Doubling down

Richard Murphy says:
July 15 2017 at 11:23 am
Deposits do not create loans

Loans create deposits

Banks literally never lend deposited money

All loans are made out of thin air

Reply
Jerome says:
July 15 2017 at 5:51 pm
I’m sorry, but years working in Bank treasuries tell me you have got this totally wrong.

Banks have to have a certain amount of Tier 1 capital – and therefore a lot of deposits – before they can ever consider making loans.

Then, when a loan is made, the money the bank has loaned doesn’t simply appear from thin air. We have to go and borrow the excess (over our deposit base) from the money markets. Which means in practice other deposits, or from longer term savings.

Loans simply are not made of thin air. It might be a nice way for economists to explain things, certainly in model terms it helps with velocity of money calculations etc, but in the real world a bank simply cannot “loan money out of thin air”. At the end of every day our balance sheets need to be whole – so that money we loaned gets borrowed from somewhere else. As an accountant I would hope you understand the basics of balance sheet accounting and management.

Richard Murphy says:
July 15 2017 at 8:37 pm
Go and read what the Bank if England said in its first quarterly bulletin of 2014

And the double entry proves it

You need not one penny if another person’s money to go Dr Loan, Dr Current account

And that is all ( and I mean all) there is to it

Jerome says:
July 15 2017 at 5:52 pm
To add:

Banks are in the business of maturity transformation. We borrow short to lend long. We do NOT create money out of thin air, as has widely and innaccurately been claimed.

Richard Murphy says:
July 15 2017 at 8:34 pm
Stop lying

That is what you do

Even the Babk of England now say so

Game over

The bullshit you’re promoting is now seen for what it is. You don’t like it because it leaves you limited purpose

Jerome says:
July 15 2017 at 11:33 pm
That BoE Q1 bulleting you refer to says that bank deposits come first, and that bank deposits increase when banks make loans. Deposits first, loans second. You will also notice that they specifically say that Bank’s ability to create new money is NOT without limit. This is the very basis of the fractional reserve banking system.

You clearly don’t seem to understand the business of banking. My guess is that you have little or no experience in how and what they do.

Almost all banking involves maturity transformation. This includes the money creation/destruction aspect of fractional reserve banking. Any term loan is a maturity transformation for example.

You also don’t seem to understand basic balance sheet accounting. Double entry book-keeping is simply not sufficient for banking. With DE you assets and liabilities might match up, but in the real world they don’t because of their specific maturities.

When a bank lends money out, for say a mortgage, it might now have an asset on it’s books (the loan) as well as the cash liability, but that loan might be a 20 year loan, and that liability is immediate. Therefore the Bank has to go out and borrow that cash. Now in theory you could go and borrow the same amount for 20 years (and thus match the maturities of your asset and liability), but in practice this is not what happens – it’s simply not feasible. What almost always happens is the bank goes out into the money markets and borrows whatever cash it needs.

The way you see it, banks wouldn’t ever need to do this. By inference, we simply wouldn’t have had the financial crisis of 2008 as the money markets drying up wouldn’t have led to banks running out of SHORT TERM liquidity – because under your version of the system they simply don’t need to make their balance sheets whole.
Northern Rock simply wouldn’t have happened if the bank didn’t need to access the money markets – which it could no longer do.

Richard Murphy says:
July 16 2017 at 9:48 am
We don’t have fractional reserves banking

And the BoE quite specifically says deposits are created by loans and not the other way round

And of course there is a limit to debt creation – it is the capacity to repay

And perhaps you should understand the difference between loans and liquidity

It is still astonishing that this man is employed to teach economics.

33 comments on “Doubling down

  1. I laughed like a drain.

    Double entry, the Big Dick way. Two debits. Yeah, right. That would fail you on a bookkeeping course, let alone an accountancy one.

  2. Murphy is a dick. He is quite right the bank doesn:’t need extra deposits to create a loan, but unless the borrower is going to leave the money on deposit for the maturity of the loan, the bank is going to need to attract fresh deposits as soon as the borrower spends the Len money.

  3. The remarkable thing about this exchange is that Murphy has allowed the back and forth to continue as long as he has.

    He must have noticed from the start that Jerome knew what he was talking about which is normally his cue for a ‘candidly’ and a ‘go and play elsewhere’.

