered losses. Building workers and those working in firms producing supplies were laid off. Those who of them who had taken out loans couldn’t keep up with their payments. And the whole downward spiral began.

That there was an actual overproduction of houses in the US (as opposed to just a bubble in the prices of already-built houses) was confirmed in a paper published in 2008 by an economist, Luci Ellis, working for the Bank of International Settlements in Berne entitled “The housing meltdown: Why did it happen in the US?” As the title suggests, she set out to explain why the housing boom first ended in the US rather than in Britain or some other European country:

Her conclusion is interesting:



> “In contrast to some other countries, strong housing demand was met with additional supply that exceeded underlying needs. When the boom stopped, the United States was left with an overhang of excess supply that other countries have not built up” (p. 1).
> 
> “US housing construction peaked in early 2006. By the end of that year, housing starts had fallen by around 40%” (p. 2)
> 
> ...



So there really was an actual oversupply of new housing in relation to paying demand. What Ellis called an “overbuilding of new houses” is of course an “overproduction” of them. And this happened “even before credit supply tightened”. In other words, the oversupply of housing preceeded the financial crisis and was in fact the event in the real economy that provoked it.


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## love detective (Sep 27, 2012)

pretty much agree with that - only qualifier would be to say that supply exceeded effective demand, not actual or real need/demand

and that the level of effective demand was overstated/misjudged for many years in the run up to the crisis through the drive of capital to exploit new avenues of appropriation, not in the sphere of production, but within the sphere of circulation - sup prime lending on teaser rates and an assumption that house prices would keep on rising forever now that neoliberal economics had abolished boom & bust and those loans could be renewed on new teaser rates after the initial 2-3 year teaser rate expired, so the day of judgement would never come

so from that perspective you could say, yeah it was the banks that facilitated it , but the driver for it to happen was falling rates of profit and falling opportunities for value extraction elsewhere, i.e. in real production in the wider economy. When faced with that kind of squeeze, capital goes roaming elsewhere for new markets to exploit, and it found one in the shape of borrowers who couldn't really afford to borrow, yet this was just a barrier that capital could temporarily smash through, moving the problem onto a different plane and for a different time - that's capital in a nutshell.

So as Jean-Luc says, to look at banks independently from everything else (like most money first/currency cranks do) is not likely to help in understanding what banks do and why they do it


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## Jean-Luc (Sep 27, 2012)

I don't disagree that the way the banks behaved did play a role, especially in spreading the crisis worldwide (there was no actual overproduction of houses in relation to effective demand in the UK). They, too, are profit-seeking businesses and they, too, in a sense “overproduced” – they “over-lent” and for the same reason that the speculative builders “overbuilt”: in pursuit of profits. The official US Financial Crisis Inquiry Commision Report said:



> Too many of these institutions acted recklessly, taking on too much risk, with too little capital, and with too much dependence on short-term funding. In many respects, this reflected a fundamental change in these institutions, particularly the large investment banks and bank holding companies, which focused their activities increasingly on risky trading activities that produced hefty profits. They took on enormous exposures in acquiring and supporting subprime lenders and creating, packaging, repackaging and selling trillions of dollars in mortgage-related securities, including synthetic financial products.



But what were they supposed to do? With “hefty profits” in the offing any capitalist corporation is bound to go for them. If, in this particular case, one bank had refused to enter into the chase for these profits they would make less profits than their rivals. In any event, if one bank wouldn’t do it another would. So what happened would have happened anyway.

So you could say that, in the end, it was the capitalist system of production organised by profit-seeking businesses that was the cause of this (and past and future) crises.


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## littlebabyjesus (Sep 27, 2012)

Blagsta said:


> Banks can't lend without having money to lend. The money does not come from the bank, it comes from the actual productive economy. This is ld's essential point I think - to look at what banks do in isolation from the rest of the economy is silly.


I agree that to look at banks in isolation is silly. However, banks do in a very real sense create money, in the act of making loans. What they don't do is create the value that is attached to that money in the process of circulating.


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## love detective (Sep 27, 2012)

Jean-Luc said:


> So you could say that, in the end, it was the capitalist system of production organised by profit-seeking businesses that was the cause of this (and past and future) crises.


 
wasn't that exactly what i said!


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## happie chappie (Sep 27, 2012)

Jean-Luc said:


> I agree that perhaps the most common view is that the crisis was caused by the reckless and greedy behaviour of the banking sector, with the implication that if the bankers hadn’t been so reckless and so greedy there would not have been a slump.
> 
> Obviously the banks and other mortgage-lenders played a role but the crisis was brought about by overproduction in the house-building industry in the US
> 
> ...


 
I think this is right, but only up to a point as it primarily looks at, and explains, the over-production of housing in America and the knock-on effect it had on the US economy.

What made this crisis more than just what would have been, in normal circumstances, a manageable and containable problem of supply and demand, were the systemic weaknesses in the world financial system, notably in relation to sub-prime mortgages in the US and the complex financial instruments they were packaged in to which were then sold on to institutions after they were assured they were copper-bottomed investments. They turned to be nothing of the sort. Investors could hold them on their balance sheets as “assets” and lend against them which merely amplified the problem as events unfolded.

However, in the end these securities turned out to be virtually worthless as, in many cases, the properties they were secured against were bought by people who didn’t have a hope in hell of being able to afford the mortgage. IIRC many house buyers were offered original deals that were literally too good to be true to tempt them into taking on the loan, thus generate lots of business for the loan companies. When the “deal” ended and the true repayments became apparent, there were mass foreclosures as people simply couldn’t afford them, and asset values plummeted.

So when the US housing crisis really hit home, and the highly dodgy nature of the mortgage-backed securities was exposed, the shit really hit the fan as the world markets realised there was a major problem not limited to an over supply of housing in the USA.

Therefore, I’m not sure that the near melt-down of the global financial system was rooted on the excess housing production in the USA (although it probably didn’t help). Without the existence of the casino element of the finance sector, the consequences wouldn’t have nearly been as bad.


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## littlebabyjesus (Sep 27, 2012)

What got me when I started looking into this was that people were warning of the problem of sub-prime back in 2000, saying exactly what the problem was and what it would cause.


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## love detective (Sep 27, 2012)

a marxian analysis has been saying what the problem has been for over a hundred and fifty years, saying exactly what the problem was and what it would cause


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## littlebabyjesus (Sep 27, 2012)

love detective said:


> a marxian analysis has been saying what the problem has been for over a hundred and fifty years, saying exactly what the problem was and what it would cause


Yes, true enough. But these were warnings in mainstream economics journals by non-marxists.


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## happie chappie (Sep 27, 2012)

love detective said:


> a marxian analysis has been saying what the problem has been for over a hundred and fifty years, saying exactly what the problem was and what it would cause


 
In this regard, there was one other thing I meant to mention with regard to the role of capitalism and labour in all this.

It is somewhat ironic that the crisis that so nearly brought capitalism to its knees was nothing to do with a straight conflict between capital and labour in the traditional sense as much of the post-war left thought it would.

IIRC, its analysis was that, yes, the banking system was bad, but that any crisis would be brought to a head by the actions of organised labour, in particular relating to mass industrial action.

That’s why the CP and, to a lesser extent, Militant and other groups expended a lot of time and effort trying to gain influence in the trade union movement so it could be used as the “battering ram” against the bosses.

It appears that they’ve wasted a lot of their time as the true struggle has turned out to be between financial capitalism and financial capitalism, with labour (at least in the organised, trade union, sense) a bit part player.


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## love detective (Sep 27, 2012)

huge chunks of volumes 1 to 3 of Marx's Capital, in fact almost all of it is focussed on looking at the contradictions within capital itself, looking at things which capital does in one sphere and at one time and how these come back to haunt it in another sphere at another time, so it is very much the type of thing that we have seen play out over the last decade or so (and wider over the last couple of hundred years)

that's not to suggest though that all that needs to be done to get a better world is to sit back and wait for capital to tear itself apart though


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## butchersapron (Sep 27, 2012)

happie chappie said:


> In this regard, there was one other thing I meant to mention with regard to the role of capitalism and labour in all this.
> 
> It is somewhat ironic that the crisis that so nearly brought capitalism to its knees was nothing to do with a straight conflict between capital and labour in the traditional sense as much of the post-war left thought it would.
> 
> ...


There is no_ true struggle_ in the sense that fighting that battle and that battle alone will bring victory. What there are are fights that won't bring any sort of victory - and internal battles between different factions of capital (the wars between bands of brothers) most certainly won't.


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## revol68 (Sep 27, 2012)

happie chappie said:


> In this regard, there was one other thing I meant to mention with regard to the role of capitalism and labour in all this.
> 
> It is somewhat ironic that the crisis that so nearly brought capitalism to its knees was nothing to do with a straight conflict between capital and labour in the traditional sense as much of the post-war left thought it would.
> 
> ...


 
Yes but what's left out of that analysis is that it was the struggle of labour and other excluded/exploited groups that played a significant role in putting capital into crisis in the 60's and 70's and hence the development of neo liberalism and the suppression of working class wages and conditions, something that was to a large extent painted over by the availability of cheap personal credit. So even if the labour looks conspicuously absent from the current crisis it isn't, and certainly not when one considers that it is having the cost of it forced on it.


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## love detective (Sep 27, 2012)

yeah this is important point - was going to bolt that on at the end of my last post about a parallel within contemporary society where on the surface there is a pretence/assertion that class and class issues does not exist anymore, with that about the  pretence that class issues & matters were not relevant in and to the crisis


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## happie chappie (Sep 27, 2012)

revol68 said:


> Yes but what's left out of that analysis is that it was the struggle of labour and other excluded/exploited groups that played a significant role in putting capital into crisis in the 60's and 70's and hence the development of neo liberalism and the suppression of working class wages and conditions, something that was to a large extent painted over by the availability of cheap personal credit. So even if the labour looks conspicuously absent from the current crisis it isn't, and certainly not when one considers that it is having the cost of it forced on it.


 
Not sure I entirely agree with this (and this has a feel of major thread derail, which is my fault!)

For example, the main driver of the world economic crisis of the early 1970s was one of energy, notably a massive spike in oil prices. Nothing really to with organised labour (or even primarily as a wider struggle between capital and labour) except their members suffered from the consequences of it, but they weren’t the cause.


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## butchersapron (Sep 27, 2012)

happie chappie said:


> Not sure I entirely agree with this (and this has a feel of major thread derail, which is my fault!)
> 
> For example, the main driver of the world economic crisis of the 1970s was one of energy, notably a massive spike in oil prices. Nothing really to with organised labour (or even primarily as a wider struggle between capital and labour) except their members suffered from the consequences of it, but they weren’t the cause.


No it wasn't -  it was a component part of the crisis, but one that itself was driven by class struggle. How on earth can you just cut out class struggle and the massive rise in the costs of social reproduction shoveled onto state and capital as a result out of the history of capitalism?


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## love detective (Sep 27, 2012)

happie chappie said:


> Not sure I entirely agree with this (and this has a feel of major thread derail, which is my fault!)
> 
> For example, the main driver of the world economic crisis of the early 1970s was one of energy, notably a massive spike in oil prices. Nothing really to with organised labour (or even primarily as a wider struggle between capital and labour) except their members suffered from the consequences of it, but they weren’t the cause.


what revol means is that by the late 60's/early 70's - capital was becoming increasingly constrained by restrictions that had been put on it by the post war consensus and the various demands that had come up from below, by labour on capital. It was going through a crisis in that it was unable to roam free to seek enough profitable outlets for it to produce & appropriate value on a scale that allowed it to keep going, it also had a considerable social burden placed on it by labour. From the 70's onwards a direct response to this in practice was the liberation of finance and the end to this 'repression' of finance (something that had been preached for the last couple of decades by the usual suspects) - the collapse of breton woods, the relaxing of capital & exchange controls which allowed petro dollars 'earned' through the oil shock to be recycled back into the global economy through the increasingly liberalised financial system and allowed to roam around in a footloose way vulture like, added to this the increase in offshore & globalised banking plus the active gradual transfer of social costs from capital back to labour, all these things done under the banner of neoliberalism were a reaction to the problem capital found itself in the 60's/70's - and that problem was one which was put there very much by the active pressure of labour on capital. The resultant fall out 40 years later can be tied back to these very things. Labour is always there. Class Struggle is always there.

edit: posted that before seeing your post butchers


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## revol68 (Sep 27, 2012)

butchersapron said:


> No it wasn't - it was a component part of the crisis, but one that itself was driven by class struggle. How on earth can you just cut out class struggle and the massive rise in the costs of social reproduction shoveled onto state and capital as a result out of the history of capitalism?


 
and even if one was to accept what happie chappie claims it still doesn't remove the struggle between labour and capital, as capital responded to the crisis by launched an assault on labour's wages and conditions not to mention it's social wage in terms of public services. Just because labour has been largely taking the kicking in this struggle doesn't mean to say that the capital/labour conflict isn't there, as Zizek says the absence of explicit class struggle (strikes etc) is all the more proof of it being waged.


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## Blagsta (Sep 27, 2012)

littlebabyjesus said:


> I agree that to look at banks in isolation is silly. However, banks do in a very real sense create money, in the act of making loans. What they don't do is create the value that is attached to that money in the process of circulating.


 
No, they don't create money by making loans.  They expand the money supply by circulating money.


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## Jazzz (Sep 28, 2012)

Blagsta said:


> No, they don't create money by making loans. They expand the money supply by circulating money.


Wrong way around.

Whenever a bank makes a loan, the money supply increases by the value of the loan. Whenever ordinary people make loans, the money supply does not increase. Whenever we simply circulate money - whether through bank accounts or otherwise - the money supply does not increase.

I don't see how anyone can persist with this nonsense about 'circulation'. It is in the act of making a loan that the new money is created - not the circulation of it.

Will address previous posts later.


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## butchersapron (Sep 28, 2012)

Jazzz said:
			
		

> Wrong way around.
> 
> Whenever a bank makes a loan, the money supply increases by the value of the loan. Whenever ordinary people make loans, the money supply does not increase. Whenever we simply circulate money - whether through bank accounts or otherwise - the money supply does not increase.
> 
> ...



How can time confuse one so?


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## littlebabyjesus (Sep 28, 2012)

Jazzz said:


> Wrong way around.
> 
> Whenever a bank makes a loan, the money supply increases by the value of the loan. Whenever ordinary people make loans, the money supply does not increase. Whenever we simply circulate money - whether through bank accounts or otherwise - the money supply does not increase.
> 
> ...


While I agree that the money supply is expanded through the creation of loans - through the creation of new promises, basically - you do need to look at circulation to see how that money affects the economy. ld is right that if it doesn't circulate, it does nothing. And also that expanding the money supply doesn't necessarily cause inflation.

So, Japan currently functions with 400 percent gdp total debt (money supply), while Brazil, say, functions with 50 percent, one eighth the amount (although it's growing as the economy grows). But through the nature of circulation, and through the nature of the promises (Japan has a great deal of long-term promises in there), inflation in Brazil is much higher than inflation in Japan, despite its money supply being far smaller.


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## Jean-Luc (Sep 28, 2012)

Jazzz said:


> Whenever a bank makes a loan, the money supply increases by the value of the loan. Whenever ordinary people make loans, the money supply does not increase. Whenever we simply circulate money - whether through bank accounts or otherwise - the money supply does not increase.
> I don't see how anyone can persist with this nonsense about 'circulation'. It is in the act of making a loan that the new money is created - not the circulation of it.


This is begging the question because of the way the "money supply" is defined these days, i.e. not just as "base money" which only the state or its central bank can create but also including bank (and building society) loans or "bank money". No problem with this, as long as you don't mix the two kinds of "money" up and attribute to one something that is only a feature of the other.

So, as bank loans are included in the "money supply", yes, an increase in bank loans does (by definition) increase it. But "bank money" is not created in the same way that "base money" is, ie out of nothing by a stroke of the pen or whatever. When a bank makes a loan what it is doing is transferring the use of already existing "purchasing power" (or potential command over wealth) from someone or body that doesn't want to use it (spend it) for the time being to someone else or some other body to use which the bank judges very likely to repay with interest. This will have the effect of increasing spending, which will have economic consequences. and so it is legitimate to measure it But so do loans by pawnbrokers and moneylenders, only in their case it is their own money that they are lending to someone else to spend. No more than the money they lend are "bank loans" created out of nothing. The difference between a bank and a pawnbroker is that banks are lending other people's money while pawnbrokers are lending their own money. Question for Jazzz: do pawnbrokers "create money"? If not, why not and what are they doing?

Bank loans are a special case of the circulation of already-existing purchasing power. In fact, to make unused purchasing power available for spending is the basic economic function of banks.


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## littlebabyjesus (Sep 28, 2012)

Each loan creates a new deposit, so that isn't the whole story by any means.


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## Jean-Luc (Sep 28, 2012)

littlebabyjesus said:


> Each loan creates a new deposit, so that isn't the whole story by any means.


True, but saying "each loan creates a new deposit" is ambiguous. It can either mean (1) that when a bank makes a loan it opens a deposit account for the borrower in which it places the loan, or (2) that when a bank makes a loan and the borrowers spends it the money spent returns to one or other bank, not necessarily the one that granted the loan. The first is merely a tautology. The second is generally true, even if there will in practice be leakages. That's when the story continues. It began when somebody from outside deposited a sum of money in a bank. So you could also say that each (outside) deposit "creates" (is the basis for) a loan, but of a lesser amount.


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## littlebabyjesus (Sep 28, 2012)

Jean-Luc said:


> TThe second is generally true, even if there will in practice be leakages. That's when the story continues. It began when somebody from outside deposited a sum of money in a bank. So you could also say that each (outside) deposit "creates" (is the basis for) a loan, but of a lesser amount.


 
The second is what I meant. The 'loan first' theory of endogenous money creation contends that this is how it really works: loan is made, deposit is made, bank balances its books _afterwards_ through interbank lending. By this view, fractional reserve lending is in fact a fiction. Steve Keen, among others, believes that this is the real story of bank lending.


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## Jean-Luc (Sep 28, 2012)

littlebabyjesus said:


> The 'loan first' theory of endogenous money creation contends that this is how it really works: loan is made, deposit is made, bank balances its books _afterwards_ through interbank lending. By this view, fractional reserve lending is in fact a fiction. Steve Keen, among others, believes that this is the real story of bank lending.


This may well be what happens in practice but it is still the case that the vast majority of bank loans have to be made out of the deposits that the bank already has. And of course in the small minority of cases where a bank makes a loan without first having the money it does have to find it literally by the end of the day and is relatively costly for the bank compared with getting the money first. So in fact all loans are covered by payments in to a bank.

The main purpose of the so-called "endogenous" theory of bank lending espoused by Steve Keen and others is to explain why a central bank can't control banking lending. Which in fact it can't (but also because of other factors such as both the supply and demand for funds for lending depending on the general state of the economy, whether or not it is expanding, at what rate, etc). "Full reserve banking" (actually, allowing banks to make loans only from time-deposits) is supported by the Nobel Prize winners Jazzz boasts about as a way of trying to assert government and central bank control over bank lending. Needless to say, none of them base their support for this reform on the fallacious arguments put forward by Jazzz.


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## littlebabyjesus (Sep 28, 2012)

Keen goes further than that. He models a theoretical 'pure credit' system of money creation, which could work in theory, and compares the results with what actually happens. It is his contention that the central bank always expands the base money supply in response to bank lending expanding - forced to as the banks' reserve requirement would be broken otherwise.

A paper on it is found here:



> the classic causal mechanism of the “money multiplier” model of money creation, in which base money
> must be created before credit money, is the reverse of what is found in the actual data.


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## love detective (Sep 28, 2012)

littlebabyjesus said:


> It is his contention that the central bank *always* expands the base money supply in response to bank lending expanding


 
Are you sure about that? specifically the bolded part

So what is happening at the moment, with the central bank expanding the base money supply not in response to bank lending expanding (as you say assert that Keen says 'always' happens), but it actually contracting - is not actually happening?

likewise central banks have actively in the past effected a contraction (not an expansion) in the base money supply when lending is expanding, to attempt to constrain the inflationary pressures of lending (through what is effectively a process that is the reverse of QE)

These two things are known empirical observations, they are observable facts

There is a huge false dichotomy going on at the moment between exogenous and endogenous theories

exogenous money theory contains large elements of endogenous theory and vice versa - at different times and different situations the system relies more on one way than the other to varying degrees of 'success' or otherwise

loans create deposits and deposits create loans - there is no real starting point as such it's a circuit not a line - all of this collapses into circulation as a process which can start at any point in that circuit

endogenous money theory and what is commonly referred to as fractional reserve lending are not mutually exclusive


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## littlebabyjesus (Sep 28, 2012)

'always' is probably too strong. But it is certainly his contention that this is the usual state of affairs. He gives worked examples (from the US mostly, irrc). I agree that the two are not mutually exclusive, but Keen certainly contends that the system is primarily driven by endogenous money creation.


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## love detective (Sep 28, 2012)

exogenous money theory contends that the system is primarily driven by endogenous money creation as well!

circulation, circulation, circulation


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## Jean-Luc (Sep 28, 2012)

littlebabyjesus said:


> Keen goes further than that. He models a theoretical 'pure credit' system of money creation, which could work in theory, and compares the results with what actually happens. It is his contention that the central bank always expands the base money supply in response to bank lending expanding - forced to as the banks' reserve requirement would be broken otherwise.


I can accept that something like this probably does happen, ie the tail (the commercial banks) wagging the dog (the central bank) but that doesn't mean that the dog can't or doesn't wag the tail. In the end, both working in conjunction with each other expand "the money supply", i.e, the commercial banks can't really do it all on their own: they need the collaboration of the central bank (which can indeed create new money, but not of course wealth, out of nothing)


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## Jean-Luc (Oct 1, 2012)

Monkeygrinder's Organ said:


> Yes, some excellent posts on this and the last thread about this, I've found it really interesting.
> 
> Anyway assuming the book isn't in the offing is there one you would recommend to read up on this stuff?


By coincidence the October issue of this journal is a special issue devoted to the subject:






Another modern criticism of today's Monetary Reformers can be found here:

http://www.metamute.org/editorial/articles/john-maynard-nothing


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## littlebabyjesus (Oct 1, 2012)

Jean-Luc said:


> I can accept that something like this probably does happen, ie the tail (the commercial banks) wagging the dog (the central bank) but that doesn't mean that the dog can't or doesn't wag the tail. In the end, both working in conjunction with each other expand "the money supply", i.e, the commercial banks can't really do it all on their own: they need the collaboration of the central bank (which can indeed create new money, but not of course wealth, out of nothing)


Well, commercial banks could do it on their own in theory, according to Keen. All that would be needed would be a removal of their reserve requirements. And in fact, as is it works now, they are constantly breaching those reserve requirements, compelling the central bank to step in and create more base money in response to the banks' lending. Fundamentally, it is _demand for loans_ that drives money creation.


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## Blagsta (Oct 1, 2012)

littlebabyjesus said:


> Well, commercial banks could do it on their own in theory, according to Keen. All that would be needed would be a removal of their reserve requirements. And in fact, as is it works now, they are constantly breaching those reserve requirements, compelling the central bank to step in and create more base money in response to the banks' lending. Fundamentally, it is _demand for loans_ that drives money creation.


 
That demand has to come from somewhere.


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## Jazzz (Oct 3, 2012)

Jean-Luc said:


> This is begging the question because of the way the "money supply" is defined these days, i.e. not just as "base money" which only the state or its central bank can create but also including bank (and building society) loans or "bank money". No problem with this, as long as you don't mix the two kinds of "money" up and attribute to one something that is only a feature of the other.
> 
> So, as bank loans are included in the "money supply", yes, an increase in bank loans does (by definition) increase it. But "bank money" is not created in the same way that "base money" is, ie out of nothing by a stroke of the pen or whatever. When a bank makes a loan what it is doing is transferring the use of already existing "purchasing power" (or potential command over wealth) from someone or body that doesn't want to use it (spend it) *for the time being* to someone else or some other body to use which the bank judges very likely to repay with interest. This will have the effect of increasing spending, which will have economic consequences. and so it is legitimate to measure it But so do loans by pawnbrokers and moneylenders, only in their case it is their own money that they are lending to someone else to spend. No more than the money they lend are "bank loans" created out of nothing. The difference between a bank and a pawnbroker is that banks are lending other people's money while pawnbrokers are lending their own money. Question for Jazzz: do pawnbrokers "create money"? If not, why not and what are they doing?
> 
> Bank loans are a special case of the circulation of already-existing purchasing power. In fact, to make unused purchasing power available for spending is the basic economic function of banks.


I am highlighting the bit which is crucial and which you still have not grasped. Think about what you mean, "for the time being"? How long is "the time being"? A year, a month, a day?

Because you must realise that we are talking about 'demand deposits' which can and may very well be withdrawn in the *very next minute.*

What you are unwittingly alluding to is 'full-reserve banking'. You are implying that the money given out as loans somehow is the same money that was deposited. And of course that it doesn't make sense for that money to be in two places at once. With full-reserve banking this is the case - but not with fractional-reserve. With fractional-reserve banking the money ends up in thirty places at once, all of them circulating.

This is why I don't like the 'money multiplier' model - it is highly contrived and does nothing to disabuse people of the idea that banks are simply lending out the money they receive as deposits (as well as suggesting that the monetary base determines the money supply).

Other bits: the money supply is indeed increased by bank loans, it is defined that way because in a fractional-reserve system it does. The bank loans are made by typing numbers into a computer and that is how the new money is created. When you say that banks lend other people's money, this is legally not the case, crucially the ruling is that banks lend their own money, and when you deposit money in a bank, you are actually giving a loan to the bank (see Carr vs. Carr 1811, Davaynes vs. Noble 1816, and other cases http://www.cobdencentre.org/tag/carr-v-carr-1811/ which are all crucial to allowing the fractional reserve scam to exist)

Do pawnbrokers create money? No of course not. If pawnbrokers could act like fractional-reserve banks, they could lend out your wristwatch while at the same time allowing it to remain in the shop window.


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## Jazzz (Oct 3, 2012)

Jean-Luc said:


> Needless to say, none of them base their support for this reform on the fallacious arguments put forward by Jazzz.


Where do we disagree?


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## frogwoman (Oct 3, 2012)

Jean-Luc said:


> By coincidence the October issue of this journal is a special issue devoted to the subject:
> 
> 
> 
> ...


eta: stupid me! ta!


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## Das Uberdog (Oct 3, 2012)

reallllly wouldn't take my economic theorisations from the SPGB


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## Jean-Luc (Oct 3, 2012)

Jazzz said:


> I am highlighting the bit which is crucial and which you still have not grasped. Think about what you mean, "for the time being"? How long is "the time being"? A year, a month, a day? Because you must realise that we are talking about 'demand deposits' which can and may very well be withdrawn in the *very next minute.*


Yes, of course that can happen in theory but in practice it doesn't and banking is based on the fact that it doesn't. Because only a proportion (fraction) of what is in "demand deposits" will be withdrawn at any time, the banks are free to lend the rest.



