The amount of people that understand this is one in a million. The amount of people willing to learn this is one in a Million Hence why we vote in people that work against our interest. We vote from ignorance
im confused. so without over complicating this, basically: banks can create new money by issuing loans; those new loans become assets which is the basis of the value of the new money; new money (loan asset) represents a IOU; the IOU actually represents the expectation of value (equivalent to loan plus interest) being extracted from the real world and re-inserted into the banking system; so correct me if im wrong, but it seems that a banking system crisis would be composed primarily of, probability of repayment of new money * the amount of new money (aka loan assets); any clarity would be helpful.
6:23 If the interbanking market is a closed system and each bank needs to keep certain in reserves in proportion to deposits. It should make the outer money system also closed and with the correct required proportion ne?
You contradict yourself when you say that there is no limit to the amount of money that banks can create. There are actually 3 limits: 1) demand from the public - as you explained, money is created when consumers and businesses get loans from banks, and that demand has a limit, 2) you mention the capital requirements for banks, they must have a certain level of equity to compensate for loans going bad. Banks have a limited equity which means the amount of money they can loan is limited too, and therefore the amount of money they can create is limited, and 3) and for an individual bank, there is a limit on loans based on their central bank reserves: if a bank loans at a rate much higher than the rest of the banks, its central bank reserves will start to shrink because the money from the loans are distributed throughout the economy (and all banks), and it will get a point where a bank doesn't have enough central bank reserves to make payments to other banks, even with the help of inter-bank lending.
Hey, but banks can create equity if they can extend a loan to a player that will buy shares - and thus provide them new equity. How do you think Credit Suisse and Barclays escaped the 09 crisis? They were as bust as the other banks, but "raised" capital through loans they extended to big players such as the sovereign fund of Qatar. Also, when banks have trouble settling cash (and central reserves) they can cry out and the Central Bank can step in the Repo market to bail them out and avoid defaults/insane overnight rates - Just look at what the Fed has done in the past months. So, again, even if banks go way beyond and get in huge trouble, there's a system in place to bail them out on their reckless expansion of balance sheets. So even crisis aren't exactly an absolute limit to it.
@@leonardoh.okamotomarroquin4298 apparently when one of the oldest banks in the world was created, the shareholders pledged to contribute a certain amount of capital. However, they did not have the cash in hand. So what did they do? The bank was incorporated and its first acts were to extend loans to the shareholders, and the shareholders used the money as capital!
Thank you so much, i have asked on many many forums about issues that i could see happening when the banks created money, and to be honest nobody, even bankers didnt answer correctly... this video explained a lot to me that after days and days of searching and discussing with other economist workers and bank workers.. couldnt explain. now i am fully armed to take them all on ...thanks so much.
Question: at about 7:00 it's mentioned that a bank isn't worried about having its own reserves to give out a loan, because at the end of the day another bank is willing to settle the reserves of its own payments. But the amount of reserves within the banks (under the bank of England) is finite, so shouldn't a bank be worried about lending out too much money?
Yes, I noticed the same issue. The graphic didn't make sense to me for the following reason: 1) The inter-bank settlement mechanism was defined as a closed system; in a closed system, the total quantity of values (i.e CBRs) must stay *constant* 2) The video states that during the inter-bank settlement mechanism, any commercial bank that doesn't have the funds (CBRs) to settle its payment(s) to the other banks, can receive a loan from one of the other banks to cover the payment 3) A loan implies an interest repayment on top of the principle - otherwise there is no incentive to make the loan in the first place. 4) The additional interest repayment necessitates that the total quantity of CBRs must increase by the interest to be repaid. So, by definition, the system cannot be closed, as the total quantity of CBR has increased. Which would seem to indicate that consumer loans made by commercial banks do necessitate an expansion of the central bank reserve, meaning that the base money does expand with the rest of the money.
Great discussion about what can be a rather complex topic. Bank confidence truly is a crucial component that determines whether a bank will extend credit. As we've recently seen what can happen when banks do not extend credit at what can happen.
Surely a mistake at 9.50. The default on a mortgage does not lose the bank any money. The invented the money to loan in the first place. They then got that loan as real money when they sold it on, so a default will only affect the investors who purchased that mortgage. And even if they had not sold it on, they have still collected on, say, half the loan, even without selling the house, which is all pure profit, plus interest, of course. And then they sell the house too. The bank simply can't lose, at all.
When a bank creates money for a loan, it also creates a liability for itself. The owner of the created money is not the bank but the loanee. The bank promises that it can produce the money it has made out of thin air whenever asked. Then this created money scatters in the economy as the loan is spent, and the loanee slowly starts to pay it back. If the bank loans too much and the economy goes bad, it may happen that people can't pay back their mortgages. If in that case too many people want to take out their money or too many investors ask for their money back, the bank doesn't have the actual ability to pay its massive liabilities back. Which is a tragedy because 99% of the time the taxpayer will bail out the bank. The bank of course benefits from it because the more it loans the more interest is paid, but the bank cannot create money for itself without creating liability for it.
"This means that a liquidity ratio, as opposed to a proper cash-and-central-bank-reserves ratio, has no limiting effect on the total amount of money" - this is not entirely correct, it is still limited by amount of government bonds banks can get a hold of. If gov issues no fresh debt, in theory, money supply would be solely limited by reserves and cash, if there is liquidity ratio in place.
Why are banks given so much leniency over any money they don't have though all of these systems? This just adds more complication and allows them to lend more easily without much fear of going bust. They should be treated like any other business where you have to make money by trading real assets.
