Let's get the basics correct, already!

JohnfrmClevelan · Oct 30, 2018

imagep said:
Whether one deposits cash or a check, only 10% of it has to be held by the bank (or deposited into the banks reserve account at the fed) as required reserves. The rest can be utilized by the bank for whatever purpose, including lending it out. While my deposit is a bank liability, the money itself that I deposited is a bank asset. Reserves are an asset to a bank, so if I deposit cash/check or electronic money into a bank, that bank's reserve increases. As long as the banks total reserves are in excess of it's required reserves, then the bank simply transfers digits from it's own reserve account to the borrowers account (which may or may not be at the same bank). The bank didn't simply just add digits to the borrowers account, it added digits to the borrowers account AND subtracted an equivilent amount of digits from it's reserve account.

When you deposit a check for $1000, your bank gets $1000 transferred to their reserve account at the Fed. The bank never touches those reserves. Yes, by the rules, $100 of those reserves will be required, and $900 will be excess. But the bank does not transfer digits from its reserve account to borrower's account; if they did, they would be subtracting assets while adding liabilities. So for a $1000 loan, the bank would be down $2000; $1000 less reserves, and $1000 more account balances. That accounting doesn't work.

What does work is borrower's account balance being created in exchange for a promissory note.

The closest thing that works would be if borrower took out his loan in cash. So after marking up borrower's account by $1000 and holding borrower's promissory note as an asset worth, say, $1200, the loan is disbursed to borrower in cash; borrower's account balance goes down by $1000, and the bank's vault cash (reserves) also goes down by $1000. They are left with the soft asset, the promissory note, hopefully worth $1200. The bank, having disbursed the loan, is down $1000 of reserves, but up $1200 in promissory notes. Borrower's account balance is back to where it started.

But that is a disbursement, like any other disbursement, even if it's cash to borrower himself. The bank has settled up the loan by disbursing reserves and extinguishing borrower's account balance. The reserves only got involved upon disbursement, not upon loan creation.

imagep said:
The total reserves held by the fed may not change, but the lending banks reserves decreased (but is still above the required reserves).

If banks don't utilize depositors money, then where do banks get the money to lend to other banks on the interbank lending system?

Those are reserves. Bank A can move reserves to Bank B in return for repayment plus interest. That accounting works. It's like you lending me cash - nothing is created or extinguished, in a net sense.

imagep said:
If banks simply add digits to accounts to make a loan, without having to reduce digits in it's reserve account, then why would any bank ever need to borrow on the interbank lending system?

They add digits to accounts while at the same time getting a promissory note, which is the balancing asset.

imagep said:
It simply wouldn't be possible for a banks reserve to be below the required reserve, if banks held every penny of deposits in their reserve account at the fed, we wouldn't have a "fractional reserve banking system", we would have a 100% reserve banking system. But we all know that we have a fractional reserve system. If banks could not lend from reserves, then no depositors deposit would ever be at risk, and that government insurance on deposit account of up to $200k wouldn't even exist. Bank runs would be impossible, although people withdrawing their deposits would have to be willing to accept cashiers checks.

There is way more M1 money that there are reserves. It's no longer a 10-to-1 ratio, like before QE, but it's close. But there is really no close relationship between MB and M1. They are two separate, unmixable pools of money. **Except for people holding cash - but that is really just portable reserves. Instead of 100% of your money being in a bank account, when you take a cash withdrawal you are lowering the bank's liabilities, and the bank gives you reserves (cash) to settle up. Nobody's net position has changed.**

Remember that at the same time banks are taking deposits and increasing their reserve balances, they are also disbursing checks and lowering their reserve balances. While deposits bring in reserves in excess of the requirement, outgoing transfers lose reserves in excess of the requirement. You have to take them as a whole, and just worry about the net transfer at the end of the day. It very well might be zero, even if the bank has created more loans and increased the M1 money supply.

imagep · Oct 31, 2018

JohnfrmClevelan said:
When you deposit a check for $1000, your bank gets $1000 transferred to their reserve account at the Fed. The bank never touches those reserves. Yes, by the rules, $100 of those reserves will be required, and $900 will be excess. But the bank does not transfer digits from its reserve account to borrower's account; if they did, they would be subtracting assets while adding liabilities. So for a $1000 loan, the bank would be down $2000; $1000 less reserves, and $1000 more account balances. That accounting doesn't work.

What does work is borrower's account balance being created in exchange for a promissory note.

The bank isn't "down" anything. The bank issues a check to the borrower, the borrower deposits that check in a different bank, the lending bank then holds a promissory note for $1,000, and $1,000 less in reserves after the fed settles the check. That's a zero net gain/loss.

