You can say this is tacky. Except I hear sentiments like this expressed far too often. And the idea that it's 'your money' is pervasive when that's simply not true.
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Our company lawyer walked past me as I was reading your blog over lunch today.
He tutted and told me that you were a very ‘dangerous man’ Richard.
A very dangerous chartered accountant
It takes some doing to be that
Oxymoron I’d have thought. 🙂
‘Very dangerous’ is just what you want to hear. So much better than saying “Who’s he?”.
🙂
really?!
how amusing!
I would consider that a compliment,
maybe Richard should ask your company lawyer if he could use it as an endorsement on the cover of his next book?
PSR, might I have his email address?
Only joking….
Is the tropical island at the back one of those riven by gang warfare with a high rate of criminal mortality and low expectation of life? And while you may send your money there it might be a problem getting it back.
I suspect so
Hi Richard,
I wanted to ask about the money creation by banks and was not sure where on this site to ask (please move this if it should be elsewhere).
If banks create money by lending:
1. Does that mean retail banks, investment banks or both?
2. Do banks not themselves have to be “made whole(or flat)” by borrowing in the short term money markets? (isn’t this what caused Northern Rock’s issues?)
3. Why do banks care at all about being repaid/why do they care about credit worthiness of borrowers?
4. If the money is created out of thin air, why are banks susceptible to defaults of large numbers of borrowers – such as in the sub-prime example, if they are just charging interest on money they created and incur no cost of funding?
Thanks very much.
D
1. Retail banks: unless the investment bank makes loans when it too creates money
2. Northern Rock wanted to change its risk profile by securitising debt and selling it. It’s growth model was wholly dependent on doing so – and then people realised it was selling them junk and so it failed regulatory requirements
3. Because non-repayment is a real cost. repayment cancels debt and destroys money. But non-repayment reduces its capital and so it matters
4. See three
“Because non-repayment is a real cost”
Sorry how does it manifest as a real cost please?
If a bank has no requirement to cover/fund most of the pounds it lends with capital (only has to cover a fraction of it). Why is there much of a cost?
Is this what you meant? That the fractional capital requirements are the cost?
It’s an absolute loss
So a direct charge to capital
Is that so hard to understand?
I have the impression that it is not
Yes – it’s very difficult to grasp. This is precisely the problem with all of this and probably why most people do not grasp it at all. Including many economists…
If a retail bank creates a debit in their account and a credit in a customer account as a loan, but don’t have to move any actual capital to do that (which I think is the process?). What is the capital cost? Surely it’s cost them nothing?
The term “charge to capital” suggests you have to pay for it somehow but the detail/mechanics of it are what someone like me needs to see (and I imagine many others do too). So an example might help:
If a bank loans me £100, by creating it out of thin air, why is there any cost to them? They will always appear to be -£100 in their balance sheet (right?) until I repay, but so what? That will be offset by a +£100 asset no? (Obviously I am not an accountant). What forces them to flatten that position ever?
Thanks for your time. The more people that understand this fully, the better.
There is no capital cost until there is no repayment
Because the customer may have spent with another bank then there is a loss
It does not change the reality of the loan creation
So why could you not just call it a permanent loan?
Because it’s not
I mean what’s to stop banks lending to people in perpetuity? Equity is effectively this isn’t it? I think you can get perpetual bonds too?
If the only reason for their being capital cost, is that there is an expectation of repayment, what is to stop a bank from lending with no repayment date?
Let’s start with the obvious fact that people are mortal and so your idea is flawed
Then let’s say lending in the current style is a legacy of another era of banking
And then suggest what you’re really saying is that there is a need for social access to capital – and I would agree
But that’s not a bank activity
Probably a day too late on this but here’s my take on this.
The thing that steps a bank making too many loans is risk.
The risk that the loan could end up as a deposit which someone then wants to withdraw as cash.
Lets say the bank lends A 100k to buy a house from B, the 100k gets transferred (electronically) to B’s account which happens to be at the same bank.
Now B wants the money in cash! If the bank does not have the cash in reserve it needs to borrow it from another bank and if that other bank doubts that A will pay up it may refuse. So the viability of the loan book is crucial.
Ultimately the convertibility of debt into sovereign money is key.
Yes- the Taxpayers’ money meme needs consistent challenging.
The Americans perpetuate this myth referring to ‘your tax-dollars.’ It’s all very emotive stuff and designed to arouse indignation and channels it in the wrong direction.
All based on Gold-standard myths. You deal with this issue well in ‘The Joy of Tax.’