Banks create money out of thin air

Breadan O'Connor

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A fine article I came across in the Guardian archives, written after the Northern Rock crisis in early 2008.

Quote: "At the heart of the matter is the fact that commercial banks are allowed to create nearly all of the money that we use. They create it out of thin air and put it into circulation in the form of profit-making(interest-bearing) loans. They credit those to their customer's accounts by a simple accounting procedure and the customers spend the money into circulation."

"This bank -account money is the money that all of us, people and organisations alike, have in our bank accounts. It is held in electronic form in bank computers. It is far and away the largest part of the money supply. The rest, less than 5% in this country, is cash. This is issued by agencies of the state in the form of paper banknotes by the Bank of England, and coins by the Royal Mint."

The writer goes on to propose transferring the function of creating bank-account money from the commercial banks to the central bank, which would greatly reduce the power of comercial banks in the economy.

IMO this is an idea well worth investigating.

Money from thin air | Comment is free | guardian.co.uk
 


the real athair_siochain

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A fine article I came across in the Guardian archives, written after the Northern Rock crisis in early 2008.

Quote: "At the heart of the matter is the fact that commercial banks are allowed to create nearly all of the money that we use. They create it out of thin air and put it into circulation in the form of profit-making(interest-bearing) loans. They credit those to their customer's accounts by a simple accounting procedure and the customers spend the money into circulation."

"This bank -account money is the money that all of us, people and organisations alike, have in our bank accounts. It is held in electronic form in bank computers. It is far and away the largest part of the money supply. The rest, less than 5% in this country, is cash. This is issued by agencies of the state in the form of paper banknotes by the Bank of England, and coins by the Royal Mint."

The writer goes on to propose transferring the function of creating bank-account money from the commercial banks to the central bank, which would greatly reduce the power of comercial banks in the economy.

IMO this is an idea well worth investigating.

Money from thin air | Comment is free | guardian.co.uk
I have spent more than a decade investigating how banks create money.
The common denominator is, "the majority of politicians all over the world are landlords and moneylenders. this is why the money market is moved up and down,,,, most people in our Society believe it is the deposits in savings accounts that are used to create loans, Most Countries allow a moneylenders to lend 10 times the value of the funds deposited in the bank, some US moneylenders went as far as lending out 65 times the value of deposits, the money is created/invented. the moneylenders survive on the future mortgage repayments, add to this, the banks valuations on property they always go up, this ensures the moneylenders books are balanced, with false values and future mortgage repayments, the property will always belong to the moneylender until the final payment is made, today in Ireland people have lost their life savings. along with their family home. the money lenders keep the life savings of the borrower along with the family home, so why has the system allowed this to happen,

"the majority of politicians are landlords and moneylenders"

this thread will be deleted. this always happens, the power of the landlords and moneylenders, they always win,

Irish people are deserving of better government reps. why should our life saving end up in the pockets of moneylenders , we are victims of legalistic theft,
 

Breadan O'Connor

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I have spent more than a decade investigating how banks create money.
The common denominator is, "the majority of politicians all over the world are landlords and moneylenders. this is why the money market is moved up and down,,,, most people in our Society believe it is the deposits in savings accounts that are used to create loans, Most Countries allow a moneylenders to lend 10 times the value of the funds deposited in the bank, some US moneylenders went as far as lending out 65 times the value of deposits, the money is created/invented. the moneylenders survive on the future mortgage repayments, add to this, the banks valuations on property they always go up, this ensures the moneylenders books are balanced, with false values and future mortgage repayments, the property will always belong to the moneylender until the final payment is made, today in Ireland people have lost their life savings. along with their family home. the money lenders keep the life savings of the borrower along with the family home, so why has the system allowed this to happen,

"the majority of politicians are landlords and moneylenders"

this thread will be deleted. this always happens, the power of the landlords and moneylenders, they always win,

Irish people are deserving of better government reps. why should our life saving end up in the pockets of moneylenders , we are victims of legalistic theft,

It is surprising given our present disastrous situation why people are not willing to discuss this issue more.
 

Goban Saor

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Everytime monetary reform comes up in the media, RTE or whoever changes the topic. The problem with the banks has been recognised for nearly 200 years but its too nerdy to become a political issue. Hence the Tea Party.

The ECB intends to bleed Ireland white much like the French were bled at Verdun.


The real solution to the crisis is the same as it was in September 2008:




For the Irish government to default on its debts
To establish a 100 percent reserve banking system
To pull out of the Euro and let the market establish a commodity tied currency



Capitalism is a profit and loss system. Many seem to think it’s all about profits and not about losses. The socialisation of losses will eventually come to an end. The only question is whether it is done orderly or in chaos.
A System of Profit and Loss?
 

hmmm

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Congratulations, you've reached the level of a first year economics student and have discovered banking.
 