> What you are unwittingly alluding to is 'full-reserve banking'. You are implying that the money given out as loans somehow is the same money that was deposited. And of course that it doesn't make sense for that money to be in two places at once. With full-reserve banking this is the case - but not with fractional-reserve.


Yes, I am saying that what happens today is a sort of "full-reserve banking" only not as rigid as what you mean by it: banks lend from the part of "demand deposits" they know from experience are not likely to be withdrawn as well as from "time deposits". In other words, from your point of view, your banking reform is not really needed.


> With fractional-reserve banking the money ends up in thirty places at once, all of them circulating.


I don't know what you mean by this : that a bank can lend 30 times the amount of money deposited with it?



> Jean-Luc said: ↑
> Needless to say, none of them base their support for this reform on the fallacious arguments put forward by Jazzz.​Where do we disagree?


On this last point, for one. I don't think any of the Nobel Prize winner you cite nor Mervyn King believe that when somebody deposits £100 in a bank that bank can then lend up to 30 times that amount, ie £3000. I don't think either that they think that a bank creates the money it lends by a mere keyboard stroke. Nor are they in favour of all money being so-called "debt-free money". What they are concerned about is trying to assert central bank control over the amount of bank loans.



> I don't like the 'money multiplier' model - it is highly contrived and does nothing to disabuse people of the idea that banks are simply lending out the money they receive as deposits


I know that's why you don't like it, but it's probably accepted by your Nobel Prize winners. I think it's contrived too, but at least it accepts that a bank can't make a loan unless it has a corresponding deposit.



> Do pawnbrokers create money? No of course not. If pawnbrokers could act like fractional-reserve banks, they could lend out your wristwatch while at the same time allowing it to remain in the shop window.


And you think banks can do the equivalent of this?


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## Jazzz (Oct 4, 2012)

Jean-Luc said:


> Yes, of course that can happen in theory but in practice it doesn't and banking is based on the fact that it doesn't. Because only a proportion (fraction) of what is in "demand deposits" will be withdrawn at any time, the banks are free to lend the rest.
> 
> Yes, I am saying that what happens today is a sort of "full-reserve banking" only not as rigid as what you mean by it: banks lend from the part of "demand deposits" they know from experience are not likely to be withdrawn as well as from "time deposits". In other words, from your point of view, your banking reform is not really needed.
> I don't know what you mean by this : that a bank can lend 30 times the amount of money deposited with it?
> ...


i) This is flat out wrong. This is precisely the thing that you have not grasped.* The banks cannot be said to be lending the money they receive as deposits. *They are creating new money which doesn't sit around - it circulates.

If what you said was true, then only the monetary base could be said to be circulating - but clearly we have far more than that going around. The reason has little to do with the fact that depositors like to save their money. It is the fact that *unless they withdraw hard cash, then their money is always going to be somewhere in the banking system, existing simply as a liability entry in a bank's books, and as one bank loses these funds another gains.* So when we consider the high street banks as a whole, they can create a great deal of money as loans just with keystrokes. When one customer circulates his money by transferring it to someone else's account at the same bank, it doesn't affect the bank at all. And when customers transfer money to other banks, it is going to be balanced by the transfers coming the other way ('clearing').

I suggest that you forget about the 'money multiplier' model, and just suppose instead that there is a central bank, and one big high street bank which has everyone's accounts (LLoydsNatwestHSBCBarclays). Now it should be straightforward to see that this big high street bank simply creates money when it issues a loan, out of nothing, and it can loan as much as it likes at interest, the only restriction being that it needs to maintain confidence that it can come up with cash (or other central bank money) for the tiny percentage that will require it at any time. Crucially, the bank is not affected at all by transfers between customers. Now it works the same way when you split up the big bank - interbank lending allows the four banks to operate as one.

There is a massive difference between fractional-reserve and full reserve banking and what we have is a million miles from full-reserve.

If you want to quote where my Nobel prize winners disagree with me, please go ahead, I will genuinely be interested.

It hardly restricts money creation that banks must have a corresponding deposit to every loan, because for every loan a corresponding deposit is created.

Last bit - yes, the banks are creating wristwatches whenever they lend a wristwatch.


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## Jazzz (Oct 4, 2012)

Jean-Luc said:


> This is another currency crank fallacy: that all interest received by banks is pure profit. Actually it is only the bank's gross income, out of which must be paid the bank's running costs (buildings, computers, etc) as well as staff wages but also interest to those from who the banks have themselves borrowed money (according to Robert Peston, the "interest margin" between what banks charge for loans and what they pay out in interest is currently not much above 2%, ie if they charge borrowers 6% they pay lenders to them 4%). What's left is profit, out of which is paid dividends to shareholders, big bonuses to top executives or which is accumulated as more capital. Apart from the last, all the interest is distributed to people or institutions who will spend it and even the part transferred to the reserves as more bank will be spent in the sense of being invested in bonds. It won't be hoarded ("stockpiled"), as you seem to be suggesting. This is not banks behaving "altruistically" but the way they work.


I meant to go back to this. 2% doesn't sound like a great margin. But when you consider that this 2% is *2% of our entire money supply*, it's stupendously massive. No wonder bankers can take such huge salaries, and they have the flashiest buildings in town!


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## Jazzz (Oct 4, 2012)

littlebabyjesus said:


> This is an argument I've seen put before - that it is in the interests of banks to cause default on loans in order to seize the assets the loans were secured against. But I'm not entirely clear that this is a coherent argument. By doing this, the banks cause a collapse in confidence and the devaluing of those assets - and of course, they never get the money back from their loans as a result.


This was the other point I wanted to come back to. Overall (counting the banks as one) the banks can do fantastically well with this. Their money costs nothing to produce and as the money comes in to repay loan principals, it simply disappears anyway! If they get to take real assets, that is gaining real wealth.


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## cesare (Oct 4, 2012)

The concept of money fails without understanding value. Try this with words.


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## Jean-Luc (Oct 4, 2012)

Jazzz said:


> I meant to go back to this. 2% doesn't sound like a great margin. But when you consider that this 2% is *2% of our entire money supply*, it's stupendously massive. No wonder bankers can take such huge salaries, and they have the flashiest buildings in town!


You've really shot yourself in the foot this time, Jazzz. Because, surely, an interest margin is still going to exist with "full reserve banking", i.e banks will charge borrowers a higher rate of interest than they pay to those with time-deposits with them, won't they? I imagine the margin between the two will also be of the order or 2-3%. What do you think it will be?

Also, even the 2% is not pure profit for the banks as they still have to pay their running costs (buildings, computers, staff wages, stationery, etc) out of this.


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## littlebabyjesus (Oct 4, 2012)

Jean-Luc said:


> Also, even the 2% is not pure profit for the banks as they still have to pay their running costs (buildings, computers, staff wages, stationery, etc) out of this.


Jazzz has a point, though, eh? That's a massive amount of money.


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## love detective (Oct 4, 2012)

who denies that banks make big profits though? who thinks that it's justifiable? that's never been the point of contention on any of these threads.

However Jean-Luc is correct about what that margin has to cover in terms of fixed/variable costs alone - staff compensation alone for big banks up to around 2008 was running at between 45% and 65% of net revenues

Jazz is still all over the place though - in post 302 he claims 'their money costs them nothing to produce' - yet in post 301 admits that 2% is the margin between what banks earn in interest on their loans and what banks pay in interest on the funding for their loans (i.e. the cost of 'producing' the money for the loan)

edit: and while i'm here - freespirit you seem to have gone pretty quiet since this post of mine. you were very confident you were correct about the motivations for QE, so i'm patiently waiting for the evidence for your assertions to be set out in the same way I did for my assertion - then the jury can retire and consider their decision


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## Jean-Luc (Oct 4, 2012)

littlebabyjesus said:


> Jazzz has a point, though, eh? That's a massive amount of money.


Maybe, but banks are not the only enterprises that make profits. All capitalist enterprises try do and generally succeed. I suspect that bank profits will only be a relatively small proportion of total profits. Why just pick on bank profits? All profit-making firms have an income that exceeds their expenditure, ultimately from paying those who produce less than the value of what they produce.

I'm not sure what your argument is: that nobody should be able to lend money at interest? I hold no brief for the banks (of course not) but, given capitalism, if they weren't allow to make profits then they wouldn't operate and we have to rely on peer-to-peer lending. But then perhaps you object to individuals who lend money, whether directly to other individuals or indirectly via a bank, receiving interest too? As I just said, given capitalism, that's completely unrealistic.

In fact, not even Jazzz objects to banks making a profit, as long as they do so only by lending money from time-deposits.


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## littlebabyjesus (Oct 4, 2012)

Jean-Luc said:


> I'm not sure what your argument is: that nobody should be able to lend money at interest?


Private entities should not be able to lend money at interest. A full nationalisation of the money-creation process in which state entities and genuine cooperatives are the only ones allowed to lend money at interest. That is the only way to prevent the inevitable conflict of interests that private money creation entails - getting people into debt is good for business; hiking up asset values is good for business; what is good for the bank, generally, is not good for everyone else.

Even in narrow capitalist terms, a business in whose interests it is to fuck over its customers is not one that should exist in a market system.

And this is, imo, a realistic possibility as capitalism continues to misfire. I'm not a revolutionary. Or at least, I do not wish for violent revolution. There is an inherent flaw to violent revolution, in that the power to violence that achieved the change will then be in the hands a particular band following that change. And then, inevitably, we who do not control the means to violence shake hands with the new boss. So I look for potential ways of getting from here to somewhere better that don't involve violent revolution. This is one of those ways, imo. I know many on here disagree.


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## Blagsta (Oct 4, 2012)

"private money creation"?


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## littlebabyjesus (Oct 4, 2012)

Blagsta said:


> "private money creation"?


Yes. That is what banks do when they make loans. Money is created with the loan (a promise is made); that money is then destroyed when the loan is repaid (promise discharged). That is the process of money creation.


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## Blagsta (Oct 4, 2012)

littlebabyjesus said:


> Yes. That is what banks do when they make loans.


 
No they don't, have you not followed the thread?


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## littlebabyjesus (Oct 4, 2012)

Blagsta said:


> No they don't, have you not followed the thread?


You clearly haven't read any of the papers I've linked to. Do so. Steve Keen is a very good place to start.

Money creation is by no means the end of the story. How that money then circulates is the effect it has on the economy. The size of the money supply varies hugely from one economy to the next. The value that is attached to that money is created by real people doing real things. But if you're talking narrowly about what money is and how it is created, this is fundamentally the story.


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## Blagsta (Oct 4, 2012)

littlebabyjesus said:


> You clearly haven't read any of the papers I've linked to. Do so. Steve Keen is a very good place to start.


 
You clearly haven't understood any of the arguments put forth by love detective etc.  Do so.  This thread is a good place to start.


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## littlebabyjesus (Oct 4, 2012)

Blagsta said:


> You clearly haven't understood any of the arguments put forth by love detective etc. Do so. This thread is a good place to start.


Before you start trying to patronise me, try reading some of my links. These are not links to cranks.


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## Blagsta (Oct 4, 2012)

littlebabyjesus said:


> Before you start trying to patronise me, try reading some of my links. These are not links to cranks.


 
Oh, I thought you were patronising me!  I was just reflecting your own words back to you.  Love detective has shown how bank loans have to be funded.   So I'm not sure how you can claim that banks create money other than via circulation.


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## littlebabyjesus (Oct 4, 2012)

Blagsta said:


> Oh, I thought you were patronising me! I was just reflecting your own words back to you. Love detective has shown how bank loans have to be funded. So I'm not sure how you can claim that banks create money other than via circulation.


No, you started the patronising with your 'have you been following the thread'.

Bank loans do have to be funded. They are funded by the deposits that the loans themselves create. That is the contention of Keen and others, and it is a contention that I find very compelling. It is called the endogenous theory of money creation. Keen models this and contends that the empirical evidence proves that this is the way things work. Try reading some of his articles.

One thing that is very true, though, is that a functional system of circulation has to be in place for this process to be possible. When that breaks down, well, we have seen what happens.


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## Blagsta (Oct 4, 2012)

I said "have you not followed the thread?" because IMO, the idea that banks create money other than via circulation has been thoroughly debunked.  I haven't seen anything to convince me otherwise.


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## littlebabyjesus (Oct 4, 2012)

Blagsta said:


> I said "have you not followed the thread?" because IMO, the idea that banks create money other than via circulation has been thoroughly debunked. I haven't seen anything to convince me otherwise.


Exactly. You haven't read any of the links I've given, have you?

here's quite a recent one. but there is loads out there. I'd recommend you trying to grapple with his models to see what it is that he is contending and why he is contending it. NOT A CRANK. Not at all.

I linked to this last page, but I'll give it to you again. Look at the second paper down. Work your way through it and try to follow the logic of his models. It is a very sound logic, given his assumptions. He himself points out some of the flaws in his assumptions and ways that the model can be improved, but in itself, it provides a working model of what he's talking about that avoids many of the flaws that other models have.


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## Jazzz (Oct 5, 2012)

Jean-Luc said:


> You've really shot yourself in the foot this time, Jazzz. Because, surely, an interest margin is still going to exist with "full reserve banking", i.e banks will charge borrowers a higher rate of interest than they pay to those with time-deposits with them, won't they? I imagine the margin between the two will also be of the order or 2-3%. What do you think it will be?
> 
> Also, even the 2% is not pure profit for the banks as they still have to pay their running costs (buildings, computers, staff wages, stationery, etc) out of this.


But the point is that with a great deal of our money circulating in demand deposits as now - and crucially with us making the money up ourselves interest-free, the banking loan market would reduce hugely. Also, note that if interest rates on savings accounts became zero, that is in keeping with an inflation-free and more equal economy.


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## Jean-Luc (Oct 5, 2012)

Jazzz said:


> But the point is that with a great deal of our money circulating in demand deposits as now - and crucially with us making the money up ourselves interest-free, the banking loan market would reduce hugely.


When you say it will be "us" who will be making the money I assume you mean the government or some State body (which is not at all the same as "us")? I agree that, under your proposed Banking Reform, bank loans would be reduced, but the economy's demand for loans wouldn't. So you are being logical here in seeking an alternative supply: fiat money created by the State by a keyboard stroke (which is what you imagine commercial banks do today). I don't know whether or not this would work, but I suspect the temptation would be too strong and that more than the economy requires will be "printed", which would cause inflation, possibly run-away inflation. Presumably your scheme includes a way of preventing this?


Jazzz said:


> Also, note that if interest rates on savings accounts became zero, that is in keeping with an inflation-free and more equal economy.


You're leaving your Nobel Prize winners behind again here. The three you mentioned by name (Irving Fischer, James Tobin and Milton Friedman) all accepted that interest was a fact of economic life under capitalism and made their mark by analysing various aspects of it. Fischer, incidentally, wasn't a Nobel Prize winner. This prize was only set up in 1969 and he died in 1947. He was however a keen campaigner for "full reserve banking". None of them wanted to abolish interest. Neither does the main thinktank in this country advocating "full reserve banking", Positive Money. In their booklet _Full-Reserve Banking in Plain English_ the say (page 21) that what will be the same under this banking reform would be:


> 1. Investment accounts will still be used by customers who wish to 'put money aside' or earn interest on their spare money ('savings').
> 2. These accounts would still pay varying rates of interest.


If interest rates on savings were zero why would anybody lend their savings to a bank to relend at interest? This wouldn't make sense (unless there was deflation or fall in the general price level). I don't think you've thought your reform proposal through. You can't have capitalism and abolish interest. I know the view that you can goes back a long way (Karl Marx encountered it in the 1840s). In fact it could be said to be the original currency crank theory.


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## Jean-Luc (Oct 5, 2012)

littlebabyjesus said:


> Private entities should not be able to lend money at interest. A full nationalisation of the money-creation process in which state entities and genuine cooperatives are the only ones allowed to lend money at interest. That is the only way to prevent the inevitable conflict of interests that private money creation entails - getting people into debt is good for business; hiking up asset values is good for business; what is good for the bank, generally, is not good for everyone else.
> Even in narrow capitalist terms, a business in whose interests it is to fuck over its customers is not one that should exist in a market system.
> And this is, imo, a realistic possibility as capitalism continues to misfire.


So, under your reform of capitalism only the central bank or perhaps some government department, the Co-operative Bank, building societies and credit unions would also be allowed to lend money at interest. I don't think this would make much difference to the way the capitalist economy works. It would still be dominated by profit-seeking corporations, most of which are non-financial. Capitalism misfires not because there's some flaw in the banking system, but because it's a system based on the competitive pursuit of profits by private and/or state enterprises. If they are to survive co-operative enterprises have to play by the same rules, i.e seek to make profits to re-invest in cost-cutting innovations so as to be competitive and stay in the race for sales and profits.

Anyway, if like other banks, the Co-operative Bank can make loans out of nothing, what would be wrong with it doing this to finance "ethical" projects? In fact, if it has this power, why doesn't it use it to do this? Not to do so would be being unethical. The fact that it doesn't is yet further proof that a bank can't create money to lend out of nothing.


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## littlebabyjesus (Oct 5, 2012)

Jean-Luc said:


> So, under your reform of capitalism only the central bank or perhaps some government department, the Co-operative Bank, building societies and credit unions would also be allowed to lend money at interest. I don't think this would make much difference to the way the capitalist economy works. It would still be dominated by profit-seeking corporations, most of which are non-financial. Capitalism misfires not because there's some flaw in the banking system, but because it's a system based on the competitive pursuit of profits by private and/or state enterprises. If they are to survive co-operative enterprises have to play by the same rules, i.e seek to make profits to re-invest in cost-cutting innovations so as to be competitive and stay in the race for sales and profits.
> 
> Anyway, if like other banks, the Co-operative Bank can make loans out of nothing, what would be wrong with it doing this to finance "ethical" projects? In fact, if it has this power, why doesn't it use it to do this? Not to do so would be being unethical. The fact that it doesn't is yet further proof that a bank can't create money to lend out of nothing.


I've been talking about the conditions that need to exist for it to happen - someone wanting that money, prepared to get into debt, and someone else prepared to accept the money in return for some thing of real value. You're arguing with someone else on that point.

As for your first point, I don't accept it. Cooperative, worker-owned entities don't have to seek profits in the same way as shareholder-owned companies do. And in a world where there is no competition from shareholder-owned companies, there is even less pressure on them to do so.


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## love detective (Oct 5, 2012)

Jean-Luc said:


> So, under your reform of capitalism only the central bank or perhaps some government department, the Co-operative Bank, building societies and credit unions would also be allowed to lend money at interest. I don't think this would make much difference to the way the capitalist economy works. It would still be dominated by profit-seeking corporations, most of which are non-financial. Capitalism misfires not because there's some flaw in the banking system, but because it's a system based on the competitive pursuit of profits by private and/or state enterprises. If they are to survive co-operative enterprises have to play by the same rules, i.e seek to make profits to re-invest in cost-cutting innovations so as to be competitive and stay in the race for sales and profits.
> 
> Anyway, if like other banks, the Co-operative Bank can make loans out of nothing, what would be wrong with it doing this to finance "ethical" projects? In fact, if it has this power, why doesn't it use it to do this? Not to do so would be being unethical. The fact that it doesn't is yet further proof that a bank can't create money to lend out of nothing.


the 'money first' analysis never seem to see capitalist social relations as the problem though Jean - it's all about getting rid of the pope, not the system of catholicism which is the essence that ultimately manifests itself in pope like phenomenal forms - it's the 21st century equivalent of 19th century vulgar political economy


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## littlebabyjesus (Oct 5, 2012)

love detective said:


> the 'money first' analysis never seem to see capitalist social relations as the problem though Jean - it's all about getting rid of the pope, not the system of catholicism which is the essence that ultimately manifests itself in pope like phenomenal forms - it's the 21st century equivalent of 19th century vulgar political economy


Oh fuck off  with your patronising shit. Changing patterns of ownership is crucial to making any real change. I've never denied this, and in fact, I would see nationalising the banking system as a necessary step to achieve it.


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## love detective (Oct 5, 2012)

littlebabyjesus said:


> Cooperative, worker-owned entities don't have to seek profits in the same way as shareholder-owned companies do.


 
sorry but this is absolute nonsense - this fetishism of co-ops within capitalism shows a total ignorance of the realities of any kind of organisation operating and competing within capitalist social relations


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## littlebabyjesus (Oct 5, 2012)

love detective said:


> sorry but this is absolute nonsense - this fetishism of co-ops within capitalism shows a total ignorance of the realities of any kind of organisation operating and competing within capitalist social relations


Not nonsense. The difference may not be huge, but it is better to work for Waitrose than Tesco.


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## love detective (Oct 5, 2012)

littlebabyjesus said:


> Oh fuck off with your patronising shit.


 
i'm responding to your posts and what you say in them and to what others notice what you say in them - don't post such ridiculous utopian nonsense if you don't want people like me to respond in the way that i do to them


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## love detective (Oct 5, 2012)

littlebabyjesus said:


> Not nonsense. The difference may not be huge, but it is better to work for Waitrose than Tesco.


 
a worker working in waitrose is still required to sell their labour as a commodity in the market in order to survive - there is no essential change in the wage-labour relationship they have with the individual capital of their own company nor capital in general within society - their labour power is turned into a commodity and sold to capital to allow them to then purchase the commodified means of subsistence - none of this changes whether you work for waitrose or tesco

waitrose/JL is still an organisation which buys labour as a commodity in order to sell commodities to labour

even if workers there end up with marginally more in return for their sold labour it doesn't really change anything - the relationship to capital is essentially a qualitative relation based at the level of society as a whole not a quantitive one based at the level of the individual company (which is why marx makes the point that co-operatives operating within capitalist social relations _naturally reproduce, and must reproduce, everywhere in their actual organisation all the shortcomings of the prevailing system_)


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## littlebabyjesus (Oct 5, 2012)

Not utopian. Something I think it is possible to do, and that would make a genuine difference.


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## Jean-Luc (Oct 5, 2012)

love detective said:


> the 'money first' analysis never seem to see capitalist social relations as the problem though Jean - it's all about getting rid of the pope, not the system of catholicism which is the essence that ultimately manifests itself in pope like phenomenal forms - it's the 21st century equivalent of 19th century vulgar political economy


Yes, most Banking and Money reformers are free-marketeers who think that, once their banking reform has been implemented, capitalism should be allowed to operate without state interference and will then function in a crisis-free way without booms and slumps.  The left-wing variety goes back to the anarchist Proudhon and his crack-pot scheme for "free credit", ie interest-free loans from a People's Bank.


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## Riklet (Oct 5, 2012)

i know i'm being a bit lazy but is there a particular part of this thread (or elsewhere?) worth reading to tackle the claims that:

"banks create money out of nothing" ie the isolationist, desert island view which fails to take into account circulation and the real economy behind this 'money creation'?

whilst I can mostly get my head 'round this I still find it hard to actually articulate at all. someone was going on about it the other day and it left me wanting to sharpen my spear


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## love detective (Oct 5, 2012)

the arguments and counter arguments from both sides have been made on this and countless other threads here (this for example and this , this, this, this, this and this and probably loads of others)

best off just reading through them all and going along with whatever you find the most convincing, but remember: t_here is no royal road to science, and only those who do not dread the fatiguing climb of its steep paths have a chance of gaining its luminous summits!_


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## Das Uberdog (Oct 5, 2012)

Jean Luc and love detective have both read an awful lot into the posts of Jazzz which wasn't necessarily there. i'm certainly not of the opinion that banking reform could allow us to avoid recession, however that doesn't stop us learning about the actual processes which occurred within the banking system before the credit crunch and what defined the specificities of our current situation. so as i can see Jazzz's analysis doesn't discount the need for circulation - as has been claimed numerous times here. that disagreement, to me, looks totally semantic. fractional reserve banking, in fact, is designed precisely _to allow_ circulation in periods where there would otherwise be a natural contraction. it is a far more efficient deployment of money.

as far as i understand the process, in a situation where the reserve minimum is 10% a bank would receive a deposit (say £100) and this money would be immediately accounted for as a liability on the bank's books (payable at short-term either via an interbank or central bank loan). the bank would then place £10 down in reserve, out of circulation, and loan out the remaining £90. having written off the initial deposit as a liability, of which it can essentially be assured an emergency loan through the central bank or other institutions if push came to shove, the bank has then created £90 of circulating money (the depositor still being able to withdraw their deposit from their account and spend it too). this is then multiplied each and every time the loaned money is re-deposited in a bank account.

the 'elastic effect' of the conflict between underlying labour value and value extraction isn't compromised by this aesthetic procedure, but the elastic is allowed to stretch further. recession can't be avoided, but it can be delayed (sometimes long enough for the technological innovation and real wealth creation necessary for real growth to be introduced).

as for the issue of QE, whatever the 'rationale' it is in effect being used to plug up the liabilities of lending banks. of course, the BoE was trying to encourage broader lending: as Marx points out in Capital vol. 1, capitalists experience a crisis in surplus value extraction as a shortage of money. the whole point of capitalism is the evolution from C-M-C to M-C-M1 - where you are dealing in the first place with money, the production of value being artificially seen only as your mediary towards increased profits, stagnated rates of surplus value extraction conceals itself. broader questions of over-accumulation, etc, don't appear so readily apparent.


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## love detective (Oct 5, 2012)

i'm going to ignore most of your post as it adds nothing to the discussion (i mean how many people are going to come onto this thread and give a warmed up wikipedia version of fractional reserve banking as though they've discovered higgs boson), but:-



Das Uberdog said:


> as for the issue of QE, whatever the 'rationale' it is in effect being used to plug up the liabilities of lending banks


 
what does this even mean?

i suspect like free spirit before you, you've put a number of words together of which you don't understand what they mean individually let alone together

can you explain in what way the process of QE 'plugs up the liabilities of the lending banks' (and also explain what 'plug up the liabilities' actually means?)


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## Das Uberdog (Oct 5, 2012)

oh fuck off then you miserable twat


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## love detective (Oct 5, 2012)

you not going to explain how QE 'plugs up the liabilities of the lending banks' then?

(or explain what 'plugs up the liabilities' means?)


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## Pickman's model (Oct 5, 2012)

Das Uberdog said:


> oh fuck off then you miserable twat


incisive analytical skills deserted you then


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## Das Uberdog (Oct 5, 2012)

well i would actually like the first part responded to tbh as that's where the crux of the discussion over the past few pages has come to, but as you have no time for that -

what i mean is that, in effect, all QE has done is improve the balance sheets of the banks. i agree with you that the original intention was to promote lending, but in effect that hasn't happened for multiple reasons - not least that there aren't enough profitable investment opportunities for them to sensibly invest.