If the bank lends cash, it works the same way, the bank then has $1000 less in cash reserves and has a promissory note for $1,000. When the fed clears the transaction, it most definitely moves a thousand dollars from the lending banks reserve account and transfers it to the bank who receives the deposit. The system-wide net reserves may not change, but the lending bank and the bank which gets the deposit both have changes in their reserve accounts.

Even if the proceeds of the loan are deposited into an account at the bank who issues the loan it still balances. The bank then has a promissory note for $1000, no change in reserves, and a liability of the $1000 deposit - a 0 net gain/loss. The only thing that has really changed is the required reserves of the bank goes up by $100 and the excess reserve is now jut $900 (instead of a thousand) - but no net change in total reserves.

No bank just marks up or down an account without an offsetting transaction.

The mistake in your example is that the promissory note isn't a liability to the bank, it's an asset. The promissory note is a liability to the borrower.

ludin · Oct 31, 2018

imagep said:
Actually, that's not correct. There is no reserve on loans. The reserve is a percent of deposits, not loans. A bank can acquire the money it lends, and as long as it didn't acquire it from customer deposits, then there is no additional required reserves needed.

Actually it is correct because it works out to be the same thing. A banks reserve must be a X% set by the reserve.
As a bank i can lend out 1m even if i do not have the reserve rate. at the end of the day i must have that many deposits or borrow that much
money from another bank or from the federal reserve to meet the deposit requirement. which is x% of my loan liability.

The federal reserve literature is very clean on the fact that the reserve is a percentage of deposits.

it works out the same way.

The claim that "banks don't lend reserves" isn't quite true either. That claim is based upon some incorrect assumptions. The first assumption is that the word "reserves" means the same as "required reserves". It doesnt. Every dollar that a bank deposits with the fed is part of it's reserves. When a bank has more reserves than it is required to have, then the bank can use that money to fund loans, or it can loan it out to other banks through the interbank lending system.

A bank will not lend out it's reserve. It will loan out excess reserves that it has. which is any thing greater than the x% set by the fed.

And technically, a bank can't lend reserves because if the money was lent, it would no longer be that banks reserves, but that's really a silly semantic issue.

Plus the bank must have X% cash on hand at all times.

PleasantValley · Oct 31, 2018

JohnfrmClevelan said:
Lately I have seen a few misinformed claims on various things that end up as tangential sub-threads in other posts, so I thought a good, basic, economics-minus-the-politics thread was in order. So I will start off with a few points for consideration, and maybe debate (if you consider them incorrect).

Banks do not lend out pre-existing money (like money from our savings accounts). Instead, banks create M1 money by expanding their balance sheets via loans.

The government spends not by borrowing, but by simply creating and spending liabilities (assets to us, though) into the economy. There is no debt to be "repaid," only liabilities (in the accounting sense only) that may or may not be extinguished by taxation.

The economy can only grow with an addition of new demand, which requires increased private sector debt and/or federal deficit spending and/or a trade surplus and/or net dis-saving. And in the U.S., the latter two almost never happen. See Circular Flow of Income for an additional explanation.

A greater disparity in income generally leads to increased federal deficits, in order to make up for lost demand.

Entitlement programs are a boon to the economy, while tax cuts for the rich are costly to the economy.

Have at it.

I would never argue with anyone who has Dan Halen as an avatar.

imagep · Oct 31, 2018

ludin said:
Actually it is correct because it works out to be the same thing. A banks reserve must be a X% set by the reserve.
As a bank i can lend out 1m even if i do not have the reserve rate. at the end of the day i must have that many deposits or borrow that much
money from another bank or from the federal reserve to meet the deposit requirement. which is x% of my loan liability.

Nope, the required reserve isn't based upon loans, it's based upon deposits. A bank can increase it's total amount loaned out without increasing it's required reserve, but when the amount of checking account deposit liabilities increases for a bank, so does it's required reserve.

https://www.investopedia.com/terms/r/reserveratio.asp

https://www.federalreserve.gov/monetarypolicy/reservereq.htm

it works out the same way.

No it doesn't. A bank can lend more or less than the amount of deposits that it holds.

A bank will not lend out it's reserve. It will loan out excess reserves that it has. which is any thing greater than the x% set by the fed.

I (almost) totally agree. That's what I've been trying to explain to JohnfrmClevelan.

The reason I said "almost" is because the term "reserves", covers both required reserves and excess reserves, thus banks do fund loans from "reserves", just not from "excess reserves".

Plus the bank must have X% cash on hand at all times.

Sure.

JohnfrmClevelan · Oct 31, 2018

imagep said:
The bank isn't "down" anything. The bank issues a check to the borrower, the borrower deposits that check in a different bank, the lending bank then holds a promissory note for $1,000, and $1,000 less in reserves after the fed settles the check. That's a zero net gain/loss.