Iarmuid

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Congratulations, you've reached the level of a first year economics student and have discovered banking.
Banks are in one business and one business only. Risk Management, they are in the privledged position of despensing liquidity or money (debt) to the economy in the form of loans i.e they decide whom or whom does not get a loan based on the assessed risk of the lendee paying the loan back, this is a vital service required in any advanced society, the banks charge a fee (interest) in case the lender is unable to pay the loan back, in case of which, the bank accepts liability for the loan, this is the theory, what actually happens in fact is the tax payer picks up the tab when banks get their risk management incorrect on a large scale, the world over.

So imo this is a topic which should be front and center in politics as to whether this should be a service provided publicly or privately and the regulation and stipulations in either case. The banking industry in its current guise is essentially quasi private-public in form i.e privatising profits, socialising losses and I have not even touched on usury. petunia
 
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Cassandra Syndrome

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Congratulations, you've reached the level of a first year economics student and have discovered banking.
Well if that it is bit too kindergarden for you here is an article from 1995 written by one of the Zen masters of economics that commends the OP.

An honest warehouse makes sure that the goods entrusted to its care are there, in its storeroom or vault. But banks operate very differently, at least since the days of such deposit banks as the Banks of Amsterdam and Hamburg in the seventeenth century, which indeed acted as warehouses and backed all of their receipts fully by the assets deposited, e.g., gold and silver. This honest deposit or "giro" banking is called "100 percent reserve" banking. Ever since, banks have habitually created warehouse receipts (originally bank notes and now deposits) out of thin air. Essentially, they are counterfeiters of fake warehouse-receipts to cash or standard money, which circulate as if they were genuine, fullybacked notes or checking accounts. Banks make money by literally creating money out of thin air, nowadays exclusively deposits rather than bank notes. This sort of swindling or counterfeiting is dignified by the term "fractional-reserve banking," which means that bank deposits are backed by only a small fraction of the cash they promise to have at hand and redeem. (Right now, in the United States, this minimum fraction is fixed by the Federal Reserve System at 10 percent.)
Fractional Reserve Banking
 
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Banks are in one business and one business only. Risk Management, they are in the privledged position of despensing liquidity or money (debt) to the economy in the form of loans i.e they decide whom or whom does not get a loan based on the assessed risk of the lendee paying the loan back, this is a vital service required in any advanced society, the banks charge a fee (interest) in case the lender is unable to pay the loan back, in case of which, the bank accepts liability for the loan, this is the theory, what actually happens in fact is the tax payer picks up the tab when banks get their risk management incorrect on a large scale, the world over.

So imo this is a topic which should be front and center in politics as to whether this should be a service provided publicly or privately and the regulation and stipulations in either case. The banking industry in its current guise is essentially quasi private-public in form i.e privatising profits, socialising losses and I have not even touched on usury. petunia
That's all true. The big problem is the size of banks relative to the economy. If there were dozens of similar sized banks, then an economy could probably afford for one or two of them to go bust. In an ideal world, there might be a reasonable (though limited) guarantee on deposits, but otherwise no other guarantees. If banks make risky loans and offer high rates on their bonds and deposits then the people who invest in them, should be prepared to lose their money (or some of it). Though even all that is no guarantee that the entire system wouldn't go in the same reckless direction, as our banks did. Banks are definitely different to other capitalist corporations and they need to be regulated a lot more heavily.

It strikes me that banks have to remain as private institutions, because risk assessment is an activity suited to the profit motive, rather than through political influence as would happen if they remain publicly owned.

Either banks can't be too big to fail (at the national level) or else we concede the regulation of them to the EU so that the EU would centrally be able to provide much larger future guarantees to banks.
 

Iarmuid

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It strikes me that banks have to remain as private institutions, because risk assessment is an activity suited to the profit motive, rather than through political influence as would happen if they remain publicly owned.

Either banks can't be too big to fail (at the national level) or else we concede the regulation of them to the EU so that the EU would centrally be able to provide much larger future guarantees to banks.
I think a detailed conversation on whether banks should be private or public entities is warranted, with pros and cons of each. But my own inclinination is they should be run at the community level and regulated at the community level as much as possible, centralisation is not a good idea in my view. Lord Actons insight is always useful in such cases I believe.
 

atlantic

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We can all see the damage now what fractional reserve banking does.We will soon the damage that Helicopter ben will do the dollar and the US as the ECB will also do to the Euro zone.
 

atlantic

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You will find that most people in Ireland and world wide do not understand how the monetay system operates,and alot of these people are well educated including UNi Trinity types.I give the op heads fgor looking into these facts.
Congratulations, you've reached the level of a first year economics student and have discovered banking.
 

oggy

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I like this topic, reaches close to the heart of economics. Hopefully more contribute and I will read every post
 

ddoggfather

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I like this topic, reaches close to the heart of economics. Hopefully more contribute and I will read every post
I would like to know if any political party would even discuss this matter. Note none of our 'celebrity economists' who called the bust talk about it or the gold standard...