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## love detective (Oct 5, 2012)

how has it improved the balance sheet of banks? in what way? what has it done that the bank's couldn't have done through a multitude of other ways that were not QE?

what does 'plug up the liabilities of the lending banks' mean?


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## Das Uberdog (Oct 5, 2012)

Pickman's model said:


> incisive analytical skills deserted you then


 
neither of you have a style which is particularly conducive to receiving a thoughtful response tbh


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## Pickman's model (Oct 5, 2012)

Das Uberdog said:


> neither of you have a style which is particularly conducive to receiving a thoughtful response tbh


see, you can post without swearing when you try.


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## Das Uberdog (Oct 5, 2012)

love detective said:


> how was it improved the balance sheet of banks? in what way?


 
the BoE, as i understand it, pursues QE through buying up assets (stock, bonds etc) to increase bank reserves, in this case to promote lending. in practice this has just remained excess cash


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## love detective (Oct 5, 2012)

what are bank reserves?

Are you saying the purpose of QE is to increase bank reserves (whatever they are?)

and what does plug up the liabilities of the lending banks mean? this was your original point about it, you're now talking about something completely different


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## Das Uberdog (Oct 5, 2012)

if you have terminology issues then how about you do some defining rather than just pratting about

bank reserves are their reserves, which can either be minimum or in excess of reserve needs. if they're in excess then technically they have more money to invest if they wish, their balance sheets are 'healthier'.

e2a and to your second point, the dispute i was referring to was earlier in the thread where you were arguing over whether or not QE was used to compensate for the liabilities incurred by the banks through their profligatory loaning - this separate from your later spat with littebabyjesus over Keen's findings


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## love detective (Oct 5, 2012)

why should i do the defining, you came onto this thread (having presumably read it all) to tell everyone where they were going wrong and that QE was being used to plug the liabilities of the lending banks. you gave the impression you knew what you were talking about and had a wee hissy fit when i suggested you didn't, so i'm just asking you to explain what you actually said

you still haven't explained what bank reserves are (other than to say they are reserves and they can either be below or above a certain level) - do you mean capital reserves? liquidity reserves? loan loss provision reserves? what do you actually mean and how does QE increase them?

and how does QE plug the liabilities of the lending banks?

e2a - in response to your edit - how can QE 'compensate for the liabilities incurred by the banks through their profligatory loaning' - what on earth does this even mean? what does compensate for their liabilities mean? how does QE do this? explain the mechanics? tell me how QE has an impact on a bank's liabilities?


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## Das Uberdog (Oct 5, 2012)

wow you are one prickly fuck - my original point was that you'd read far too much into the continuity of Jazzz's arguments earlier which is true. you made logical extensions from where his arguments finished and the confusion was supplemented by you seemingly presuming the reality of fractional reserve banking was in contradiction with ideas of labour value ultimately dictating the contraction or expansion of the economy... which it isn't.

then there was a separate strain where you seemed to have another major disagreement with free spirit, concerning the time frame in which QE was administered and how that apparently disproved that the effect of QE was to compensate for the banks liabilities. what i was trying to argue was that this isn't necessarily the case, that despite intention the impact was as littlebabyjesus' links to Keen pointed to later, that ultimately central bank spending does in fact chase loans and not the other way around (as you claimed). so, regardless of the reasoning behind QE the impact was actually more akin to free spirit's claim.

if you don't know what i mean by bank reserves then i can only presume you're being a deliberate dickhead, which from your general conduct on this thread isn't so hard to believe.


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## Jean-Luc (Oct 5, 2012)

Das Uberdog said:


> Jean Luc and love detective have both read an awful lot into the posts of Jazzz which wasn't necessarily there.
> (...)
> as far as i understand the process, in a situation where the reserve minimum is 10% a bank would receive a deposit (say £100) and this money would be immediately accounted for as a liability on the bank's books (payable at short-term either via an interbank or central bank loan). the bank would then place £10 down in reserve, out of circulation, and loan out the remaining £90. having written off the initial deposit as a liability, of which it can essentially be assured an emergency loan through the central bank or other institutions if push came to shove, the bank has then created £90 of circulating money (the depositor still being able to withdraw their deposit from their account and spend it too). this is then multiplied each and every time the loaned money is re-deposited in a bank account.


Actually, Jazzz has specifically rejected this "money multiplier" theory in post #295 (which you liked). He wrote:


> With fractional-reserve banking the money ends up in thirty places at once, all of them circulating.
> This is why I don't like the 'money multiplier' model - it is highly contrived and does nothing to disabuse people of the idea that banks are simply lending out the money they receive as deposits (as well as suggesting that the monetary base determines the money supply).


His view is that, with a 10% cash reserve minumum, when a bank receives a deposit of £100 it can lend out not £90 but £900 (he arrives at £3000 because he's assuming a 3.3% reserve). He objects to the "money multiplier" model precisely because it assumes that the process of the banking system (not a bank on its own) using the initial deposit to make loans totalling £900 depends on the money of the original loan being re-deposited, if in decreasing amounts.

I agree with your other point that banks aren't lending so much today as


Das Uberdog said:


> there aren't enough profitable investment opportunities for them to sensibly invest.


Not so sure about another of your points, though:



Das Uberdog said:


> the 'elastic effect' of the conflict between underlying labour value and value extraction isn't compromised by this aesthetic procedure, but the elastic is allowed to stretch further. recession can't be avoided, but it can be delayed (sometimes long enough for the technological innovation and real wealth creation necessary for real growth to be introduced).


Banks lending money in a boom, ie when there are enough profitable investments for them to sensibly invest in, is not stretching anything. It's responding to the market. Nor is it postponing a recession (that's conceding too much to reformists). Recession are caused by events in the real economy (overproduction in relation to a market) which no amount of banking activity can avoid. As Marx put it:


> Ignorant and confused bank laws, such as those of 1844-5, may intensify the monetary crisis. But no bank legislation can abolish crises themselves (Capital, Volume 3, chapter 30).


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## Das Uberdog (Oct 5, 2012)

Jean Luc said:
			
		

> Actually, Jazzz has specifically rejected this "money multiplier" theory in post #295 (which you liked). He wrote:




gotta run out, but quickly on this - i don't ascribe to the 'multiplier model' - i don't honestly know enough about it to say i do. the multiplying effect i referred to was only meant to refer to the money which, having been lent out, finds it's way back into a bank account repeating the original process


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## love detective (Oct 5, 2012)

Das Uberdog said:


> and the confusion was supplemented by you seemingly presuming the reality of fractional reserve banking was in contradiction with ideas of labour value ultimately dictating the contraction or expansion of the economy... which it isn't.


 
can you show me the post/posts in which i supposedly did what you say above?

I've consistently argued here that fractional reserve banking is nothing more than money circulating around the system, something that is essential for a 'functioning' capitalist system. how you have got from this that somehow I think circulation is in contradiction with a system of capitalist production i have no idea



> then there was a separate strain where you seemed to have another major disagreement with free spirit, concerning the time frame in which QE was administered


 
there was no argument about the time frame in which QE was administered. I laid out the time frame in which it was administered (mid 2009 to 2012) as part of my evidence against FS's assertion that the reason for QE being administered was to provide banks with emergency liquidity during the time when the money markets froze up (which happened in 2007 to early 2009). Since then FS has, unsurprisingly, not replied, as his claim now looks somewhat foolish now that the timescales have been laid out, as something which was done in 2009-2012 could in no way be as a reaction to the immediate help that bank's needed in 2007-2008 which was the time that the wholesale lending markets completely froze. I also laid out the various state schemes that, in contrast to QE, were a response to the liquidity crisis and provided over £400bn of liquidity assistance to banks in 2008.



> and how that apparently disproved that the effect of QE was to compensate for the banks liabilities.


 
you keep saying this and i keep asking for an explanation of what it means but you never do so - so once again - what does 'compensate for the banks liabilities' actually mean? tell me how QE has an impact on a bank's liabilities? what are the mechanics of the process that means that QE has an impact on banks liabilities? can you tell me?




> what i was trying to argue was that this isn't necessarily the case, that despite intention the impact was as littlebabyjesus' links to Keen pointed to later, that ultimately central bank spending does in fact chase loans and not the other way around (as you claimed).


 
sorry but you're all over the place here - LBJ's point about Keen was that the central bank 'always' increases the money supply in response to an increase in lending activity in the economy - QE tried to increase the money supply in response to a decrease in lending activity in the economy. So how you can use the former which is in total contradiction with the later, to prove that this is what QE was about is simply absurd



> so, regardless of the reasoning behind QE the impact was actually more akin to free spirit's claim.


 
the discussions were not about the impact (which we both actually agreed on if you'd bothered to actually read the thread) but about the reasoning. FS claim and my counter claim and subsequent discussion/argument was 100% about the reasoning behind QE, at no time did we disagree about the impact of QE. I said it many times during that discussion that I agreed with him as to what the impact of it was.



> if you don't know what i mean by bank reserves then i can only presume you're being a deliberate dickhead, which from your general conduct on this thread isn't so hard to believe.


 
I suspect you don't know what you mean by 'bank reserves' the only time i see this phrase is used is by people who tend to not have much of a clue what they are talking about


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## ayatollah (Oct 5, 2012)

Meanwhile the real "Currency cranks" out there in the right wing ideology world have completely different fish to fry. They take the simple observational reality of fractional Reserve Banking's ability to increase the money supply, potentially (at a 10% cash reserve) increasing every £100 of deposits to £900 of loans, (they don't concern themselves about the very "real" but ultimately very "deep" level economic issues around value, prices, and money) and then build an empire of reactionary ideas, such as:

Its the Jews ultimately behind banking in general and the apparent "creative magic" of fractional reserve bankings's ability to "create " money, and through this "money alchemy" , they secretly control the world.

100% Reserve banking is both possible and desirable - and offers a route out of parasitic "financier" (read "Jew") dominated capitalism.. to a capitalism dominated by the "independent producer".

A return to the Gold Standard offers a route forward based on "real value" rather than the chymera of false values produced by the parasitic empire of Finance Capital, and will therefore avoid future speculative finance-led economic "bubbles.

Now all of these concepts are utter bullshit.. but they have real traction for the small manufacturer and right wing influenced citizens generally - faced with the incomprehensible power and chaos of modern world capitalism. Of course these concepts and illusory "solutions" all in the end tend to fall within the general orbit of fascist "economic " theory - but not exclusively. They are very widespread in various forms, in popularity - and all serve , ultimately, to let "capitalism" as a system off the hook - as a counterpose to socialist proposals for the actual abolition of capitalism.

This thread and the other one have been totally bogged down on barren arguments about definitions, and disputes as to whether fractional reserve banking actually does have a key (but OK, OK, I concede, a dialectically interdependent role as a component of a much bigger system) role in creating money, whilst never actually confronting ANY of the key ideas of the real "Currency Cranks". A sad metaphor for the "Left's" ability to get very angry with itself in arguing about abstruse minutia, whilst the ideologically potent weaponry of the Far Right sails on, completely unmolested !

Das Uberdog's frustration with the form and content of this barren "debate" is quite understandable.


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## love detective (Oct 5, 2012)

> the ideologically potent weaponry of the Far Right sails on, completely unmolested


 
more of your 'the fascists are coming/the fascists are not coming' gymnastics


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## Blagsta (Oct 5, 2012)

But this thread has confronted the ideas of the money cranks.


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## littlebabyjesus (Oct 5, 2012)

love detective said:


> a worker working in waitrose is still required to sell their labour as a commodity in the market in order to survive - there is no essential change in the wage-labour relationship they have with the individual capital of their own company nor capital in general within society - their labour power is turned into a commodity and sold to capital to allow them to then purchase the commodified means of subsistence - none of this changes whether you work for waitrose or tesco


I don't dispute that except for one bit: 'their labour power is turned into a commodity and sold to capital'. What is capital? What does the changing of companies into worker-owned entities do to capital? Who owns what is a crucial question in all of this. Changing companies from shareholder owned to worker-owned changes the nature of 'capital' in very important ways, all the more so, clearly, if such a situation becomes the norm rather than the exception.

also, you dismiss differences in working conditions between Waitrose and Tesco as somehow irrelevant. They are not irrelevant. They are central.

Maybe I'm misunderstanding you. But you appear to be denying any possibility of a differentiation between different forms of capitalism, as if German social market were the same as US free market. This is patent nonsense.

Who owns what? That is the crucial question. How do you change that pattern of ownership? You have ridiculed and dismissed what I have said, but you haven't confronted it. Rather, you've fallen back on a lazy dismissal of what I have to say. Engage with it properly, ffs.


Tell me what you want, and tell me how we get from here to there. If you cannot do that, then have the fucking decency to treat those who have the guts to attempt such a thing with some respect.


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## free spirit (Oct 6, 2012)

> Since then FS has, unsurprisingly, not replied, as his claim now looks somewhat foolish now that the timescales have been laid out, as something which was done in 2009-2012 could in no way be as a reaction to the immediate help that bank's needed in 2007-2008


fyi I've not replied because you're such an annoying twat to debate with that I've got better things to do with my time.

Please don't take my silence as in any way suggesting that you've done anything other than batter me into submission with your relentless bullshit.

I see you've ignored my post pointing out that the post you keep responding to was regarding a Hypothetical situation in response to a daft post you made, not directly describing what happened with Northern Rock. It's pretty pointless arguing with you when you continually pull shit like this to misrepresent my position.

actually fuck it, I can't let you get away with misrepresenting my position again...



> 1. The money markets started to freeze up in September 2007 with 2008 being the real crunch time. This period from late 2007 to 2009 was the real crunch point in terms of little or no liquidity being available in the open markets for banks. While from 2010 onwards the money markets have not went back to how they were pre 2007, they have certainly thawed a great deal. Anyway, the point is that in late 2007/early 2008 they froze completely, this is the time that if any bank was going to need assistance in liquidity, it was going to be then.
> 
> So at this stage we have serious liquidity problems for banks, and we both agree that they needed some kind of assistance to get by. You claim that QE was this assistance. The first batch of QE didn't get transacted until March 2009, and by September 2009, a full two years after the money markets had froze, the amount of QE was only £175bn.


QE obviously wasn't used to solve the immediate problem in 2007, and I never claimed it was. Frankly I find it bizarre that you'd attempt to make out that this was what I'd meant.

This in no way proves that a major part of it's rationale when it was implemented was to take up the strain from the other policies they had previously been using to pump cash into the banks.

Let's just review this timeline in it's true context.

January 2009 - Special Liquidity Scheme closes after loaning a total of around £180 billion

March 2009 - Quantitative Easing first round of asset purchases starts with a £200 billion, with a further £170 billion following over the next 3 1/2 years.

During the next 3 1/2 years around £170 billion of SLS loans are repaid, with the balance now standing at around £10 billion.

Over the same period approximately £370 billion of cash is poured into the banks via QE, only around £100 billion of which made it back out in the form of increased business lending.

Point made?


http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb120105.pdf

ps 


> The aim of the Facility was to improve liquidity in credit markets.


http://www.bankofengland.co.uk/markets/Pages/apf/default.aspx


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## free spirit (Oct 6, 2012)

Das Uberdog said:


> if you have terminology issues then how about you do some defining rather than just pratting about
> 
> bank reserves are their reserves, which can either be minimum or in excess of reserve needs. if they're in excess then technically they have more money to invest if they wish, their balance sheets are 'healthier'.
> 
> e2a and to your second point, the dispute i was referring to was earlier in the thread where you were arguing over whether or not QE was used to compensate for the liabilities incurred by the banks through their profligatory loaning - this separate from your later spat with littebabyjesus over Keen's findings


to help you out, when arguing this point with LD, you need to specify that you mean cash reserves.

He won't allow you to use any other term that anyone else reading the thread would understand perfectly, all terms must be referenced clearly, otherwise he'll spend several posts arguing the toss with you and making out you must have meant something you obviously didn't.

I think he works on the general principle that everyone else must be wrong, then finds ways of misinterpreting their posts so that they fit with this general principle.


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## love detective (Oct 6, 2012)

free spirit said:


> fyi I've not replied because you're such an annoying twat to debate with that I've got better things to do with my time.


 
If you find it annoying that when you post crap, people point this out, then this is a problem that rests with you, not me



> Please don't take my silence as in any way suggesting that you've done anything other than batter me into submission with your relentless bullshit.


 
if you find it annoying that when you continue to post crap, people continue to point this out, then yes, the best way for it to stop is if you stop posting crap.



> I see you've ignored my post pointing out that the post you keep responding to was regarding a Hypothetical situation in response to a daft post you made, not directly describing what happened with Northern Rock. It's pretty pointless arguing with you when you continually pull shit like this to misrepresent my position.


 
Ah, so when you told me what happened with Northern Rock, when you put forward your (incorrect) order of events in relation to Northern Rock, saying things like:-

_the public get spooked and start trying to pull their money out as happened with Northern Rock, and at this point the government has to step in_

This was just you describing a Hypothetical situation was it?

And all the other discussions that was had around Northern Rock, you weren't really talking about Northern Rock, just some hypothetical situation? Utter bullshit and deceitful backtracking more like. And anyway, given that the discussion was about bank runs and all that, surely the discussion would be more illuminated by reference to an actual bank run that happened recently (i.e. Northern Rock), rather than some made up hypothetical one? But no, because a made up hypotehtical one allows you to put forward any old bullshit without it being empirically disproven. Well again, if y



> actually fuck it, I can't let you get away with misrepresenting my position again...


 
I respond to what you type here, if you've given anyone a different position to what you actually have, the fault lies with you not me



> QE obviously wasn't used to solve the immediate problem in 2007, and I never claimed it was. Frankly I find it bizarre that you'd attempt to make out that this was what I'd meant.


 
1. You claim QE was in response to the liquidity crisis

2. The worst period of the liquidity crisis ran from late 2007 to early 2009

3. Liquidity issues are immediate for banks, you can't wait a couple of years before dealing with them (otherwise you end like Northern Rock, Lehmans etc.), liquidity crisis are all about when the next 1 week/1 month/3 month funding loans come due for repayment.

4. Therefore the only way you can give any credibility to your claim that QE was in response to the liquidity crisis (rather than the economic or fiscal crisis) is to show that QE was instigated when the liquidity crisis was actually happening. You can't.

5. It's like saying that the purpose of sending the fire brigade round to someone's house a few days after a fire has burnt it to the ground was to put out the fire (when in fact it is actually to do an assessment of what happened)



> This in no way proves that a major part of it's rationale when it was implemented was to take up the strain from the other policies they had previously been using to pump cash into the banks.


 
I'm afraid it does.

The other policies did not need their 'strain taken up'. The other policies, which unlike QE, were designed to be a response to the liquidity crisis continued to operate until the worst parts of the liquidity crisis had receded. The liquidity schemes didn't run down/run off because they 'ran out' or anything like that (and therefore needed boosting from other schemes), they ran down because bank's started to voluntarily repay the state liquidity help (which was both expensive and stigmatic) by replacing it with the now accessible again liquidity from the money markets



> Let's just review this timeline in it's true context.
> 
> January 2009 - Special Liquidity Scheme closes after loaning a total of around £180 billion


 
The Special Liquidity Scheme closed in January 2012. This is stated in the first paragraph of the bank of england report I linked to in the post that I mentioned it. Here it is again for you.




			
				bank of england said:
			
		

> The Bank of England introduced the Special Liquidity Scheme (SLS) in April 2008 to improve the liquidity position of the UK banking system. It did so by helping banks finance assets that had got stuck on their balance sheets following the closure of some asset-backed securities markets from 2007 onwards. The Scheme was, from the outset, intended as a temporary measure, to give banks time to strengthen their balance sheets and diversify their funding sources. The last of the SLS transactions expired in January 2012, at which point the SLS terminated. During the period in which the SLS was in operation, the Bank undertook a fundamental review of its framework for sterling market operations and developed a new set of facilities to provide ongoing liquidity insurance to the banking system.


 
The drawdown window closed in January 2009 after having been extended for another 6 months from its original date to allow further liquidity drawdowns for those who needed it. It was extended because the liquidity crisis was still ongoing. The fact that this drawdown window wasn't extended beyond January 2009 was because by that time, the liquidity crisis as it was, was pretty much over, and it wasn't required anymore.

The other important point about that paragraph is the last sentence, which points out that even though the SLS closed in 2012, a whole new raft of facilities & schemes were set up to provide 'ongoing liquidity insurance' to the banking system.



> March 2009 - Quantitative Easing first round of asset purchases starts with a £200 billion


 
The First round in March 2009 was actually £75bn, and by September 2009 £175bn had been done.



> Over the same period approximately £370 billion of cash is poured into the banks via QE, only around £100 billion of which made it back out in the form of increased business lending.
> 
> Point made?


 
Absolutely no point made whatsoever



> ps
> 
> http://www.bankofengland.co.uk/markets/Pages/apf/default.aspx


 
Ah, so when i put forward something that the state/central bank said in favour of my position, i got the whole '_oh you believe in the tooth fairy'_ routine, but when you find something that you think backs up your story (which it actually doesn't as QE was one part of the APF scheme, not all of it) from the state/central bank it gets rolled out as gospel. nice.

I'll expand on this last point a bit as you seem to have confused yourself with it. APF in general was a wider umbrella which QE was transacted under and you are confusing what is being said about the Non-QE part of APF with the QE part. The bit you quoted in terms of providing liquidity did not actually refer to QE, but to other APF schemes.

If you look at this one page summary from the bank of england, each column shows a type of scheme they currently have on the go. The last two columns are the two different types of Asset Purchase Schemes with QE being the one in the final column. The purpose of each scheme is also shown on the first row (with quite a few showing their purpose as liquidity). For 'APF - Corporate Bonds' the purpose is given as improving liquidity. This is what your previous quote refers to. For 'APF-Gilts' (which is QE) the purpose is given as monetary policy implementation. To date something like £0.3bn of 'APF-Corporate Bonds' has been transacted (whose purpose is liquidity), compared to around £375bn for 'APF-gilts' (whose purpose is not for liquidity)

So to take this back to your quote - if we put that quote in its context by showing more of the paragraph it came from




			
				freespirit said:
			
		

> The aim of the Facility was to improve liquidity in credit markets. *The Chancellor also announced that the APF provided an additional tool that the Monetary Policy Committee (MPC) could use for monetary policy purposes. *When the APF is used for monetary policy purposes, purchases of assets are financed by the creation of central bank reserves.


 
The first sentence of that paragraph was what you quoted and tied incorrectly to QE. It's actually the following two sentences that relates to QE (note the words also & additional are used, to signify a difference to the previous sentence) which also states what the purpose of doing it was (which in this case, isn't liquidity). It also makes it clear that when the APF is used for monetary policy purposes (as opposed to liquidity purposes) the purchase of assets are financed by the creation of central bank reserves - which i'm sure we'll both agree describes what is happening under QE

So you can go back to saying that this is just all tooth fairy stuff now that your quote doesn't actually apply to what you thought it applied to.

I suspect you'll now retreat again to silence claiming you've been battered into submission by 'relentless bullshit'. Truth is, you don't know what you're talking about and I do. If that pisses you off then that's not my problem.


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## love detective (Oct 6, 2012)

littlebabyjesus said:


> I don't dispute that except for one bit: 'their labour power is turned into a commodity and sold to capital'. What is capital? What does the changing of companies into worker-owned entities do to capital?


 
In this case it does nothing. Waitrose competes in a capitalist system and thus takes on, and internalises, all the negative aspects of that system. It's not because it wants to do this (most companies, co-ops or otherwise don't intentionally want to be 'bad') it's because they have to do it if they are to remain in the market. The ownership composition of an individual company has no real impact on it's qualitative position as a capitalist company operating in a capitalist market and thus subject to every single imperative & tendency of that market and the other companies operating within it.

All the problems of capitalist social relations are unsurprisingly problems at the level of society, at the macro leve, at the social level. These govern social reproduction and our society. The problem is one at the level of society so therefore the solution is not to be found, and cannot be found, at the level of individual companies tinkering with their ownership structure



> if such a situation becomes the norm rather than the exception.


 
Yes I agree with this, if everything was different then everything would be different. but if we were ever at the stage where this started to come the norm rather than the exception, this would come about by a significant change in the balance of class forces that would allow these kind of things to happen. It's not going to happen as a result of utopian dreaming.



> also, you dismiss differences in working conditions between Waitrose and Tesco as somehow irrelevant. They are not irrelevant. They are central.


 
I don't dismiss working conditions. I dismiss the idea that co-ops are somehow not under the same kind of market imperatives & pressures to make changes that are detrimental to workers interests. They are. Why for example have cleaners at John Lewis been taking all kinds of actions recently to protect their working conditions against attack from that company?



> Maybe I'm misunderstanding you. But you appear to be denying any possibility of a differentiation between different forms of capitalism, as if German social market were the same as US free market. This is patent nonsense.


 
I'm saying they are part and parcel of the same thing - the UK is an example of the tendency for the former to turn into the later



> Who owns what? That is the crucial question. How do you change that pattern of ownership? You have ridiculed and dismissed what I have said, but you haven't confronted it. Rather, you've fallen back on a lazy dismissal of what I have to say. Engage with it properly, ffs.


 
I've confronted everything you have said - that you don't like what I say doesn't make it ridicule.



> Tell me what you want, and tell me how we get from here to there. If you cannot do that, then have the fucking decency to treat those who have the guts to attempt such a thing with some respect.


 
So you typing a few words on a internet discussion board is having the guts to attempt such a thing with some respect? If not you then who are you talking about? Are you saying that we should all be bowing down before the board of John Lewis/Waitrose and congratulating their 'guts' to move society forward to a new era?


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## love detective (Oct 6, 2012)

free spirit said:


> to help you out, when arguing this point with LD, you need to specify that you mean cash reserves.
> 
> He won't allow you to use any other term that anyone else reading the thread would understand perfectly, all terms must be referenced clearly, otherwise he'll spend several posts arguing the toss with you and making out you must have meant something you obviously didn't.
> 
> I think he works on the general principle that everyone else must be wrong, then finds ways of misinterpreting their posts so that they fit with this general principle.


 
If I came onto an energy thread and started throwing around a load of terms that I clearly didn't have much handle on what they were and put forward confident but ridiculous assertions, not backed up by any credible evidence, that didn't make sense to anyone who knew what they were talking about - then you would rightly point this out and put me in my place. 

That you get all but hurt when your own lack of knowledge & understanding is pointed out in an area you don't have much of a handle on says more about you than it does about my failings. If it makes you feel better though to displaces your failings in this area onto me, then feel free to do it though. The main thing for me is that even if you don't realise that you are talking shit, I do.


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## littlebabyjesus (Oct 6, 2012)

love detective said:


> Are you saying that we should all be bowing down before the board of John Lewis/Waitrose and congratulating their 'guts' to move society forward to a new era?