The section talking about the requirement for liquid assets shrinking from 28% before 1971 to 12.5% afterwards doesn't make sense to me because it says that this contributed to a reduction of total assets to less than 5% at the end of 1970... a year before this regulation took place...?
At 7:40 it says that before the financial crises the ratio between the bank created money and the central bank reserves was 80:1 Can you please tell me the source of this information?
Do European banks function in a similar way? It would be great if you could make a video connecting interest rates and modern banking. Great job! Congrats!
A good set of videos, thank you very much. I do have one small criticism: you claim that 'relying on the mood swings of banks is an insane way to run an economy.' The problem with this is that it isn't clear that there is any other way to run an economy. Bankers are subject to the same 'animal spirits' as entrepreneurs. If banks simply mechanically leant out money, you'd still be left with entrepreneurial mood swings. With state planning you'd be relying on the mood swings of politicians.
Just by setting up new rules, we could send the money were its really profiting the majority of the people. Just like a judge can rely on the law even it the job remains emotionaly charged.
I honestly don’t think this is an insane way to run an economy. It’s actually a fantastic way to gain control over people and nations. It’s obvious that the banks are cooperating and perusing their own self interests and these interests don’t run parallel to most people.
A bank is allowed to make a loan from another bank. But is a bank allowed to deposit their cash, or central bank reserve into another bank, and profits from interest difference?
Hello and thank you for this amazing information, but you have a really important question that I did not understand so much from your video: You said it was a closed system the central bank and the 46 banks with which they have a joint account and you said that if there was ever a bank that would end the day with a lack of cash there would be another bank that could lend to it. If I understand correctly from you then we will take an example that there are 10 banks and a million dollars in the system which means that at the end of the day they will transfer between them what is needed but there will still be a million dollars left. You also said that the bank can lend money to the public without having a reserve because it knows that at the end of the day there will be someone to lend it, but if that bank lent "other" money to the public it causes it to make more money than there is in the system. Will not be worth and will not have enough money for another bank to lend to him, I would be happy to help please ??
The real problem of the private banking model is the act of lending all money into an economy. When you borrow money, you don't borrow the interest with the the principal. This means that someone else needs to borrow for you to be able to pay your loan. It creates an exponential requirement for new lending even though as i previously stated this is limited by future earnings of borrowers. The system logically cannot work as it stands. It will always fall over once debt saturation is touched.
This is important to understand because it underlines the importance of economic growth and inflation. If growth is not there then the hard limit of borrowing will be struck (as we experience now). Inflation is important because it devalues existing debt thereby making it more affordable as time progresses. My income grows, but the principal value of a loan does not inflate thereby making it more affordable and increasing capacity for new borrowings.
Positive money UK has overlooked what actually limits the creation of market money. It is the borrower. When i want to borrow money from the bank the bank looks to see if i can pay it back because once the money is created it is ultimately a liability for me and the bank. For the borrower, the act of borrowing is actually borrowing from their future earnings so they can spend it now. The limit is therefore the borrower and their future earnings.
Ummm... NO. Capital adequacy ratios do keep controls on banks during good and bad times. The regulator (the PRA for the UK) carries out regular stress tests on banks to assess that they do have sufficient liquidity to face a crisis situation. There is also a requirement that banks categorise their assets according how risky they are (RWA - Risk Weighted Asset) in order to calculate how solvent a bank would be during different crisis situations. If a bank fails a stress test and is found to be insufficiently solvent in a crisis scenario, the regulator would require that the bank up its liquidity buffer. So no there isn't a specific ratio for all banks however, it's done on a case by case basis and in that way the extent of each bank's risky lending is controlled. Please do not state half facts to mislead people and skew them to ultimately adopt your political views (which are presumably of the failed Marxist variety).
CAR is dependent on profits - those profits must come from another banks lending, as the money creation is a closed loop system (in this model so far explained) - so some bank MUST lose. Right?
This needs one more part that underlines the most obvious problem you didn't address. If everyone and their grandmother is already neck-deep in debt, where does the money to pay interest for all this debt come from? It's like the system was planned from ground up to end up in bankruptcy. Or maybe the EU leaders hoped that by expanding the debt system, country by country, enough surplus can be created to keep expanding the debt. If only we lived in an infinite world with infinite resources.
Can somebody explain how it would be possible to create money to an infinite amount or how money creation is not restrained in a boom? Because even equity goes grows by a factor 5, the money that can be created goes also up by a factor 5. I'm referencing to the statement in the video:"it does not restrain lending in a boom" I think through the capital adequacy ratio the money creation must be limited, even if the bank has a super high equity, it still a certain number and not an infinite value?
***** going back to your first post and thinking about it some more. certainly a bank can take the first downpayment to satisfy their capital adequacy, but i think this money still has to come from a source which likewise satisfies capital adequacy. when you think about it in this manner the money multiplier model sounds more accurate to me.
One small problem with what is said in the video. At about 10':05'', it is stated that interests from the other mortgage-based loans the banks have (other than those going bad), can be use to cover the bank's loses. Not that this is not true but, this *mathematically* means there will not be enough money in the economy for the other loans to be payed off as well!!!! I hope this makes sense to people in PM...
Since banks create money out of nothing. They could literally just strike off the "mortgage note" on the asset & liability (if someone fails to repay the loan), and just add a new property in the asset column.
How liabilities could be greater than assets if most of the money is created by the banks in the first place? If one bank has more liabilities should be due that others having that money in the asset side unless off course borrower defaults capturing and making it unable ho return to the banking system
Great videos, but you guys never mention the fact that another important variable determines the amount of money created by banks : the actual demand from people! By influencing interest rate, Central Banks can in fact affect the demand for money, therefore the amount of money created by Commercial banks.
