Tag Archives: credit

IMF Economist Says Banks’ Key Function Is To CREATE Money

9 Aug

Cross-posted from neweconomics.net.nz (my bold added) –

Today I made the mistake of going to a Georgist website where there was a sentence which made me mad. It said that in New Zealand, banks like finance companies can only lend out deposits made with them. Well I rarely get mad these days but I don’t like untruths being perpetrated. So I thought the best way to recover would go and transcribe the first seven minutes of a talk Michael Kumhof, economist from the IMF made to a seminar in January 2013.  It is on youtube here and here is my transcript, give or take the odd aside I left out.

“Virtually all money is bank deposits.

The key function of banks is money creation not intermediation. The entire economics literature that you see out there today is that it is intermediation, taking the money from granny, storing it up and then when someone comes and needs it I can lend it out to them. That is complete nonsense. Intermediation of course exists, but it is incidental and secondary and it comes after the actual money creation. Banks do not have to attract deposits before they create money. I’m a former bank manager. I worked for Barclays for five years. I’ve created those book entries. That is how it works. And if a leading light economist like Paul Krugman tries to tell you otherwise, he does not know what he is talking about.

When you approve a loan, as a bank manager you enter on the asset side of your balance sheet the loan, which is your claim against this guy and at the exact same time you create a new deposit on the liability side. You have created new money because this gives this guy purchasing power to go out and buy something with it. Banks have created money at that point. No intermediation, because the asset and liability are in the same name at that moment. What happens afterwards is that that guy can spend it somewhere else later but it is still in the banking system. I care about the aggregate banking system. Looking at the microeconomy and transferring the logic to the macroeconomy is really wrong. Someone will accept that payment.

money

What that means is that it becomes very, very easy for banks to start or lead a lending boom even though policy makers might not, because if they feel that the time is right, they simply expand the money supply. There is no third party involved, just the bank and the customer and I make the loan. The only thing that is required is that someone else will accept that deposit, say as payment for a machine, and he knows that is acceptable because it is legal fiat.

There is an important corollary to this story. A lot of loans are not for investment purposes, in physical capital. Loans that are for investment purposes are a small fraction. The story that is often told in development economics is that first you need to have savings, then once you have the savings, you can have investment. So a country needs to have sufficient savings in order to have enough investment. Nonsense too – at least for the part of investment that is financed through banks because when a bank makes a new loan it creates new purchasing power for the investment to go ahead. The investment goes ahead. Then the investor takes his new bank deposit and gives it to someone else In the end someone is going to leave that new deposit in the bank. That is saving.  The saving is created along with the investment. It’s not that saving has to come before investment. Saving comes after investment, not before. This is important for development economics.

The deposit multiplier that is taught in economics textbooks is a fairytale. I could use less polite terms. The story goes that central bank creates narrow money and there is a multiplier because banks can lend out a fraction. It is actually exactly the opposite. Broad monetary aggregates lead the cycle and narrow monetary aggregates lag the cycle.”

***********

As we have oft-repeated here at barnabyisright.com, while this power to “create money” ex nihilo (out of nothing) is a key problem, it is not THE root problem.

The power to create “money” (in the form of debt) out of nothing, simply gives banks leverage.

What they leverage, is Usury.

The “net interest income” — that is, the difference (or “spread” or “margin”) between the interest % they give on deposits, and the interest % they take on loans — is the heart of the banks’ profit (and power) business model.

The power to create more and more money (“credit”), simply allows them to magnify (or leverage) their “returns” (profits) on that difference between usury paid, and usury taken.

It deeply saddens your humble blogger that there are so many highly intelligent (far moreso than I), sincere, well-meaning, altruistic men and women in the world who are keenly interested in reforming the financial system for the betterment of humanity … and yet, almost none have yet recognised that usury is the root problem.

One that must be dug up entirely, and killed off, else all other “reforms” are a waste of time.

The evil tree will simply regrow.

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Imagine A World With No Banks

27 Apr

Sradar_Sarovar_Irrigation_Canal_-_largest_lined_canal_in_thwe_world

Imagine a world where banks are redundant … because everyone is a bank.

Read more here…

All Wars Are Bankers’ Wars

16 Feb

This is superb. A “must watch”.

Listen carefully.

Share widely.

Because it is the truth.

“The common enemy of all humankind are private central banks…”

The World’s Most Immoral Institution Tells You How

1 Apr

To understand why The Banking System is The World’s Most Immoral Institution, you need only to understand how it actually works.

Not how it works in the lofty, rarefied atmosphere of incomprehensible acronyms like ARM and RMBS and CFD and CDO and QE and LTRO.

Just the basics of banking.

The works that you and I deal with every day, at our local bank.

Fortunately, The Banking System has grown so proud of its near God-like power, it is happy to tell us how the basics really work.

From Modern Money Mechanics – A Workbook on Bank Reserves and Deposit Expansion, a complete booklet originally produced and distributed free by the Public Information Center, Federal Reserve Bank of Chicago, now out-of-print (emphasis added):

Who Creates Money?