Where the fuck did you get that from in my posts? No, I'm not. If you would respond to what I actually said, you would see that I'm not setting jl up as any kind of ideal model. I merely pointed out that the nature of the business does make a tangible difference to working conditions.


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## love detective (Oct 6, 2012)

you talked about how I should '_have the fucking decency to treat those who have the guts to attempt such a thing with some respect'_

who were you referring to then? who are these people who have the guts to attempt whatever it is you're talking about?

oh, and by the way, nice dodging of the substantive parts of my post (once again)

If conditions at John Lewis/Waitrose are as good as you suggest and this is down to the nature of the business (and better than Tesco apparently as a result), why are we seeing strike action from cleaners working at John Lewis over working conditions?


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## littlebabyjesus (Oct 6, 2012)

I posted that when drunk last night, so I was overdramatic. I was actually asking you to treat _me_ with some respect.

Fat fucking chance, eh?


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## love detective (Oct 6, 2012)

so when you're drunk and post overdramatic shite it's my fault that I'm not able to discern the reasons for you posting overdramtic shite and instead I should just automatically respect you regardless of what you actually post/say to me? I'm sorry but it doesn't work like that for me, i'll respect you if I respect what you write here, you can't shift that burden away from you and onto me so that I have to 'respect' you no matter what you come out with (you even admit yourself you were far too overdramatic but still you demand that I respect you nonetheless)

and come on, you were asking me to have some respect for people (like you) who have the guts to post about something on a message board - can't you see how absurd and pompous this is - there's only one response appropriate here and that's what you got (and something I would expect to get from others if I did similar)

for what it's worth i generally do respect people initially on here, it's only if they continue to post unsubstantiated crap and assert that they are correct without any basis from which to do so, then I return fire and often take the time to post in some detail showing why they are talking crap. That this often gets met with claims of 'relentless bullshit' and 'not respecting others' just because i don't let someone get away with posting bollocks about stuff they don't particularly understand that well is a reflection on their wooly liberal sentimentalities and not me.

but yes, well done on turning the discussion away from the actual points and into a nice liberal wooly one about how we should all automatically respect each other regardless of what is said


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## free spirit (Oct 6, 2012)

love detective said:


> If you find it annoying that when you post crap, people point this out, then this is a problem that rests with you, not me


I find it annoying when people put words into my mouth, deliberately misunderstand fucking obvious points being made (such as what someone might mean by reserves when talking about cash, and hard currency), then attempt to ridicule them on the basis of points they've not made, and words they've not spoken.

I particularly find it annoying when the person in question is wrong, but resorts to this sort of crap to disguise that fact.



> Ah, so when you told me what happened with Northern Rock, when you put forward your (incorrect) order of events in relation to Northern Rock, saying things like:-
> 
> _the public get spooked and start trying to pull their money out as happened with Northern Rock, and at this point the government has to step in_
> 
> This was just you describing a Hypothetical situation was it?


no you prick, that was in a different post, this one was responding directly to your claim before it that people withdrawing money from the banks was just an effect of the credit crunch and not a cause of it.

You also quote that out of context


> I'm not entirely sure it's accurate to describe it as just being an effect of the credit crunch though. *It's more complex than that, as it's effectively a feed back loop interconnected with general confidence levels in that bank / the banking system in general,* so the markets get spooked about a bank and stop lending to it, then the public get spooked and start trying to pull their money out as happened with Northern Rock, and at this point the government has to step in or the bank went bust because it can't finance its liabilities in the event that the bank run continues.


Note that I'm specifically not saying it was the cause of the crunch, or even the initial cause of it, just that it acts as a feedback mechanism to help turn a bad situation into a potentially catastrophic situation.

This should be pretty clear from the entire paragraph posted above, given that I specifically state it in the bit you deliberately missed out in order to misrepresent my position again.



> 1. You claim QE was in response to the liquidity crisis
> 
> 2. The worst period of the liquidity crisis ran from late 2007 to early 2009
> 
> ...


I'm attaching a copy of the results for a search for the term 'liquidity crisis' by the poster 'Free Spirit' on this thread. As you can see, I've not used those words on this thread, and having checked all my posts, neither have I said anything else with a similar meaning, so once again you're putting words into my mouth. Please stop doing this.

Once more then, QE was not an immediate response to the immediate liquidity crisis in 2007, but this in no way means that it wasn't a longer term response to the same underlying issue.

The immediate response was to issue short term cash loans to the banks. A cash loan pretty much by definition doesn't actually solve the underlying issue of low levels of actual cash across the entire banking system, it merely postpones the data when a long term solution needs to be found to the point at which those loans get paid back.

QE was that long term response, taking over directly from the previous loan scheme, and effectively resulting in those loans being repaid without impacting on the banks overall cash position, or the government's ability to sell new gilts in the open market (as would have happened if the banks had also been offloading several hundred billion of government gilts at the same time to repay their loans and bolster their cash reserves).



> The Special Liquidity Scheme closed in January 2012. This is stated in the first paragraph of the bank of england report I linked to in the post that I mentioned it. Here it is again for you.
> 
> The drawdown window closed in January 2009


Right, so after January 2009 no more money could be drawn down from the scheme?

Therefore it was closed, at least to the extent that it could provide no further support to the banks beyond the level they'd already been supported. The fact it remained open to allow the banks to repay their loans is fairly obvious from the fact I then discussed the loans being repaid over the next 3.5 years, and actually means that the scheme beyond Jan 2009 was then acting to reduce the volume of cash available in the banking system, not improve the situation.



> The First round in March 2009 was actually £75bn, and by September 2009 £175bn had been done.


your point being?



> The bit you quoted in terms of providing liquidity did not actually refer to QE, but to other APF schemes.


how do you work that one out then?

The sentence and the entire paragraph referred to the APF scheme, which includes the APF scheme for corporate bonds, and the APF scheme for Gilts. It doesn't differentiate between the 2 schemes in that paragraph at all.

Stating that one APF scheme worth less than 1% of the other was to provide cash liquidity into the market, and the other had nothing to do with it is nonsensical when both had the exact same affect of injecting cash liquidity into the banks.

The summary you quote, only lists the 'Primary Purpose' of the scheme anyway. It may well be that monetary policy was the primary purpose of the gilts scheme (or at least the stated primary purpose), but this in no way excludes the possibility that a significant secondary purpose of it was to take over from the SLS scheme to bolster the banks cash reserves, and increase / maintain the higher rates of cash liquidity in the banking system that the SLS had temporarily supplied.

The argument that this was all about Monetary Policy really falls down when you consider the fact that the banks inflation target is 2%, yet they authorised a further £75 billion QE spending round in October 2011 when RPI stood at over 5%.

I think this paragraph is also pretty telling



> *Since the initiation of Quantitative Easing, the supply of reserves has varied in response to the MPC's policy decisions, rather than the changes in the demand for reserves.* This potential imbalance in the demand and supply of reserves could have resulted in loss of control over market interest rates had banks been required to continue to set and meet targets. The Bank therefore suspended reserves averaging in March 2009. Banks are not currently required to set targets for their reserves accounts and all reserves balances are remunerated at Bank Rate. As a result there is no incentive for banks to borrow from or lend to each other at rates materially away from that, so that market rates stay close to Bank Rate.


boe
So QE has increased the liquidity in the market to such an extent that they've had to entirely abandon the previous system of regulating money flows between the BoE, the banks and the interbank lending market because of the excess of cash sloshing around in the banks.

Yet you maintain that QE didn't have the purpose of increasing liquidity.

Your position looks pretty untenable to me tbh, no wonder you have to repeatedly resort to misrepresenting my position.


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## free spirit (Oct 6, 2012)

love detective said:


> but yes, well done on turning the discussion away from the actual points and into a nice liberal wooly one about how we should all automatically respect each other regardless of what is said


fwiw I'm quite willing to both address the points made and disrespect you in the same post.

You on the other hand seem determined not to address points I've actually made, but instead to make up alternative versions of what I've actually said, then argue against them, then somehow claim to have won the debate on that basis.

I assign respect to posters on merit rather than automatically and your conduct in this thread shows you don't merit respect.




Unless of course you actually do have severe reading comprehension issues, in which case I'll cut you some slack.


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## littlebabyjesus (Oct 6, 2012)

love detective said:


> but yes, well done on turning the discussion away from the actual points and into a nice liberal wooly one about how we should all automatically respect each other regardless of what is said


No. You did this by making it personal, which is your usual trick.


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## free spirit (Oct 6, 2012)

love detective said:


> If I came onto an energy thread and started throwing around a load of terms that I clearly didn't have much handle on what they were and put forward confident but ridiculous assertions, not backed up by any credible evidence, that didn't make sense to anyone who knew what they were talking about - then you would rightly point this out and put me in my place.


tbh, if someone used the term kW but obviously meant kWh as happens regularly, then I may point this out to them, but would still be capable of understanding what they actually meant when taken in the context of the entire post.

You on the other hand appear to ignore all the context of the post, and focus on the use of the incorrect term as being somehow more significant than the rest of the post, despite it being entirely obvious to anyone with half a brain cell engaged what the meaning of the post was.

This isn't the mark of real expertise in the field, it's the mark of someone who's actually got very little expertise in the field, but chooses to attempt to flaunt that expertise by demonstrating that they've learnt the precise terminology by rote, and therefore their views must somehow be more valid than someone who slips into using more basic terminology.

If you were a true expert in the field, then I wouldn't have been able to rip your argument apart so easily. BTW, in terms of evidence, I seem to have been the only one posting up facts and figures to support my argument, you're relying on bluff and bluster.


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## free spirit (Oct 6, 2012)

free spirit said:


> Can't be fucked to have this debate again though with people who should know better.


I really should have stuck with my first post on this thread.


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## love detective (Oct 6, 2012)

free spirit said:


> I find it annoying when people put words into my mouth, deliberately misunderstand fucking obvious points being made (such as what someone might mean by reserves when talking about cash, and hard currency), then attempt to ridicule them on the basis of points they've not made, and words they've not spoken.


 
If you can't articulate what you are trying to say, and furthermore don't understand what you are trying to articulate, then once again that is a failing on your part, not the part of the unlucky ones who have to listen to you.



> I particularly find it annoying when the person in question is wrong, but resorts to this sort of crap to disguise that fact.


 
In this case you shouldn't be as annoyed because I am correct and use easy understandable facts & sources to prove that is the case




> no you prick, that was in a different post, this one was responding directly to your claim before it that people withdrawing money from the banks was just an effect of the credit crunch and not a cause of it.


 
very convenient you slip and slide all over the place here as and when you get pulled up on your shite



> I'm attaching a copy of the results for a search for the term 'liquidity crisis' by the poster 'Free Spirit' on this thread. As you can see, I've not used those words on this thread, and having checked all my posts, neither have I said anything else with a similar meaning, so once again you're putting words into my mouth. Please stop doing this.


 
You were talking about the time that the money markets froze up and the resulting stepping in of the state to provide support - this happened from late 2007 to early 2009 - that you did not formally label this 'liquidity crisis' is neither here nor there, that's what it was.



> Once more then, QE was not an immediate response to the immediate liquidity crisis in 2007, but this in no way means that it wasn't a longer term response to the same underlying issue.


 
It wasn't a response to the liquidity crisis full stop - it was a response to the economic & fiscal crisis. This was a crisis not for the banks (primarily) but for the state. QE was a response to this in the fuckwited hope that it would do something to reverse the economic & fiscal crisis. It was not about helping them banks out as you continually assert.



> The immediate response was to issue short term cash loans to the banks. A cash loan pretty much by definition doesn't actually solve the underlying issue of low levels of actual cash across the entire banking system, it merely postpones the data when a long term solution needs to be found to the point at which those loans get paid back.


 
QE was that long term response, taking over directly from the previous loan scheme, and effectively resulting in those loans being repaid without impacting on the banks overall cash position, or the government's ability to sell new gilts in the open market (as would have happened if the banks had also been offloading several hundred billion of government gilts at the same time to repay their loans and bolster their cash reserves).[/quote]

absolute nonsense - that you link QE to something to help the banks when it patently is not and was never that, shows how little you grasp of this kind of hting




> Right, so after January 2009 no more money could be drawn down from the scheme?


 
After January 2009 the liquidity crisis was pretty much over, so there was no need for the scheme - your assertion that it stopped and QE started in its place is totally incorrect. The special liquidity scheme stopped because it had served its purpose, the money markets had opened up again and funding was available from the wholesale markets again, so banks used that as they were a) cheaper and b) didn't carry the stigma of state help



> Therefore it was closed, at least to the extent that it could provide no further support to the banks beyond the level they'd already been supported.


 
It provided that liquidity support until the last bits of it had been repaid in 2012. That the banks no longer needed to draw down anymore on it beyond January 2000 (unlike in August 2009 when they did and it had to be extended) shows that your assertion that QE then came in to take its place is utter bullshit



> your point being?


 
that you can't even get your basic facts right as to when things happened and in what volume they happened




> how do you work that one out then?
> 
> The sentence and the entire paragraph referred to the APF scheme, which includes the APF scheme for corporate bonds, and the APF scheme for Gilts. It doesn't differentiate between the 2 schemes in that paragraph at all.


 
can you not read? It clearly talks off two components to the APF scheme - the first which was to provide liquidity and was based on the purchase of corporate bonds by the bank of england (and done so not through the creation of money by the central bank). The purpose of this was to provide liquidity. A total of £0.3bn was transacted under this scheme, and this scheme is nothing to do with the £375bn of QE we have been discussing here. The second component of the APF scheme involved the creation of money out of nothing by the central bank and the subsequent usage of that to buy gilts from banks with it. The stated purpose of this was not to provide liquidity, but for monetary policy purposes. 



> The summary you quote, only lists the 'Primary Purpose' of the scheme anyway. It may well be that monetary policy was the primary purpose of the gilts scheme (or at least the stated primary purpose), but this in no way excludes the possibility that a significant secondary purpose of it was to take over from the SLS scheme to bolster the banks cash reserves, and increase / maintain the higher rates of cash liquidity in the banking system that the SLS had temporarily supplied.


 
If you'd read the document on the SLS you would see that the liquidity arrangements by the central bank were revamped to ensure sufficient ongoing liquidity support was available to banks going ahead (and that one page summary I linked to from the BOE, shows what those schemes are). These ongoing liquidity schemes specifically make clear they are about providing liquidity to banks, as that is what they were for. QE was not. This news may upset you as it means you are wrong, but that's just something you need to deal with it.



> The argument that this was all about Monetary Policy really falls down when you consider the fact that the banks inflation target is 2%, yet they authorised a further £75 billion QE spending round in October 2011 when RPI stood at over 5%.


 
Pillock - monetary policy is based on future expectations of interest rates, not current ones. this is because it takes a while for things done under monetary policy to actually have the impact that they are hoped to have. So something done today is not done in response to inflation today, it's done in response to expectations of future inflation. And tellingly inflation indeed has come right down since October 2011. RPI inflation was high in 2011 due to a mixture of oil price increases, increases in VAT and weakness in sterling. These things (well the last two anyway) were not seen as being ongoing things so the forecast was that inflation would be falling (which is in line with reduced demand and sluggish growth) , and it did. So sorry, but as usual you're way out with this again.



> I think this paragraph is also pretty telling
> 
> So QE has increased the liquidity in the market to such an extent that they've had to entirely abandon the previous system of regulating money flows between the BoE, the banks and the interbank lending market because of the excess of cash sloshing around in the banks.
> 
> Yet you maintain that QE didn't have the purpose of increasing liquidity.


 
you don't really understand what you're reading there - which comes as no surprise to me



> Your position looks pretty untenable to me tbh, no wonder you have to repeatedly resort to misrepresenting my position.


 
As stated at the beginning, i respond to the shite you post. I don't have to misrepresent your position, I only need to point out your actual position and show how it is incorrect. that you continually slip and slide and hide behind different interpretations of what you said, shows how little grasp you have of this.


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## love detective (Oct 6, 2012)

littlebabyjesus said:


> No. You did this by making it personal, which is your usual trick.


 
it's you who poncing around like some kind of weird butt hurt hybrid of Catman from southpark and Sheldon from big bang theory

but yeah man, you had the guts to do it on the internet


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## love detective (Oct 6, 2012)

free spirit said:


> I really should have stuck with my first post on this thread.


 
If i was as wrong as you i wouldn't have even bothered going as far as you did, so you've done pretty well in perseverance terms


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## free spirit (Oct 6, 2012)

right then dickhead.

If the money markets were so ticketyboo in 2009 how come the libor rates were still sky high, and actually higher than they were in 2007-8?

and if QE wasn't a response to this, how come that the libor rates instantly dropped like a stone when QE started in March 2009, and within months had fallen to their pre credit crunch crisis levels?

Something that none of the previous schemes had achieved.

see, facts and figures, not just bluff and bluster.


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## free spirit (Oct 6, 2012)

> Pillock - monetary policy is based on future expectations of interest rates, not current ones. this is because it takes a while for things done under monetary policy to actually have the impact that they are hoped to have. So something done today is not done in response to inflation today, it's done in response to expectations of future inflation. And tellingly inflation indeed has come right down since October 2011. RPI inflation was high in 2011 due to a mixture of oil price increases, increases in VAT and weakness in sterling. These things (well the last two anyway) were not seen as being ongoing things so the forecast was that inflation would be falling (which is in line with reduced demand and sluggish growth) , and it did. So sorry, but as usual you're way out with this again.


erm right, so following their intervention, what's happened to RPI rates? Have they

A - returned to the BoE target inflation rate
B - dropped from their previous high, due mainly to temporary fuel price reductions, and the ending of the impact of the VAT rate rise, but remained 1% above the target rate?

and also what was it that necessitated that QE increase in October 2011?

Was it the inflation rate which stood at more than double the target rate, or was it maybe more to do with the fact that the libor rates had been climbing steadily again since the summer, reflecting a tightening in the interbank lending markets, probably because the banks had found a none liquid home for most of the initial liquidity injected by QE, mainly in the form of the commodities bubble they were (still are) pushing ever higher?


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## free spirit (Oct 6, 2012)

love detective said:


> If i was as wrong as you i wouldn't have even bothered going as far as you did, so you've done pretty well in perseverance terms


never let the facts and figures stand in the way of your opinion that you must be right eh.


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## free spirit (Oct 6, 2012)

love detective said:


> It provided that liquidity support until the last bits of it had been repaid in 2012. That the banks no longer needed to draw down anymore on it beyond January 2000 (unlike in August 2009 when they did and it had to be extended) shows that your assertion that QE then came in to take its place is utter bullshit


firstly, would you like to try again with your dates?

Scondly, all loans were made by the end of January 2009. No further loans were made after that point, and all activity beyond that point was related purely to these loans being repaid.

Oddly enough, banks repaying loans actually removes cash from the market, rather than adding cash to the market, so it only continued to provide liquidity support to the market in the same way that a bank continues to supply financial support to a customer by not immediately calling the loan in, but giving them 2 years to repay it.

After January 2009, the only impact of this scheme was to reduce cash in the market over the next 3 years by the full amount that the scheme had initially injected into the market. SLS had no overall long term impact on the cash available within the banks, it was therefore incapable of actually solving the long term underlying issue that the entire banking system had massively over extended itself in the preceding decade, and held too little cash reserves as a whole compared to its liabilities.

Therefore SLA was just a temporary fix, a sticking plaster to keep the system going until surgery could take place to solve the problem long term. QE was that surgery.


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## love detective (Oct 6, 2012)

free spirit said:


> View attachment 23766
> 
> right then dickhead.
> 
> ...


 
swear and bluster all you like - the graph shows what i've been saying all along

the disruption starts in late 2007, reaching a peak throughout 2008 and then by mid 2009 rates were back to what they were - rates fell because the immediate liquidity crisis subdued, banks started to lend to each other again - QE came about after all this, not before

And for you to say that rates in 2009 were still sky high when they were at least half the level they were at the peak of the liquidity crisis in 2008 is stretching the levels of acceptable hyperbole to the limit

i've certainly not denied that one of the intended outcomes of QE was to lower yields, i've been saying that all along - that you are now saying back to me what i've said previously doesn't allow you to bask in any glory - for example in this post here many many pages ago, i said to you




			
				me said:
			
		

> The reasons the state indulges in QE is that they think they can stimulate real activity in the economy purely through monetary shenanigans, and part of this reasoning is that by pushing down the yield on gilts (through artificially driving up the price of gilts through QE/Central bank purchases) and therefore pushing down market interest rates in general it will encourage people to 'do stuff'.


 
I've said many times before, the impacts of QE are not disputed - one of these is to lower yields, this has been something i've been saying all along. that you think that this is what the argument is about shows how little you understand about the whole thing. Now you can get all uptight and call me a dickhead if you want, but i'll for as long as you continue to be wrong, i'll be pointing out that you're wrong.


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## littlebabyjesus (Oct 6, 2012)

love detective said:


> the disruption starts in late 2007, reaching a peak throughout 2008 and then by mid 2009 rates were back to what they were - rates fell because the immediate liquidity crisis subdued, banks started to lend to each other again - *QE came about after all this, not before*.


 
No, that graph doesn't show this. It shows QE starting at a point where libor rates were still high and had started rising again. It shows libor rates plummeting back down to previous levels after QE had started.


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## love detective (Oct 6, 2012)

free spirit said:


> erm right, so following their intervention, what's happened to RPI rates? Have they
> 
> A - returned to the BoE target inflation rate
> B - dropped from their previous high, due mainly to temporary fuel price reductions, and the ending of the impact of the VAT rate rise, but remained 1% above the target rate?


 
RPI has pretty much halved since it's peak of 5.2% with the current forecasts set for it to continue to decline (reflecting the sluggish state of the domestic economy), hence the need for more QE in a fuckwited attempt to stimulate the economy



> and also what was it that necessitated that QE increase in October 2011?


 
amongst other things a whole load of bad news coming out of the eurozone with the predicted impact that this would also have a knock on impact on UK's 'growth' hence more QE, exactly the same reasons for all the QE done to date. Plus the fact that in October 2011 it was looking more and more likely that a double dip recession was on it's way, which it was.



> Was it the inflation rate which stood at more than double the target rate, or was it maybe more to do with the fact that the libor rates had been climbing steadily again since the summer, reflecting a tightening in the interbank lending markets, probably because the banks had found a none liquid home for most of the initial liquidity injected by QE, mainly in the form of the commodities bubble they were (still are) pushing ever higher?


 
And of course the latest batch of QE had nothing to do with the fact that in October 2011 the domestic economy was projected to be heading into a double dip recession (which it did in Q1 of 2012) so more fuckwited attempts to stimulate the economy through QE were required. But no, you stick to the fact that it was done for liquidity reasons for banks, and not to try and get the economy out of trouble. Discount all of that as it's an inconvenient truth for your stupid assertions


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## love detective (Oct 6, 2012)

littlebabyjesus said:


> No, that graph doesn't show this. It shows QE starting at a point where libor rates were still high and had started rising again. It shows libor rates plummeting back down to previous levels after QE had started.


 
QE started in March 2009 with a paltry amount of £75bn, when according to that graph spreads were at around 100 basis points, compared to a high of 240 during the liquidity crisis - the biggest drop in rates occurred in the period before QE started,during the SLS, but as already pointed out - no one is disputing that QE drove down market rates, that was part of the reasoning behind it


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## love detective (Oct 6, 2012)

free spirit said:


> View attachment 23767
> 
> firstly, would you like to try again with your dates?


 
OK - clearly that was a typo, it should have said January 2009 not January 2000 - well done, you've got one thing right eventually



> Scondly, all loans were made by the end of January 2009. No further loans were made after that point, and all activity beyond that point was related purely to these loans being repaid.


 
The liquidity given was still in force however, the graph doesn't show significant repayments until mid 2010. In addition £250bn of liquidity assistance was also delivered thorugh the Treasury's scheme which I linked to earlier, you seem somewhat silent on this



> Oddly enough, banks repaying loans actually removes cash from the market, rather than adding cash to the market, so it only continued to provide liquidity support to the market in the same way that a bank continues to supply financial support to a customer by not immediately calling the loan in, but giving them 2 years to repay it.


 
which is still a pretty good amount of support, not sure what you're actual point is here



> After January 2009, the only impact of this scheme was to reduce cash in the market over the next 3 years by the full amount that the scheme had initially injected into the market. SLS had no overall long term impact on the cash available within the banks, it was therefore incapable of actually solving the long term underlying issue that the entire banking system had massively over extended itself in the preceding decade, and held too little cash reserves as a whole compared to its liabilities.


 
And you're off again into not having a clue what you're talking about. Do you think QE is forever, QE will eventually be reversed which will do exactly what you say above. That you think QE is a long term solution to what the SLS provided temporarily shows no understanding of what these two things are and what they were for.



> Therefore SLA was just a temporary fix, a sticking plaster to keep the system going until surgery could take place to solve the problem long term. QE was that surgery.


 
SLS was about providing liquidity to banks, specifically to help out banks. QE was about trying to stimulate activity in the wider economy, specifically to help out the wider economy. Two completely separate things, done at different times for different reasons in response to different problems with the ultimate (intended) beneficiary being two different things


----------



## free spirit (Oct 6, 2012)

do I think QE is forever?

how do you mean?

QE is an asset purchase scheme, a scheme to purchase something being fundamentally different to a scheme to loan someone some money on a short term basis using that asset as security for the loan.

If you don't understand the difference, well I'd suggest that's your problem not mine.

As for QE being reversed... well, if it is then this will be an entirely voluntary arrangement where the BoE offer the gilts back for sale, and the banks decide to buy them back, as opposed to being obliged to buy them back as part of their original loan agreement.


----------



## littlebabyjesus (Oct 6, 2012)

free spirit said:


> do I think QE is forever?
> 
> how do you mean?


The BofE now owns a whole load of govt gilts. At some point, it will have to sell these, thus reversing QE: raising yields by reducing demand for govt debt. I would think that the hope was that QE would have stimilated the economy such that it could reach a point where such a flooding of the market with govt gilts would be fine - with a healthy economy, the govt wouldn't need to borrow so much, but could take revenue from taxes instead.


----------



## free spirit (Oct 6, 2012)

littlebabyjesus said:


> The BofE now owns a whole load of govt gilts. At some point, it will have to sell these, thus reversing QE: raising yields by reducing demand for govt debt.


but the banks are under no obligation to buy that debt back are they, which is a crucial difference to the previous scheme under which they were obliged to buy it back.

also, the BoE could as easily sit on those gilts themselves, they're under no actual obligation to sell them if they don't want to.


----------



## littlebabyjesus (Oct 6, 2012)

free spirit said:


> but the banks are under no obligation to buy that debt back are they, which is a crucial difference to the previous scheme under which they were obliged to buy it back..