But you are describing settlement now, not loan funding. Earlier, you said this: "The bank didn't simply just add digits to the borrowers account, it added digits to the borrowers account AND subtracted an equivilent amount of digits from it's reserve account." The offsetting transaction of loan creation isn't a deduction of reserves, it's the addition of a promissory note to the bank's asset side of the ledger. Even if the bank has tons of excess reserves, borrower still gives the bank a promissory note.

Here's how you know banks don't fund loans with reserves: if you have two equivalent loans of $1000 at two banks, and they each get deposited into the opposite bank, no reserves move. And even if those banks have no excess reserves at the time, they can acquire them later - and even then, they only need $100 each to meet requirements, not $1000 each. (In Canada, they don't even need to do that.) So you have increased M1 by $2000, increased bank liabilities by $2000, and completed two transactions, all without using reserves.

imagep said:
If the bank lends cash, it works the same way, the bank then has $1000 less in cash reserves and has a promissory note for $1,000. When the fed clears the transaction, it most definitely moves a thousand dollars from the lending banks reserve account and transfers it to the bank who receives the deposit. The system-wide net reserves may not change, but the lending bank and the bank which gets the deposit both have changes in their reserve accounts.

Even if the proceeds of the loan are deposited into an account at the bank who issues the loan it still balances. The bank then has a promissory note for $1000, no change in reserves, and a liability of the $1000 deposit - a 0 net gain/loss. The only thing that has really changed is the required reserves of the bank goes up by $100 and the excess reserve is now jut $900 (instead of a thousand) - but no net change in total reserves.

If a bank were to actually lend cash, settlement would happen as soon as the bank handed borrower their cash. No Fed transfer would happen.

imagep said:
No bank just marks up or down an account without an offsetting transaction.

And when a loan is created, that offsetting transaction is the promissory note. When a check is transferred, that offsetting transaction is a corresponding transfer of reserves.

imagep said:
The mistake in your example is that the promissory note isn't a liability to the bank, it's an asset. The promissory note is a liability to the borrower.

If I ever said that the promissory note is an asset to the bank, I misspoke.

JohnfrmClevelan · Oct 31, 2018

ludin said:
Actually it is correct because it works out to be the same thing. A banks reserve must be a X% set by the reserve.
As a bank i can lend out 1m even if i do not have the reserve rate. at the end of the day i must have that many deposits or borrow that much
money from another bank or from the federal reserve to meet the deposit requirement. which is x% of my loan liability.

Almost. It's x% of your (short-term) account balance liability. Banks don't have loan liabilities - the loans are disposed of right away, leaving banks with an asset, the promissory note.

Banks are required to hold x% against short-term account balances because those accounts are what empties out when you write a check, or take out cash, or have a bank run. All of those transactions require outgoing reserves (including vault cash).

ludin said:
it works out the same way.

System-wide, yes, but not for specific banks. Borrower's bank creates the loan, but depositor's bank holds the liabilities.

ludin said:
A bank will not lend out it's reserve. It will loan out excess reserves that it has. which is any thing greater than the x% set by the fed.

See my answer to imagep above. The only time reserves are loaned out is to other banks. Never to customers.

ludin said:
Plus the bank must have X% cash on hand at all times.

That cash (vault cash) still counts towards a bank's reserve requirement.

imagep · Oct 31, 2018

JohnfrmClevelan said:
But you are describing settlement now, not loan funding.

I'm obviously not understanding the difference. Every transaction has to be settled, and the money for every loan comes from somewhere.

Here's how you know banks don't fund loans with reserves: if you have two equivalent loans of $1000 at two banks, and they each get deposited into the opposite bank, no reserves move. And even if those banks have no excess reserves at the time, they can acquire them later - and even then, they only need $100 each to meet requirements, not $1000 each. (In Canada, they don't even need to do that.) So you have increased M1 by $2000, increased bank liabilities by $2000, and completed two transactions, all without using reserves.

I never said that loans have to be funded with excess reserves, they can be funded lot's of ways. It also just depends on one's perspective. I could easily look at those transactions and see that the reserves of each bank did change, but that the changes for this particular example more or less canceled each other out. The amount of a banks reserves change in one direction or another every time a bank makes a transaction, it's neither here or there that for the most part transactions tend to cancel each other out leaving a banks reserves more or less the same (but I doubt a banks reserves and the composition of the reserves would frequently be exactly the same at the end of the day).

Let's cut your example in half, and say that only one of the banks made a loan. At this point, the bank making the loan, assuming that it had no more transactions for the day, would have two options depending upon it's particular situation:
A. If it was short required reserves due to making that loan, it would need to borrow to meet the minimum loan requirement (proving that banks do lend money that comes out of their reserve account)
B. If it had ample reserves over the required min. reserves, the bank wouldn't need to acquire any additional reserves, it's reserve account would simply be marked down.

