6 ms·

Actually no, although I agree there is a certainly a lot of research, creating some horribly flawed mathematical models. Essentially with respect to the bankin

by neffy 4y ago

Actually no, although I agree there is a certainly a lot of research, creating some horribly flawed mathematical models. Essentially with respect to the banking system, economics has built on a false understanding of how it works (fundamentally the incorrect claim that banks lend out their depositors funds), and never gone back to fix that with a correct understanding. So we have the situation that the Bank of England published a memo reiterating how that deposit money is created through lending about 8 years ago now, but there are still papers being published with the incorrect understanding as a basis. And now we have the Bank of England essentially proposing to "solve" that problem by introducing a digital form of asset cash. It will be very interesting to see what goes on the other side of the balance sheet for that.

vishnugupta 4y ago
> fundamentally the incorrect claim that banks lend out their depositors funds To an extent that 2022 Noble prize in Economic dished out this same trope!
- r3trohack3r 4y ago
  For those of us who want to learn - any good resources/primers on how banks actually work?
  - unmole 4y ago
    Economics of Money and Banking by Perry G Mehrling. Available as a MOOC on Coursera and a YouTube playlist.
    - kasey_junk 4y ago
      I really like Mehrling's theories but I think anyone that points to his work should reasonably caveat by saying a) there is not a lot of broad agreement with it in economics circles and b) its describing a system that was dramatically changed by the 2008 financial crisis and the Money View might be found completely wanting before it achieves uptake as a major economic theory. I've not watched the listed course so this shouldn't be seen as a criticism of it, only as context for the theories broadly espoused by Mehrling.
      - unmole 4y ago
        > there is not a lot of broad agreement with it in economics circles This is fair. > its describing a system that was dramatically changed by the 2008 financial crisis Mherling emphasizes the historical development of central banking but I don't think the Money View is describing an outdated system. The MOOC itself came out after the 2008 financial crises and it does reference Quantitative Easing as a response to the European sovereign debt crisis.
  - vishnugupta 4y ago
    Coincidentally, Bank of England has a terrific explainer on this exact topic [1]. It gets straight to the point and explains without resorting to jargons. [1] 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-...
MrMan 4y ago
banks in the US can borrow from multiple sources to secure funds which they can then lend out. depositors are a major source, perhaps the largest source. are you saying that this is not true? I am not super familiar with the UK system
stanleydrew 4y ago
Ok I'll bite. How does the banking system work? Are you just saying banks create loans worth more than the deposits they have, i.e. they have fractional reserves?
- bernawil 4y ago
  > fundamentally the incorrect claim that banks lend out their depositors funds Typical arguments against this always end up in "they do lend out their depositors funds" with extra steps. deposits go to their balance sheets as assets and a liability towards the depositor. Banks do business with their assets and some of that business might put their balance sheet in a position where they can't or won't honor their debt to depositors. At that point whether they "lent out depositor's funds" is philosophical.
- neffy 4y ago
  It's statistical multiplexing essentially. To create a loan a bank performs the double entry book keeping operation: [debit loan, credit deposit] Which creates a loan instrument on the asset side, and creates a matching deposit in the borrower's account. When the borrower repays capital on the loan, the operation is reversed. Old time banks would have a roughly 1:1 ratio of loans to deposits, these days because banks are also borrowing from other entities, that can ratio can get a bit squirrel.
ricksunny 4y ago
Can you link that memo from 8 years ago?
- JumpCrisscross 4y ago
  > Can you link that memo from 8 years ago? Here you go: 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-... It’s a terrific memo. But it was groundbreaking as a public relations piece. Not a theoretical work.
Aunche 4y ago
>fundamentally the incorrect claim that banks lend out their depositors funds Not sure what you mean by "fundamentally incorrect"? If your bank only has $100 in deposits, you simply can't loan out $101. The money multiplier effect occurs because the lent out money is deposited at another bank rather than stuffed under a mattress.
- upsidesinclude 4y ago
  This is most assuredly incorrect. Banks lend at certain multiples of assets, 10:1. Money creation takes place here, not as imagined at the treasury.
  - kasey_junk 4y ago
    Loans are assets for the bank. The typical ratio people talk about here loan:deposit. Bank investors get spooked if that goes over about .8 currently. Prior to 2008 it was closer to .9 but the financial crisis caused people to be more risk adverse. A ratio over 1 implies a bank is lacking liquidity. A 10:1 loan:deposit ratio would be real bad. The industry overall during the pandemic was sitting at around .6, which is one of the reasons the Fed removed the reserve requirement. They wanted to stimulate lending. LTD is not typically part of regulatory control (though in the US there are certain controls to make sure no bank gets too big that benchmark to it). Rather its enforced by the market, because equity holders demand it, because they have lower debt precedence than depositors. Bank assets(loans, investments, cash, etc):liabilities (deposits, borrowed money, trading losses, foreign bank holdings, etc) requirements are covered by capital regulations. A bank with less than 1 a:l would be considered insolvent and depending on the regulatory regime they are part of, might be forcibly put into receivership. Banks create money through lending, not because they are lending more than they are taking in, but because to the person being lent to, they now have more money. They have both their deposit, and the loan which can be put into circulation now. But they have a corresponding liability to the bank that must be paid over time.
    - upsidesinclude 4y ago
      This must be wildly different between the US and the UK, a difference of which I was unaware. At least you have that going for you

by neffy 4y ago

vishnugupta 4y ago

> fundamentally the incorrect claim that banks lend out their depositors funds To an extent that 2022 Noble prize in Economic dished out this same trope!