Changes in the quantity of money may originate with actions of the Federal Reserve System (the central bank), depository institutions (principally commercial banks), or the public. The major control, however, rests with the central bank.

The actual process of money creation takes place primarily in banks. As noted earlier, checkable liabilities of banks are money. These liabilities are customers’ accounts. They increase when customers deposit currency and checks and when the proceeds of loans made by the banks are credited to borrowers’ accounts.

In the absence of legal reserve requirements, banks can build up deposits by increasing loans and investments so long as they keep enough currency on hand to redeem whatever amounts the holders of deposits want to convert into currency. This unique attribute of the banking business was discovered many centuries ago.

NB: This is why governments the world over are so obsessed with maintaining public “con-fidence” in the banking system. It is why they so fear any hint of a “run on the banks”. As we have seen previously ( “Think You’ve Got Cash In The Bank? Think Again” ), the Australian banking system only has around $183.50 in stored ‘reserve’ cash for every employed person in the country.  According to Australia’s central bank, the RBA, there is only $53.2 billion in actual cash notes in existence (or $4,655 per employed person) … even though Australian households and non-financial businesses believe that they have a combined $986 billion in total Deposits. If 1 in every 19 Aussies insisted on withdrawing their bank “Deposits” at the same time … all the cash would be gone. To add injury to insult, The Banking System is “earning” (?!) interest (thus, profits) from a grand total $1.95 Trillion in “loans” created out of thin air, and “lent” to Australian households and businesses.  Interest on “money” that does not exist … except as a series of electronic digits that a banking clerk typed into a computer.

It started with goldsmiths. As early bankers, they initially provided safekeeping services, making a profit from vault storage fees for gold and coins deposited with them. People would redeem their “deposit receipts” whenever they needed gold or coins to purchase something, and physically take the gold or coins to the seller who, in turn, would deposit them for safekeeping, often with the same banker. Everyone soon found that it was a lot easier simply to use the deposit receipts directly as a means of payment. These receipts, which became known as notes, were acceptable as money since whoever held them could go to the banker and exchange them for metallic money.

Then, bankers discovered that they could make loans merely by giving their promises to pay, or bank notes, to borrowers. In this way, banks began to create money. More notes could be issued than the gold and coin on hand because only a portion of the notes outstanding would be presented for payment at any one time. Enough metallic money had to be kept on hand, of course, to redeem whatever volume of notes was presented for payment.

Transaction deposits are the modern counterpart of bank notes. It was a small step from printing notes to making book entries crediting deposits of borrowers, which the borrowers in turn could “spend” by writing checks, thereby “printing” their own money.

Consider what this really means.

A bank creates “money”, authorised by your signature on a loan document.

Your signature is your legally-binding agreement, to become the bank’s debt slave.

With a few taps on the keyboard and clicks of a mouse, the “loan” that you must pay back, with interest, is created right out of thin air.

An electronic book-keeping entry is made under your name, as a new bank “Deposit”.

And another electronic book-keeping entry is made under the bank’s name, as an “Asset”.

Your legally-binding agreement to pay back the “loan” … with interest … is the bank’s “Asset”.

Every person, every business, every nation with a debt to a banking institution, is in plain truth a slave to their own wilful ignorance.

Working and slaving away, day after day, to pay back with interest something that came from nothing.

While the “Big Club” of elite bankers stride the earth like princes, on the back of everyone else’s daily toil and trouble.

Producing no thing.

Gaining every thing.

The Banking System.

It is the World’s Most Immoral Institution.

It is also the World’s Most Unnecessary Institution.

Here is my solution, for how we should do it.

Some of you, we all know, are poor, find it hard to live, are sometimes, as it were, gasping for breath. I have no doubt that some of you who read this book are unable to pay for all the dinners which you have actually eaten, or for the coats and shoes which are fast wearing or are already worn out, and have come to this page to spend borrowed or stolen time, robbing your creditors of an hour. It is very evident what mean and sneaking lives many of you live, for my sight has been whetted by experience; always on the limits, trying to get into business and trying to get out of debt, a very ancient slough, called by the Latins aes alienum, another’s brass, for some of their coins were made of brass; still living, and dying, and buried by this other’s brass; always promising to pay, tomorrow, and dying today, insolvent; seeking to curry favor, to get custom, by how many modes, only not state-prison offences; lying, flattering, voting, contracting yourselves into a nutshell of civility or dilating into an atmosphere of thin and vaporous generosity, that you may persuade your neighbor to let you make his shoes, or his hat, or his coat, or his carriage, or import his groceries for him; making yourselves sick, that you may lay up something against a sick day, something to be tucked away in an old chest, or in a stocking behind the plastering, or, more safely, in the brick banks; no matter where, no matter how much or how little.

I sometimes wonder that we can be so frivolous, I may almost say, as to attend to the gross but somewhat foreign form of servitude called Negro Slavery, there are so many keen and subtle masters that enslave both North and South. It is hard to have a Southern overseer; it is worse to have a Northern one; but worst of all when you are the slave-driver of yourself.