If a bank were to actually lend cash, settlement would happen as soon as the bank handed borrower their cash. No Fed transfer would happen.

Since vault cash is part of a banks reserve and can even be part of a banks required reserve, and although no Fed transfer may happen, the bank is still lending out of reserves. If it loans $1k in cash, it now has $1k less in reserves. I suppose that's the best example possible of a bank lending from reserves.

And when a loan is created, that offsetting transaction is the promissory note. When a check is transferred, that offsetting transaction is a corresponding transfer of reserves.

Yes, both happen, normally within the time span of one working day, and both are part of the same transaction - bank trades it's asset of money (the check) for the prommissory note that the borrower provides to the bank. The promissory note offsets the reduction in bank reserves, and vice versa.

-----------------------WAIT, I think I just found another part of our disagreement. You are under the assumption that the bank is issuing the borrower, a promissory note instead of actual money, no, the borrower trades the promissory note to the bank and the bank provides the lender with money. so are you calling the check that the bank issues a "promissory note"? The bank doesn't have to pay the borrower with a check, it could be cash or an instant electronic transfer, not a "promissory note" The borrower issues a promissory note to the bank, not the other way around

The promissory note is a bank asset, the reduction in reserves (even if offset by a different transaction) is a reduction in bank assets, at the end of the day, the bank didn't change financial positions, it just changed the composition of it's assets.

Likewise
The promissory note is a liability to the borrower, the increase in money that the borrower now holds offsets that new liability, so the borrower also has no net change in position.

And since the Fed marks down the reserve account of the lending bank, and marks up the account of the bank that receives the deposit, the federal reserve has no net change in position either, the two transactions offset each other.

JohnfrmClevelan · Oct 31, 2018

imagep said:
I'm obviously not understanding the difference. Every transaction has to be settled, and the money for every loan comes from somewhere.

The difference is mostly in the timing. Loan creation is one event, and settlement is another. Usually, they happen so close together that they seem like one event (borrower's account isn't really marked up when you get a home mortgage, for example, because the bank pays the seller directly).

The money for loans does not have to come from somewhere. It is created on the spot when the bank marks up borrower's account. It's not a collection of reserves or any other pre-existing money.

imagep said:
I never said that loans have to be funded with excess reserves, they can be funded lot's of ways. It also just depends on one's perspective. I could easily look at those transactions and see that the reserves of each bank did change, but that the changes for this particular example more or less canceled each other out. The amount of a banks reserves change in one direction or another every time a bank makes a transaction, it's neither here or there that for the most part transactions tend to cancel each other out leaving a banks reserves more or less the same (but I doubt a banks reserves and the composition of the reserves would frequently be exactly the same at the end of the day).

Bank loans are funded one way, and one way only - by banks expanding their balance sheet, marking up borrower's account and borrower executing a promissory note. For the bank, the account balance is on the liability side, and the promissory note is on the asset side.

imagep said:
Let's cut your example in half, and say that only one of the banks made a loan. At this point, the bank making the loan, assuming that it had no more transactions for the day, would have two options depending upon it's particular situation:
A. If it was short required reserves due to making that loan, it would need to borrow to meet the minimum loan requirement (proving that banks do lend money that comes out of their reserve account)
B. If it had ample reserves over the required min. reserves, the bank wouldn't need to acquire any additional reserves, it's reserve account would simply be marked down.

The bank won't be short due to making the loan; the loan is normally both created and disbursed before the bank has to worry about its reserve requirement. Like with a mortgage, if the bank pays the seller/payee directly, the loan is never on the books as borrower's account; it's helpful to break down the loan process this way in order to understand it, but the only bank that has to worry about an increased reserve requirement is payee's bank.

The bank might well be short due to disbursing the loan - not because its reserve requirement goes up (it doesn't), but because it is losing reserves in the amount of the loan. If it had no excess reserves, the bank will need to borrow/obtain reserves equal to 90% of the loan amount, at some point (3 days?) after settlement, to get back up to 10%.

But banks don't have to get back up to 10% before settlement, then can do it days later. That proves that banks don't lend money that comes out of their reserve account. Payee's bank is completely satisfied before borrower's bank gets those required reserves.

I get what you are driving at. You see a loan for $1000, and (sometimes) $1000 of reserves moves from borrower's bank to payee's bank, and it looks like reserves are getting loaned out. But that's only the case when you are looking at a single loan that is paid to a different bank. If you look at two loans between two banks that cancel each other out, or come close, it is clear either no reserves move, or very few reserves move, so they obviously can't be what "funds" loans. A single loan deposited back into borrower's bank also demonstrates this, as no reserves at all move.

JohnfrmClevelan · Oct 31, 2018

(cont.)

imagep said:
Since vault cash is part of a banks reserve and can even be part of a banks required reserve, and although no Fed transfer may happen, the bank is still lending out of reserves. If it loans $1k in cash, it now has $1k less in reserves. I suppose that's the best example possible of a bank lending from reserves.

