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I think this article misses a valuable point: because they lend more than they keep in reserve, banks create money or credit, and thus expand the available mone

• vladimirralev 6y ago
  I think a key point here is "productive lending". You still need banks to have vested interest in loaning out money that they think will be paid back. Thus banks need to verify the credit-worthiness of the borrower, the collateral and consider the economic outlook. If you remove the banks and the government lends indiscriminately or with an agenda with no market interest, that's instantly a broken system for malinvestment and corruption.
  • mrmikardo 6y ago
    I agree. And the more centralised the banking system is, the weirder the incentives become / banks are somewhat decoupled from the incentive to lend to credit-worthy / promising businesses (like here in the UK).
    • mr_toad 6y ago
      I’m not sure what you mean by that. It seems obvious that’s banks have become increasingly risk adverse in the last 12 years or so, but I’m not sure what that has to do with centralisation.
  • 2Gkashmiri 6y ago
    funny you said "the government lends indiscriminately or with an agenda with no market interest" https://indianexpress.com/article/cities/delhi/centre-launches-micro-credit-scheme-to-provide-loans-to-street-vendors-6437617/ https://indianexpress.com/article/cities/delhi/centre-launch... this one is only "micro credit" but its pretty "indiscriminate" in a sense that the poorest of roadside street vendors/hawkers who "do not" have a credit score even are getting a loan. https://www.financialexpress.com/industry/banking-finance/psu-banks-come-to-rescue-before-govts-economic-package-sbi-indian-bank-others-offer-quick-credit/1909852/ https://www.financialexpress.com/industry/banking-finance/ps... this one, everyone, like every business owner using a credit line or similar products from banks were given additional 20%, no checks, no nothing. take it. while the second one is in somewhat organized sector because those are already bank customers, the first article, these people will have a lot of default because people see this as free money, not a "loan" and guess who will bear the expense. taxpayers.
    • vladimirralev 6y ago
      Small and short term programs are still prudent because the value of the loan is a tiny fraction of the expected wages for the demographic. Every bank will lend to anybody some amount just because it's a virtual certainty that over their lifetime they will find some job and claim the earnings statistically speaking. The problems start when the loans approach a lifetime of after-tax inflation-adjusted earnings. Then, there is no margin for error and the margin is padded with asset inflation/bubbles.
      • 2Gkashmiri 6y ago
        where i live specificaly, indian occupied kashmir, we have been in homes since 5 august 2019, no internet, no movement, no phones, no business, no schools till march, then corona happened and lockdown. the thing is, i deal with asmall businesses all day, its my job but i have seen something like 90% drop in sales, many businesses folded and bank loans continued because credit sales arent getting paid and expectation is if i continue selling, some revenue will pass. 8 million people. i personally dont own a credit card, dont have any loans and as a result, my income is spent on food, electricity and office staff salary, rent. i cannot imagine taking on a loan and repaying it back in these uncertain times but my clients are and its very difficult for the whole system. i have a teacher relative who in his 50s has taken huge loans because he had no house for his family. today his salary is going to 60% bank, 30% school fees of children and rest is used at home. i can only imagine if he is let go or something happened to him. sad state of affairs
        • riskneutral 6y ago
          > i have seen something like 90% drop in sales A good story would be "I have seen a 90% increase in sales," then it would make sense for you to borrow money from a bank to expand your business because something seems to be working well. A bad story is "I have seen something like 90% drop in sales" and now you need a loan in order to delay bankruptcy in the hopes that sales will pick up before you can't afford your next bill or loan payment and default on a financial obligation. It is difficult to work out what the best solution is in this situation, often the answer is just to fold the business instead of taking on a personal liability as the owner of the business that could wipe out your personal savings along with a potentially already doomed business. You see, the bank most strongly wants to lend money to people or businesses who are in the least need a loan. Put another way, the more desperate you are for money, the more reluctant anyone is to lending you that money. This is a fact of nature, no "app" can solve this problem. I am sorry that you and 8 million other Kashmiris are struggling so badly. It is a humanitarian tragedy that doesn't get any attention due to the geopolitics of the situation, COVID, and the right wing nationalist tendencies of the current Indian administration.
  • eru 6y ago
    And that's one of the reasons government deposit insurance is a bad idea.
• neffy 6y ago
  You're right - the article goes wrong almost immediately when it claims that banks lend out their savers deposits. Banks are statistical multiplexers, and effectively function as hubs in a network of loans and monetary transfer. So the same arguments can be made for the centralisation of banking as for the centralisation of network systems. It should also be mentioned that the central banks aren't really central in any functional sense outside supervision, and backstopping. At least not at the moment.
  • eru 6y ago
    At some basic level, banks do lend out their savers deposits. The multiplier effect comes about because after the loan the bank's debtors obviously have money, but also the depositors treat their (loaned out!) deposits as if they were money. (And the depositors usually don't take out the loans as cash, but as deposits with some bank or another.) There's some complications with regulation, central bank reserves etc. But fundamentally, banks lend out deposits.
