7 ms·

The first paper mentioned, Money Creation in the Modern Economy, is available here: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/m

The first paper mentioned, Money Creation in the Modern Economy, is available here: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

7373737373 4y ago
One thing I'd love to read more about is how banks, larger and smaller ones, handle liquidity outflows. Do banks have to cooperate to ensure that transfers caused by loans - e.g. customers paying for equipment with a transfer to another bank - mostly net out between them and the "real money" mostly stays within the system?
- retube 4y ago
  Having worked in a GSIB Treasury I can answer this: In short banks do not co-operate, they are completely independent of each other. To manage liquidity they project all their expected outflows and inflows over a variety of time horizons under both normal and stressed conditions (capturing everything - cc purchases, drawdowns on overdrafts or other credit facilities, deposit movements and transfers, mortgages and other loans, refinancing of funding, debt issuance, staff and building costs etc etc etc, there's a huge amount of modelling behind this). Under US or UK regs Banks have to hold large liquidity buffers, in the UK this is enough to finance 2 months stressed outgoings assuming no incoming. It's pretty punitive, and runs into the 100s of billions for big banks.
  - 7373737373 4y ago
    Thank you :) Sounds like a hell of an optimization problem, since there are not only many variables to model, but also many ((risk) allocation) decisions to make! When a bank considers giving a loan, can it model where the money would/might be eventually transferred to - whether it would stay on the bank's books and thus require less liquidity to cover net outflows? I have the impression that central banks try to model national economies via "flows between large groups of actors", do commercial banks analyze/simulate this too on a (smaller) scale, to find out how not only money flows between them and other banks, but within itself too? Since accurate models would result in more profitability, is it safe to assume that banks have the best economic "world model"? When I buy groceries, I have no idea where the money ends up even in the next "step", maybe banks attempt full "network simulations"? Regarding the cooperation/net flows, wouldn't a more "symmetric" banking system be able to create more credit? https://github.com/void4/notes/issues/73 https://github.com/void4/notes/issues/73
andrepd 4y ago
What percentage of people do you think realise how modern banking works? In my experience when I talk to people, universally the answer is "they take money from Alice and lend it to Bob, the difference in rates is how they make money". I wonder if a survey about this has ever been done, but I suspect only a very small percentage of people really realise that banks, private banks, simply create the money they loan you themselves, as they wish. Reminds me of that quote: "if the average man realised how our banks work, there would be revolution in the streets tomorrow".
- plonk 4y ago
  I don’t see the problem here. Creating money isn’t free for private banks, they can’t do it as much as they want. They start rejecting more loans when funding gets tighter. What is the concrete problem that this system creates in your opinion?
  - andrepd 4y ago
    Several problems. First, it has been amply demonstrated that (1) the rules aren't as tight as should be and (2) the "punishment" for failure is not strong enough, or should I say, it is non-existent. This means that banks can and will make too risky investments, collect the profits when they succeed, and get bailed out – with no personal or corporate responsibility of any kind – when they fail. Second, this creates a class privilege: while banks can create money at will (and profit from it) as long as they stay within the confines of the regulations, ordinary families and individuals have no such power. There is no mechanism whereby ordinary people and families can do something equivalent to free leveraging through money creation, given similar capital/reserve minimums rules as banks have. Unlike a bank, a person with 10k$ cash on hand cannot credit themselves 100k$ (or 200k$ or 500k$) of money and use it as they please, to spend or to invest. In fact they have to go through the very same middlemen who do *have that kind of power, and which do use that mechanism to credit themselves the money that they will lend you for interest*. This doesn't strike me as fair.
    - plonk 4y ago
gilbetron 4y ago
So it states: "This description of the relationship between monetary policy and money differs from the description in many introductory textbooks, where central banks determine the quantity of broad money via a ‘money multiplier’ by actively varying the quantity of reserves.(3) In that view, central banks implement monetary policy by choosing the quantity of reserves. And, because there is assumed to be a stable ratio of broad money to base money, these reserves are then ‘multiplied up’ to a much greater change in bank deposits as banks increase lending and deposits. Neither step in that story represents an accurate description of the relationship between money and monetary policy in the modern economy. Central banks do not typically choose a quantity of reserves to bring about the desired short-term interest rate.(4) Rather, they focus on prices — setting interest rates.(5)" Does that mean the whole "Fractional Reserve Banking" explanation is not how it works?
- spiralx 4y ago
  FRB isn't how banking has ever worked, even when we used commodity money, but it's a relatively simple concept that matches peoples' intuitive sense of money as a fixed amount of tokens used to store wealth. But money's purpose is to facilitate transactions and be a unit of account which should be thought of through the lens of double-entry accounting, something almost nobody does. Banks would always have tracked accounts via ledgers though, it's just that before fiat currencies they had reserve requirements in place to ensure banks kept enough currency on hand to handle day to day withdrawals.
  - gilbetron 4y ago
    So is an explanation like this just incorrect? Or an oversimplification? https://www.investopedia.com/terms/f/fractionalreservebanking.asp https://www.investopedia.com/terms/f/fractionalreservebankin... Genuinely curious!
    - skybrian 4y ago
      It's still true that reserves are only a small fraction of deposits, so the part about calling it fractional reserve banking isn't incorrect. But the Bank of England explanation is a lot better.
skybrian 4y ago
Yes, Bank of England's explanation is the place to start. If you don't understand banking then you don't understand money, and most people don't understand banking.