What if borrower simply leaves his loan proceeds deposited in his account for, say, a month? Reserves/cash don't come into play unless and until he takes cash out of the ATM. But there was still money in his account for the month.

imagep said:
Yes, both happen, normally within the time span of one working day, and both are part of the same transaction - bank trades it's asset of money (the check) for the prommissory note that the borrower provides to the bank. The promissory note offsets the reduction in bank reserves, and vice versa.

I'm looking at the two events as discrete, even if just by a moment. Loan creations is one event, disbursement is another, later, event.

imagep said:
-----------------------WAIT, I think I just found another part of our disagreement. You are under the assumption that the bank is issuing the borrower, a promissory note instead of actual money, no, the borrower trades the promissory note to the bank and the bank provides the lender with money. so are you calling the check that the bank issues a "promissory note"? The bank doesn't have to pay the borrower with a check, it could be cash or an instant electronic transfer, not a "promissory note" The borrower issues a promissory note to the bank, not the other way around

No, that's not my assumption. The promissory note is a bank asset/borrower liability. And it's not what the bank gives the borrower.

ludin · Nov 1, 2018

imagep said:
Nope, the required reserve isn't based upon loans, it's based upon deposits. A bank can increase it's total amount loaned out without increasing it's required reserve, but when the amount of checking account deposit liabilities increases for a bank, so does it's required reserve.

https://www.investopedia.com/terms/r/reserveratio.asp

https://www.federalreserve.gov/monetarypolicy/reservereq.htm

No it doesn't. A bank can lend more or less than the amount of deposits that it holds.

I (almost) totally agree. That's what I've been trying to explain to JohnfrmClevelan.

The reason I said "almost" is because the term "reserves", covers both required reserves and excess reserves, thus banks do fund loans from "reserves", just not from "excess reserves".

Sure.

https://www.investopedia.com/terms/r/reserveratio.asp
The reserve ratio is the portion of reservable liabilities that depository institutions must hold onto, rather than lend out or invest. This is a requirement determined by the country's central bank, which in the United States is the Federal Reserve. As a simplistic example, assume the Federal Reserve determined the reserve ratio to be 11%. This means if a bank has deposits of $1 billion, it is required to have $110 million on reserve.

Depository institutions in the United States are required to hold reserves against their total reservable liabilities, which cannot be lent out by the bank. Reservable liabilities include net transaction accounts, nonpersonal time deposits and Eurocurrency liabilities.

imagep · Nov 1, 2018

ludin said:
https://www.investopedia.com/terms/r/reserveratio.asp
The reserve ratio is the portion of reservable liabilities that depository institutions must hold onto, rather than lend out or invest. This is a requirement determined by the country's central bank, which in the United States is the Federal Reserve. As a simplistic example, assume the Federal Reserve determined the reserve ratio to be 11%. This means if a bank has deposits of $1 billion, it is required to have $110 million on reserve.

Depository institutions in the United States are required to hold reserves against their total reservable liabilities, which cannot be lent out by the bank. Reservable liabilities include net transaction accounts, nonpersonal time deposits and Eurocurrency liabilities.

Exactly. That proves my point. Required reserves are based upon deposits, not loans.

A bank loan doesn't require an increase in required reserves, only a deposit results in an increase of required reserves.

ludin · Nov 1, 2018

imagep said:
Exactly. That proves my point. Required reserves are based upon deposits, not loans.

A bank loan doesn't require an increase in required reserves, only a deposit results in an increase of required reserves.

we are talking past each other.
talking the same thing but using different terms.

if a bank has 1 billion dollars but the reserve is 10% is not going to hold all 1billion dollars.

it is going to lend out all but 100m of it.

imagep · Nov 1, 2018

ludin said:
we are talking past each other.
talking the same thing but using different terms.

if a bank has 1 billion dollars but the reserve is 10% is not going to hold all 1billion dollars.

it is going to lend out all but 100m of it.

Sure, we are on the same sheet of music. Yes, I agree.

I think that maybe you misspoke in an earlier post where you indicated that the the reserve was based upon loans, that's when I pointed out that the reserve is based upon deposits. It doesn't work out exactly the same way because as JohnfrmClevelan says, banks aren't limited by reserves. Banks can acquire reserves after loans are made if they happen to need additional excess reserves (interbank lending system, or by selling assets, or by new investor investment, etc - none of which result in additional requires reserves).

ludin · Nov 2, 2018

imagep said:
Sure, we are on the same sheet of music. Yes, I agree.

