Bliteringly, blindingly, wrong, as usual.
Of course banks handle deposits, but as anyone who has reviewed rates available to depositors for the last few years will know just how contemptuous banks have been of those who wish to use their services for this purpose. There is good reason for that: banks do not (and never have) needed depositors for enable them to make loans. The simple fact is that the money banks lend is created by them out of thin air. It’s offensively easy for them to do so. All that happens when someone asks for a loan is to credit a current account with the amount of the loan and debit a loan account with the same sum. That’s it: that is how 97% of all money in the UK is created, but as is clear, deposits play no part in that process. Instead banks literally create the cash they lend and can get away with this trick so long as people think they’re good for their promise to pay – which they will be so long as, as is now the case, the government clearly considers them too big to fail and explicitly and implicitly guarantees all they do. The insult to the injury is that having made this cash out of thin air they then charge heavily for it – vastly more than they pay for deposits. No wonder an organisation that can costlessly create what it sells is so profitable.
Bob Diamond acknowledges none of this, and the fact that much of the profit he and his colleagues supposedly generate is effectively licenced to them by the fact that the government has failed to claim for itself the right to he profit made on the creation of money; money which only the state can legitimise, but which banks have claimed for thei own benefit and which they have used to speculate at considerable social cost to society at large, as Adair Turner and others have noted.
Dear Lord, the stupid, it hurts.
If a bank just creates money then why do banks have funding needs?
Why, for example, is there an interbank market?
Why did MF Global go bust? It was lending money to southern European governments and surely, it just created the money that it used to buy those bonds?
Why did Northern Rock go bust? If they could just create money then why did people taking their deposits out make it fall over?
The banking system as a whole does credit creation, yes. But each such credit created by an individual bank must be backed by a deposit accepted by that individual bank. Banks no more, as a single bank, create money than I do.
As to that \”profit made on the creation of money\” that\’s seignorage which is a very different thing altogether. It does not refer at all to the creation of credit. It refers to the ability to take 3 p worth of paper, print some nice stuff onit and have it worth £5. And the Bank of England gets all of that.
What does worry is that this nonsense is actually being believed by people. Ignorance is multiplying.