r3trohack3r 4y ago
For those of us who want to learn - any good resources/primers on how banks actually work?
- unmole 4y ago
  Economics of Money and Banking by Perry G Mehrling. Available as a MOOC on Coursera and a YouTube playlist.
  - kasey_junk 4y ago
    I really like Mehrling's theories but I think anyone that points to his work should reasonably caveat by saying a) there is not a lot of broad agreement with it in economics circles and b) its describing a system that was dramatically changed by the 2008 financial crisis and the Money View might be found completely wanting before it achieves uptake as a major economic theory. I've not watched the listed course so this shouldn't be seen as a criticism of it, only as context for the theories broadly espoused by Mehrling.
    - unmole 4y ago
      > there is not a lot of broad agreement with it in economics circles This is fair. > its describing a system that was dramatically changed by the 2008 financial crisis Mherling emphasizes the historical development of central banking but I don't think the Money View is describing an outdated system. The MOOC itself came out after the 2008 financial crises and it does reference Quantitative Easing as a response to the European sovereign debt crisis.
- vishnugupta 4y ago
  Coincidentally, Bank of England has a terrific explainer on this exact topic [1]. It gets straight to the point and explains without resorting to jargons. [1] 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-...

MrMan 4y ago

banks in the US can borrow from multiple sources to secure funds which they can then lend out. depositors are a major source, perhaps the largest source. are you saying that this is not true? I am not super familiar with the UK system

stanleydrew 4y ago

Ok I'll bite. How does the banking system work? Are you just saying banks create loans worth more than the deposits they have, i.e. they have fractional reserves?

bernawil 4y ago
> fundamentally the incorrect claim that banks lend out their depositors funds Typical arguments against this always end up in "they do lend out their depositors funds" with extra steps. deposits go to their balance sheets as assets and a liability towards the depositor. Banks do business with their assets and some of that business might put their balance sheet in a position where they can't or won't honor their debt to depositors. At that point whether they "lent out depositor's funds" is philosophical.
neffy 4y ago
It's statistical multiplexing essentially. To create a loan a bank performs the double entry book keeping operation: [debit loan, credit deposit] Which creates a loan instrument on the asset side, and creates a matching deposit in the borrower's account. When the borrower repays capital on the loan, the operation is reversed. Old time banks would have a roughly 1:1 ratio of loans to deposits, these days because banks are also borrowing from other entities, that can ratio can get a bit squirrel.

ricksunny 4y ago

Can you link that memo from 8 years ago?

JumpCrisscross 4y ago
> Can you link that memo from 8 years ago? Here you go: 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-... It’s a terrific memo. But it was groundbreaking as a public relations piece. Not a theoretical work.

Aunche 4y ago

>fundamentally the incorrect claim that banks lend out their depositors funds Not sure what you mean by "fundamentally incorrect"? If your bank only has $100 in deposits, you simply can't loan out $101. The money multiplier effect occurs because the lent out money is deposited at another bank rather than stuffed under a mattress.

upsidesinclude 4y ago
This is most assuredly incorrect. Banks lend at certain multiples of assets, 10:1. Money creation takes place here, not as imagined at the treasury.
- kasey_junk 4y ago
  Loans are assets for the bank. The typical ratio people talk about here loan:deposit. Bank investors get spooked if that goes over about .8 currently. Prior to 2008 it was closer to .9 but the financial crisis caused people to be more risk adverse. A ratio over 1 implies a bank is lacking liquidity. A 10:1 loan:deposit ratio would be real bad. The industry overall during the pandemic was sitting at around .6, which is one of the reasons the Fed removed the reserve requirement. They wanted to stimulate lending. LTD is not typically part of regulatory control (though in the US there are certain controls to make sure no bank gets too big that benchmark to it). Rather its enforced by the market, because equity holders demand it, because they have lower debt precedence than depositors. Bank assets(loans, investments, cash, etc):liabilities (deposits, borrowed money, trading losses, foreign bank holdings, etc) requirements are covered by capital regulations. A bank with less than 1 a:l would be considered insolvent and depending on the regulatory regime they are part of, might be forcibly put into receivership. Banks create money through lending, not because they are lending more than they are taking in, but because to the person being lent to, they now have more money. They have both their deposit, and the loan which can be put into circulation now. But they have a corresponding liability to the bank that must be paid over time.
  - upsidesinclude 4y ago
    This must be wildly different between the US and the UK, a difference of which I was unaware. At least you have that going for you