Doesn't matter. At the moment, banks and others are very keen on buying govt debt - hence govt can borrow at very low rates of interest. If the BofE were to introduce a whole load more govt debt for sale, that would be effectively changing the supply/demand balance.

tbh the more I think about this, the more I think qe's primary purpose was to provide a short-term solution to keeping government debt cheap to finance for government.

It isn't working, but I can see the logic of QE in using it to try to get people doing stuff. A money trick designed to encourage investment that will eventually be paid for by the real value that the extra investment enables. But imo that ignores the real problem here, which is a lack of demand for loans. That deeper lack of confidence in the economy isn't solved by keeping interest rates low.

Eventually the lesson has to be that the state itself is going to have to make that investment, I would have thought. Already seeing signs of that with the tentative initiatives to back house builders. I expect to see a lot more in the coming years as the lack of willing of the private sector to get into deeper debt continues.


----------



## free spirit (Oct 6, 2012)

love detective said:


> QE started in March 2009 with a paltry amount of £75bn, when according to that graph spreads were at around 100 basis points, compared to a high of 240 during the liquidity crisis - the biggest drop in rates occurred in the period before QE started,during the SLS, but as already pointed out -


so £75 billion is a paltry amount yet this is 3/4 of the initial amount lent under the SLS scheme, and almost exactly the same amount that was lent during the extension in the scheme from the Autumn to January 2009.

How come that the same paltry amount was capable of achieving all you suscribe to it when given as a loan, but when it's actually used to buy the assets directly it suddenly becomes a paltry amount?

btw you seem to have missed the fact that the LIBOR rate had started increasing dramatically again between the end of January and March 2009 between the ending of the SLS scheme, and the start of QE, prior to nose diving as soon as QE kicked in. 



> no one is disputing that QE drove down market rates, that was part of the reasoning behind it


so wtf have you spent the majority of this thread arguing if not this precise point?

It drove down these rates by dramatically improving the cash reserve situation of all the banks to the point where they were more than happy to lend it out to each other at more normal levels again.


----------



## Jazzz (Oct 6, 2012)

Jean-Luc said:


> When you say it will be "us" who will be making the money I assume you mean the government or some State body (which is not at all the same as "us")? I agree that, under your proposed Banking Reform, bank loans would be reduced, but the economy's demand for loans wouldn't. So you are being logical here in seeking an alternative supply: fiat money created by the State by a keyboard stroke (which is what you imagine commercial banks do today). I don't know whether or not this would work, but I suspect the temptation would be too strong and that more than the economy requires will be "printed", which would cause inflation, possibly run-away inflation. Presumably your scheme includes a way of preventing this?
> You're leaving your Nobel Prize winners behind again here. The three you mentioned by name (Irving Fischer, James Tobin and Milton Friedman) all accepted that interest was a fact of economic life under capitalism and made their mark by analysing various aspects of it. Fischer, incidentally, wasn't a Nobel Prize winner. This prize was only set up in 1969 and he died in 1947. He was however a keen campaigner for "full reserve banking". None of them wanted to abolish interest. Neither does the main thinktank in this country advocating "full reserve banking", Positive Money. In their booklet _Full-Reserve Banking in Plain English_ the say (page 21) that what will be the same under this banking reform would be:
> If interest rates on savings were zero why would anybody lend their savings to a bank to relend at interest? This wouldn't make sense (unless there was deflation or fall in the general price level). I don't think you've thought your reform proposal through. You can't have capitalism and abolish interest. I know the view that you can goes back a long way (Karl Marx encountered it in the 1840s). In fact it could be said to be the original currency crank theory.


hmm, I didn't say I would actually abolish interest. Perhaps let's say that if the interest paid on savings accounts was closer to zero, that would in my view fit a more desirable scenario.

I don't fully know exactly how my alternative (full-reserve) economy would be exactly. I don't feel that it is necessary for me to have it perfectly planned in order to argue that the current one is unstable and extremely biased in favour of the bankers.

By creating money ourselves (yes, via government body) of course it would be crucial to create the right amount of money. I don't see why this is not possible. I would much rather we controlled this, than private entities who are not only taking a huge cut for doing so but as I have argued can wreck economies to their advantage should they operate as a cartel. At present, if private banks stopped money creation, then our money supply would be fast reducing as we paid back existing loans - so initially we would to create plenty to keep our money supply topped up.

I would like to see money introduced into the economy as a "citizen's income". Wouldn't that be a nice way of getting it in there? In fact, if you had that, and in the long run taxed demand deposit accounts, then you could have savings account paying zero interest which people would use (use it or lose it). I'm not necessarily saying this would be ideal, I've only just thought of it, but mention as a way in which you could have savings accounts at zero interest.

You say that "economy's demand for loans wouldn't [reduce]", which is not quite the thing - if large amounts of government-created money was coming into the economy via citizen's income (my suggestion) or publicly funded works (as Henry Ford and Edison suggested) or indeed anything the government pays for, like salaries of civil servants (NHS the largest employer in the world!)  - then clearly the demand for loans *would reduce *- why borrow the money when you already have it? We are so used to having to borrow money for everything, that I think we forget - it is absurd that we have to. Why are we all having to pay for our houses three times over, when our ancestors have already built them?


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## Jazzz (Oct 6, 2012)

love detective said:


> If conditions at John Lewis/Waitrose are as good as you suggest and this is down to the nature of the business (and better than Tesco apparently as a result), why are we seeing strike action from cleaners working at John Lewis over working conditions?


 


> The reason this can happen within such a vaunted co-operative is because the cleaning work is outsourced to a subcontractor. As a result the cleaners enjoy none of the rights or benefits of the John Lewis partnership. Instead their employer is another company, Integrated Cleaning Management (ICM), which says cuts are necessary due to economic conditions.




http://www.newint.org/blog/2012/07/05/john-lewis-cleaners/


----------



## Jazzz (Oct 6, 2012)

Jean-Luc said:


> Anyway, if like other banks, the Co-operative Bank can make loans out of nothing, what would be wrong with it doing this to finance "ethical" projects? In fact, if it has this power, why doesn't it use it to do this? Not to do so would be being unethical. The fact that it doesn't is yet further proof that a bank can't create money to lend out of nothing.


I would say it is quite likely that the Co-operative bank does make loans to ethical projects. I would hope so anyway.

Where's the problem?


----------



## Blagsta (Oct 6, 2012)

Jazzz said:


> http://www.newint.org/blog/2012/07/05/john-lewis-cleaners/


 
This proves ld's point.


----------



## ayatollah (Oct 6, 2012)

The Co-operative Bank does indeedy claim to make loans to "ethical" projects, and yes indeedy, depending on the current reserve ratio rules it operates within it can use the perfectly normal functioning of fractional reserve banking to lend out to these "ethical projects" a lot more cash than it has taken in as deposits.(eg, £900 in cash based on £100 of deposits, if the cash reserve ratio is £10% for instance) So What ? It's ability to "create money" isn't unlimited , it can't give out loans of unlimited money value for each £100 of deposits, but is governed by the rules, and structures, enforced by the Bank of England and FSA ...ie, by the state.

Unlike Jazz I think the idea of 100% Reserve banking is a "money crank" pipedream - a dream held by non-socialists who long for a "better", less dominated by the banking sector, capitalism. Whereas I think Fractional Reserve Banking is a vital component of an expansionery, dynamic, capitalism,in all its ghastly exploitative horror, and the "answer" is to abolish capitalism, not tinker with the banking system. Doesn't make the basic operational feature of Fractional Reserve banking - its ability to increase the money supply , a "myth" though - on that at least , Jazz is quite correct.


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## Blagsta (Oct 6, 2012)

ayatollah said:


> The Co-operative Bank does indeedy claim to make loans to "ethical" projects, and yes indeedy, depending on the current reserve ratio rules it operates within it can use the perfectly normal functioning of fractional reserve banking to lend out to these "ethical projects" a lot more cash than it has taken in as deposits.*(eg, £900 in cash based on £100 of deposits*, if the cash reserve ratio is £10% for instance) So What ? It's ability to "create money" isn't unlimited , it can't give out loans of unlimited money value for each £100 of deposits, but is governed by the rules, and structures, enforced by the Bank of England and FSA ...ie, by the state.
> 
> Unlike Jazz I think the idea of 100% Reserve banking is a "money crank" pipedream - a dream held by non-socialists who long for a "better", less dominated by the banking sector, capitalism. Whereas I think Fractional Reserve Banking is a vital component of an expansionery, dynamic, capitalism,in all its ghastly exploitative horror, and the "answer" is to abolish capitalism, not tinker with the banking system. Doesn't make the basic operational feature of Fractional Reserve banking - its ability to increase the money supply , a "myth" though - on that at least , Jazz is quite correct.


 
Eh?  Its £90 loan for £100 deposit with a 10% reserve.


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## littlebabyjesus (Oct 6, 2012)

Blagsta said:


> Eh? Its £90 loan for £100 deposit with a 10% reserve.


yes, then £81 for 90 deposit when that 90 loan is deposited in the bank. etc.

Although Keen and others would contend that this isn't really how things work at all.


----------



## free spirit (Oct 6, 2012)

Blagsta said:


> This proves ld's point.


that's a low burden of proof your applying, which is pretty typical for this thread.

So all companies are as bad as each other because one co-operative decided to outsource its cleaning contract at one store to another company that wasn't a co-op, and that none co-op company then decided to fuck over it's staff.

An annual profits based bonus equivalent to 14% of salary must be standard across the entire retail sector then if all companies are the same....


----------



## Blagsta (Oct 6, 2012)

free spirit said:


> that's a low burden of proof your applying, which is pretty typical for this thread.
> 
> So all companies are as bad as each other because one co-operative decided to outsource its cleaning contract at one store to another company that wasn't a co-op, and that none co-op company then decided to fuck over it's staff.
> 
> An annual profits based bonus equivalent to 14% of salary must be standard across the entire retail sector then if all companies are the same....


 
Why do you think John Lewis outsourced?


----------



## littlebabyjesus (Oct 6, 2012)

Blagsta said:


> Why do you think John Lewis outsourced?


I'm sure they outsource all kinds of things. Nobody here is arguing that jl is some kind of saintly entity. The original point was that it is better to work for jl than tesco because jl is a form of cooperative while tesco is shareholder-owned. That this change in company ownership itself represents a change in capitalist relations, and that, if repeated, it would result in a better deal for workers. So the argument put forward by ld that cooperatives don't make any difference because they don't change the underlying capitalist relations is wrong, imo. Dead wrong. That the few coops that do exist now are far from ideal organisations existing as they do within the current system is not surprising and not in dispute.


----------



## Blagsta (Oct 6, 2012)

littlebabyjesus said:


> I'm sure they outsource all kinds of things. Nobody here is arguing that jl is some kind of saintly entity. The original point was that it is better to work for jl than tesco because jl is a form of cooperative while tesco is shareholder-owned. That this change in company ownership itself represents a change in capitalist relations, and that, if repeated, it would result in a better deal for workers. So the argument put forward by ld that cooperatives don't make any difference because they don't change the underlying capitalist relations is wrong, imo. Dead wrong. That the few coops that do exist now are far from ideal organisations existing as they do within the current system is not surprising and not in dispute.


 
I don't know if it is better or not.  What is the difference?


----------



## littlebabyjesus (Oct 6, 2012)

Blagsta said:


> I don't know if it is better or not. What is the difference?


Pay and conditions.


----------



## Blagsta (Oct 6, 2012)

littlebabyjesus said:


> Pay and conditions.


 
In what way?


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## littlebabyjesus (Oct 6, 2012)

Blagsta said:


> In what way?


Higher pay and better working conditions. Although not, clearly, for the workers for the outsourced companies. Something if I worked for jl that I would be bringing up.


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## Blagsta (Oct 6, 2012)

littlebabyjesus said:


> Higher pay and better working conditions. Although not, clearly, for the workers for the outsourced companies. Something if I worked for jl that I would be bringing up.


 
What does JL pay compared to Tesco?  What's the difference in sick pay and annual leave?


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## littlebabyjesus (Oct 6, 2012)

Blagsta said:


> What does JL pay compared to Tesco? What's the difference in sick pay and annual leave?


Pay rates are similar, except that jl employees get an annual bonus that is rarely less than 10 percent and can be as much as 30 percent. They also have a non-contributory final salary pension scheme, and get many different side-bonuses.

Here's a rather gushing article, but it contains concrete facts too.

And this is interesting (and not so surprising) - cut out the parasitic shareholding class and companies do better:



> he point, though, is how this different way of thinking and feeling about work translates. John Lewis, we've seen, does more than all right. Employee-owned companies currently contribute some £25bn to the British economy. According to an annual index compiled by a leading law firm, they outperform the FTSE by roughly 10% each year. Research by the Cass Business School indicates that employee-owned businesses also create jobs faster; are significantly more resilient in an economic downturn; deliver far better customer satisfaction; boast substantially higher value added per employee; and, depending on the sector and size of the business, can deliver markedly higher profits (co-owned businesses seem to work best when they've got fewer than 75 staff and operate in knowledge- or skill-intensive sectors).


 
As I said, I'm not trying to act as a fanboy for jl. But the claim that they're no different from shareholder-owned companies is patent nonsense.


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## Blagsta (Oct 6, 2012)

and sick leave and holidays?


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## littlebabyjesus (Oct 6, 2012)

Blagsta said:


> and sick leave and holidays?


Look it up yourself. Did you see the bit about the bonus and the pension. And also the bit about how I wasn't claiming that they are an ideal company?


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## Jazzz (Oct 6, 2012)

​


> Staff at the John Lewis store at Westfield, Stratford, celebrate this year's bonus. Photograph: Stefan Rousseau/PA​John Lewis staff saw their traditional annual bonus fall on Wednesday after profits at the retailer were knocked by the economic downturn last year.​Staff at the department stores and Waitrose supermarkets will share £165.2m, to receive a bonus of 14% of salary. That is down from the18% enjoyed by the staff who co-own the retail group last year.​


Guardian

enough questions I think blagsta until you have a go at your own research.
​​


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## Blagsta (Oct 6, 2012)

littlebabyjesus said:


> Look it up yourself. Did you see the bit about the bonus and the pension. And also the bit about how I wasn't claiming that they are an ideal company?


 
I'm not the one claiming that JL is better than Tescos.  I have no idea if it is or not!  You make a claim, you back it up.


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## littlebabyjesus (Oct 6, 2012)

Blagsta said:


> I'm not the one claiming that JL is better than Tescos. I have no idea if it is or not! You make a claim, you back it up.


I just did! ffs. You read my Steve Keen links yet?


----------



## Blagsta (Oct 6, 2012)

littlebabyjesus said:


> I just did! ffs. You read my Steve Keen links yet?


 
No you didn't.


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## littlebabyjesus (Oct 6, 2012)

Blagsta said:


> No you didn't.


Right So they don't get an annual bonus or a final salary pension or subsidised holidays or generous discounts, or any of the other things in the link I posted that you couldn't be arsed to look at?

You're being a complete dick.


----------



## Blagsta (Oct 6, 2012)

littlebabyjesus said:


> Right So they don't get an annual bonus or a final salary pension or subsidised holidays or generous discounts, or any of the other things in the link I posted that you couldn't be arsed to look at?
> 
> You're being a complete dick.


 
You're claiming that conditions were better yet refuse to back your statement up, instead you chuck out insults.


----------



## littlebabyjesus (Oct 6, 2012)

I haven't refused to back it up. 

You're completely mystifying me now.

But here you go, I'll totally spoonfeed you:




> *Benefits at John Lewis Partnership*
> *Pension:*
> A non-contributory defined benefit (DB) plan for all staff after three years’ service.
> *Healthcare and wellbeing:*
> ...


 
Now you go and find me the equivalent for Tesco. And remember that the above applies to every employee except where stated otherwise, so I don't want a Tesco executive's pay. Just a shop floor worker, please.


----------



## free spirit (Oct 6, 2012)

Blagsta said:


> I'm not the one claiming that JL is better than Tescos. I have no idea if it is or not! You make a claim, you back it up.


you're the one questioning the statements that they are though. perhaps you could tell us what percentage of profits or pay tesco staff receive each year?

I concur with LBJ btw, you are being a bit of a dick.

actually, I've done the work for you.

Tesco paid out £110 million in staff bonuses last year, or 10% of profits, between 500,000 staff, or £220 each.

John Lewis paid out £165 million in staff bonuses last year, or 46% of profit between 51,000 FTE staff, or £3235 average per FTE staff member.

Now if you don't see there's a difference between £3k / 46% of profits a year and £220 or 10% of profits a year....

http://www.tescoplc.com/index.asp?pageid=17&newsid=632
http://www.johnlewispartnership.co....rtnership_annual_report_and_accounts_2012.pdf


----------



## Blagsta (Oct 6, 2012)

I'm asking someone to back up their statements.  Apparently that's being a dick.  If you say so.


----------



## Blagsta (Oct 6, 2012)

littlebabyjesus said:


> I haven't refused to back it up.
> 
> You're completely mystifying me now.
> 
> ...


 
You're the one comparing to Tesco!  As I already said, I don't know who is the better employer.  You may well be right.  I'm just asking for evidence.  Apparently this is being a dick.


----------



## free spirit (Oct 6, 2012)

Blagsta said:


> I'm asking someone to back up their statements. Apparently that's being a dick. If you say so.


he'd backed up his position, you carried on demanding that  he continue backing up his position, aka acting like a dick.

anyway, now you've been presented with evidence, are you still of the same opinion you were on the last page?


----------



## Blagsta (Oct 6, 2012)

free spirit said:


> he'd backed up his position, you carried on demanding that he continue backing up his position, aka acting like a dick.
> 
> anyway, now you've been presented with evidence, are you still of the same opinion you were on the last page?


 
You'll note I didn't express an opinion. I just asked for clarification.

[edit]

I expressed an opinion about JL and the economic pressures for them to outsource their cleaning.  I haven't seen anything to make me alter that opinion.

Why do you think they outsourced?  You haven't answered that, unless I missed it?


----------



## free spirit (Oct 6, 2012)

Blagsta said:


> You'll note I didn't express an opinion. I just asked for clarification.


what's this then?


Blagsta said:


> This proves ld's point.


looks like an opinion to me.


----------



## Blagsta (Oct 6, 2012)

see my edit


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## free spirit (Oct 6, 2012)

Blagsta said:


> Why do you think they outsourced? You haven't answered that, unless I missed it?


Any number of reasons, and it's certainly not something I'm going to waste my time investigating - if you can be arsed then feel free to find out and report back though.

Are they generally better as a company than other none co-ops in the same business is the important point here, not whether they're whiter than white in everything they ever do at all their branches.


----------



## free spirit (Oct 6, 2012)

I believe I've got a question pending as well...


----------



## Blagsta (Oct 6, 2012)

free spirit said:


> Any number of reasons, and it's certainly not something I'm going to waste my time investigating - if you can be arsed then feel free to find out and report back though.
> 
> Are they generally better as a company than other none co-ops in the same business is the important point here, not whether they're whiter than white in everything they ever do at all their branches.


 
The general point was that they will be subject to the same economic pressures as other businesses.  I think the outsourcing backs this up.


----------



## free spirit (Oct 6, 2012)

Blagsta said:


> The general point was that they will be subject to the same economic pressures as other businesses. I think the outsourcing backs this up.


ok, maybe to areas of the business that aren't part of the co-op, but within the co-op there will be no shareholder pressure to increase profits by driving down staff wages and conditions because the shareholders are the staff.

I'd think most union types would think that a situation where there was no shareholder pressure to drive down pay and conditions for staff, and where nearly 50% of the company's profits are distributed to staff, was a situation to be championed where it existed and worked towards in other companies.


----------



## Blagsta (Oct 6, 2012)

So why hive parts of the business off to external companies?


----------



## free spirit (Oct 6, 2012)

Blagsta said:


> So why hive parts of the business off to external companies?


perhaps they don't own the store, and the cleaning company is part of the contract with the building owners.

I've no idea, you clearly don't either, so unless you're going to find out, this conversations is a little pointless.


----------



## free spirit (Oct 6, 2012)

one thing's for sure though, if the cleaners were to put together a proposal for the cleaning work to be taken in house, they'd stand a chance of having that proposal voted on by the staff* they work alongside instead of shareholders who really don't give a toss about anything other than profits.




*I don't know the exact membership rules involved, but would expect something like this could go to a vote of the membership.


----------



## Blagsta (Oct 6, 2012)

free spirit said:


> perhaps they don't own the store, and the cleaning company is part of the contract with the building owners.
> 
> I've no idea, you clearly don't either, so unless you're going to find out, this conversations is a little pointless.


 
They wouldn't be John Lewis cleaners then would they.  That was desperate!

No, I don't know the reasons for sure, but I can have an informed guess!


----------



## Blagsta (Oct 6, 2012)

free spirit said:


> one thing's for sure though, if the cleaners were to put together a proposal for the cleaning work to be taken in house, they'd have that proposal voted on by the staff they work alongside instead of shareholders who really don't give a toss about anything other than profits.


 
For sure is it?  Yet you won't hazard a guess as to why they were outsourced?


----------



## free spirit (Oct 6, 2012)

Blagsta said:


> For sure is it? Yet you won't hazard a guess as to why they were outsourced?


is this the difference between us then blagsta?

You're happy to guess why something might have happened, whereas I'd want to actually research it before commenting, and if I don't know then I'd prefer not to comment.


----------



## Jazzz (Oct 6, 2012)

It's completely in the nature of business that things are outsourced. There are surely no large companies that have no expenses or overheads to other suppliers because they take care of it all themselves.


Blagsta said:


> They wouldn't be John Lewis cleaners then would they.


They aren't John Lewis cleaners.


----------



## Blagsta (Oct 6, 2012)

free spirit said:


> is this the difference between us then blagsta?
> 
> You're happy to guess why something might have happened, whereas I'd want to actually research it before commenting, and if I don't know then I'd prefer not to comment.


 
Now its my turn to tell you you're being a dick.


One can make informed guesses on things - which is what I said I did.  You're making guesses only when it suits your argument.


----------



## Blagsta (Oct 6, 2012)

Jazzz said:


> It's completely in the nature of business that things are outsourced. There are surely no large companies that have no expenses or overheads to other suppliers because they take care of it all themselves.
> They aren't John Lewis cleaners.


 
No, they're fucking outsourced.  Pay attention.


----------



## butchersapron (Oct 6, 2012)

Jazzz said:


> It's completely in the nature of business that things are outsourced. There are surely no large companies that have no expenses or overheads to other suppliers because they take care of it all themselves.


 
Marvelous, a faltering step into the the _hidden abode of production_ and he's hopelessly lost.


----------



## free spirit (Oct 6, 2012)

Blagsta said:


> Now its my turn to tell you you're being a dick.
> 
> 
> One can make informed guesses on things - which is what I said I did. You're making guesses only when it suits your argument.


you think so?

I've offered you the opportunity to find the evidence if you want to discuss this. You appear to be declining that invitation then attempting to force me into guessing about a situation I know sod all about. Seems pretty dick like behaviour to me, given that you'd just spent the last page demanding people found evidence to support their POV.

If you can be arsed to find the evidence I'll discuss it, but if you can't be arsed then neither can I.


----------



## Blagsta (Oct 6, 2012)

free spirit said:


> you think so?
> 
> I've offered you the opportunity to find the evidence if you want to discuss this. You appear to be declining that invitation then attempting to force me into guessing about a situation I know sod all about. Seems pretty dick like behaviour to me, given that you'd just spent the last page demanding people found evidence to support their POV.
> 
> If you can be arsed to find the evidence I'll discuss it, but if you can't be arsed then neither can I.


 
I don't have any evidence for my assertion other than it makes sense given my understanding of economics.  I said as much.  It seems that being honest about the limits of my knowledge is being a dick too!


----------



## littlebabyjesus (Oct 6, 2012)

Jazzz said:


> They aren't John Lewis cleaners.


If they clean a JL store, they are JL cleaners in a very real sense.

Seems the cleaners won.


----------



## free spirit (Oct 6, 2012)

Blagsta said:


> I don't have any evidence for my assertion other than it makes sense given my understanding of economics. I said as much. It seems that being honest about the limits of my knowledge is being a dick too!


right, well if you're not willing to find evidence to support your guess either, then there's fuck all point us discussing this further is there.

considering your demands last page for LBJ to supply evidence to support his position, this is pretty weak, or does the need for evidence only apply to those you disagree with?

btw, as I have no interest in discussing this further, and you have no interest in finding anything else out about it, I don't know why you keep pushing this. It does seem to be serving as a distraction from this point, which you seem to be ignoring.



> ok, maybe to areas of the business that aren't part of the co-op, but* within the co-op there will be no shareholder pressure to increase profits by driving down staff wages and conditions because the shareholders are the staff.*
> 
> I'd think most union types would think that a situation where there was no shareholder pressure to drive down pay and conditions for staff, and where nearly 50% of the company's profits are distributed to staff, was a situation to be championed where it existed and worked towards in other companies.​


​


----------



## Blagsta (Oct 6, 2012)

free spirit said:


> right, well if you're not willing to find evidence to support your guess either, then there's fuck all point us discussing this further is there.
> 
> considering your demands last page for LBJ to supply evidence to support his position, this is pretty weak, or does the need for evidence only apply to those you disagree with?
> 
> ...


 


Right, so making an educated guess and saying so is being dickish, but insisting you are right but refusing to back it up isn't?


----------



## littlebabyjesus (Oct 6, 2012)

free spirit said:


> I'd think most union types would think that a situation where there was no shareholder pressure to drive down pay and conditions for staff, and where nearly 50% of the company's profits are distributed to staff, was a situation to be championed where it existed and worked towards in other companies.


 
Well, this goes back to my original point. Changing banks into state-owned/cooperatives and requiring them by statute only to lend to businesses that incorporate themselves as cooperatives is not such a far-fetched idea as the current crisis unfolds. Just as the Depression of the 30s opened up new space for the Keynesian reforms of the post-war period, which made a real difference to people across Western Europe and even in the US, so the prolonged failure of the current model to provide investment can also open up space for new ideas.

A necessary first step along that route would be the nationalisation of banking in one form or another. Again, not such a far-fetched idea. It's already part-happened. It could be a far more ambitious and radical programme than the German landesbank schemes.

I knew I'd be ridiculed for suggesting this. But I stand by it as a possible way to get from where we are now to somewhere better.


----------



## littlebabyjesus (Oct 6, 2012)

Blagsta said:


> Right, so making an educated guess and saying so is being dickish, but insisting you are right but refusing to back it up isn't?


I didn't refuse to back it up. I provided you with a fucking link, you dick.


----------



## Blagsta (Oct 6, 2012)

littlebabyjesus said:


> I didn't refuse to back it up. I provided you with a fucking link, you dick.


 
Wow, you don't like being challenged!  You did show that JL provide a share of profits yes.  You also claimed conditions (this means things like annual leave etc) were better.  Based on...what?  I'm not disagreeing with you, just wondering what you base this on?  I'd guess they might be too, but I don't actually know for sure!


