But this is impossible!

RBS shares closed at 19.67p, down 5.3pc, while Lloyds fell 2.9pc to 27.56p and Barclays closed at 146¼p, down 2.8pc. Shares in Standard Chartered, which had avoided much of the recent slump, fell 2.5pc to £13.29. Only HSBC avoided the losses, but still ended the day flat at 511p.

The falls came as investors continued to worry about funding conditions for European banks, with shares in several major French, German and Italian banks closing at new lows despite the imposition more than a week ago of short-selling bans on financial sector companies.

No, really, it is impossible.

For, as we know thanks to the sterling work of people like Anne Pettifor, banks themselves are the creators of credit. They produce it simply by pressing a few keys on the computer.

Thus it is impossible for there to be a bank funding crisis as banks just create the funds they need out of thin air. For how can there be a shortage of funds if funds are simply created from nothing?

Which, of course, is where the analysis of the Pettifors of this world falls down. Yes, the banking system as a whole is the creator of most of the credit in the economy. This does not mean however that individual banks are able to create their own funding out of nothing: it also shows that they\’re not able to capture the benefits of the credit creation.

If they were, there could not be a funding crisis. That there is a funding crisis shows they cannot.

Which leads, in the end, to the total implosion of the idea that if we just nationalised credit creation then all would be right with the world. There\’s not a profit there to be captured as the very existence of the funding crisis shows.

So park that theory over in the corner along with all the others which result from fundamental misunderstandings of the real world.

4 thoughts on “But this is impossible!”

  1. I was with you up to this bit:

    If they were, there could not be a funding crisis. That there is a funding crisis shows they cannot.

    It’s not a ‘funding’ crisis, it’s a crisis of confidence (or a reduction in recklessness).

    Remember the Gold Rule f banking: loans create deposits and not the other way round. This presupposes

    a) that there is somebody confident or reckless enough to borrow some money (i.e. to buy a house),

    b) the bank is confident that he can repay, and

    c) the recipient of the funds (the vendor of the house) is confident enough in the bank to deposit the proceeds back in the bank.

    If a) to c) are all given, then banks can continue lending out money and taking it back in as deposits, lending more money and taking more in as deposits more or less ad infinitum.

    If any of a) to c) is not met, then the credit bubble goes into reverse and it all gets very unpleasant, as we are seeing.

  2. admittedly this is the wrong thread but a similar theme from noted greenietwat

    http://www.stumbleupon.com/su/1ZXrmg/initforthegold.blogspot.com/2009/01/can-computation-help-solve-new-economic.html:

    Michael Tobis said…

    The only way to simplify ourselves out of the present mess is by cutting our population 80%, unfortunately.

    Individual actions are well and good, but as Gore said in his Noble lecture, and as Obama sed about his lightbulbs, they aren’t enough. Not even close.

  3. And yet you’ll read a thousand comments on Comment Macht Frei saying “the UK is being bankrupted by the Fractional Reserve System” without any understanding of what that is, or why the UK and the US are different….

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