– Henry David Thoreau, Walden; or, a Life in the Woods, 1854

Starve The Beast

17 Oct

In observing the “Occupy” movement now growing around the Western World, your humble blogger recalls an old wisdom story, attributed to a Native American elder:

“Inside of me there are two dogs. One of the dogs is mean and evil. The other dog is good. The mean dog fights the good dog, all of the time.” When asked which dog wins, he reflected for a moment and replied, “The one I feed the most.”

On the weekend I was reminded of this wisdom, upon reading the following article in Australia’s Sunday Telegraph:

Banks are handing out bonuses to staff who upsize your debt

BANK staff are being offered Christmas party bonuses, free meals and other prizes to push more credit cards, loans, insurance policies and other products to customers.

Australia’s biggest lender – the CBA – has launched a “double up” campaign to push personal bankers and tellers into selling twice as many products, such as increasing credit limits, each week.

The other three major banks – the NAB, ANZ and Westpac – are also forcing branch staff to meet stringent weekly sales targets as the “big four” battle for market share.

An internal CBA document obtained by The Sunday Telegraph reveals the pre-Christmas push to supersize customers – increase their credit limits, convince them to take out home and contents policies and open up new accounts.

“We are under increasing pressure from competitors who are looking for a greater share of our retail banking business,” CBA retail banking boss Ross McEwan says in the document.

The briefing reads: “The campaign encourages sales teams to double their sales productivity during October and November to earn double the fun (and funds) at their end of year team celebrations.”

Staff at the four major banks, which are expected to record a combined profit of $24.2bn this financial year, have also revealed the tactics used to win over customers.

Sales targets differ depending on the branch size and location. Convincing a customer to roll their credit card debt into their mortgage is a target winner.

At Westpac, each personal banker has a revenue target of about $3750 a week.

Selling a credit card earns $150 towards that goal. At NAB, a city branch with four staff would have to sell 72 products a week, while a teller has to make 10 “quality” referrals to personal bankers that result in a sale.

Personal bankers have to sell 13-16 items. Debt products are worth the most because they are more lucrative for the bank.

All banks encourage staff to “cross sell” so when a customer opens a savings account, staff are likely to offer an increased credit card limit or income protection insurance.

“Staff get really desperate, to the point where they will convince customers they need something when they really don’t,” a Westpac staffer said.

Even more telling, the small inset story accompanying this article, in the paper’s print version:

Bank staff say their targets are so high and unrealistic they are selling customers products they don’t need or can’t afford.

Staff from Commonwealth, Westpac, ANZ and NAB describe work as a pressure cooker and say they are forced to meet stringent targets – a claim all four banks categorically deny.

Workers say white boards are used in branches to track sales.

“We don’t want to be pushing debt on to people but you have the pressure of your job security hinging on it,” a CBA staffer told The Sunday Telegraph.

“A home loan is a life long debt. We shouldn’t be selling it like a box of crackers.”

After three years as a CBA teller, the “cut-throat” environment became too much for 20-year-old Tyson Adams.

“The whole time your target is being pushed on you really hard and it is never negotiable … it doesn’t even matter if you are off sick, you have to make it up.”

An NAB worker said” “It is not about whether you are great with the customers; at the end of the day it is how much you have either referred or you have sold.”

A Westpac banker said: “They give us lists of customers who have almost paid out their home loans so we have to call them and get them to borrow more, go get an investment property or something.”

Your humble blogger has a word of advice for the growing thousands in the “Occupy” movement, who are (apparently) protesting against Greed.

Just DON’T Do It.

Borrow, that is.

They say that “money makes the world go ’round”.

They lie.

Our world runs not on “money”, but on debt.

Your agreement to borrow is The Beast’s daily bread.

In the old Native American wisdom tale, the winner in the fight of good versus evil was the one that he fed the most.

A simple, alternative view of the same tale, is that the loser is the one we feed the least.

Starve The Beast.

“After these things I saw another angel coming down from heaven, having great authority, and the earth was illuminated with his glory. And he cried mightily with a loud voice, saying, “Babylon the great is fallen, is fallen, and has become a dwelling place of demons, a prison for every foul spirit, and a cage for every unclean and hated bird! For all the nations have drunk of the wine of the wrath of her fornication, the kings of the earth have committed fornication with her, and the merchants of the earth have become rich through the abundance of her luxury.”

And I heard another voice from heaven saying, “Come out of her, my people, lest you share in her sins, and lest you receive of her plagues.”

* Please see also “The People’s NWO: Every Man His Own Central Banker”

UPDATE:

Paying down (y)our debt, and refusing to take out more, is the fastest way to kill the Beast. Most people don’t even realise that the simple act of paying down debt (and not taking out more) reduces the banks’ “assets” on their balance sheet. Eventually, all they have is Liabilities (your actual savings, plus outgoing interest payments owed to you on your savings) … and no Assets.

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