----------



## free spirit (Oct 6, 2012)

love detective said:


> the discussions were not about the impact (which we both actually agreed on if you'd bothered to actually read the thread) but about the reasoning. FS claim and my counter claim and subsequent discussion/argument was 100% about the reasoning behind QE, at no time did we disagree about the impact of QE. I said it many times during that discussion that I agreed with him as to what the impact of it was.


I've just spotted this gem.

So let me get this straight. Your argument isn't about the impact of QE on increasing liquidity in the market, and bolstering the banks cash reserves, it's about whether or not this was an intended impact of the scheme.

So your contention is that despite the lack of liquidity in the market being the subject of several panicked international meetings and stop gap solutions over the previous couple of years that had only partially solved the problem on a temporary basis, the policy they eventually agreed upon that actually solved the problem long term and led virtually immediately to a sustained period of extremely low libor rates, and high levels of liquidity was what? Just a happy accident?

I know I'm generally cynical about the level of competence in government, but seriously this is a ridiculous position.

It's also no wonder I've been struggling to understand you position if this actually is what you've been trying to say.

If it is what you've been trying to say, then I still think you're wrong btw.


----------



## free spirit (Oct 6, 2012)

Blagsta said:


> Right, so making an educated guess and saying so is being dickish, but insisting you are right but refusing to back it up isn't?


who's done that?

and again, why are you continuing this crap and ignoring anything of any substance on this thread?


----------



## littlebabyjesus (Oct 6, 2012)

Blagsta said:


> Wow, you don't like being challenged! You did show that JL provide a share of profits yes. You also claimed conditions (this means things like annual leave etc) were better. Based on...what? I'm not disagreeing with you, just wondering what you base this on? I'd guess they might be too, but I don't actually know for sure!


Well you've now seen the basic JL conditions that I found for you. At every point, they will be better than tesco. And you clearly didn't read the original link as it talked at length about conditions.


----------



## Blagsta (Oct 7, 2012)

littlebabyjesus said:


> Well you've now seen the basic JL conditions that I found for you. At every point, they will be better than tesco. And you clearly didn't read the original link as it talked at length about conditions.


 
I'm not disbelieving you, I'm just asking you to provide a comparison with Tesco.  Accuracy is being a dick apparently.


----------



## littlebabyjesus (Oct 7, 2012)

Blagsta said:


> I'm not disbelieving you, I'm just asking you to provide a comparison with Tesco. Accuracy is being a dick apparently.


Which I have done. You think tesco gives 6 weeks holiday to all employees after 3 years? Or a final salary, non-contributory pension scheme to all staff? Or subsidised holidays and other activities to all staff? Or 6 months full-pay sick leave after 5 years to all staff?

of course they fucking don't and you know it.

Sorry, but this faux naive stance is becoming incredibly tiresome.


----------



## Blagsta (Oct 7, 2012)

littlebabyjesus said:


> Which I have done. You think tesco gives 6 weeks holiday to all employees after 3 years? Or a final salary, non-contributory pension scheme to all staff? Or subsidised holidays and other activities to all staff? Or 6 months full-pay sick leave after 5 years to all staff?
> 
> of course they fucking don't and you know it.
> 
> Sorry, but this faux naive stance is becoming incredibly tiresome.


 
I don't know it, no.  Neither do you it seems, you're just guessing.

It irritates me when you pretend to know stuff, its your main MO and its annoying.


----------



## littlebabyjesus (Oct 7, 2012)

Blagsta said:


> I don't know it, no. Neither do you it seems, you're just guessing.
> 
> It irritates me when you pretend to know stuff, its your main MO and its annoying.


Pretend to know stuff? Pretend to know that tesco don't give all their staff 6 weeks holiday after 3 years? Really? Come the fuck off it. Yes, I know that tesco don't give all their staff what amounts to a well above average set of working conditions, which is what that JL list amounts to - well above average.

I've provided you with links to this which you haven't read. Still haven't read the Steve Keen stuff either, I'm guessing. Go on, give them a read. You might start to understand some of the stuff you've been questioning on this thread about what I've been saying.


----------



## free spirit (Oct 7, 2012)

love detective said:


> After January 2009 the liquidity crisis was pretty much over, so there was no need for the scheme - your assertion that it stopped and QE started in its place is totally incorrect. The special liquidity scheme stopped because it had served its purpose, the money markets had opened up again and funding was available from the wholesale markets again, so banks used that as they were a) cheaper and b) didn't carry the stigma of state help


I've just found the figures to counter this assertion, and they're pretty conclusive.

Prior to the interbank lending market seizing up in August 2007 the total amount owed between the UK banks was £639 billion.

After August 2007 this dropped almost immediately to below £200 billion, and was still at approximately this level in early 2009 prior to QE kicking in, at the point the SLS was closing, and you're claiming that the situation had already resolved itself

By the end of 2009 after QE had kicked in the rate of interbank lending had more than doubled to £424 billion, so QE had achieved what the previous loan / loan protection schemes hadn't.

You attacked my understanding of the timeline earlier. I'd contend that it's actually you who's got the timeline mixed up here.

figures


----------



## free spirit (Oct 7, 2012)

btw, the QE proposal was actually announced in mid January of 2009, before opening in March 2009, so it pretty much immediately took over as soon as the SLS closed.


----------



## free spirit (Oct 7, 2012)

To pick up on the earlier discussion around bank runs, the following are the monthly figures for the total UK site liabilities for the period around the northern rock melt down.



> 31 Aug 07 = £176 billion
> 30 Sep 07 = £108 billion
> 29 Oct 07 = £95 million


 
So £68 billion cash was removed from the banks in one month at a time at which their average total cash reserves between them had been in the region of £30 billion.

Still, I'm sure LD must be right, and that this wasn't in any way a significant factor in the loss of liquidity in the banks.


figures


----------



## Jazzz (Oct 7, 2012)

Blagsta said:


> No, they're fucking outsourced. Pay attention.


pay attention? It was, if you recall, me that pointed the fact out.


----------



## Blagsta (Oct 7, 2012)

Jazzz said:


> pay attention? It was, if you recall, me that pointed the fact out.


 
Yes Jazzz, that's right, you sent the IWW email to me months ago.


----------



## littlebabyjesus (Oct 7, 2012)

free spirit said:


> I've just found the figures to counter this assertion, and they're pretty conclusive.
> 
> Prior to the interbank lending market seizing up in August 2007 the total amount owed between the UK banks was £639 billion.
> 
> ...


 
Interesting figures. They tell a story about the boom, I would think. Rates fairly stable between 1500 and 2000 up to 2002, then a relentless rise to well over 6000 between 2002 and 2007. Those do appear to have been the years of madness in all kinds of ways.


----------



## love detective (Oct 7, 2012)

free spirit said:


> do I think QE is forever?
> 
> how do you mean?
> 
> ...


 
you don't understand a thing about QE by the looks of things

QE can't go on for ever - it will end in two ways

1) the bank of england starts selling the gilts on the market - this along with the current need of the state to issue fresh gilts to fund the deficit would bring about a glut of gilts on the market, forcing rates up and potential fiscal crisis

2) gilts have maturity date - at which time the issuer (the state) has to repay the principal to the holder (currently the BOE). In order for the state to pay back they have to issue more gilts to fund the repayment, this along with the current need of the state to issue fresh gilts to fund the deficit would bring about a glut of gilts on the market, forcing rates up and potential fiscal crisis

That you say the reversal of QE would be a voluntary arrangement is like saying that the fact that you have to pay your mortgage back is ultimately a voluntary arrangement


----------



## love detective (Oct 7, 2012)

free spirit said:


> also, the BoE could as easily sit on those gilts themselves, they're under no actual obligation to sell them if they don't want to.


 
you do realise gilts have a maturity date don't you?


----------



## love detective (Oct 7, 2012)

littlebabyjesus said:


> Doesn't matter. At the moment, banks and others are very keen on buying govt debt - hence govt can borrow at very low rates of interest. If the BofE were to introduce a whole load more govt debt for sale, that would be effectively changing the supply/demand balance.
> 
> tbh the more I think about this, the more I think qe's primary purpose was to provide a short-term solution to keeping government debt cheap to finance for government.


 
Indeed, your last sentence is what i've been saying since the very start (posts 184 and 188 for example) as to what is the real unstated purpose of QE (in addition to the stated purpose of trying through fuckwitted means to stimulate the economy)


----------



## love detective (Oct 7, 2012)

free spirit said:


> so £75 billion is a paltry amount yet this is 3/4 of the initial amount lent under the SLS scheme, and almost exactly the same amount that was lent during the extension in the scheme from the Autumn to January 2009.


 
£75bn is a paltry amount compared to the overall amount of QE



> How come that the same paltry amount was capable of achieving all you suscribe to it when given as a loan, but when it's actually used to buy the assets directly it suddenly becomes a paltry amount?
> 
> btw you seem to have missed the fact that the LIBOR rate had started increasing dramatically again between the end of January and March 2009 between the ending of the SLS scheme, and the start of QE, prior to nose diving as soon as QE kicked in
> 
> ...


 
you keep seeming to miss the point that at no point on this thread have i argued against the simple/banal truism that QE forces up the price of gilts thus driving down their yield

that you think showing graphs showing the reduction in yields/rates which correlate to QE transactions is somehow proving your point, show's that you don't even understand what the discussion you are involved in is about - which probably explains why you're doing it so badly

i've said from the very start that the impact of QE drives up gilt prices and yields down - that this happens is purely a function of a deep pocketed buyer in the market for something - the argument you and I are having (which I seem to have to remind you as you don't seem to know) - was about the reasoning and motivations of doing QE in the first place. You claim it was purely to help out the banks, I claim that it wasn't as there was a myriad of other schemes in place to help the banks. QE was about two things:-

1) on the surface to try and stimulate the economy (not the banks) and

2) to try to ensure there were sufficient demand for state debt in the market to ward off bond market vigilantism and therefore to artificially sustain the unsustainable political programme of austerity that is being waged

That banks were involved in the transmission mechanism of this and didn't play game is clear, that they may have benefited as a by-product of this situation is also not at doubt. But your initial claim that QE was primarily intended to help out the banks is total and utter bullshit.


----------



## love detective (Oct 7, 2012)

Jazzz said:


> http://www.newint.org/blog/2012/07/05/john-lewis-cleaners/


 
hold on though - co-operatives are nice friendly places to work for that don't have any of the negative charactersitics of shareholder owned companies

they are not subject to the same competitive pressures that other companies working in those same markets are subject to

i mean they would never end up subcontracting out elements of their business in order to drive down costs without any concern as to the impact of those decision on the actual workers who do the work would they, erm hang on....


----------



## love detective (Oct 7, 2012)

free spirit said:


> ok, maybe to areas of the business that aren't part of the co-op, but within the co-op there will be no shareholder pressure to increase profits by driving down staff wages and conditions because the shareholders are the staff.


 
sorry but that's laughable - if a co-op can pick & choose which parts of its business are not actually part of the co-op (and therefore outsource and treat them like any other company) - it doesn't say much about the nice, friendly cuddly image of the co-op

you say there is no shareholder pressure to increase profits by driving down staff wages at co-ops - what has the pressure that lead to JL outsourcing its cleaning which ultimately ended up increasing profits by driving down wages and forcing people to work more for less

the main argument from me is that co-ops are subject to the same economic pressures & competitive impulses as are non co-op companies - the outsourcing of cleaning contracts shows exactly that happening in reality


----------



## love detective (Oct 7, 2012)

Jazzz said:


> It's completely in the nature of business that things are outsourced.


 
bingo!

like a stopped calendar, once a year you actually get something right

it's completely in the nature of business to look to drive down costs and if this driving down of costs is against the interest of workers then so be it, and this applies regardless of the ownership structure of the companies operating in the market


----------



## love detective (Oct 7, 2012)

free spirit said:


> I've just spotted this gem.
> 
> So let me get this straight. Your argument isn't about the impact of QE on increasing liquidity in the market, and bolstering the banks cash reserves, it's about whether or not this was an intended impact of the scheme.
> 
> So your contention is that despite the lack of liquidity in the market being the subject of several panicked international meetings and stop gap solutions over the previous couple of years that had only partially solved the problem on a temporary basis, the policy they eventually agreed upon that actually solved the problem long term and led virtually immediately to a sustained period of extremely low libor rates, and high levels of liquidity was what? Just a happy accident?


 
if you'd actually been able to read and follow the thread you would know that our argument from the very start has been about the reasoning & intentions behind QE, not the actual impact or the by-product impacts of it. 

that I keep having to remind you what you are meant to be backing up here is pretty revealing


----------



## love detective (Oct 7, 2012)

free spirit said:


> I've just found the figures to counter this assertion, and they're pretty conclusive.
> 
> Prior to the interbank lending market seizing up in August 2007 the total amount owed between the UK banks was £639 billion.
> 
> ...


 
You can't help but make a fool of yourelf over this stuff can you

while the SLS scheme was in operation there was no need for banks to borrow in the market - they borrowed a shit load in 2008 while it was available through state help to get them through what was at that time an un-quantifiable period of seizure in the markets. Don't forget that in 2008 alone the total liquidity provided by the states liquidity schemes (nothing to do with QE) was around £450bn (£200bn from SLS and £250bn throught he treasury insurance scheme)

They filled their boots at that point in time, overfilled them actually because they didn't know what lay ahead in terms of whether markets woud ever become functioning again

by 2009 however markets did begin to open up (mainly because most of the banks did indepth audits and took big write downs on positions so it was much more visible which banks had the biggest exposures to the toxic crap). When the markets started to thaw, there was a big push for banks to free themselves from state aid and for two reasons 1) it was quite expensive relative to now available market rates and 2) it carried a stigma with it which they wanted to unburden

So throughout 2009 liquidity loans started to be repaid (as the graph quoted ages ago shows) which was in return replaced by market funding leading to the increase you point out

that you say the doubling of money market funding to 424bn (an increase of £224bn) was achieved by £75bn of QE which you admit nothing was done with this other than put it back on deposit with the central bank is astonishing. No, the truth is that money market funding increased because the markets thawed in 2009, as i've been saying all along, and things started to operate again at levels nearer what they had been before the freeze.

you continually post up stuff here that detracts from your own case muppet

keep throwing those fish into the barrel though and i'll happily keep shooting them


----------



## love detective (Oct 7, 2012)

free spirit said:


> To pick up on the earlier discussion around bank runs, the following are the monthly figures for the total UK site liabilities for the period around the northern rock melt down.
> 
> 
> 
> ...


 
sorry but once again, you're playing around with numbers you have no clue about and are once again making a fool of yourself for doing so

you think the figures that you have quoted represent the amount of sight deposits that customers have with banks

the figures actually (if you read the title of the thing you linked to) represent sight deposits that uk banks have with other uk banks (excluding the central bank). so they represent bank to bank lending

that there is a big drop at exactly the time the money markets freeze up represents the facts that banks started to be shut out of the money markets at that time - and instead had to rely on state help. For example the central bank had to step in with emergency funding of 30bn for northern rock alone at that time

that you think those figures show customers withdrawing 60bn of cash from banks is absurd - where did this money go even if that was what it represented (which it doesn't) - under the mattress? or into other banks?


----------



## redsquirrel (Oct 7, 2012)

love detective said:


> the main argument from me is that co-ops are subject to the same economic pressures & competitive impulses as are non co-op companies - the outsourcing of cleaning contracts shows exactly that happening in reality


I'm not up on all the QE and gilt debate (though I think I'm getting some sense of it, ta to you and Jean-Luc), but I'm amazed that anybody could argue against this point. I mean it's just bloody obvious.


----------



## littlebabyjesus (Oct 7, 2012)

redsquirrel said:


> I'm not up on all the QE and gilt debate (though I think I'm getting some sense of it, ta to you and Jean-Luc), but I'm amazed that anybody could argue against this point. I mean it's just bloody obvious.


It is worth pointing out again, I think, that the cleaners won their dispute. Massive kudos to them for what looks like it was a brilliantly worked piece of industrial action, but I would also like to know what if any pressure JL put on its subcontractor.

It is shit that JL subcontracts its cleaning to non-coop companies. But that doesn't mean that coops are subject to the same pressures and impulses as shareholder-owned companies. They're not. JL is incorporated in such a way (it's written in its constitution) that the trust that runs it is obliged to run the company for the benefit of its workers. And that does have concrete results in terms of the way its workers (the ones who are actually part of the coop at least) are treated. This is in stark contrast to shareholder-owned companies that are normally incorporated in such a way that they are obliged to run the company for the benefit of its shareholders.

So internally, this makes a huge difference - the company is run for its members. Externally - the way it relates to the rest of the economy - I'd like to see some figures. JL has a reputation for treating its suppliers better than other companies in the same sector. Even those cleaners at the JL store who went on strike - I'd like to see their pay and conditions compared to cleaners subcontracted by other companies.

JL is far from ideal, but stating that being a coop makes no difference is overstating the case. It makes less difference than one might hope, but I would contend that the more coops there are, the better they will behave. The pressures on them will change because the capitalist relations within them will have changed. I come back to that question 'who owns what?'. If you're coming to a society fresh and trying to work out the power dynamics of that society - and if you know that the concept of private property is well entrenched - that question 'who owns what' is just about the first port of call. Changing patterns of ownership changes behaviour.


----------



## free spirit (Oct 7, 2012)

love detective said:


> you don't understand a thing about QE by the looks of things
> 
> QE can't go on for ever - it will end in two ways
> 
> ...


This is like wading through treacle.

Do you not get the difference between a loan with a fixed payback date that uses something as collateral, and someone actually buying that thing off you?

In the first scenario the banks were obliged to pay the loans back within a relatively short time frame, in the second they're under no obligation to do anything at all, the money is theirs to do what they want with it for as long as they want.

The fact the BoE may decide at a later date to try to flog the gilts on the open market has no bearing on the situation from the banks point of view - they're free to participate in buying those gilts at that time if they choose to, but are under no obligation to do so.

Or do you work on the basis that anytime you buy something from someone they're automatically obliged to buy it back again from you if you tell them to?


----------



## free spirit (Oct 7, 2012)

love detective said:


> while the SLS scheme was in operation there was no need for banks to borrow in the market - they borrowed a shit load in 2008 while it was available through state help to get them through what was at that time an un-quantifiable period of seizure in the markets. Don't forget that in 2008 alone the total liquidity provided by the states liquidity schemes (nothing to do with QE) was around £450bn (£200bn from SLS and £250bn throught he treasury insurance scheme)


so when you said the money markets had been freed up and were operating freely by the start of 2009 so that QE wasn't needed for this purpose, what you actually meant was the complete opposite?

You realise of course that all (or maybe virtually all) the previous funding was in the form of loans, or loan guarantees, and that the loans needed to be repaid over the next 3 years, so all that extra cash in the market was going to be withdrawn over that period despite the fact that the money markets, or the interbank lending market at least, had hardly been freed up at all, and LIBOR remained at something like 8 x it's more usual rate.


----------



## littlebabyjesus (Oct 7, 2012)

free spirit said:


> The fact the BoE may decide at a later date to try to flog the gilts on the open market has no bearing on the situation from the banks point of view - they're free to participate in buying those gilts at that time if they choose to, but are under no obligation to do so


 
You have missed a point here, I think. Of course they're under no obligation. They're under no obligation to buy govt gilts now, but they do. But the more gilts the govt tries to sell, the higher the interest rate it will have to offer in order to sell them. That's just simple supply and demand - increasing the supply reduces the price.

So ld is right on this, I think - and everyone I've read agrees on this point: at some point QE will need to be unravelled - all that extra money that they printed up will need to be destroyed. I would enter a possible third scenario to the ones ld suggests, which is that the BofE could do some more QE to buy more gilts. I would wonder how long such a trick could continue before confidence in the currency collapses, though. But Japan's been doing it for over a decade now and is currently on its eighth round! Link. We could very well be in for a future similar to this - prolonged slump with low interest rates, low private investment levels and round after round of qe. In fact, we already are in this process, as many predicted in 2007. For Japan 1990, read UK 2007. The structural similarities in the countries' booms and debts are strikingly similar. And in Japan, for the last 20 years, the overextended private sector has been paying its debts down, to be replaced by govt debt, whose yields are kept very low through qe.

As slump continues, and round after round of QE is carried out, it does rather leave one thinking of Wile Coyote at the point where he still hasn't realised he's run off the cliff. For money systems to work, people need to have confidence in them. Once that confidence goes, the whole thing collapses. Don't look down, Wile!


----------



## free spirit (Oct 7, 2012)

love detective said:


> that you say the doubling of money market funding to 424bn (an increase of £224bn) was achieved by £75bn of QE which you admit nothing was done with this other than put it back on deposit with the central bank is astonishing. No, the truth is that money market funding increased because the markets thawed in 2009, as i've been saying all along, and things started to operate again at levels nearer what they had been before the freeze.


£75 billion was just the first bit of QE, by the end of 2009 when the majority of this unfreezing of the interbank lending markets took place, the BoE had bought around £200 billion worth of gilts.



It's not me who's wrong here, and it's odd that I'm the only one posting up facts and figures to support my case. Why is that?


----------



## free spirit (Oct 7, 2012)

littlebabyjesus said:


> You have missed a point here, I think. Of course they're under no obligation. They're under no obligation to buy govt gilts now, but they do. But the more gilts the govt tries to sell, the higher the interest rate it will have to offer in order to sell them. That's just simple supply and demand - increasing the supply reduces the price.


not you as well.

how hard is this? Under the previous schemes the banks HAD to repay the loans on a fixed timescale.

Under this scheme the money is theirs to do what they want with for as long as they want. The fact the BoE might have to try to sell on the gilts in the future has zero baring on the other banks liabilities, they're under no legal obligation to buy them back from the BoE are they.

If they choose to buy them back then that's their choise, but the BoE can't force them to buy them back.



littlebabyjesus said:


> So ld is right on this, I think - and everyone I've read agrees on this point: at some point QE will need to be unravelled - all that extra money that they printed up will need to be destroyed.


I've never said it won't, but the banks are under no obligation to buy them back if they don't want to, which is vastly different to a scenario where they'd just been loaned the money and had to repay it within a relatively short timescale.

I reckon I could make a killing from those on this thread as a loan shark btw given how you all seem to not understand the difference between a loan using an asset as a guarantee with a fixed repayment period and a sale.

eta, it's not me that's missing the point.


----------



## littlebabyjesus (Oct 7, 2012)

Ok, I see. Misunderstanding I think. I was looking at this from the BofE's point of view rather than the banks'. Yes, you are right from that point of view - the money the banks received from qe through sale of their govt gilts doesn't have to be repaid. It's a change in liquidity of funds, rather than an increase in funds, though, isn't it? Changing govt gilts into cash, basically.

From what I can tell, qe is no problem for the banks. It's the Central Bank that has given itself a future headache. That's what I was talking about.


----------



## free spirit (Oct 7, 2012)

love detective said:


> you keep seeming to miss the point that at no point on this thread have i argued against the simple/banal truism that QE forces up the price of gilts thus driving down their yield.


what the fuck are you prattling on about here?

At no point have I even mentioned the price or yield of gilts, and none of my references have related to this either.

If you've been discussing the implications of the price and yields of gilts, then you've been having a completely different conversation to the one I've been having, which is odd seeing as the starting point for this discussion was you disagreeing with my points earlier in the thread.


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## littlebabyjesus (Oct 7, 2012)

tbf I think I misunderstood you too, fs. Easy to talk past one another in this particular subject, ime.

And there is a lot to dispute - the BofE has as good as admitted that it is taking a leap into the unknown somewhat with QE. In the 70s we had 'stagflation' - high unemployment, high interest rates, high inflation and low growth. But now we have something different - high unemployment, low interest rates, low inflation and no growth. The key factor I would see is employment. If you want growth, you have to have people doing stuff! So austerity is self-defeating, leading to higher govt deficit, not lower, which requires qe to make the deficit viable.

What I'm unsure about is how this can end. The way out of qe is to return to growth, which would reduce the deficit and allow the BofE-owned gilts to be sold back. But we're not likely to return to growth as long as the private sector, taken as a whole, is paying down its debts, which is what has been happening in Japan and now appears to be happening here.

Breaking this cycle could be done through government spending programmes - govt investing directly in the economy to replace private investment. This is going to happen in one way or another in the coming years, I think - it's been happening in Japan already. Steve Keen has a suggestion for a different solution. He suggests reducing the private debt burden ( which is the real story of the crisis - it is a crisis of too much private debt, not public debt - public debt has been rising precisely because the private sector has been seizing up, not the other way round) by attacking the problem from the other end. Instead of buying gilts from banks, you give the money you've printed directly to those who are in debt. This is particularly suitable in the UK, where household debt is enormous. You give everyone £10k, for instance, on condition that they use this money first to pay down any debts they might have. They are free to spend anything left over.


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## free spirit (Oct 7, 2012)

littlebabyjesus said:


> Ok, I see. Misunderstanding I think. I was looking at this from the BofE's point of view rather than the banks'. Yes, you are right from that point of view - the money the banks received from qe through sale of their govt gilts doesn't have to be repaid. It's a change in liquidity of funds, rather than an increase in funds, though, isn't it? Changing govt gilts into cash, basically.


yes, as I've repeatedly stated, it's not a change in the overall balance sheet, it's a change in their actual cash holdings.

and it was the cash position that was the systemic problem, not access to gilts, as they could all have happily swapped gilts for other gilts all day long but it wouldn't have altered the fundamental problem that they didn't have sufficient cash within the entire banking system to cover their liabilities, and as a result they were all incredibly reluctant to lend to each other still.

The previous schemes had managed to stave off total collapse, but hadn't actually worked to really free up the interbank lending market, and bring libor down to anything like it's previous level precisely because they were loans that needed repaying in the not too distant future, so didn't really alter the medium term position, and the banks were still hoarding the cash in order to ensure they had sufficient to repay these loans when they fell due. They'd certainly not have been wanting to lend large volumes of it to other riskier banks that might have gone bust in the intervening period, leaving the original bank still needing to find that cash to give back to the BoE.

LD is arguing that the intent behind the injection of £370 billion of actual cash into the banking system that resulted in the freeing up of the interbank lending rate, and Libor dropping like a stone and staying down had nothing to do with any of this, the fact that it actually sorted the situation out was just a happy byproduct of it's true purpose or something. Also that the previous loan schemes that needed to be repaid from cash reserves of the banks that were 1/3 lower than the total value of those loans at the point of QE starting wasn't a problem either.


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## free spirit (Oct 7, 2012)

littlebabyjesus said:


> tbf I think I misunderstood you too, fs. Easy to talk past one another in this particular subject, ime.


given that I've never once mentioned the price or yields on gilts, I don't understand how anyone could think this was what I was talking about.


