And gets it wrong again, as you would expect:
This is just not true, and so it seems appropriate to give a blog I’ve used twice before another airing. I first wrote the blog reproduced below in September 2007: Northern Rock was falling over at the time and needed bailing out but it’s just as relevant today. The point is a simple one and is that the reality is that confidence is all there is to money because it literally comes out of thin air:
Instead what the bank does is a conjuring trick. They agree to give you a loan. They do it by opening two accounts for you. One is a current account (for ease, let’s assume you haven’t already got one). The other is a loan account. If you borrow £10,000 they mark your current account as having £10,000 in it. You’re now free to spend that however you like.
They also mark your loan account as having £10,000 in it. You now owe that to the bank.
Add the two together and they add up to nothing. One you apparently own (the current account) and one you apparently owe (the loan account). But if you decided to cancel the deal you could straight away repay the loan using the current account and there would be nothing left. Which is why I mean they add up to nothing.
Note there’s no cash involved in this process at all. It’s just an accounting trick. Nothing more.
The great gorgeousness of this is that if banking did work this way then Northern Rock would not have gone bust.
The bank does not just open the two accounts and then forget about it. It must go off and finance that loan from somewhere. It can do that from money extant internally in the bank or from money external to the bank.
If internal it could be the bank\’s capital, or bonds it has issued but most likely it the deposits that other people have made in the bank. I lend money to the bank by making a deposit, the bank lends money by lending that deposit to someone else.
It can also be done externally: as Crock often did. Jim and John get their mortgage, N Rock hands over the money to the solicitor. They also create that loan account for Jim and John: their mortgage. But by 4 pm that day Crock has to find that money from somewhere. Borrow it from another bank was their usual method. On the over night market. Then every few months they would bundle up all those mortgage accounts and issue them as another Granite bond. Take the money in for the bond and pay off all that overnight money they have been rolling over. Then do it all again.
If Crock simply invented the money it issued for mortgages then there would be no Granite bonds. But there are, tens of billions of £s worth of Granite bonds. So Ritchie must be wrong here. Further, if Crock just made up its own money then it wouldn\’t have gone bust. For what actually happened was that the overnight markets refused to roll over their loans. So, Rock was left with no way of funding the mortgages it had already issued but were not yet in Granite bonds. And as they had no funding for those loans they were bust.
This is what is just so amazing about the Murphmonster. He knows that the Granite bonds exist because he\’s written about them. But that they exist shows that banks don\’t simply invent money. They have to find funding for the loans that they make: otherwise, why the fuck do the bonds exist?