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Wow! Accounting fraud? You do realise that if you kept personal accounts and you lent money to me, you would post exactly the same journals as the bank because

by rojeee 6y ago

Wow! Accounting fraud? You do realise that if you kept personal accounts and you lent money to me, you would post exactly the same journals as the bank because you are carrying out exactly the same operation. The only difference between you and the bank is that the bank’s IOU is widely accepted and yours isn’t. I used to be an advocate of Austrian economics until I worked as a bank auditor and really got to understand operationally how they work. Now, I feel the Austrian economist movement has done the world a great disservice and it’s a crying shame because there’s nothing wrong or insidious about banking.

alexmingoia 6y ago
I'm aware of how accounting and banking works. Borrowing does not create money in FRB, since all loans are deposits. Unless of course, the bank creates more certificates than deposits (but don't call it fraud!), which the Fed did prior to 1971, as did many private banks prior to the Fed. FRB always ended in bankruptcy and bank runs. A central bank was created to bail them out. And what happened? The central bank went bankrupt doing the same thing. In 1971 the US couldn't honor its foreign gold obligations – which is exactly what happens when you promise to deliver something you don't have. The US defaulted on their obligations.
- rojeee 6y ago
  Can you cite your sources? There's a lot to unpack in your post but let's just focus on a couple of things. Firstly, borrowing _does_ create money - it's how most money comes into existence. Straight from the horse's mouth: > Most of the money in the economy is created, not by printing presses at the central bank, but by banks when they provide loans. [0] You said: > Borrowing does not create money in FRB, since all loans are deposits Loans are not deposits. Loans sit on the asset side of the balance sheet and represent an IOU from the borrower to the bank. Deposits sit on the liability side of the balance sheet and represent an IOU from the bank to the deposit holder - the borrower in this case. Banks are literally in the business of swapping IOUs... Our IOUs which are not widely accepted for their IOUs which are widely accepted. Furthermore, commercial banks make absolutely zero promises to redeem their IOUs for base money or central bank issued money, or anything else for that matter. Read the terms and conditions of your bank account to see for yourself! If the bank creates too many bad loans, then the value of their IOUs fall to take this into account. Lastly, Central banks were not created to bail out commercial banks. The first central bank (the Bank of England) was created by the Government at the time to fund the on-going war with France. The government gave the Bank of England monopoly rights over currency issue in return for financing the war - i.e. giving them a whole bunch of IOUs on the Bank of England to pay soldiers and factories because the credit risk of the government at the time was considered quite poor. [0] https://www.bankofengland.co.uk/knowledgebank/how-is-money-created https://www.bankofengland.co.uk/knowledgebank/how-is-money-c...
  - alexmingoia 6y ago
    We are arguing over semantics. Bank lending doesn’t create money, it creates debt. Issuing debt is only creating money if you don’t count liabilities. Is $100 liabilities and $100 assets, net $0 or net $200? Only in whacko-economics land is it considered $200. If I receive a loaf of bread, and promise to give it back on demand, I record a liability of 1 loaf of bread and asset of 1 loaf of bread. If I then lend the bread to someone else, I still have 1 loaf liability and 1 loaf asset, but now the asset is a loan. How many bread loafs exist after I loaned it out? In whacko economics we have 2 bread loafs. In reality there is still 1 loaf of bread. No bread was created. So you might say, “but IOUs are money, debt is money, and banks charge interest, so when they lend they increase net assets such that assets > liabilities.” Yeah, so necessarily debt must be greater than money supply. Where does the net interest come from? What happens if there’s not enough money to service the debt? The central bank creates money. AKA “monetizing the debt” or “quantitative easing.” It’s the central bank that creates money, not bank loans. And they don’t borrow anything to do it.
    - rojeee 6y ago
      Yes, I think we are in agreement. The money supply is endogenous and if all loans were paid back, there would be no money left.

by rojeee 6y ago

alexmingoia 6y ago

I'm aware of how accounting and banking works. Borrowing does not create money in FRB, since all loans are deposits. Unless of course, the bank creates more certificates than deposits (but don't call it fraud!), which the Fed did prior to 1971, as did many private banks prior to the Fed. FRB always ended in bankruptcy and bank runs. A central bank was created to bail them out. And what happened? The central bank went bankrupt doing the same thing. In 1971 the US couldn't honor its foreign gold obligations – which is exactly what happens when you promise to deliver something you don't have. The US defaulted on their obligations.

rojeee 6y ago
Can you cite your sources? There's a lot to unpack in your post but let's just focus on a couple of things. Firstly, borrowing _does_ create money - it's how most money comes into existence. Straight from the horse's mouth: > Most of the money in the economy is created, not by printing presses at the central bank, but by banks when they provide loans. [0] You said: > Borrowing does not create money in FRB, since all loans are deposits Loans are not deposits. Loans sit on the asset side of the balance sheet and represent an IOU from the borrower to the bank. Deposits sit on the liability side of the balance sheet and represent an IOU from the bank to the deposit holder - the borrower in this case. Banks are literally in the business of swapping IOUs... Our IOUs which are not widely accepted for their IOUs which are widely accepted. Furthermore, commercial banks make absolutely zero promises to redeem their IOUs for base money or central bank issued money, or anything else for that matter. Read the terms and conditions of your bank account to see for yourself! If the bank creates too many bad loans, then the value of their IOUs fall to take this into account. Lastly, Central banks were not created to bail out commercial banks. The first central bank (the Bank of England) was created by the Government at the time to fund the on-going war with France. The government gave the Bank of England monopoly rights over currency issue in return for financing the war - i.e. giving them a whole bunch of IOUs on the Bank of England to pay soldiers and factories because the credit risk of the government at the time was considered quite poor. [0] https://www.bankofengland.co.uk/knowledgebank/how-is-money-created https://www.bankofengland.co.uk/knowledgebank/how-is-money-c...
- alexmingoia 6y ago
  We are arguing over semantics. Bank lending doesn’t create money, it creates debt. Issuing debt is only creating money if you don’t count liabilities. Is $100 liabilities and $100 assets, net $0 or net $200? Only in whacko-economics land is it considered $200. If I receive a loaf of bread, and promise to give it back on demand, I record a liability of 1 loaf of bread and asset of 1 loaf of bread. If I then lend the bread to someone else, I still have 1 loaf liability and 1 loaf asset, but now the asset is a loan. How many bread loafs exist after I loaned it out? In whacko economics we have 2 bread loafs. In reality there is still 1 loaf of bread. No bread was created. So you might say, “but IOUs are money, debt is money, and banks charge interest, so when they lend they increase net assets such that assets > liabilities.” Yeah, so necessarily debt must be greater than money supply. Where does the net interest come from? What happens if there’s not enough money to service the debt? The central bank creates money. AKA “monetizing the debt” or “quantitative easing.” It’s the central bank that creates money, not bank loans. And they don’t borrow anything to do it.
  - rojeee 6y ago
    Yes, I think we are in agreement. The money supply is endogenous and if all loans were paid back, there would be no money left.