What do banks do with our deposits then if they don't use it for loans? What I'm getting is that they use our deposits to fund their reserve accounts to maintain the Capital Adequacy Ratio buffer? Or am I getting it wrong?
Mate, cheers!! Just one thing: what is the purpose of the central bank reserves? I thought banks pay each other using the central bank reserves, not deposited commercial bank money or am I wrong? So, if a bank buys a loan, do they pay using commercial bank money or in central bank reserves?
No because, more loans means more profits means an increasing buffer to create more loans and more profit...etc it cyclical which is not what you want as it creates bubbles, the opposite also happens when the economy is bad and less loans are made, less profits, smaller buffer, mean even less loans are made, less profit...etc A fractional reserve ratio mean that the total amount of created money would be a fixed amount.
Thank you so much for the great videos Thank you very much for translating into my native language (Hebrew) Is there a possibility that in one of your videos you will analyze a balance Of one of the largest banks in the US or UK ??
...to complete this, If the interest of loans is not made available for the borrowers to gain back (by spending the interest into circulation), then there is not enough money in the "money supply" to pay back both the rest of the interest and the principle! They will need to refinance their loan and perpetuate their debt! Effectively, this is a way for the banks to roll over part of loans going bad, to reliable borrowers!
The implication is that the banks can create and loan money faster than the actual economy grows. Actual economy being factories, jobs, services etc. This leads to enormous amounts of money and debt that are sustained in nothing, fuelling speculation. Prices rise uncontrolably until the market inevitably realizes the economy is not actually that big and current investments are not worth that much and so adjusts itself via a bubble burst. Prices fall, loans cannot be paid back, banks go under, and so on. There are many theories about the details of how this happens and no one knows exactly how it works but thats the basics.
@@heinz8233 and the government takes taxpayer money to pay off the debts of the for profit companies that did the reckless lending. Take from everyone and pay off the rich.
Yes that's fine but why do banks need deposits then? And what are they liable to? If they can create money then they don't need to borrow so they wouldn't be in debt
And what if there aren't enough Reserves for all of them. Presume there are 4 banks,£100 reserves,each owns £25. Since the Liquid Ratio is 0 so each bank went nuts and created £10'000 in credit. Let's say the final result is Bank A owes £1000 to B, B owes £2000 to C, C owes £3000 to D, D owes £300 to A. In each case the differences are at least in hundreds and thousands in some. How can the £25 reserves cover the fictional money? Thank you. Great video by the way.
bonds are bad assets for liquidity requirements. that fraction reserve requires of idle credit (cash) so that when a debt bubble bust then bank does lose money on it deflating assets. it in way rationing credit because banker a lot times miscalculate risk and get loans with to low of interest rates.
+JYGilgamesh Positive money has it mostly right, although their comments such as, "The money supply of the nation depends on the mood swings of banks...," is probably hyperbolic. Banks are always willing to lend, so long as they can find a credit-worthy borrower. So, the money supply is more dependent on the general financial health of the public (demand for money), not the bank. There are some other things i believe they get wrong, but I would mostly be nit-picking. ;)
+Wayne Vernon 'The financial health of the nation' sounds about as precise as 'mood swings'. But anyway, doesn’t the ‘demand for money’ depend on how hard the banks are touting their debt points; on how cheap they are and how widely they’re advertised? If so, we’re still searching for the causes behind the bankers’ decisions to increase and decrease the availability of debt.
SimsulatedId Economics is about as precise as 'mood swings.' What I mean by _"General financial health"_ is the balance sheet position of the private sector. If private individuals are leveraged up to their eyeballs, it makes no difference how low rates are pushed. If private individuals have a low debt/income ratio, than adjusting rates will have greater traction. Banks are always willing to lend to credit worthy borrows, that's how they make money (no pun intended). What do you mean, _"bankers decisions to increase and decrease the availability of credit?_" The availability of credit is not constrained at all under a fiat system. Central banks control the nominal _price_ of money, not the quantity of credit. Money is endogenous.
+Wayne Vernon Thanks for the explanation of ‘financial health’. It would seem reasonable that banks make lending decisions according to the borrowers’ capacity to repay. But in fact the banks seemed to care less about that ‘health’ or used lackadaisical measures to evaluate it. After all, it was said that they got into the mess because they cared less about it. And now banks may be even less inclined to investigate ‘health’ since they were bailed out handsomely last time their game went belly up. Moreover, the crisis of late was not only the fault of non-repayment by borrowers, as far as I know, but was even more to do with a lack of bankers’ confidence in their own ‘sophisticated’ products and the profligate money creation they’d permitted themselves on the back of the dodgy paper. ‘Lack of confidence’ was cited all over the place as the primary cause of the sudden unwillingness to trade money, and that’s pretty close to a gloomy mood. So I’m not convinced that the creditworthiness of borrowers is much of a constraint in bank lending; as long as the potential borrowers have enough life in them to sign the deal... Nice pun, by the way.