I think that maybe you misspoke in an earlier post where you indicated that the the reserve was based upon loans, that's when I pointed out that the reserve is based upon deposits. It doesn't work out exactly the same way because as JohnfrmClevelan says, banks aren't limited by reserves. Banks can acquire reserves after loans are made if they happen to need additional excess reserves (interbank lending system, or by selling assets, or by new investor investment, etc - none of which result in additional requires reserves).

I have never said they are limited by reserves. I have said that if there is a difference then they have to make up for it.
Clevelan well he is a different story and i have no reason to discuss things with him as he doesn't care about facts.

he is not an authority in this matter and he has been proven wrong more times than i can say.

For instance the other day he asked why bank pay people interest on their savings accounts.

The answer is simple because the bank borrows peoples money for loans and other investments.
i even gave him the site and everything else and he still denies it.

so there is no point in talk to him.

JohnfrmClevelan · Nov 2, 2018

ludin said:
I have never said they are limited by reserves. I have said that if there is a difference then they have to make up for it.
Clevelan well he is a different story and i have no reason to discuss things with him as he doesn't care about facts.

he is not an authority in this matter and he has been proven wrong more times than i can say.

For instance the other day he asked why bank pay people interest on their savings accounts.

The answer is simple because the bank borrows peoples money for loans and other investments.
i even gave him the site and everything else and he still denies it.

so there is no point in talk to him.

Investopedia is not a trustworthy authority on economics. Like Wikipedia, it is written by individuals submitting articles. Unlike Wikipedia, it doesn't even have the redundancy of multiple authors on the same subject. It is the picture dictionary of economics.

I'm trying to discuss this in good faith, ludin. Don't let your stubbornness prevent you from accepting what is correct, just because it's coming from me.

https://www.forbes.com/sites/francescoppola/2014/01/21/banks-dont-lend-out-reserves/#681ce6e17d20

...This is because when a bank creates a new loan, it also creates a new balancing deposit. It creates this "from thin air", not from existing money: banks do not "lend out" existing deposits, as is commonly thought.

https://ellenbrown.com/2014/10/26/why-do-banks-want-our-deposits-hint-its-not-to-make-loans/

All of which leaves us to wonder: If banks do not lend their depositors’ money, why are they always scrambling to get it? Banks advertise to attract depositors, and they pay interest on the funds. What good are our deposits to the bank?
The answer is that while banks do not need the deposits to create loans, they do need to balance their books; and attracting customer deposits is usually the cheapest way to do it.

I'm still waiting for your explanation of how a bank can lend out customer deposits, which are liabilities to the bank.

MrWonka · Nov 2, 2018

JohnfrmClevelan said:
Lately I have seen a few misinformed claims on various things that end up as tangential sub-threads in other posts, so I thought a good, basic, economics-minus-the-politics thread was in order. So I will start off with a few points for consideration, and maybe debate (if you consider them incorrect).

Banks do not lend out pre-existing money (like money from our savings accounts). Instead, banks create M1 money by expanding their balance sheets via loans.

The government spends not by borrowing, but by simply creating and spending liabilities (assets to us, though) into the economy. There is no debt to be "repaid," only liabilities (in the accounting sense only) that may or may not be extinguished by taxation.

The economy can only grow with an addition of new demand, which requires increased private sector debt and/or federal deficit spending and/or a trade surplus and/or net dis-saving. And in the U.S., the latter two almost never happen. See Circular Flow of Income for an additional explanation.

A greater disparity in income generally leads to increased federal deficits, in order to make up for lost demand.

Entitlement programs are a boon to the economy, while tax cuts for the rich are costly to the economy.

Have at it.

I think almost everything you said here is off a bit. In fact, the last statement which was the most political was the closest to being accurate.

Banks definitely create money to a certain extent, but much of the money is in fact money that they need to have, and need to get paid back. Obviously, during the crisis, the big problem was that so many banks were out of money. That's why the government had to refund them.

When the government borrows it does to a certain extent have the debt to be repaid. Much of it is in bonds that citizens own, but there is at least some debt even though much of it is just money printed.

It's true that the economy can only grow with an additional new demand, but you forgot population increases as the primary driver of that. More people require more food, more houses, more cars, more goods more everything... They also drive up the cost of existing resources like land.

The disparity of income doesn't necessarily have to lead to federal deficits.

Entitlement programs can definitely be a boon to the economy and tax cuts for the rich can definitely be costly to the economy, but it's a matter of timing and degree. Over taxation, even on the wealth can at some point do more harm than good. Excessive government spending on the poor can at some point cause more harm than good as well. The timing of that all matters though. In a bad economy tax cuts and higher spending can both be a good idea. In a really good economy like we have now tax cuts make no sense, and spend for the poor should naturally decrease since there are fewer of them.

marke · Nov 2, 2018

JohnfrmClevelan said:
Lately I have seen a few misinformed claims on various things that end up as tangential sub-threads in other posts, so I thought a good, basic, economics-minus-the-politics thread was in order. So I will start off with a few points for consideration, and maybe debate (if you consider them incorrect).