Eric Cantona had some French oligarchs in a twist in case his idea to take down the banks actually came to fruition.

Revolution is easily thrown around these days but its going to take a massive shift in this or any country before the root of all evil (fractional reserve banking) is tackled
 

Iarmuid

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Revolution is easily thrown around these days but its going to take a massive shift in this or any country before the root of all evil (fractional reserve banking) is tackled
Fractional reserve banking is not so much the problem in my view, in fact it is a necessity in the system we have today, if fractional reserve banking was eliminated tomorrow, the deflation would make the current crisis look like a picnic.

However that said the current banking system is near indefensible in my view, firstly virtually all money in the economy today is issued as debt and COMPOUND interest bearing debt at that, it is at its very heart usurious, loan defaults are gauranteed under the current system.

A primer for this can be got by googling for the video Money as Debt or for a more academic view see Steve Keens Debt watch.

Secondly as I noted previously banking today is a quasi private public entity enjoying all the benefits of privatisation and none of the risks.

The only two rational choices in my view are either a system of public banks such as the one in North Dakota as advocated by Ellen Brown or a Mises type solution of real free market banking. But this, in between system as of now is just fraudulent and criminal. Regulation will not fix the issues, root reform of the money system is required, but you wont hear that conversation on RTE or BBC etc..
 
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Squire Allworthy

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I think a detailed conversation on whether banks should be private or public entities is warranted, with pros and cons of each. But my own inclinination is they should be run at the community level and regulated at the community level as much as possible, centralisation is not a good idea in my view. Lord Actons insight is always useful in such cases I believe.
Sound, safe, local banks would be a good start, but Central Banks such as the Bank of England should not be private.
 

Pegasus1010

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Quote:
An honest warehouse makes sure that the goods entrusted to its care are there, in its storeroom or vault. But banks operate very differently, at least since the days of such deposit banks as the Banks of Amsterdam and Hamburg in the seventeenth century, which indeed acted as warehouses and backed all of their receipts fully by the assets deposited, e.g., gold and silver. This honest deposit or "giro" banking is called "100 percent reserve" banking. Ever since, banks have habitually created warehouse receipts (originally bank notes and now deposits) out of thin air. Essentially, they are counterfeiters of fake warehouse-receipts to cash or standard money, which circulate as if they were genuine, fullybacked notes or checking accounts. Banks make money by literally creating money out of thin air, nowadays exclusively deposits rather than bank notes. This sort of swindling or counterfeiting is dignified by the term "fractional-reserve banking," which means that bank deposits are backed by only a small fraction of the cash they promise to have at hand and redeem. (Right now, in the United States, this minimum fraction is fixed by the Federal Reserve System at 10 percent.)



This is such a no-brainer that it's scarey to think that anyone could not be aware of it...
 

Cael

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It is surprising given our present disastrous situation why people are not willing to discuss this issue more.
Its really not surprising at all, a chara. Our uneducational system is designed to turn curious children into docile cretins, who obey orders without question. The Murder Machine, as Pearse called it. People are trained just enough to operate the machines and systems of capitalism, but not enough to step back and analyse that system.
 

Padraigin

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There are actually two separate topics being linked in this thread: (1) money or currency and (2) banking.

The "creating money out of thin air" is what inevitably happens to currency once it goes off the gold standard. Money becomes a type of accounting rather than a measurement of anything tangible. Sometimes banks are creating money out of thin air with their loan portfolios, sometimes appraisers do it when they value property, and sometimes governments to it when they print and buy their own bonds. As "money" becomes more and more abstract numerical values and less and less tied to anything tangible, all kinds of distortions and imbalances occur, because it loses any real connection to reality. Imaginary monetary systems inevitably collapse, and sooner or later everyone will have to go back to basing the value of money on something tangible.

There is a lot of talk right now about returning to the gold standard, because currencies everywhere are becoming increasingly unstable, and everyone is well aware that they are not supported by anything.
 

Vote_No_on_Everything

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Its really not surprising at all, a chara. Our uneducational system is designed to turn curious children into docile cretins, who obey orders without question. The Murder Machine, as Pearse called it. People are trained just enough to operate the machines and systems of capitalism, but not enough to step back and analyse that system.
+1
 


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