I think I may have noticed LD mentioning something about it at some stage previously, but as it was irrelevant to the point under discussion I ignored it.


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## love detective (Oct 7, 2012)

free spirit said:


> This is like wading through treacle.
> 
> Do you not get the difference between a loan with a fixed payback date that uses something as collateral, and someone actually buying that thing off you?
> 
> ...


 
Your changing the topic - my post was a response to your post asking:-

'do i think QE is forever' what do you mean?

I answered it, and explained that QE cannot go on forever, it will come to an end eventually in one of two ways

that you take a hairy strop because i answered your question is bizarre


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## love detective (Oct 7, 2012)

free spirit said:


> £75 billion was just the first bit of QE, by the end of 2009 when the majority of this unfreezing of the interbank lending markets took place, the BoE had bought around £200 billion worth of gilts.
> 
> View attachment 23782
> 
> It's not me who's wrong here, and it's odd that I'm the only one posting up facts and figures to support my case. Why is that?


 
you're right about one thing, it is like wading through treacle

you claimed earlier that the £75bn was the thing that made market rates drop from their high of 240 or whatever to around 20/40. In which case why was there a need for another £300bn subsequent to that? You admit yourself that the majority of the unfreezing in the interbank lending markets had taken place by the end of 2009, and the graph that you posted shows fairly constant rates ever since - in which case why the need for another £175bn since then?

and i noticed you didn't respond to my post where you asked me what was the reason for QE in october 2011 - where i replied that was the time the fear of a double dip recession was starting to mount and so more monetary stimulus (in the shape of QE) was announced. keep on avoiding the inconvenient facts to your shit thesis free spirit


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## free spirit (Oct 7, 2012)

love detective said:


> But your initial claim that QE was primarily intended to help out the banks is total and utter bullshit.


 
For the record my initial point on this subject was this.



free spirit said:


> really. So it's not been *partly* used by the banks to build up their capital reserves to meet the government's new requirements for the proportion of capital reserves to liabilities the banks must hold in order to ensure they can meet a greater proportion of their existing liabilities?


 
in response to this point from LD



> quantitative easing has *nothing* to do with 'meeting the banks existing liabilities'


 
now I did also go on to say this,


> Quantitative easing was therefore a win win for both sides, but *the ultimate driving force* for it IMO was the recognition of the need to inject huge quantities of hard cash into the banks, and that without QE the banks would be forced to achieve this in ways that would negatively impact on government's ability to borrow at low interest rates. I entirely acknowledge the potential that the politicians aren't even aware of this, and believe their own bullshit about getting the banks lending etc, but it is largely bullshit, as the figures on the ground clearly demonstrate.


which is a bit more in line with LD's statement, but my point all along has been arguing against LDs initial statement that QE had 'nothing to do with meeting the banks existing liabilities'.

I'd find it hard to determine exactly which motivation for QE was the strongest, but resolving the cash problems of the banks, and thereby solving the credit crunch aspect of the problem was certainly a major motivating factor behind QE IMO.

The other key liability that it solved for the banks was the £180 billion liabilities they owed to the BoE from the previous loan scheme that LD seems to think somehow wasn't an issue.


----------



## free spirit (Oct 7, 2012)

love detective said:


> you're right about one thing, it is like wading through treacle
> 
> you claimed earlier that the £75bn


actually, you introduced the £75 billion figure.


----------



## free spirit (Oct 7, 2012)

love detective said:


> and i noticed you didn't respond to my post where you asked me what was the reason for QE in october 2011 - where i replied that was the time the fear of a double dip recession was starting to mount and so more monetary stimulus (in the shape of QE) was announced. keep on avoiding the inconvenient facts to your shit thesis free spirit


I've not denied this would also have been a motivating factor.

You're the one that seems to be denying that the rise in the libor rates at the same time could have had anything to do with it, as you're denying that this aspect had anything to do with the motivation for QE.


----------



## love detective (Oct 7, 2012)

free spirit said:


> LD is arguing that the intent behind the injection of £370 billion of actual cash into the banking system that resulted in the freeing up of the interbank lending rate, and Libor dropping like a stone and staying down had nothing to do with any of this


 
you keep saying this and i keep telling you that you're incorrect

In post 184 of this thread, almost 300 posts ago i said this



> The reasons the state indulges in QE is that they think they can stimulate real activity in the economy purely through monetary shenanigans, *and part of this reasoning is that by pushing down the yield on gilts (through artificially driving up the price of gilts through QE/Central bank purchases) and therefore pushing down market interest rates in general* it will encourage people to 'do stuff'.


 
That you seem to keep on insisting (in the face of a whole lots of posts from me that say the contrary) that I have argued anything like what you suggest above in your case says a lot more about your lack of comprehension and reading skills than it says about me


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## free spirit (Oct 7, 2012)

love detective said:


> Your changing the topic - my post was a response to your post asking:-
> 
> 'do i think QE is forever' what do you mean?
> 
> ...


and I'd also explained in that post how QE differed from a loan scheme, in that the cash injected into the banks was a permanent injection of cash and not a temporary one.


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## littlebabyjesus (Oct 7, 2012)

free spirit said:


> LD is arguing that the intent behind the injection of £370 billion of actual cash into the banking system that resulted in the freeing up of the interbank lending rate, and Libor dropping like a stone and staying down had nothing to do with any of this, the fact that it actually sorted the situation out was just a happy byproduct of it's true purpose or something.


 
But what has been the effect on the real economy of that reduction in the libor? That would be my question. It's had far less effect than was hoped, I would suggest, because easing the credit crunch doesn't in itself create demand for loans. That is the criticism levelled at qe from certain quarters - that it has the way the system works back to front. And as a result, the only 'positive' result of qe is that the government can fund itself for a bit longer.


----------



## free spirit (Oct 7, 2012)

love detective said:


> you keep saying this and i keep telling you that you're incorrect
> 
> In post 184 of this thread, almost 300 posts ago i said this
> 
> ...


so you believe the libor rates are being driven down by the yields on gilts?

can you not see the difference in our positions?

for the record, I'm saying that libor rates were driven down directly by the influx of £200 billion or so of cash into the banks in 2009, not indirectly via some weird linkage with gilt yields.


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## love detective (Oct 7, 2012)

free spirit said:


> I've not denied this would also have been a motivating factor.
> 
> You're the one that seems to be denying that the rise in the libor rates at the same time could have had anything to do with it, as you're denying that this aspect had anything to do with the motivation for QE.


 
I have been saying consistently that the fact that libor rates (which generally track yields on gilts) went down as a result of QE - is a banal truth which neither gives any evidence to support your assertion or mine as to the reasoning behind QE

Rates going down is an objective of QE yes - the question is why did the state want rates to go down. You contend that the main reason for them wanting this was purely to help the banks (despite many other existing schemes in force which specifically and explicitly state their aim is to help bank liquidity). I contend that the main reason for them doing this was

1) on the surface to stimulate activity in the wider economy, and

2) to ensure continued demand for govt gilts to allow the economical unsustainable political austerity to be sustained artifically

can you not see that pointing to rates going down does not provide evidence one way or another as to whether you are correct or whether i am correct?


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## love detective (Oct 7, 2012)

free spirit said:


> so you believe the libor rates are being driven down by the yields on gilts?
> .


 
of course - that was the objective of QE - to drive down wider market rates through pushing down gilt rates - this is exactly what i said in post 184, nearly 300 posts ago




			
				me said:
			
		

> The reasons the state indulges in QE is that they think they can stimulate real activity in the economy purely through monetary shenanigans, *and part of this reasoning is that by pushing down the yield on gilts (through artificially driving up the price of gilts through QE/Central bank purchases) and therefore pushing down market interest rates* in general it will encourage people to 'do stuff'.


 
as per my post above though, this is not the crux of our argument - the crux is why the state wanted that to happen. you say it was primarily to help the banks, i disagree and say it was primarily to help the state and give it cover for its political programme


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## free spirit (Oct 7, 2012)

littlebabyjesus said:


> But what has been the effect on the real economy of that reduction in the libor? That would be my question. It's had far less effect than was hoped, I would suggest, because easing the credit crunch doesn't in itself create demand for loans. That is the criticism levelled at qe from certain quarters - that it has the way the system works back to front. And as a result, the only 'positive' result of qe is that the government can fund itself for a bit longer.


please don't think my position is somehow a defence of QE as a policy to improve the wider economic situation, it isn't.

IMO QE solved the immediate cash crisis for the banks, but they've then gone on to use a significant portion of the extra cash they had sloshing around to join a global effort to pump up a massive commodity price bubble, which actually damages the global economy as it's grown, as well as building up for another major problem when the bubble inevitably bursts.


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## free spirit (Oct 7, 2012)

love detective said:


> of course - that was the objective of QE - to drive down wider market rates through pushing down gilt rates
> 
> as per my post above though, this is not the crux of our argument - the crux is why the state wanted that to happen. you say it was primarily to help the banks, i disagree and say it was primarily to help the state and give it cover for its political programme


can you be a bit more precise.

You initial post said that it had '*nothing*' to do with the banks cash situation.

This is the point I was arguing against, what exactly would class as the primary motivation is a lot more debatable.


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## littlebabyjesus (Oct 7, 2012)

free spirit said:


> please don't think my position is somehow a defence of QE as a policy to improve the wider economic situation, it isn't.
> 
> IMO QE solved the immediate cash crisis for the banks, but they've then gone on to use a significant portion of the extra cash they had sloshing around to join a global effort to pump up a massive commodity price bubble, which actually damages the global economy as it's grown, as well as building up for another major problem when the bubble inevitably bursts.


 
What's been happening in Iceland interests me. From deepest shit to a return to growth in a few short years, in stark contrast to Ireland or Greece. They allowed the banks to go bust rather than bail them out. Hurting various individuals whose savings disappeared, but as a result, they have been able to move on. In many ways, I see qe as a prolonging of the crisis, postponing the day of moving on. In this sense it is a very bad thing.


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## love detective (Oct 7, 2012)

free spirit said:


> can you be a bit more precise.
> 
> You initial post said that it had '*nothing*' to do with the banks cash situation.
> 
> This is the point I was arguing against, what exactly would class as the primary motivation is a lot more debatable.


 
No i said the motivation for doing it had nothing to do with helping the bank's out, QE was about trying to help out the economy and state out in various ways - using the banks as the transmission mechanism for doing so

i've never deined on this thread that a by-product of doing this has been to help out banks in various ways (even more so given that the scheme didn't end up doing what the stated objective was), but i still maintain that this was not the motivation for doing so


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## free spirit (Oct 7, 2012)

love detective said:


> you keep seeming to miss the point that at no point on this thread have i argued against the simple/banal truism that QE forces up the price of gilts thus driving down their yield


is this actually what you intended to say here?







£200 billion of QE in 2009 seems to have had minimal impact on Gilt Yields, and if anything there was a slight rise in Yields through 2009, but dramatic impacts on LIBOR, with a virtually immediate fall to a steady low rate within 6 months of QE starting.

Therefore you're wrong to ascribe the impacts on LIBOR rate to having anything to do with gilt yields IMO.

eta - long term maybe the reducing yield on gilts could be related to QE, I've not really looked into that side of things. It definitely wasn't this that caused the almost immediate drop in the libor rates, and increased bank to bank lending in 2009 though.


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## free spirit (Oct 7, 2012)

love detective said:


> No i said the motivation for doing it had nothing to do with helping the bank's out, QE was about trying to help out the economy and state out in various ways - using the banks as the transmission mechanism for doing so
> 
> i've never deined on this thread that a by-product of doing this has been to help out banks in various ways (even more so given that the scheme didn't end up doing what the stated objective was), but i still maintain that this was not the motivation for doing so


ok, so do you still maintain that the motivation behind QE had nothing to do with solving the banks cash problems?

I note you've changed the last part of your post to saying 'the' motivation... but was it 'a part' of the motivation behind it as I stated in my first post on the topic.


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## littlebabyjesus (Oct 7, 2012)

free spirit said:


> is this actually what you intended to say here?
> 
> 
> 
> ...


You could argue perhaps that stopping yields from going up was an achievement, given the way they've shot up in many other countries.


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## free spirit (Oct 7, 2012)

littlebabyjesus said:


> You could argue perhaps that stopping yields from going up was an achievement, given the way they've shot up in many other countries.


you could, but then you'd have to also consider the fact that they dropped significantly in the year before QE, and actually rose in the first year of QE, which really disproves that logic.


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## free spirit (Oct 7, 2012)

It's interesting what happens to a debate when someone actually introduces some facts and figures isn't it.

I'm going to have to leave you all to it, but I hope I've now actually proved that I've been right in virtually everything I've said in this thread all along, and LD has been wrong.


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## littlebabyjesus (Oct 7, 2012)

free spirit said:


> you could, but then you'd have to also consider the fact that they dropped significantly in the year before QE, and actually rose in the first year of QE, which really disproves that logic.


It doesn't support it, but it also doesn't disprove it. I'm not sure what the time-lag on such measures would be. I'm up against my own ignorance here too, as I don't know exactly how governments issue bonds - do they drip-feed them constantly or do them in big chunks? Also, regardless of qe, hasn't there been a fleeing of money to govt gilts from riskier investments in recent years?


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## love detective (Oct 7, 2012)

free spirit said:


> It's interesting what happens to a debate when someone actually introduces some facts and figures isn't it.


 
you've introduced facts & figures, the problem is they do nothing to support the arguments you are making. they don't provide support one way or another to either your assertion or mine.

that you cannot see this is somewhat amusing



> I'm going to have to leave you all to it, but I hope I've now actually proved that I've been right in virtually everything I've said in this thread all along, and LD has been wrong.


 
you've been proved right in the way that Jazz proves himself to be right - the main thing is though you've convinced yourself, nobody else though


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## love detective (Oct 7, 2012)

free spirit said:


> ok, so do you still maintain that the motivation behind QE had nothing to do with solving the banks cash problems?


 
yes of course i still maintain that

there are a myriad of state/bank of england schemes that are specifically to solve bank cash problems. QE is not one of them.

the motivation behind QE was not to provide cash to banks to meet prior liabilities as you seem to maintain - but to funnel cash through the banks into the wider economy, the purpose was to get the cash to non-banks, not banks

so the reasoning & motivating factors behind it were actually the complete opposite of what you suggest


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## love detective (Oct 8, 2012)

free spirit said:


> It's interesting what happens to a debate when someone actually introduces some facts and figures isn't it.
> 
> I'm going to have to leave you all to it, but I hope I've now actually proved that I've been right in virtually everything I've said in this thread all along, and LD has been wrong.


 
I've realised i've been a bit stupid in this discussion as I missed out raising something that I should have done much earlier on. This has meant that i've been relying on circumstantial evidence to prove your assertions incorrect, rather than going to something which proves beyond all reasonable doubt that you are incorrect with your assertions.

To recap, you maintain that the primary motivation of QE was to give assistance to the UK banks. Your assertion makes an assumption that QE was done to benefit the banks and therefore the banks were the main beneficiary of the scheme. Therefore the banks were the beneficiary of the £375bn of money that was created by the central bank in order to purchase gilts. This assumes therefore that the banks have sold in the region of £375bn of gilts to the central bank over the period of QE, and in return have received cash which they have then pretty much sat on, thus vastly improving their liquidity/cash reservers situation. This is your contention.

So let's look at the actual numbers relating to the distribution of Gilt ownerships both on the eve of QE commencement and also the latest figures.

According to page 203 of the Bank of England's 2011 report on The United Kingdom’s quantitative easing policy: design, operation and impact




			
				page 203 of BOE quarterly bulletin said:
			
		

> Before asset purchases began, *the main holders of gilts were UK non-bank financial institutions and overseas investors*.
> 
> *At the end of 2008, UK banks held only about 4% of the total stock of gilts*, and these tended to be shorter-maturity ones. *As Chart 2 shows, the banking sector actually increased its holdings of gilts during the period that the Bank was conducting asset purchases*, *suggesting that the main impact was to reduce the gilt holdings of the non-bank private sector relative to what would otherwise have happened*.


 
So, at end of 2008, just before QE was about to be introduced, according to the UK Debt Management Office the total amount of debt in issue stood at £617bn, of which banks only held £18bn, which along with the £8bn held by building societies gives a grand total of £26bn (which as a proportion of overall gilts outstanding of £617bn gives the 4% figure quoted above in the BOE report).



So, when the first lot of QE was announced in Jan 2009 and transacted in March 2009, the UK banking sector only held £26bn of gilts in total which they could use to gain access to QE money.

Now, let's look at the current ownership distribution of UK gilts in issue. Again the UK Debt Management Office gives the numbers, with the latest available numbers being as at 30 March 2012



So at 30 March 2012, Banks had actually increased their overall holdings of gilts, not reduced them.

Below is a brief summary of the two tables above:-



So as stated, at the outset of QE, the banking sector only held £26bn of gilts. the latest figures show the banking sector holding £116bn worth of gilts. So in that period of QE where £375bn of gilts have been purchased by the bank of england for cash, banks have not decreased but increased their holdings of gilts by a net £90bn. This means that even if every single pound of the £375bn purchase of gilts by the bank of england had been bought from banks, then banks would have had to have bought £465bn (90bn + 3755bn) of gilts in the period to enable them to both sell £375bn of gilts to the bank of england and still end up with £90bn of gilts owned based on the most recent figures. So the exact opposite of what you claim has happened. Instead of banks having £375bn of additional liquidity as a result of QE, they actually have £90bn less liquidity in relation to movements in their gilt holdings.

The schedule below takes a look at what gilt ownership might have looked like if the central bank had not made any purchases, and applies the 31st Dec 2008 ownership spread to 31st March 2012 total gilts outstanding figure


So the first two columns are the 31st December 2008 holdings in £bns & % from the above table.

The third column applies the 2008 ownership distribution to the 2012 gilts total to get a rough approximation of the ownership spread had the BOE not been involved (and assumes the same ownership distribution as 2008, which is not really valid, but it doesn't really matter)

The fourth column shows the actual ownership distribution as at 2012

The 5th column shows the difference between the third & fourth columns. As we can see, the BOE holdings have increased by £319bn with the bulk of the reduction coming from Overseas (which are central bank foreign reserves and sovereign wealth funds), Insurance & Pension funds and other financial institutions (hedge funds etc.). As you can see for Banks, they have a far higher holding of gilts in both percentage and absolute terms now than they did on the eve of QE. So how you can claim that banks are and were intended to be the main beneficiary of the overall £375bn programme of QE, when the figures show they own more gilts now than they did before it started is beyond me.

To recap, the Bank of England report on The United Kingdom’s quantitative easing policy: design, operation and impact says:-




			
				page 201 said:
			
		

> The aim of undertaking asset purchases was the same as a cut in Bank Rate, to stimulate nominal spending and thereby domestically generated inflation, so as to meet the MPC’s 2% inflation target in the medium term. (1) As discussed in a previous Quarterly Bulletin article by Benford et al (2009), there are a number of potential channels through which asset purchases might affect spending and inflation. (2) Purchases of financial assets financed by central bank money should initially increase broad money holdings, push up asset prices and stimulate expenditure by lowering borrowing costs and increasing wealth. Asset purchases may also have a stimulatory impact through their broader effects on expectations and by influencing bank lending, though this channel would not be expected to be material during times of financial crisis


 



			
				page201 said:
			
		

> Central bank asset purchases,through this channel, push up the prices of the assets bought and also the prices of other assets. When the central bank purchases assets, the money holdings of the sellers are increased. Unless money is a perfect substitute for the assets sold, the sellers may attempt to rebalance their portfolios by buying other assets that are better substitutes. (3) This shifts the excess money balances to the sellers of those assets who may, in turn, attempt to rebalance their portfolios by buying further assets — and so on. This process will raise the prices of assets until the point where investors, in aggregate, are willing to hold the overall supplies of assets and money. Higher asset prices mean lower yields, and lower borrowing costs for firms and households, which acts to stimulate spending. In addition, higher asset prices stimulate spending by increasing the net wealth of asset holders


 
Now, I know that whenever you are confronted with evidence from state sources which contradicts you assertions, you dismiss it as _believing in the tooth fairy_ (unless of course you think the state evidence backs up your own case in which case it's accepted without doubt). So we can discount to some extent the textual remarks made in the BOE report as to the rational & reasoning behind QE.

However, what you cannot discount is that it is absolutely impossible for you to continue to suggest that the main reason behind QE was to pump £375bn of cash into the banks (through gilt purchases) when the figures show that the banks have not been net sellers of gilts during this period but instead net buyers. Meaning that as a result of net gilt purchases/sales, banks have actually reduced their cash reserves/liquidity position through gilt tranasctions, not increased it. And furthermore banks only held £26bn of gilts prior to QE being introduced, which represented only 7% of the overall QE amount. So to suggest that a programme which has consisted of buying £375bn of gilts was primarily intended to pump liquidity into a banking sector which only owned £26bn of gilts in the first place, can only come from someone who does not undertand what actually happened. You are that person.

This data also makes a mockery of your assertion that QE stepped in to take over from the SLS. You previously asserted (without any evidence to back it up) that when the SLS (which was open to UK banks only) run down, they just used proceeds from QE to repay the special liquidity loans. However it's now clear that the recipients of the SLS (UK Banks) were a completely different set of parties to the bulk of the recipients of QE money. So it's absolutely impossible for banks to have taken sufficient liquidity from QE to repay their SLS loans as they had nowhere near the amount of gils owned in the first place to do so.

In short, you're talking shite.


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## free spirit (Mar 29, 2013)

I've just seen this last post by LD, which frankly I'm finding pretty bizarre given his and my previous posts on this thread, so despite the delay I'm going to respond.

In the post above LD tells me I'm talking shite because the banks didn't hold much in the way of gilts to sell directly, yet it was actually LD who was stating specifically that this was what had happened earlier in the thread, and me that told him he was wrong.



love detective said:


> QE was not about swapping gilts for cash with the banks to give banks cash to meet their liabilities, *it was about swapping gilts for cash with the banks* in the hope that they would then create new assets in the shape of loans to customers/business with that money.


In fact this was the exact post that I used the 'do you also believe in the tooth fairy' line in response to, that LD attempts to throw back at me in the post above, while actually writing an entire post that proves his earlier statement had been wrong.

My main point all thread that was merely that QE acted to bolster the banks cash reserves, and free up the interbank lending system, as I clearly demonstrated earlier in this thread that it did.

In response to LD's post above, I'll merely point out that the institutions who did hold the gilts that did get sold to the bank of england wouldn't have then held that money down the back of the sofa, those that weren't actually banks themselves would have deposited that cash / hard currency / however you want to describe it in the banks.

So as I'd said all along, the banks gained significant amounts of immediate cash / liquidity from the QE scheme which they were desperately short of at that point, and this was a key problem that QE was designed to address.


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## love detective (Mar 29, 2013)

Sorry but that's a fairly disingenuous post

The statement you quote from me above was in the context of discussing the objective of QE transactions, and in that particular example QE transactions with banks. That I described what happened when a QE transaction was undertaken between the central bank and a commercial bank (to counter your earlier description of that same transaction) in no way implies that I held the opinion that QE transactions only happened with banks. It's like if I described what happened when a woman who has recently discovered she is pregnant visits her GP, you would take this as though I was saying only pregnant women visited GP's.

Perhaps I should have made that more clear in the post itself, but If truth be told , until our exchange on this thread I was unware of just how small a role commercial banks actually played in QE. I knew it was not a major part but I was quite surprised to see just how small it was. Our discussion prompted me to look into the figures which I outlined in the post above and in turn back up what I've been saying throughout this thread.

To summarise:-

Around 90-95% of net gilt purchases/sales during the QE period was conducted with parties other than banks. And the small proportion of net gilt purchases/sales that was done with banks actually ended up extracting liquidity from them, not providing them with liquidity. So how you can claim that these figures back up your assertion that the primary objective of QE was to provide assistance/liquidity to UK commercial banks when 95% of net gilt transactions in that period did not involve UK commercial banks and the small proportion that did ended up doing the opposite of what you claim they did (i.e. they actually extracted liquidity from banks as banks were a net purchaser of gilts during the QE period).

If this assertion of yours is just a soft subjective hunch then I guess no amount of providing evidence and facts to counter it is going to make you change your mind, but if you'd like to have a go at providing the figures to back up your claims i'd be interested in seeing them.

If you don't believe my interepretation of the figures, I'll point you again to the Bank of England's 2011 report on The United Kingdom’s quantitative easing policy: design, operation and impact which states:-




			
				boe said:
			
		

> At the end of 2008, UK banks held only about 4% of the total stock of gilts, and these tended to be shorter-maturity ones. *As Chart 2 shows, the banking sector actually increased its holdings of gilts during the period that the Bank was conducting asset purchases*, suggesting that the main impact was to reduce the gilt holdings of the non-bank private sector relative to what would otherwise have happened.


 
And i'm afraid your attempt at an explanation above doesn't cut it, you say:-




			
				free spirit said:
			
		

> In response to LD's post above, I'll merely point out that the institutions who did hold the gilts that did get sold to the bank of england wouldn't have then held that money down the back of the sofa, those that weren't actually banks themselves would have deposited that cash / hard currency / however you want to describe it in the banks.


 
As your original contention was that QE was primarily designed to:-




			
				free spirit said:
			
		

> meet the banks *existing liabilities*


 
and that it was:-




			
				free spirit said:
			
		

> partly used by the banks to build up their capital reserves to meet the government's new requirements for the proportion of capital reserves to liabilities the banks must hold *in order to ensure they can meet a greater proportion of their existing liabilities?*


 
You quite clearly stated in those posts that you believe QE helped banks cover their existing liabilities. If the non-bank Institutions who did hold the gilts that did get sold to the BOE deposited the proceeds at banks, this would increase the banks' liabilities. So how you can claim that the net impact of QE was to allow banks to_ 'meet a greater proportion of their existing liabilities'_ when you've just demonstrated that in this instance QE would in fact increase their liabilities is beyond me. While any deposits banked with them from non-bank institutions would give them access to additional 'cash', it would also at the same time increase their liabilities by the same amount.This is in complete contradiction to your claim that QE helped banks '_meet a greater proportion of their existing liabilities'._

The only way what you assert could have happened would be if it was commercial banks that made up the lions share of net gilt purchase/sales during the QE period. But as the figures i've provided above from the BOE show, this is nowhere near the case. So your initial claim that commercial banks benefited directly in this way is incorrect because the figures show that their involvement was insignificant , and your supplementary/back up claim that they benefited indirectly is false as it totally contradicts your original assertion about what QE supposedly did for the banks. You can't logically maintain both these positions as they contradict each other.

And just to add, I'm in no way claiming that the state did not provide an abundance of liquidity to UK commercial banks - i've talked in some detail in this thread about schemes that were setup to do this. QE however was not one of them. Those who argue that it was, particularly in front of all the evidence to the contrary, are lazily jumping on the post crisis omgzz, the bank the banks hysteria and are being blinded to any attempt to analysis things beyond the narrow role that banks play in capitalist society.