SimsulatedId I agree with a lot of what you wrote. There was dodgy risk-assessment leading up to the crisis. I do not agree that banks are less concerned now, if anything, they've swung too far in the opposite direction. New capital requirements have also forced banks to contain risk. My problem is with the treating of banks as some sort of sophisticated clandestine conspiracy. Statements describing the monetary system as based on the, _"mood swings of bankers"_, is not reasonable or accurate. A more accurate observation is that the economy (consumption specifically) greatly depends on the mood swings of everyone, _"expectations"_ in econ-jargon. If people are confident to take on risk(debt), than you will see credit grow. If people are afraid of risk, or have no room to leverage, than credit will not grow. The emotional side of the economy has less to do with the whims of bankers, and more to do with the whims of the private sector, in my opinion. Regardless, money is endogenous, and credit-money existed long before banks, and even long before coins or accounting...there is no way to prevent it. In my opinion, we need more money/income in the economy to aide with private deleverage. This can be accomplished by extending bank credit, but I would prefer that government issue debt-free balances with fiscal policy - increase the national debt (which is not debt in any meaningful way). Thanks! =)
They don't create money for themselves. The money sits on roberts or julies accounts. They do however profit from creating more money so that the total amount of loans is bigger. More loans = more interests. That's where they get the money. If they give out to many bad loans that depreciate they go broke as explained in the video.
beecause they can only create money as loans to others....otherwise they could just write themselves a billion dollar cheque...and if they did...they would be liable for a billion dollars ...it would be both an asset and a liability...and as they used it to bail themselves out....the liability would not be getting repaid. so they would not be able to balance their books at the end of the day.
Please please please make theses videos about the USA. Because you keep taking about the central Bank of England but you’re not really mentioning the USA central bank (federal reserve)!!!!
The board game is called Monopoly. Is the alleged money in the Monopoly game as good as the real thing? It's like board game Monopoly a game that really should be played? Mark Twain also known as Samuel Clemens was correct when he said " there's a sucker born every minute"
uk central bank is deferent from the fed. the fed has reserve requirements when it comes to banks having more than $12.4 million Net transaction accounts.
...continuing. I think 'mood swings' or 'animal spirits' are likely to be a characteristic of *any* human economy anywhere, regardless of its particular institutional set up.
Bonds are seed money. You are nit picking when implying that because they have not matured they are not as liquid as the cash used to buy them. If the government chooses to allow bonds as a reserve then the government can issue that many less bonds. Its currency control is not reduced. Liquidity can reduce to 5% if the 12% is for unsecured assets. A liquidity reserve is not needed for a housing loan for example. I can't see why the government would guarentee the interbank lending market - thats nuts. Even giant underwriters like AIG go bankrupt when they back bubbles. Reserves are pooled as a currency creation rate by interbank reserve lending but when the whole system goes bankrupt the government has to bail them out with more tax payer interest on more bonds. At that time the government in the US reregulated with the Dodd-Frank Wall Street Reform and Consumer Protection Act. This allows them to break up companies so the government can smoothly absorb all the toxic assetts to be paid for by the taxpayers. However its the UK that has the gigantic finance debt. An order of magnitude bigger than any other country. A credit based economy keeps capital flowing. It maximises trust and growth rates. Liquidity ratios are a means for banks to collapse each other. Capital adequacy ratios are used up when growth slows or reverses, loans stop, credit contracts. Good, the market was over extended. So they provide stability but are lost in bad times. The limit to money creation is simply the risk of bad debts. So what is the problem with that? Bank confidence is not dependant on mood swings but on asset and market performance. What you are missing is what happens when growth stops. When is finance contraction bad. The problem is not that new credit/faith is needed but that infrastructure investment and regulation is needed to correct the economy. That correction might mean a permanent capital shrinkage. That is not a wastage if done well. To put it another way - the problem is not capital supply - it is unreal market expectations of growth used to pressure legislators and regulators into allowing externalities to avoid capital flight. Restructuring can cause capital loss but it should not cause job loss. The financial markets may think its the end of the world but its just the reduction of the financial bubble
oh, please, you totally misunderstood how monetary systems works!! And here people believe you just because they had no opportunity to study the subject at academic level
Always be wary of the person who devotes 0% of what they say to actual reason and explanation. Correction; here people believe it because they provide reason and explanation, unlike yourself.
@@Echteseele Do you genuinely think you'd need to explain a whole course to make a single point of criticism? It would take only a few sentences to point out what is critically incorrect in the video (if there is anything) allowing any interested viewers to research further. Total omission is, reasonably, only going to lead to suspicion.
Because there are only 21 million bitcoin that exist. There can never be more. Because there is a finite amount, it has value. Unlike fiat currency which can just keep getting reproduced.
The amount of people that understand this is one in a million. The amount of people willing to learn this is one in a Million
Hence why we vote in people that work against our interest. We vote from ignorance
*****
it is also a matter of survivor. The group of people behind the banking power are doing all they can to turn society into a feudal state.
*****
A state controlled and owned by a few people at the top
*****
No but i am searching for just that right now.
They want us working for money while they sit there are create it out of thin air.
i will watch it tonight
*****
I Know about Carrol Quigley but no Antony Sutton. I know about Carrol Quigley from Edward G Griffith
im confused. so without over complicating this, basically:
banks can create new money by issuing loans;
those new loans become assets which is the basis of the value of the new money;
new money (loan asset) represents a IOU;
the IOU actually represents the expectation of value (equivalent to loan plus interest) being extracted from the real world and re-inserted into the banking system;
so correct me if im wrong, but it seems that a banking system crisis would be composed primarily of,
probability of repayment of new money * the amount of new money (aka loan assets);
any clarity would be helpful.
6:23
If the interbanking market is a closed system and each bank needs to keep certain in reserves in proportion to deposits.
It should make the outer money system also closed and with the correct required proportion ne?
