Some subversive employees at The Bank of England have put out another fine report.
To sum up, "banks create money out of thin air". They do not sit their patiently collecting deposits and lending them out. They lend first, the borrower spends the money and whoever receives it deposits it back in the banking system (what else can they possibly do? If they spend it, then somebody else deposits it etc).
This will no doubt cheer up DBC Reed no end!
Christmas Day: readings for Year C
9 hours ago
7 comments:
Stuff DBCR, it cheers ME up no end...
"out of thin air" is not correct . Banks do not create money out of thin air,
They create money out of debt contracts.
L, or that. But retail price maintenance and the "loans create deposits" are his hallmarks, so fair play.
D, they create the debt contracts out of thin air. The paper explains it. Same thing.
As far as I can see the "banks create money" concept actually does strange things to the relationship between inflation and interest rates too.
If non-banks want to make a profit lending money at interest, they have to ensure that they charge an interest rate greater than the inflation rate otherwise what they gain on interest is eaten up by what they lose on the value of the principal. So if I lend someone £100,000 for a year when inflation is 5%, I need to charge at least £5,000 in interest just to break even because the £105,000 which I have at the end of the year has the same value as the £100,000 which I had at the beginning of the year.
But if, that same year, a bank lends you £100,000 and charges you 2% interest, the bank starts the year with £0 and ends the year with the same £0 plus £2,000. So despite the 5% inflation rate, the bank has still managed to make a profit on a loan at a 2% interest rate because the £0 it had at the beginning of the year is still worth £0 at the end of it.
D, correct. Banks don't really care about inflation.
What they care about is charging borrowers more interest than they pay depositors. That is their profit.
In high inflation times, it is easier to widen the margin a bit, so it's possible that commercial banks actually like inflation.
Before 1982 when banks were given carte blanche to specifically make loans for residential mortgages , we had building societies .
Can anyone confirm that building societies were NOT able to create money through origination of loans please ?
Was 1982 when banks were able to introduce unlimited exogenous money into residential land prices the seminal moment the modern housing market developed from ?
S, on a purely mechanical level, the BSs could have printed money like banks. But they had strict limits on how much they would print.
1982 was one of the turning points, yes.
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