  4. “It is still astonishing that this man is employed to teach economics”: it’s astonishing that he’s employed to do anything.

    His obstinacy is the rotten cherry on the icing of his stupidity on the marzipan of his ignorance on the malevolance of his cake.

  5. In the old ‘I refute it thus’ manner, how are there ever runs on banks then? If they can create an account with £1000 in it for a borrower, and said borrower can remove that money to spend, and no deposits are required for this to happen, why can’t they do exactly the same when depositors come knocking?

  6. Murphy said:
    “You need not one penny if another person’s money to go Dr Loan, Dr Current account”

    OK, let’s be generous and assume he meant:
    “You need not one penny of another person’s money to go Dr Loan, Cr Current account”

    True, but utterly useless. Who borrows money to leave it in a current account?

    Murphy’s theory of banking falls apart as soon as the borrower withdraws or spends the money in the current account.

  7. couldn’t control himself for long could he -“stop lying””Game over
    The bullshit you’re promoting is now seen for what it is. You don’t like it because it leaves you limited purpose”
    -though a model of patience compared to his usual “fuck off and die troll” No wonder he’s single and unloved by even john mcdonnell who has no trouble loving murderous monsters from the ira but find murphy to much to stomache. ad hominem – murphy more unlikeable than an IRA murderer.

  8. Surely he could make a fortune if his theory is correct.
    All he needs to do is lend a lot of money and he’ll have depositors queueing up to give him money. Add in a bit of interest on the loan and maybe some charges on the depositors and he’s made.
    If his theory is right.

  9. Complain to ICAEW too. Surely they can’t continue to turn a blind eye to all this? Can they? This is so obviously lack of professional competence and due care.

  10. How many times has Chomsky been decked, Dennis? Or Robert Reich, or any of the other nitwiterati?

  11. He was on the radio the other day. Interviewer (nick Ferrari I think) gave him a lot of time and respect and didn’t pull him up on obvious bollocks.

    Don’t understand how he achieves his position really, he is a horrible moron

  12. Encyclopaedia Britannica Vol 12 15th Ed (1981).
    “In the course of issuing money the commercial banks actually create it by expanding their deposits, but they are not at liberty to create all that they may wish ,whenever they wish, for the total is limited by the volume of bank reserves and by the prevailing ratio between these reserves and bank deposits – a ratio that is set by law , regulation or custom”

  13. It’s like talking to somebody and saying “when I eat I place the food in my mouth…” and he angrily shouts back “no you don’t you stick it in your ear! I know, I’m an International Practitioner in Nutrition Ingestion, candidly, you are simply lying”

  14. How many times has Chomsky been decked, Dennis? Or Robert Reich, or any of the other nitwiterati?

    Neither have been, as far as I know, as obnoxious in public as Murphy is on a regular basis. And given how short Reich is, I’m not sure you could deck him in the first place.

  15. Richard Murphy says:
    July 16 2017 at 4:26 pm
    Thank you for your ‘kind, comments

    The point yout still miss is the simple one, and is that it is not just me who says Jerome is wrong; the BoE has specifically said his thinking is quite specifically incorrect.

    But what do they know?

    As for everything else, you appear to be intent on being gratuitously rude to a great many sensible people. You may think that socially appropriate. I think it as inept as Jerome’s comprehension of banking

  16. Dennis, why would anyone want to ‘deck him’? Apart from being a moronic way to behave, it would turn him into a massive cause celebre, and would thus be highly counter productive. The US is a target-rich environment for twats so get your own fists going and then come back on the show and tell us about it.

  17. Banks don’t create money, borrowers do.

    The borrower signs a piece of paper saying “I promise to repay £x on or before day y” and sign it. That’s the money that’s been created, but it’s a very illiquid form of money because you can’t properly spend it until day y. So the banks exchange this illiquid form of money for a more liquid one.

    The banks use deposits (which are very liquid) and ‘mix it in’ with the value of the loan agreements to turn it into money liquid enough to spend. You don’t need the full liquidity of the cash deposits, just enough to meet immediate transaction needs.