You contradict yourself when you say that there is no limit to the amount of money that banks can create. There are actually 3 limits: 1) demand from the public - as you explained, money is created when consumers and businesses get loans from banks, and that demand has a limit, 2) you mention the capital requirements for banks, they must have a certain level of equity to compensate for loans going bad. Banks have a limited equity which means the amount of money they can loan is limited too, and therefore the amount of money they can create is limited, and 3) and for an individual bank, there is a limit on loans based on their central bank reserves: if a bank loans at a rate much higher than the rest of the banks, its central bank reserves will start to shrink because the money from the loans are distributed throughout the economy (and all banks), and it will get a point where a bank doesn't have enough central bank reserves to make payments to other banks, even with the help of inter-bank lending.
Hey, but banks can create equity if they can extend a loan to a player that will buy shares - and thus provide them new equity. How do you think Credit Suisse and Barclays escaped the 09 crisis? They were as bust as the other banks, but "raised" capital through loans they extended to big players such as the sovereign fund of Qatar.
Also, when banks have trouble settling cash (and central reserves) they can cry out and the Central Bank can step in the Repo market to bail them out and avoid defaults/insane overnight rates - Just look at what the Fed has done in the past months.
So, again, even if banks go way beyond and get in huge trouble, there's a system in place to bail them out on their reckless expansion of balance sheets. So even crisis aren't exactly an absolute limit to it.
@@leonardoh.okamotomarroquin4298 apparently when one of the oldest banks in the world was created, the shareholders pledged to contribute a certain amount of capital. However, they did not have the cash in hand. So what did they do? The bank was incorporated and its first acts were to extend loans to the shareholders, and the shareholders used the money as capital!
Thank you so much, i have asked on many many forums about issues that i could see happening when the banks created money, and to be honest nobody, even bankers didnt answer correctly... this video explained a lot to me that after days and days of searching and discussing with other economist workers and bank workers.. couldnt explain.
now i am fully armed to take them all on ...thanks so much.
Question: at about 7:00 it's mentioned that a bank isn't worried about having its own reserves to give out a loan, because at the end of the day another bank is willing to settle the reserves of its own payments. But the amount of reserves within the banks (under the bank of England) is finite, so shouldn't a bank be worried about lending out too much money?
Yes, I noticed the same issue.
The graphic didn't make sense to me for the following reason:
1) The inter-bank settlement mechanism was defined as a closed system; in a closed system, the total quantity of values (i.e CBRs) must stay *constant*
2) The video states that during the inter-bank settlement mechanism, any commercial bank that doesn't have the funds (CBRs) to settle its payment(s) to the other banks, can receive a loan from one of the other banks to cover the payment
3) A loan implies an interest repayment on top of the principle - otherwise there is no incentive to make the loan in the first place.
4) The additional interest repayment necessitates that the total quantity of CBRs must increase by the interest to be repaid. So, by definition, the system cannot be closed, as the total quantity of CBR has increased.
Which would seem to indicate that consumer loans made by commercial banks do necessitate an expansion of the central bank reserve, meaning that the base money does expand with the rest of the money.
Great discussion about what can be a rather complex topic. Bank confidence truly is a crucial component that determines whether a bank will extend credit. As we've recently seen what can happen when banks do not extend credit at what can happen.
Surely a mistake at 9.50. The default on a mortgage does not lose the bank any money. The invented the money to loan in the first place. They then got that loan as real money when they sold it on, so a default will only affect the investors who purchased that mortgage. And even if they had not sold it on, they have still collected on, say, half the loan, even without selling the house, which is all pure profit, plus interest, of course. And then they sell the house too. The bank simply can't lose, at all.
When a bank creates money for a loan, it also creates a liability for itself. The owner of the created money is not the bank but the loanee. The bank promises that it can produce the money it has made out of thin air whenever asked. Then this created money scatters in the economy as the loan is spent, and the loanee slowly starts to pay it back. If the bank loans too much and the economy goes bad, it may happen that people can't pay back their mortgages. If in that case too many people want to take out their money or too many investors ask for their money back, the bank doesn't have the actual ability to pay its massive liabilities back. Which is a tragedy because 99% of the time the taxpayer will bail out the bank. The bank of course benefits from it because the more it loans the more interest is paid, but the bank cannot create money for itself without creating liability for it.
"This means that a liquidity ratio, as opposed to a proper cash-and-central-bank-reserves ratio, has no limiting effect on the total amount of money" - this is not entirely correct, it is still limited by amount of government bonds banks can get a hold of. If gov issues no fresh debt, in theory, money supply would be solely limited by reserves and cash, if there is liquidity ratio in place.
true, but as we all know, thre will never be a shortage of gov bonds under mmt and modern politicians.
When I explain this to folks their initial response is always disbelief.
Why are banks given so much leniency over any money they don't have though all of these systems? This just adds more complication and allows them to lend more easily without much fear of going bust. They should be treated like any other business where you have to make money by trading real assets.
The section talking about the requirement for liquid assets shrinking from 28% before 1971 to 12.5% afterwards doesn't make sense to me because it says that this contributed to a reduction of total assets to less than 5% at the end of 1970... a year before this regulation took place...?
This needs a much larger audience. You need to get some documentary coverage on the BBC etc to educate the masses!
At 7:40 it says that before the financial crises the ratio between the bank created money and the central bank reserves was 80:1
Can you please tell me the source of this information?
I calculated it and it was around 17 in average in 2007
How does this work when the banks are in other countries?
this helped me with my home work. thank you
Do European banks function in a similar way?
It would be great if you could make a video connecting interest rates and modern banking.
Great job! Congrats!
A good set of videos, thank you very much. I do have one small criticism: you claim that 'relying on the mood swings of banks is an insane way to run an economy.'