Banks do not lend out pre-existing money (like money from our savings accounts). Instead, banks create M1 money by expanding their balance sheets via loans.

That is misleading. Banks do not create wealth by cooking books. Wealth is created by labor. There is no other way.

The government spends not by borrowing, but by simply creating and spending liabilities (assets to us, though) into the economy. There is no debt to be "repaid," only liabilities (in the accounting sense only) that may or may not be extinguished by taxation.

The standard exchange medium of many world nations is the US dollar. The US cannot simply print more money to make itself richer, even though that is sort of what has been done since the dollar went off the gold standard. Other nations invested in US dollars are not happy with the idea of the US 'creating' wealth in its own printing presses and giving that wealth to itself with insufficient protections for other nations being damaged by that US self-indulgence. Germany once tried to eliminate its debt by printing more money, but that sort of foolishness did not and does not work.

The economy can only grow with an addition of new demand, which requires increased private sector debt and/or federal deficit spending and/or a trade surplus and/or net dis-saving.

One reason abortion is bad is because it forces a diminishing of population growth. Increasing population growth is one essential element to economic growth.

And in the U.S., the latter two almost never happen. See Circular Flow of Income for an additional explanation.

A greater disparity in income generally leads to increased federal deficits, in order to make up for lost demand.

Nonsense. Federal deficits are caused by government overspending, regardless of whatever the feel good cause.

Entitlement programs are a boon to the economy, while tax cuts for the rich are costly to the economy.

Blabbering incoherent nonsense. Nancy Pelosi praised the skyrocketing increase in food stamp recipients under Obama because she also thought increased deficit spending leads to economic prosperity. It doesn't. Increased government overspending leads to unsustainable debt. Overspending can bankrupt homes, cities, states, and entire nations.

Have at it.

ludin · Nov 2, 2018

MrWonka said:
I think almost everything you said here is off a bit. In fact, the last statement which was the most political was the closest to being accurate.

Banks definitely create money to a certain extent, but much of the money is in fact money that they need to have, and need to get paid back. Obviously, during the crisis, the big problem was that so many banks were out of money. That's why the government had to refund them.

this is 100% not correct. Banks were not out of money. Banks had over leveraged themselves with bad loans. The people couldn't pay back those loans and it was causing a massive cash flow issue.
The Federal reserve did what is called QE. this is where the Federal reserve steps in and buys out liabilities owned by the bank. They basically exchanged the bad loans for cash money from the banks.

Not did they do that just once but twice.

When the government borrows it does to a certain extent have the debt to be repaid. Much of it is in bonds that citizens own, but there is at least some debt even though much of it is just money printed.

The Federal reserve makes a request to the US treasury. The US treasury then issues money via ET to the federal reserve. The treasury charges the federal reserve an interest on the money
that it is given.

It's true that the economy can only grow with an additional new demand, but you forgot population increases as the primary driver of that. More people require more food, more houses, more cars, more goods more everything... They also drive up the cost of existing resources like land.

This is correct.

JohnfrmClevelan · Nov 2, 2018

MrWonka said:
I think almost everything you said here is off a bit. In fact, the last statement which was the most political was the closest to being accurate.

Banks definitely create money to a certain extent, but much of the money is in fact money that they need to have, and need to get paid back. Obviously, during the crisis, the big problem was that so many banks were out of money. That's why the government had to refund them.

During the crisis, the value of certain bank assets, esp. MBSs, crashed. That left banks undercapitalized, because the value of their capital no longer met capital requirements. Capital only matters when banks take losses; it doesn't affect their ability to create loans. Nor do reserves; reserves only matter (operationally) when it comes time to disburse checks (including loan proceeds).

So banks create M1 money, but they can't create base money (MB), the stuff used for settlement. The Fed makes sure that the system (banks overall) have enough MB, but individual banks can run short.

MrWonka said:
When the government borrows it does to a certain extent have the debt to be repaid. Much of it is in bonds that citizens own, but there is at least some debt even though much of it is just money printed.

There is no real difference. Bonds are liabilities of the Treasury, reserves and dollars are liabilities of the Fed. They are all perfectly interchangeable. If you take the Fed as part of the government (and I do), then there is little difference to the government between dollars, bonds and reserves. Yet we only call outstanding bonds "debt."

Furthermore, government liabilities are not extinguished by payment, they are extinguished by taxation. Payment is just replacing one government liability with another.

MrWonka said:
It's true that the economy can only grow with an additional new demand, but you forgot population increases as the primary driver of that. More people require more food, more houses, more cars, more goods more everything... They also drive up the cost of existing resources like land.

Population increases certainly help drive demand, but they are not necessary for growth. It is certainly possible for demand to shrink as the population grows. It happens all the time.