    • RobertoG 6y ago
      No, they don't. Banks lend when it makes business sense, then, because of legal requirements, they search for reserves in the inter-bank system. If the inter-bank system doesn't have spare reserves, the interest rate goes up. If the central bank doesn't want the interest rate to go up, it will add reserves to the system, independently of the quantity of deposits in the system. For instance, the reason the interest rate is so low now in most of the world, it's not because there are a lot of deposits, but because there are a lot of reserves coming from the central banks.
      • eru 6y ago
        Not all countries have legal reserve requirements. Yet, their banks still take deposits. See https://en.wikipedia.org/wiki/Reserve_requirement#Required_reserves https://en.wikipedia.org/wiki/Reserve_requirement#Required_r... for an overview of the current situation. A look at history is also useful. 'Banks lend out deposits' is a useful approximation, and more true than its opposite. To be more complete: In the absence of legal requirement, yes, a bank could just create a deposit and a loan out of thin air. That's basically how all loans work in the first place: When Alice gets a loan from ACME bank, roughly the following happens: the bank adds one million dollars to Alice's current account, and also adds an entry to their books that Alice owes them one million dollars. So far so good, and no new deposits required, or any kind of funding at all, really. If that was all that was happening, the bank would sit there and happily collect the interest differential between the loan and the current account. And in this version of the world, you are right: the only thing keeping the bank from creating endless loans would be legal requirements. Alas, our bank's life ain't so easy. Alice won't just let the money he borrowed sit in her bank account. She will spend it. Assume she spends it via a bank transfer to Bob who has an account with a Badger bank. Unlike Alice or even Bob, Badger won't settle for just an entry in ACME's books. They demand reserves in interbank settling. (Similar logic applies when Alice withdraws cash.) The bank can get reserves from their own equity, or via loans (ie deposits, the interbank system, issuing bonds, etc). Usually banks have a bit of a cushion, so on the margin they can make a few extra loans first, and look for extra funding afterwards. This story from the perspective of a single bank does not change when a central bank messes with the amount of total reserves. The bank will still have to acquire reserves to fund lending. (For the sake of our explanation, we need to differentiate between the central bank adding reserves via eg open market purchases of assets, and the central bank directly lending to banks. For the former, really nothing changes from the bank's point of view: in order to sell a T-bill to the Fed, they first need to have a T-Bill already on their balance sheet and that assets needs to be funded by liability of either equity or loans, ie deposits in the wider sense. For the latter, things get a bit more complicated from the bank's point of view. However, from a perspective of the system as a whole, it doesn't matter too much how the Fed injects extra resources. And yes, legal reserve requirements are sometimes a binding constraint. Then your original story is all there is to it. But that's a rather special and pathological situation. For historic comparison, in the heyday of Scottish banking around the time of the Industrial Revolution, banks usually ran with about 2% reserves but about 30% capital. Neither of which was mandated by law, but emerged in competition. Crucially, Scottish banks were allowed to print their own bank notes, so a customer withdrawing cash didn't affect a bank's reserves. Unless they asked for gold coins, which famously almost no-one ever did in Scotland at the time. No one was forced to accept a bank's notes, but competitors readily took them at face value, and presented them in interbank settling to get reserves.)
• roenxi 6y ago
  Whether or not there is an intermediate party, the situation is already one of central planning. The central bank has a target interest rate, and the government gives them tools to achieve it. Having a target is pretty characteristic of central planning - the Fed is manipulating parts of the market to achieve policy aims. It is highly debatable whether the the elected government is a better planner than the appointed bankers. At least the handing out of the money would be more transparent.
  • eru 6y ago
    Central banks don't have to have a target interest rate. The one in my country of residence doesn't. In any case, it's not black and white. Just because there is one target doesn't mean you live the Soviet Union. There are lots of shades.
    • RobertoG 6y ago
      If they don't have a target interest rate, how do they decide the quantity of reserves?
      • eru 6y ago
        Theoretical possibility first: The Fed, like many other central banks, have an inflation target. Thanks to TIPS spreads, they get a market forecast of inflation. Thus the Fed could just buy and sell treasuries in the open market until the TIPS spread is at their inflation target. As a by-product those open market transactions will increase or decrease the quantity of reserves. Without any need for the Fed to even think about interest rates. Practical example next: Singapore's central bank also cares about inflation. Instead of mucking around with interest rates on bonds, they muck around with foreign exchange rates by buying and selling forex on the open market. Interest rates on government debt are left to the market. (Just like in the Fed system, foreign exchange rates are left to the market.) For a big country, directly buying and selling forex might be seen as 'evil currency manipulation'. But the system would be just as workable if they used eg a basket of commodities or even some broad ETFs instead. (Historically, a basket consisting of a single commodity, gold, used to be rather popular. But that's a different story.)