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## free spirit (Mar 30, 2013)

_


love detective said:



			You quite clearly stated in those posts that you believe QE helped banks cover their existing liabilities. If the non-bank Institutions who did hold the gilts that did get sold to the BOE deposited the proceeds at banks, this would increase the banks' liabilities. So how you can claim that the net impact of QE was to allow banks to 'meet a greater proportion of their existing liabilities' when you've just demonstrated that in this instance QE would in fact increase their liabilities is beyond me. While any deposits banked with them from non-bank institutions would give them access to additional 'cash', it would also at the same time increase their liabilities by the same amount.This is in complete contradiction to your claim that QE helped banks 'meet a greater proportion of their existing liabilities'.

Click to expand...

__It's been a while, so I'll let you off, but if you were to have checked about the next post on the thread you'd have seen that I clarified that I was referring to the actual cash reserves._

_



			Actually, you're right about this, I meant to say cash reserve requirements, not the capital reserves.
		
Click to expand...

_ 
_So yes, QE resulted in hundreds of billions of new cash* being paid by the BOE for gilts, much of which one way or another ended up deposited in the banks, thereby solving their immediate liquidity crisis._

_And yes it increased their liabilities by the same amount as the cash they received, but that's a 1:1 ratio, vs the 1:97 or so reserves to liabilities ratio the banks were / are operating on. I assume I don't need to do the maths any further to explain why this would be of assistance to the banks situation?_


*hard currency / BOE credit / however you want to refer to it.


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## free spirit (Mar 30, 2013)

love detective said:


> As your original contention was that QE was primarily designed to:-
> 
> 
> 
> ...


ps, that quote was also taken out of context from before we'd even started discussing QE specifically.


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## free spirit (Mar 30, 2013)

love detective said:


> Perhaps I should have made that more clear in the post itself, but If truth be told , until our exchange on this thread I was unware of just how small a role commercial banks actually played in QE


fwiw neither was I.

But it really isn't particularly central to my point, as it doesn't really matter who owned the gilts, the banks still end up with most of the cash being deposited with them one way or another (for UK owned gilts anyway).

The point is that one way or another QE solved the basic liquidity crisis in the UK banks that was at the heart of the credit crunch. If I remember right you've even accepted this point to a degree, but qualified it by saying that you didn't agree that this was the intent behind QE... as if it were more likely that the government accidentally solved the problem rather than deliberately setting out to achieve that, at the 3rd attempt.

I think it's important to understand the actual justification behind a scheme who's other impacts have apparently been to make the ultra rich even richer, and take from the poor generally through increased inflation rates, and the pensioners etc through reduced yields to their pension funds and reduced bank interest rates. It means that the poor, savers, pensioners etc have paid significantly in the UK for a scheme designed primarily to inject liquidity into the banks, while the ultra rich made money out of it.

It helps to put the cyprus situation into some perspective - we've avoided that sort of chaos, but the UK has achieved this by very slyly robbing most of the country to ensure the banks have enough cash reserves, and in the process the rich have managed to get even richer.

The reason we can do this and Cyprus can't is that we're able to issue our own currency as the BOE did with QE. Whether or not this is a better solution is another question, I just think we ought to at least understand and acknowledge what actually just happened under the guise of QE.


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## love detective (Mar 30, 2013)

first off, fair play to you for attempting to move the discussion onto a more civil basis, it has gotten a bit heated/insulting at times (largely my fault) and there's no real need for that as we are essentially on the same side (something I can't say about the likes of Jazz and co)

That aside though, I still maintain you are fundamentally wrong in what you say though about the primary objectives/intentions of the state carrying out QE (while not denying the by products of some of it have had the effects you note). And if I had the energy i'd summarise all the reasons i've already given and evidence presented on this thread as to why I think you're wrong, and why I think it's important to understand the differing reasons for these various different state schemes being undertaken (for example the special liquidity scheme was to the banking crisis what QE was to the economic crisis that followed. I think all the evidence both in terms of stated objectives & intentions through to actual transactions & flows that stemmed from them, show that while the special liquidity scheme was specifically intended & designed to provide banks with liquidity to get them through the liquidity crisis, QE wasn't. The SLS was launched at the height of the liquidity crunch in 2008, was open only to UK commercial banks and provided them with unencumbered liquidity, QE in contrast was launched a year or so after the height of the liquidity crisis and only around 5% of it went directly to banks in unencumbered liquidity - it was a totally different beast from the SLS and was a response (admittedly a desperate one) to the economic crisis, not the banking crisis)

But I think we're past the point of just repeating stuff back over to each other as it's clearly not making any difference to our underlying positions on it - so I guess if anyone is interested (  ) it's all here on the thread from both 'sides' for them to read and take their own conclusions from it

edit: disagree that quote above was taken out of context though, it was that which started the whole argument in the first place!


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## free spirit (Mar 31, 2013)

But the special liquidity schemes had failed to really fix the problem*, and were due to be repaid over the coming 2-3 years, which would have withdrawn all that extra liquidity from the market again, sending the financial sector back to square one.

QE appears to have solved the problem for the banks (for now at least), but moved the problem out to the entire country in the inflationary pressures it caused, and the reduced interest rates for savers etc.

As to how much of a motivating factor it was, I think it's a bit odd to think that finally solving the liquidity problem at the heart of the credit crunch wouldn't be a significant driving factor behind the policy that actually did solve the problem. I think that they laid a false trail on that score to hide the true motivations to avoid people putting 2 and 2 together and realising that they'd just been robbed via inflationary pressures to prop up the banks further.

TBH I think this is too important a subject to just leave, at a time when the EU/IMF/cypriot government have started enforcing capital controls and taxing a large percentage of bank deposits over 100k, but leaving everything under 100k.

I think it's important to analyse the alternative UK approach, which seems to have managed to sort the banks out, but to have come at the expense of the bottom 99% of society and enriched the top 1%, resulted in further commodity bubbles, and bank bonuses, but at least managed to stabilise the situation.

Those in the single currency don't have that option (whether it's the better option or not), which IMO is the real reason that the UK and US have got out of the situation with the banks and European countries are still in that cycle of trying to prop the banks up one way or another.


*Well, they'd temporarily papered over the cracks, but not much else.


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## love detective (Mar 31, 2013)

free spirit said:


> But the special liquidity schemes had failed to really fix the problem*, and were due to be repaid over the coming 2-3 years, which would have withdrawn all that extra liquidity from the market again, sending the financial sector back to square one.


 
Your contention that the SLS had failed to fix the liquidity problem is fairly fundamental to your argument that QE was designed and intended to be a liquidity support scheme for banks. The problem is though this is completely untrue, and demonstrably false.

Here is the 3M LIBOR rate graph for all of 2008 (the graphs for 6M and 12M all show similar trends)






As you can see LIBOR rate had been hovering around the 6% mark for all of 2008 until around September when it then dropped dramatically over the last three months of the year to just over 2.5%*

The graph below shows the usage made of the SLS by UK banks


As you can see the SLS started in April 2008 and by the end of 2008 around £185bn of liquidity had been pumped into the market, with a steep chunk of around £100bn happening in the last 3 months of 2008/early 2009. The thawing up of the UK money markets at the tail end of 2008 (represented by LIBOR falling from 6% to nearly 2.5%) was concurrent with the usages and ramped up usage of the SLS scheme. Now i'm not even saying that the SLS singlehandely solved the somewhat narrow problem of the liquidity crisis (correlation doesn't necessarily require cause etc and the various other liquidity schemes by other central banks around the world would have had an impact on this as well), but the figures quite clearly show that by the end of 2008, well before QE had begun, the markets had not only 'normalised' but the flood of liquidity that had been pumped into them meant that market rates were not at historic lows.

I'm not sure how you can claim that by the end of 2008, when LIBOR had fallen from over 6% to nearly 2.5% that the liquidity crisis was still in effect. As at end of 2008 that figure of 2.5% was the lowest that LIBOR had ever been:-






If you contend that at the end of 2008, a good few months before the first few drips of QE had begun, that a 2.5% 3M LIBOR rate signified a continuance of the liquidity crisis then that means based on your logic the UK money markets have been in a perpetual liquidity crisis as there has never been a time when the rate has been lower than that. Sure QE pushed market rates down even more as a result but to claim that on the eve of QE being launched, a 3M LIBOR rate at a historic all time low represented either the continuation of a bank liquidity crisis or a situation that had just been temporarily covered over is pretty absurd to be honest.

The SLS scheme was launched in early 2008 and extended later on in 2008 as the situation worsened. If there was any indication of a further deterioration, the scheme would have simply been extended even more (i.e. either allowing further drawdowns or allowing the rollover of existing drawdowns when the initial 3 year period expired). It's not like there was any attempt or desire by the BOE/Treasury to hide what they were doing with the SLS, so your assertion that QE was a covert way of getting even more liquidity to the UK banks (which at that point didn't need it) just doesn't make sense, as at that point in time they had far more effective schemes in place to pump liquidity into the UK interbank market

It just doesn't make sense your claim that QE was about getting liquidity to UK banks , it was a scheme that was not efficient at getting liquidity to UK banks and launched at a time when the UK banks did not need further liquidity support. It wasn't until around the end of 2009, a good year later, when the level of QE transactions reached £200bn which was roughly the same level as that of the SLS - so I really hope you do not attempt to argue that it was the anticipation of this eventual QE in late 2009 that led to the dramatic fall of LIBOR in late 2008.

The simple fact of the matter is that even though the SLS (along with all the other injections of liquidity from other central banks around the world) thawed the freeze in the interbank markets, by the time that problem had been 'dealt with' the wider economic crisis was starting to take effect, QE was the (fuckwitted) respond to that.

*While we now know that submitted LIBOR rates during the crisis had been manipulated to an extent by certain submitters, at that point in time in 2008 the banks who were manipulating them were submitting lower figures than actual (to artificially make them look stronger than they actually were as it implies they could borrow at lower rates than other banks), so if anything the 6% at the peak of the liquidity crisis would have been even higher if the figures hadn't been lowballed, making the eventual jump down to 2.5% even more marked.


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## free spirit (Apr 9, 2013)

Some interesting tit bits of information in an Observer editorial piece last weekend that support much of what I'd been saying earlier on this thread, or maybe the previous one, about the original interventions being needed to prevent a run on the banks, and the urgent need to avert complete collapse of banks that had massively over extended themselves.



> by the time the bank collapsed in 2008, the gap between loans and deposits had exploded to an eyewatering £213bn.





> What the commission did not tackle is exactly what happened in the three days from the Lehman Brothers collapse to the announcement thatHBOS would be rescued by Lloyds TSB.
> 
> It does provide some insight into why the rescue was needed: a former HBOS banker told the commission that £35bn of deposits from big companies were pulled out of the bank in the wake of the Lehman collapse. It was not a Northern Rock-style panic, where ordinary savers queued up to take out their cash, but a vast and silent run on the bank by big businesses in the know.


Now maybe a £35 billion withdrawal of corporate deposits in a 3 day period doesn't amount to the start of a dangerous run on that bank in some eyes, but it does in mine.

http://www.guardian.co.uk/business/2013/apr/07/hbos-collapse-lessons-disastrous-rescue


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## free spirit (Apr 9, 2013)

love detective said:


> If you contend that at the end of 2008, a good few months before the first few drips of QE had begun, that a 2.5% 3M LIBOR rate signified a continuance of the liquidity crisis then that means based on your logic the UK money markets have been in a perpetual liquidity crisis as there has never been a time when the rate has been lower than that. Sure QE pushed market rates down even more as a result but to claim that on the eve of QE being launched, a 3M LIBOR rate at a historic all time low represented either the continuation of a bank liquidity crisis or a situation that had just been temporarily covered over is pretty absurd to be honest.
> 
> The SLS scheme was launched in early 2008 and extended later on in 2008 as the situation worsened. If there was any indication of a further deterioration, the scheme would have simply been extended even more (i.e. either allowing further drawdowns or allowing the rollover of existing drawdowns when the initial 3 year period expired).


I think I've been pretty clear on this point previously.

The fairly obvious problem with your statements is that you ignore the fact that the libor rate began rising rapidly again the instant the SLS scheme closed to new lending at the start of 2009, and continued to rise rapidly until pretty much the exact point that the QE scheme started. Once QE started, libor then fell to it's precrisis levels and stayed there for 2 full years even while the loans made via the SLS scheme were being repaid.






As I said, SLS was papering over the cracks of the problem, and was only a stop gap measure until something more long term could be implemented. How could it be anything else when it was made up of loans that would all need repaying entirely over the 2-3 years starting at the end of 2008, so would be withdrawing all the additional liquidity from the market that it had just added.




love detective said:


> It's not like there was any attempt or desire by the BOE/Treasury to hide what they were doing with the SLS, so your assertion that QE was a covert way of getting even more liquidity to the UK banks (which at that point didn't need it) just doesn't make sense, as at that point in time they had far more effective schemes in place to pump liquidity into the UK interbank market


Do you really not see the difference in public perception between a bank rescue scheme that's based on repayable loans to the banks vs a scheme that effectively prints several hundred billion of new money to pump cash into the banking sector, which in turn acts to inflate away the spending power of 95% of the country, rob savers of their interest rates on deposits, and seriously enrich the richest 5% or so of the population?

It's one thing for the government to be able to push this through with the stated aim of boosting lending to business and the economy generally, quite a lot different if it were explained what this was actually aimed at achieving, and how it would actually affect the real values of peoples wages and savings from that point forward.



love detective said:


> It just doesn't make sense your claim that QE was about getting liquidity to UK banks , it was a scheme that was not efficient at getting liquidity to UK banks


The bank of england figures show £110 billion being added to the combined UK banks special deposit accounts with the bank of england through 2009, rising from £28.7 billion in February 2009 to £142 billion in december 2009.

I don't know how much more efficient a scheme could actually be in pumping liquidity into the banks - it was certainly a lot better at it than the previous SLS scheme.

For reference, the special deposit accounts of the banks were also where the SLS scheme money seems to have been deposited, peaking at nearly £80 billion in September 2008, but had dropped to £29 billion by Feb 2009 prior to QE starting.

If QE weren't a replacement for SLS, it's pretty odd that it had an immediate, bigger and more sustained impact on the exact same aspects of the banks liquidity as SLS did.



> Monthly amounts
> outstanding of UK
> resident banks'
> (excl. Central
> ...


 



> QE was the (fuckwitted) respond to that.


 
I'm not disputing that this was also part of the notion driving the scheme, or how fuckwitted a notion it was, but given that Brown had spent the last 2 years trying to solve the credit crunch crisis in UK and world banking, I just don't see it's very credible to not think that this might have been a key motivating factor for him and the BOE when they dreamt up QE.


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## love detective (Apr 9, 2013)

free spirit said:


> I think I've been pretty clear on this point previously.


 
You've been pretty clear about what you believe and I've been clear that I find the assertion unconvincing



> The fairly obvious problem with your statements is that you ignore the fact that the libor rate began rising rapidly again the instant the SLS scheme closed to new lending at the start of 2009, and continued to rise rapidly until pretty much the exact point that the QE scheme started.


 
Firstly - the graph you've posted is not a graph of 3M Libor as you state.It's a graph of the spread (difference) between 3M Libor and the General Collateral 3M Repo Rate, which is the rate that can be achieved in a 'repo' transaction (this involves temporarily selling high quality securities like gov debt to a counterparty and simultaneously agreeing to buy them back at a point in the future at a slightly higher price which reflects the interest cost - the point of doing this is to borrow money cheaper than in the straight LIBOR market as your are effectively borrowing secured, as opposed to LIBOR market which is unsecured).

So your graph is a graph that shows the difference between the rates for unsecured (LIBOR) borrowing and secured (repo) borrowing - not LIBOR itself as you suggest it is in your various references to it in your post

A graph of the actual sterling 3M LIBOR rate for 2009 is below, and it paints a different picture altogether






As you can see from the start of 2009 onwards there is no spike between the closing of the drawdown window for the SLS and the start of QE. So far from their being a spike/rapid rise in LIBOR rates in that period as you suggest, what the spike on your graph actually shows was that there was a drop in LIBOR during that period and an even bigger drop in the repo rate (representing the rate achieved through secured lending) - leading to the spread between LIBOR and Repo rates to increase.

So instead of it representing an increase in borrowing rates for banks as you suggest, it actually represents a decrease (albeit a bigger decrease in secured borrowing/repo rates than unsecured/LIBOR rates - but a decrease nonetheless). And I would hazard a guess that the cause of this was the announcement of QE itself in Jan 2009 - this announcement would have probably pushed down yields on govt debt which form the basis of the repo rate which was then reflected in an increased spread between LIBOR and Repo rate - as presumably LIBOR didn't decrease by the same amount at that time (although in time it did, as your graph which shows the spread between LIBOR & Repo rate shows)

However, even for the sake of argument if we take your graph of the LIBOR/GC spread as the driver of things (which it's not) - it's misleading to say that there was a rapid rise in that period between SLS drawdown window closing and QE starting. From looking at the graph it looks nothing more than around 20 basis points. This is tiny compared to the reduction of nearly 400 basis points in actual LIBOR that was seen in the last quarter of 2008 and which relates to the SLS drawdown period.

As previously stated, SLS was extended & increased after it's initial commencement in April 2008 when it appeared that it wasn't having the effect on market rates that it had hoped. If there was any indication of a rapid rise or spike in LIBOR in early 2009 (which there wasn't as the LIBOR graph above shows) it would have been far simpler and far more low key to simply extend it again.

I also find the logic of your argument for the rational of QE starting and being maintained somewhat contradictory. Putting aside the fact that there wasn't a spike/rapid rise in LIBOR in early 2009, your logic says that QE was needed because of this spike - so the first £75bn or so of QE in March 2009 you presumably see as a response to the spike/rapid rise (which didn't happen). OK so far so good - however from that point onwards LIBOR has continued to drop and drop through 2009, 2010, 2011 and 2012. During this time, when we've been seeing either a dropping of LIBOR or a maintaining of that rate, there has been another £300bn of QE. So essentially you are saying that QE started because of a rise in LIBOR (which actually didn't happen) and was then increased another 400% over a period of time when LIBOR was either steady or falling. So your basically simultenously using LIBOR rising and falling as a reason for QE. LIBOR rises so QE is required, then LIBOR falls so even more QE was required. It just doesn't make sense. But as the actual 3M Libor graph above show, regardless of the logic of your reasoning, the initial premise of a rising LIBOR rate in early 2009 simply isn't true.




			
				 free spirit said:
			
		

> Once QE started, libor then fell to it's precrisis levels and stayed there for 2 full years even while the loans made via the SLS scheme were being repaid.


 
Again, as you're not using a graph of LIBOR - this comment does not actually describe what happened. LIBOR didn't just fall to its precrisis level it plummeted far below it. Here are the the 3M LIBOR graphs for 2006 & 2007










As you can see at the beginning of 2006 LIBOR was around 4.6% and gradually started to rise from mid 2006 up to its crisis height of around 6.8% in mid 2007.

After the injection of the SLS liquidity LIBOR had dropped to around 2.5% in early 2009 and continued to steadily decrease from there (clearly aided by QE).

So I'll repeat what I said in my previous post. Your assertion that an all time historical low LIBOR rate of around 2.5% in early 2009 was some kind of indication of a liquidity crisis which in turn was solved by QE and the eventual injection of £375bn of QE money just doesn't make sense. To say a LIBOR rate of 2.5% in early 2009 was an indication of a liquidity crisis which needed any kind of response (let alone QE) pretty much means that you think there has been a perpetual liquidity crisis for the last 100 or so years as LIBOR has never been lower than that 2.5% rate in that period.



> As I said, SLS was papering over the cracks of the problem, and was only a stop gap measure until something more long term could be implemented. How could it be anything else when it was made up of loans that would all need repaying entirely over the 2-3 years starting at the end of 2008, so would be withdrawing all the additional liquidity from the market that it had just added.


 
I think you misunderstand what the liquidity crisis was about. It wasn't that the liquidity that was in the market all disappeared/vanished and therefore needed a permanent replacement (although granted an element did disappear but this wasn't until later).

It was because it was so unclear as to which banks had the biggest & worst exposures to sub prime and the information was so muddy - liquidity in general dried up as a result. As those institutions (banks, but also hedge funds, insurance companies, pension schemes, money market funds, sovereign wealth funds) who would normally supply liquidity to the market got extreme fright about the potential solvency implications of those they would normally lend to. Over the next year or so the whole situation started to be unpicked and banks were forced to confront what exposures they had and begin to make write offs where necessary and get re capitalised or go bust if required. The picture then became more clearer as to which banks had the biggest exposures and risks, and once that happened, liquidity gradually started to return to the markets (albeit only flowing to those institutions that were deemed adequately capitalised enough to cope with any write downs they faced).

So the SLS was only ever seen as a temporary fix - because it was a holding operation to supply emergency liquidity until 'normal' market liquidity returned.

What needed a permanent fix was the recapitalisation of banks after they had took write downs on their positions - once this was done (or banks demonstrating that they were already sufficiently capitalised to withstand the write downs) then liquidity flowed back to those institutions 'naturally' (as hoarding of cash at central banks during the height of the liquidity crisis reduced)


_(Continued in Next Post)_


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## love detective (Apr 9, 2013)

_(Continued from Previous Post)_



			
				free spirit said:
			
		

> Do you really not see the difference in public perception between a bank rescue scheme that's based on repayable loans to the banks vs a scheme that effectively prints several hundred billion of new money to pump cash into the banking sector, which in turn acts to inflate away the spending power of 95% of the country, rob savers of their interest rates on deposits, and seriously enrich the richest 5% or so of the population?
> 
> 
> It's one thing for the government to be able to push this through with the stated aim of boosting lending to business and the economy generally, quite a lot different if it were explained what this was actually aimed at achieving, and how it would actually affect the real values of peoples wages and savings from that point forward.


 
I don't understand your logic here. Up until now you've been arguing that QE was a kind of 'under the radar' way of supplying liquidity to banks (putting aside the fact for the time being that they didn't need it). With your point being that even though there already was an explicitly named scheme in place which explicitly stated that its objective was to supply liquidity to banks and had done this to the tune of nearly £200bn in a matter of months, your argument has been that the state somehow wanted to hide the fact that they were doing this and so decided to do it though QE so it wasn't as obvious.

Now, I'd hazard a guess that before this thread started, you weren't aware that the SLS existed. I'd say with even more certainty that if you went outside now and asked 1,000 random people in the street if they knew what the SLS and QE were, most people would have at least of heard of QE but not many would have heard of the SLS. Further, i'd hazard a guess that most people's description of QE would be something along the lines of 'the govt printing money and giving it to the banks'

So the public profile of QE is far far higher than the SLS, and further the public perception of what QE is and does, is usually one which assumes it's the banks getting free money. Now this is wrong, but it's a general perception, and one which is pushed by the media and the loon elements of the left.

And again, putting aside the fact that banks didn't need liquidity when QE started, it just doesn't make sense that you suggest that QE was a more discreet or under the radar way of getting liquidity to banks than the SLS was. The SLS was, despite its explicitly stated purpose & objectives, an almost anonymous and under the radar scheme that received next to no publicity in the media or on the left and is a name, abbreviation and concept that the vast majority of people would struggle to recognise let alone explain what it did. In contrast QE is like a publicity seeking celebrity, always in the limelight and while often misunderstood instantly recognisable. The idea that this would be a more preferable vehicle to discreetly get liquidity to the banks than the publicity shy SLS just doesn't stack up.

Also look around the world at the moment, Japan a few days ago announced they would double the money supply through a huge QE program, the US is doing QE at a rate of $85bn a month. The UK may well announce more QE in the future. Are you seriously saying that all three of these countries, despite having record and historical low real rates of interest, are in the midst of a liquidity crisis? And that QE exists primarily as a means of solving this liquidity crisis? They are all certainly in an economic crisis of varying degrees, and QE is being done as a fuckwitted response to it, but there is no liquidity crisis and QE was not and is not being done in response to any imaginary one.



> The bank of england figures show £110 billion being added to the combined UK banks special deposit accounts with the bank of england through 2009, rising from £28.7 billion in February 2009 to £142 billion in december 2009.
> 
> I don't know how much more efficient a scheme could actually be in pumping liquidity into the banks - it was certainly a lot better at it than the previous SLS scheme.
> 
> ...


 
I'll have to look into those figures and understand what they include and what other activities impact on them them a bit more before commenting on them. For example during 2009 there was £200bn of QE done, yet those figures only show an increase of £110bn (as you've already pointed out, even if banks weren't the counterparty to the QE transaction, the bank of the party who was the counterparty to the QE transaction would receive the bank of england credit). So clearly there are other things impacting on those balances, which would need to be identified and understood before anything meaningful could be taken from them.

But as regards to the SLS, you're quite wrong in your description of it. SLS actually involved the swapping of illiquid mortgage backed securities on the banks books for highly liquid high quality treasury securities, then the banks used these treasury securities as collateral to obtain liquidity in the market. To the extent that they obtained that liquidity from non-central banks sources then you wouldn't see any increase in the aggregate balances of UK banks with the central bank. So to use those figures above as an indication of how much liquidity a bank was getting from month to month does not give the whole picture.


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## free spirit (Apr 13, 2013)

love detective said:


> You've been pretty clear about what you believe and I've been clear that I find the assertion unconvincing
> 
> Firstly - the graph you've posted is not a graph of 3M Libor as you state.It's a graph of the spread (difference) between 3M Libor and the General Collateral 3M Repo Rate, which is the rate that can be achieved in a 'repo' transaction (this involves temporarily selling high quality securities like gov debt to a counterparty and simultaneously agreeing to buy them back at a point in the future at a slightly higher price which reflects the interest cost - the point of doing this is to borrow money cheaper than in the straight LIBOR market as your are effectively borrowing secured, as opposed to LIBOR market which is unsecured).


ah. You've got me bang to rights there, not sure how that happened, I think I pulled the original graph from a BOE document after searching for libor graphs, and missed the repo rate section.

I'll withdraw that graph then, but still think my overall analysis stacks up without it.

The problem of lack of liquidity, and the risk of runs on the banks within the banking sector had only been temporarily solved via the previous SLS scheme, QE caused a massive increase in liquidity within the entire financial system, much of which filtered through to the banks and solved that aspect of the problems within the UK banking sector.



> Now, I'd hazard a guess that before this thread started, you weren't aware that the SLS existed.


Really?



> Further, i'd hazard a guess that most people's description of QE would be something along the lines of 'the govt printing money and giving it to the banks'


You may well be right, in which case it would give people generally some credit for being able to see through the government propaganda on the motivations behind the scheme.

I had written a longer post, but just lost half of it and it's too late to start rewriting it.


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