The problem with this is that it isn't clear that there is any other way to run an economy. Bankers are subject to the same 'animal spirits' as entrepreneurs. If banks simply mechanically leant out money, you'd still be left with entrepreneurial mood swings. With state planning you'd be relying on the mood swings of politicians.
Just by setting up new rules, we could send the money were its really profiting the majority of the people. Just like a judge can rely on the law even it the job remains emotionaly charged.
I honestly don’t think this is an insane way to run an economy. It’s actually a fantastic way to gain control over people and nations. It’s obvious that the banks are cooperating and perusing their own self interests and these interests don’t run parallel to most people.
It'd be like me robbing you with a gun then saying this is a great for ME to make money smh u dum prick
A bank is allowed to make a loan from another bank. But is a bank allowed to deposit their cash, or central bank reserve into another bank, and profits from interest difference?
Hello and thank you for this amazing information, but you have a really important question that I did not understand so much from your video:
You said it was a closed system the central bank and the 46 banks with which they have a joint account and you said that if there was ever a bank that would end the day with a lack of cash there would be another bank that could lend to it.
If I understand correctly from you then we will take an example that there are 10 banks and a million dollars in the system which means that at the end of the day they will transfer between them what is needed but there will still be a million dollars left.
You also said that the bank can lend money to the public without having a reserve because it knows that at the end of the day there will be someone to lend it, but if that bank lent "other" money to the public it causes it to make more money than there is in the system. Will not be worth and will not have enough money for another bank to lend to him, I would be happy to help please ??
The real problem of the private banking model is the act of lending all money into an economy. When you borrow money, you don't borrow the interest with the the principal. This means that someone else needs to borrow for you to be able to pay your loan. It creates an exponential requirement for new lending even though as i previously stated this is limited by future earnings of borrowers.
The system logically cannot work as it stands. It will always fall over once debt saturation is touched.
This is important to understand because it underlines the importance of economic growth and inflation. If growth is not there then the hard limit of borrowing will be struck (as we experience now). Inflation is important because it devalues existing debt thereby making it more affordable as time progresses. My income grows, but the principal value of a loan does not inflate thereby making it more affordable and increasing capacity for new borrowings.
Positive money UK has overlooked what actually limits the creation of market money. It is the borrower.
When i want to borrow money from the bank the bank looks to see if i can pay it back because once the money is created it is ultimately a liability for me and the bank. For the borrower, the act of borrowing is actually borrowing from their future earnings so they can spend it now. The limit is therefore the borrower and their future earnings.
Ummm... NO. Capital adequacy ratios do keep controls on banks during good and bad times. The regulator (the PRA for the UK) carries out regular stress tests on banks to assess that they do have sufficient liquidity to face a crisis situation. There is also a requirement that banks categorise their assets according how risky they are (RWA - Risk Weighted Asset) in order to calculate how solvent a bank would be during different crisis situations. If a bank fails a stress test and is found to be insufficiently solvent in a crisis scenario, the regulator would require that the bank up its liquidity buffer. So no there isn't a specific ratio for all banks however, it's done on a case by case basis and in that way the extent of each bank's risky lending is controlled. Please do not state half facts to mislead people and skew them to ultimately adopt your political views (which are presumably of the failed Marxist variety).
CAR is dependent on profits - those profits must come from another banks lending, as the money creation is a closed loop system (in this model so far explained) - so some bank MUST lose. Right?
This needs one more part that underlines the most obvious problem you didn't address. If everyone and their grandmother is already neck-deep in debt, where does the money to pay interest for all this debt come from? It's like the system was planned from ground up to end up in bankruptcy. Or maybe the EU leaders hoped that by expanding the debt system, country by country, enough surplus can be created to keep expanding the debt. If only we lived in an infinite world with infinite resources.
isnt their a liquidity ratio under BASEL III ? well a equity requirement on risk weighted assets ie loans ?
Can somebody explain how it would be possible to create money to an infinite amount or how money creation is not restrained in a boom? Because even equity goes grows by a factor 5, the money that can be created goes also up by a factor 5. I'm referencing to the statement in the video:"it does not restrain lending in a boom"
I think through the capital adequacy ratio the money creation must be limited, even if the bank has a super high equity, it still a certain number and not an infinite value?
Xez1919 i also don't quite get this
***** thanks. very interesting
@david Thank you for this information.
Do you have any sources which document this practice?
***** going back to your first post and thinking about it some more. certainly a bank can take the first downpayment to satisfy their capital adequacy, but i think this money still has to come from a source which likewise satisfies capital adequacy. when you think about it in this manner the money multiplier model sounds more accurate to me.
One small problem with what is said in the video. At about 10':05'', it is stated that interests from the other mortgage-based loans the banks have (other than those going bad), can be use to cover the bank's loses. Not that this is not true but, this *mathematically* means there will not be enough money in the economy for the other loans to be payed off as well!!!!
I hope this makes sense to people in PM...
Since banks create money out of nothing.
They could literally just strike off the "mortgage note" on the asset & liability (if someone fails to repay the loan), and just add a new property in the asset column.
There are rules
How liabilities could be greater than assets if most of the money is created by the banks in the first place? If one bank has more liabilities should be due that others having that money in the asset side unless off course borrower defaults capturing and making it unable ho return to the banking system
Great videos, but you guys never mention the fact that another important variable determines the amount of money created by banks : the actual demand from people! By influencing interest rate, Central Banks can in fact affect the demand for money, therefore the amount of money created by Commercial banks.
What do banks do with our deposits then if they don't use it for loans? What I'm getting is that they use our deposits to fund their reserve accounts to maintain the Capital Adequacy Ratio buffer? Or am I getting it wrong?