MrWonka said:
The disparity of income doesn't necessarily have to lead to federal deficits.

The disparity in income leads to greater savings, which means more income that won't be used for demand or investment. So your choices are allowing the economy to shrink (bad), increasing private sector debt (unsustainable), net exports (not happening in the U.S.), or greater federal deficits. Demand must come from somewhere.

MrWonka said:
Entitlement programs can definitely be a boon to the economy and tax cuts for the rich can definitely be costly to the economy, but it's a matter of timing and degree. Over taxation, even on the wealth can at some point do more harm than good. Excessive government spending on the poor can at some point cause more harm than good as well. The timing of that all matters though. In a bad economy tax cuts and higher spending can both be a good idea. In a really good economy like we have now tax cuts make no sense, and spend for the poor should naturally decrease since there are fewer of them.

But the poor don't seem to be going away, do they? The economy as a whole can look good when those at the top are doing great, yet those at the bottom are doing worse.

My reasoning goes back to the increases savings problem that comes with high income inequality. Taxing the rich more to spend more on the lower end is really just forced spending of money that would otherwise be wasted on savings. That's good for aggregate demand, which is good for jobs, which is good for everybody.

JohnfrmClevelan · Nov 2, 2018

marke said:
That is misleading. Banks do not create wealth by cooking books. Wealth is created by labor. There is no other way.

I'm not talking about wealth, I'm talking about money. Which matters, because nothing happens without money. Just try generating wealth without it.

marke said:
The standard exchange medium of many world nations is the US dollar. The US cannot simply print more money to make itself richer, even though that is sort of what has been done since the dollar went off the gold standard. Other nations invested in US dollars are not happy with the idea of the US 'creating' wealth in its own printing presses and giving that wealth to itself with insufficient protections for other nations being damaged by that US self-indulgence. Germany once tried to eliminate its debt by printing more money, but that sort of foolishness did not and does not work.

The difference is that government-created money (except for interest payments on bonds) enters the economy by buying domestic production, or going to people that will do the same thing. And that is not inflationary.

marke said:
One reason abortion is bad is because it forces a diminishing of population growth. Increasing population growth is one essential element to economic growth.

Population growth is not essential at all. An economy can grow simply by producing and consuming more per capita.

marke said:
Nonsense. Federal deficits are caused by government overspending, regardless of whatever the feel good cause.

Federal deficits are necessary (in this country) to keep the economy from shrinking. Too much demand (from our income) is lost to savings and net imports (which is just saving by foreign parties). And who does all of that saving? Not the lower end, that's for sure.

marke said:
Blabbering incoherent nonsense. Nancy Pelosi praised the skyrocketing increase in food stamp recipients under Obama because she also thought increased deficit spending leads to economic prosperity. It doesn't. Increased government overspending leads to unsustainable debt. Overspending can bankrupt homes, cities, states, and entire nations.

Overspending can certainly bankrupt cities and even states, but not the federal government.

I never heard Pelosi, or anybody else in government, ever praise increased deficit spending. I think that is a figment of your very conservative imagination.

But tell me, what level of debt do you consider unsustainable for our government?

JohnfrmClevelan · Nov 2, 2018

ludin said:
this is 100% not correct. Banks were not out of money. Banks had over leveraged themselves with bad loans. The people couldn't pay back those loans and it was causing a massive cash flow issue.
The Federal reserve did what is called QE. this is where the Federal reserve steps in and buys out liabilities owned by the bank. They basically exchanged the bad loans for cash money from the banks.

Not did they do that just once but twice.

The Fed buys assets, not liabilities. MBSs are assets to both the bank and the Fed. Treasuries are assets to both the bank and the Fed.

ludin said:
The Federal reserve makes a request to the US treasury. The US treasury then issues money via ET to the federal reserve. The treasury charges the federal reserve an interest on the money
that it is given.

Where on Earth did you hear this nonsense?

Treasury issues bonds, period. Bonds are sold to the private sector. Proceeds end up in Treasury's account at the Fed. Direct transactions between Treasury and the Fed are verboten.

marke · Nov 2, 2018

JohnfrmClevelan said:
I'm not talking about wealth, I'm talking about money. Which matters, because nothing happens without money. Just try generating wealth without it.

Money not based upon real wealth is called "counterfeit."

JohnfrmClevelan · Nov 2, 2018

marke said:
Money not based upon real wealth is called "counterfeit."

Then explain how money is created "based upon real wealth."

marke · Nov 3, 2018

JohnfrmClevelan said:
Then explain how money is created "based upon real wealth."

Money is the medium of exchange for swapping goods made by labor. It is the labor which creates the marketable goods of value, not the paper printed on the press.

Let's get the basics correct, already!

JohnfrmClevelan

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