    And when the depositors come knocking, the bank has a vault full of loan agreements to sell that it can use to repay all the deposits.

    So the sequence of events is: the borrower signs an agreement to repay £100; the bank puts it in its vault (+£100) and puts £100 in the borrowers account (-£100) so the bank is neutral on the deal – the accounts balance. The borrower withdraws it in cash – so the bank loses £100 cash but gains £100 by cancelling the £100 in the borrower’s account, and is still neutral. Then the depositor calls round and asks for their cash. The bank goes into the vault and fetches the £100 repayment agreement and sells it to another bank for cash, which it gives to the depositor. Everything is still hunky dory.

    Borrowers create money. Banks only create money when they borrow. When people borrow from banks, the banks only create liquidity.

    Problems arise when the value of assets held by the bank (either other investments, or the expected probability of repayment of those loan agreements (and hence their value) drops. Then the bank no longer has enough assets to cover its debts, but you might not realise it immediately. It’s a gamble whether anyone notices. But it’s got stuff all to do with fractional reserve. The reserve determines how likely it is you’ll get caught out when you’re temporarily insolvent, but doesn’t have anything to do with whether the bank is solvent or not.

  18. Dennis, why would anyone want to ‘deck him’? Apart from being a moronic way to behave, it would turn him into a massive cause celebre, and would thus be highly counter productive. The US is a target-rich environment for twats so get your own fists going and then come back on the show and tell us about it.

    To your question: If you have to ask, you’re obviously a wog.

    To your suggestion: When folks get as obnoxious with me as Murphy got with Jerome, there have been consequences. The last three times it happened I physically threw one man out of an office suite into the street, and the other two were loudly, profanely and publicly invited to engage in fisticuffs in an nearby parking lot. When both declined the invitation, they were loudly, profanely and publicly ridiculed for being the big-talking pussies they were.

    Just because you’re dainty doesn’t mean I’m dainty as well.

  19. NiV: I promise to repay £x on or before day y” and sign it. That’s the money that’s been created, but it’s a very illiquid form of money because you can’t properly spend it until day y.

    Oh joy!

    So if the (go on, why not?) Co-op bank agree to give you a 25 year mortgage today for £100k, you can’t complete on the house purchase until 2042?

    You’ll need more th NiVea to keep the wrinkles at bay.

  20. I love Murphy’s lack of knowledge. Perhaps he should get a job writing for Trivial Pursuit. 🙂
    And yes I know the history.

  21. Dennis, I could wipe the floor with you with my eyelids, you daft cunt.

    Whatever… Now who’s all bluster and bullshit? Anyway, that would be a moronic way to behave, wouldn’t it?

    I don’t claim to be tough. I’m not. But – and this is the part you’ll never understand – sometimes it makes perfect sense to refuse to allow others to disrespect you. There are – and you won’t understand this, either – worse things than having to take a punch.

    One reason douchebags like Murphy end up teaching at universities is because guys like you would rather keep it polite than get it right…

  22. One reason douchebags like Murphy end up teaching at universities is because guys like you would rather keep it polite than get it right…

    Maybe – but Murphy never interacts in meat-space with the people who would justifiably like to punch him. He goes on the Beeb, where they treat him like he isn’t a complete moron, and then gets interviewed by the Groan (ditto), and maybe Socialist Workers Weekly.
    I’m sure, whatever his students think of him (and this is City U – they probably don’t realize what a moron he is), they are unlikely to want to punch him out. The only place that he is the obnoxious bell-end that we know him to be is when he is challenged, and that happens on-line. The possibility (much less the threat) of physical confrontation is effectively zero.

  23. “Co-op bank agree to give you a 25 year mortgage today for £100k, you can’t complete on the house purchase until 2042?”

    No. What I’m saying is that if you offered to take out a 25 year mortgage with the seller, he wouldn’t let you complete the deal until he had got his money, even though the mortgage agreement is nominally worth £100k.

    You go to the bank to turn it from an illiquid long-term contract to liquid credit at the bank. The bank provides liquidity, not money, and can do so because it can pool the risk over a much larger number of borrowers.

    The bank is still necessary to the deal, but it’s not selling what you think it is.

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