INVEST. Remember money also invest money. They buy stock or bonds or other banks' loans (eg mortgages) for example.
Mate, cheers!! Just one thing: what is the purpose of the central bank reserves? I thought banks pay each other using the central bank reserves, not deposited commercial bank money or am I wrong? So, if a bank buys a loan, do they pay using commercial bank money or in central bank reserves?
Doesn't the capital adequacy ratio act as a proxy to the fractional reserve then?
No because, more loans means more profits means an increasing buffer to create more loans and more profit...etc it cyclical which is not what you want as it creates bubbles, the opposite also happens when the economy is bad and less loans are made, less profits, smaller buffer, mean even less loans are made, less profit...etc
A fractional reserve ratio mean that the total amount of created money would be a fixed amount.
How do they categorise base money?
Thank you so much for the great videos
Thank you very much for translating into my native language (Hebrew)
Is there a possibility that in one of your videos you will analyze a balance
Of one of the largest banks in the US or UK ??
How can the money supply increase indefinitely?
...to complete this,
If the interest of loans is not made available for the borrowers to gain back (by spending the interest into circulation), then there is not enough money in the "money supply" to pay back both the rest of the interest and the principle!
They will need to refinance their loan and perpetuate their debt!
Effectively, this is a way for the banks to roll over part of loans going bad, to reliable borrowers!
I sort-of understand, but don't understand the implications.
The implication is that the banks can create and loan money faster than the actual economy grows. Actual economy being factories, jobs, services etc. This leads to enormous amounts of money and debt that are sustained in nothing, fuelling speculation. Prices rise uncontrolably until the market inevitably realizes the economy is not actually that big and current investments are not worth that much and so adjusts itself via a bubble burst. Prices fall, loans cannot be paid back, banks go under, and so on.
There are many theories about the details of how this happens and no one knows exactly how it works but thats the basics.
@@heinz8233 and the government takes taxpayer money to pay off the debts of the for profit companies that did the reckless lending. Take from everyone and pay off the rich.
Yes that's fine but why do banks need deposits then? And what are they liable to? If they can create money then they don't need to borrow so they wouldn't be in debt
And what if there aren't enough Reserves for all of them. Presume there are 4 banks,£100 reserves,each owns £25. Since the Liquid Ratio is 0 so each bank went nuts and created £10'000 in credit. Let's say the final result is Bank A owes £1000 to B, B owes £2000 to C, C owes £3000 to D, D owes £300 to A. In each case the differences are at least in hundreds and thousands in some. How can the £25 reserves cover the fictional money? Thank you. Great video by the way.
bonds are bad assets for liquidity requirements. that fraction reserve requires of idle credit (cash) so that when a debt bubble bust then bank does lose money on it deflating assets. it in way rationing credit because banker a lot times miscalculate risk and get loans with to low of interest rates.
8:11 How does Central Bank create Central Bank Reserves?
By typing numbers into a database. Just like with your bank balance and the bank's database.
The Central Bank Reserves is spent from the central banks account into the bank's accounts by the central bank purchasing assets from the banks
In 2020 the reserve ratio was set to zero for US
Is this model still accurate as of August 24th 2015?
+JYGilgamesh
Positive money has it mostly right, although their comments such as, "The money supply of the nation depends on the mood swings of banks...," is probably hyperbolic. Banks are always willing to lend, so long as they can find a credit-worthy borrower. So, the money supply is more dependent on the general financial health of the public (demand for money), not the bank.
There are some other things i believe they get wrong, but I would mostly be nit-picking. ;)
+Wayne Vernon 'The financial health of the nation' sounds about as precise as 'mood swings'. But anyway, doesn’t the ‘demand for money’ depend on how hard the banks are touting their debt points; on how cheap they are and how widely they’re advertised? If so, we’re still searching for the causes behind the bankers’ decisions to increase and decrease the availability of debt.
SimsulatedId Economics is about as precise as 'mood swings.' What I mean by _"General financial health"_ is the balance sheet position of the private sector. If private individuals are leveraged up to their eyeballs, it makes no difference how low rates are pushed. If private individuals have a low debt/income ratio, than adjusting rates will have greater traction.
Banks are always willing to lend to credit worthy borrows, that's how they make money (no pun intended).
What do you mean, _"bankers decisions to increase and decrease the availability of credit?_" The availability of credit is not constrained at all under a fiat system. Central banks control the nominal _price_ of money, not the quantity of credit. Money is endogenous.
+Wayne Vernon
Thanks for the explanation of ‘financial health’. It would seem reasonable that banks make lending decisions according to the borrowers’ capacity to repay. But in fact the banks seemed to care less about that ‘health’ or used lackadaisical measures to evaluate it. After all, it was said that they got into the mess because they cared less about it. And now banks may be even less inclined to investigate ‘health’ since they were bailed out handsomely last time their game went belly up.
Moreover, the crisis of late was not only the fault of non-repayment by borrowers, as far as I know, but was even more to do with a lack of bankers’ confidence in their own ‘sophisticated’ products and the profligate money creation they’d permitted themselves on the back of the dodgy paper. ‘Lack of confidence’ was cited all over the place as the primary cause of the sudden unwillingness to trade money, and that’s pretty close to a gloomy mood.
So I’m not convinced that the creditworthiness of borrowers is much of a constraint in bank lending; as long as the potential borrowers have enough life in them to sign the deal...
Nice pun, by the way.
SimsulatedId I agree with a lot of what you wrote. There was dodgy risk-assessment leading up to the crisis. I do not agree that banks are less concerned now, if anything, they've swung too far in the opposite direction. New capital requirements have also forced banks to contain risk.