7373737373 4y ago

One thing I'd love to read more about is how banks, larger and smaller ones, handle liquidity outflows. Do banks have to cooperate to ensure that transfers caused by loans - e.g. customers paying for equipment with a transfer to another bank - mostly net out between them and the "real money" mostly stays within the system?

retube 4y ago
Having worked in a GSIB Treasury I can answer this: In short banks do not co-operate, they are completely independent of each other. To manage liquidity they project all their expected outflows and inflows over a variety of time horizons under both normal and stressed conditions (capturing everything - cc purchases, drawdowns on overdrafts or other credit facilities, deposit movements and transfers, mortgages and other loans, refinancing of funding, debt issuance, staff and building costs etc etc etc, there's a huge amount of modelling behind this). Under US or UK regs Banks have to hold large liquidity buffers, in the UK this is enough to finance 2 months stressed outgoings assuming no incoming. It's pretty punitive, and runs into the 100s of billions for big banks.
- 7373737373 4y ago
  Thank you :) Sounds like a hell of an optimization problem, since there are not only many variables to model, but also many ((risk) allocation) decisions to make! When a bank considers giving a loan, can it model where the money would/might be eventually transferred to - whether it would stay on the bank's books and thus require less liquidity to cover net outflows? I have the impression that central banks try to model national economies via "flows between large groups of actors", do commercial banks analyze/simulate this too on a (smaller) scale, to find out how not only money flows between them and other banks, but within itself too? Since accurate models would result in more profitability, is it safe to assume that banks have the best economic "world model"? When I buy groceries, I have no idea where the money ends up even in the next "step", maybe banks attempt full "network simulations"? Regarding the cooperation/net flows, wouldn't a more "symmetric" banking system be able to create more credit? https://github.com/void4/notes/issues/73 https://github.com/void4/notes/issues/73

andrepd 4y ago

What percentage of people do you think realise how modern banking works? In my experience when I talk to people, universally the answer is "they take money from Alice and lend it to Bob, the difference in rates is how they make money". I wonder if a survey about this has ever been done, but I suspect only a very small percentage of people really realise that banks, private banks, simply create the money they loan you themselves, as they wish. Reminds me of that quote: "if the average man realised how our banks work, there would be revolution in the streets tomorrow".

plonk 4y ago
I don’t see the problem here. Creating money isn’t free for private banks, they can’t do it as much as they want. They start rejecting more loans when funding gets tighter. What is the concrete problem that this system creates in your opinion?
- andrepd 4y ago
  Several problems. First, it has been amply demonstrated that (1) the rules aren't as tight as should be and (2) the "punishment" for failure is not strong enough, or should I say, it is non-existent. This means that banks can and will make too risky investments, collect the profits when they succeed, and get bailed out – with no personal or corporate responsibility of any kind – when they fail. Second, this creates a class privilege: while banks can create money at will (and profit from it) as long as they stay within the confines of the regulations, ordinary families and individuals have no such power. There is no mechanism whereby ordinary people and families can do something equivalent to free leveraging through money creation, given similar capital/reserve minimums rules as banks have. Unlike a bank, a person with 10k$ cash on hand cannot credit themselves 100k$ (or 200k$ or 500k$) of money and use it as they please, to spend or to invest. In fact they have to go through the very same middlemen who do *have that kind of power, and which do use that mechanism to credit themselves the money that they will lend you for interest*. This doesn't strike me as fair.
  - plonk 4y ago

gilbetron 4y ago

So it states: "This description of the relationship between monetary policy and money differs from the description in many introductory textbooks, where central banks determine the quantity of broad money via a ‘money multiplier’ by actively varying the quantity of reserves.(3) In that view, central banks implement monetary policy by choosing the quantity of reserves. And, because there is assumed to be a stable ratio of broad money to base money, these reserves are then ‘multiplied up’ to a much greater change in bank deposits as banks increase lending and deposits. Neither step in that story represents an accurate description of the relationship between money and monetary policy in the modern economy. Central banks do not typically choose a quantity of reserves to bring about the desired short-term interest rate.(4) Rather, they focus on prices — setting interest rates.(5)" Does that mean the whole "Fractional Reserve Banking" explanation is not how it works?

spiralx 4y ago
FRB isn't how banking has ever worked, even when we used commodity money, but it's a relatively simple concept that matches peoples' intuitive sense of money as a fixed amount of tokens used to store wealth. But money's purpose is to facilitate transactions and be a unit of account which should be thought of through the lens of double-entry accounting, something almost nobody does. Banks would always have tracked accounts via ledgers though, it's just that before fiat currencies they had reserve requirements in place to ensure banks kept enough currency on hand to handle day to day withdrawals.
- gilbetron 4y ago
  So is an explanation like this just incorrect? Or an oversimplification? https://www.investopedia.com/terms/f/fractionalreservebanking.asp https://www.investopedia.com/terms/f/fractionalreservebankin... Genuinely curious!
  - skybrian 4y ago
    It's still true that reserves are only a small fraction of deposits, so the part about calling it fractional reserve banking isn't incorrect. But the Bank of England explanation is a lot better.

skybrian 4y ago

Yes, Bank of England's explanation is the place to start. If you don't understand banking then you don't understand money, and most people don't understand banking.