My problem is with the treating of banks as some sort of sophisticated clandestine conspiracy. Statements describing the monetary system as based on the, _"mood swings of bankers"_, is not reasonable or accurate.
A more accurate observation is that the economy (consumption specifically) greatly depends on the mood swings of everyone, _"expectations"_ in econ-jargon. If people are confident to take on risk(debt), than you will see credit grow. If people are afraid of risk, or have no room to leverage, than credit will not grow. The emotional side of the economy has less to do with the whims of bankers, and more to do with the whims of the private sector, in my opinion.
Regardless, money is endogenous, and credit-money existed long before banks, and even long before coins or accounting...there is no way to prevent it.
In my opinion, we need more money/income in the economy to aide with private deleverage. This can be accomplished by extending bank credit, but I would prefer that government issue debt-free balances with fiscal policy - increase the national debt (which is not debt in any meaningful way).
Thanks! =)
Simply - Thank you.
What I dont understand is that if banks can create money indefinitely, how do they become bankrupt?
They don't create money for themselves. The money sits on roberts or julies accounts. They do however profit from creating more money so that the total amount of loans is bigger. More loans = more interests. That's where they get the money. If they give out to many bad loans that depreciate they go broke as explained in the video.
beecause they can only create money as loans to others....otherwise they could just write themselves a billion dollar cheque...and if they did...they would be liable for a billion dollars ...it would be both an asset and a liability...and as they used it to bail themselves out....the liability would not be getting repaid. so they would not be able to balance their books at the end of the day.
thank you for these videos! they are so useful!
Please please please make theses videos about the USA. Because you keep taking about the central Bank of England but you’re not really mentioning the USA central bank (federal reserve)!!!!
Did they mean 1980? Anyone?
You are probably wondering; but what happened; that everyone is talking about (is that a joke; where!?): annoying phrases.
The board game is called Monopoly. Is the alleged money in the Monopoly game as good as the real thing? It's like board game Monopoly a game that really should be played?
Mark Twain also known as Samuel Clemens was correct when he said " there's a sucker born every minute"
uk central bank is deferent from the fed. the fed has reserve requirements when it comes to banks having more than $12.4 million Net transaction accounts.
1971 ? isn't that when Nixon abolished the gold standard totally in US ? it all seems to be coordinated at a high level !
Yup
No german subtitels .(
I just learned the Money multiplier model in class lol...
part 5! part 5!
The global economy is set equal to mood swings. THAT INSANE!!
...continuing.
I think 'mood swings' or 'animal spirits' are likely to be a characteristic of *any* human economy anywhere, regardless of its particular institutional set up.
Yeah, but since they are making money from money they should be the happiest
Ive wonder recently if one could open a bank using credit from another bank 😂
Bonds are seed money. You are nit picking when implying that because they have not matured they are not as liquid as the cash used to buy them. If the government chooses to allow bonds as a reserve then the government can issue that many less bonds. Its currency control is not reduced.
Liquidity can reduce to 5% if the 12% is for unsecured assets. A liquidity reserve is not needed for a housing loan for example.
I can't see why the government would guarentee the interbank lending market - thats nuts. Even giant underwriters like AIG go bankrupt when they back bubbles.
Reserves are pooled as a currency creation rate by interbank reserve lending but when the whole system goes bankrupt the government has to bail them out with more tax payer interest on more bonds. At that time the government in the US reregulated with the Dodd-Frank Wall Street Reform and Consumer Protection Act. This allows them to break up companies so the government can smoothly absorb all the toxic assetts to be paid for by the taxpayers. However its the UK that has the gigantic finance debt. An order of magnitude bigger than any other country.
A credit based economy keeps capital flowing. It maximises trust and growth rates.
Liquidity ratios are a means for banks to collapse each other. Capital adequacy ratios are used up when growth slows or reverses, loans stop, credit contracts. Good, the market was over extended. So they provide stability but are lost in bad times. The limit to money creation is simply the risk of bad debts. So what is the problem with that? Bank confidence is not dependant on mood swings but on asset and market performance.
What you are missing is what happens when growth stops. When is finance contraction bad. The problem is not that new credit/faith is needed but that infrastructure investment and regulation is needed to correct the economy. That correction might mean a permanent capital shrinkage. That is not a wastage if done well. To put it another way - the problem is not capital supply - it is unreal market expectations of growth used to pressure legislators and regulators into allowing externalities to avoid capital flight. Restructuring can cause capital loss but it should not cause job loss. The financial markets may think its the end of the world but its just the reduction of the financial bubble
This is not true.
Did the family of the Rothschild sponsor this video?
Well, Cryptocurrency isn't based on bank loans and government control.
Maaaaybe its time for a cryptorevolution?
oh, please, you totally misunderstood how monetary systems works!!
And here people believe you just because they had no opportunity to study the subject at academic level
whats the mistake ma men?!
Always be wary of the person who devotes 0% of what they say to actual reason and explanation. Correction; here people believe it because they provide reason and explanation, unlike yourself.
@@TS-gt1lm yeah, like I can explain 80hours college course in one TH-cam comment!
@@Echteseele Do you genuinely think you'd need to explain a whole course to make a single point of criticism? It would take only a few sentences to point out what is critically incorrect in the video (if there is anything) allowing any interested viewers to research further. Total omission is, reasonably, only going to lead to suspicion.
take 2 minutes of your time to enlighten others then
Lol
Bitcoin bitcoin bitcoin
Because there are only 21 million bitcoin that exist. There can never be more. Because there is a finite amount, it has value. Unlike fiat currency which can just keep getting reproduced.