Skip to content

Yes, he’s being a cretin again

Money out of thin air

The same 2014 publication from the Bank of England notes that:

In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

That is how money is created. In a modern economy there is no other way to do it. The consequence, as the Bank of England also notes, is that:

Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.

In other words, savings are redundant to the process of lending and banks are not intermediaries between savers and investors. The only use for bank deposits from customers as far as banks are concerned is to provide them with very cheap capital: in effect the banks treat deposits as if they are money that they might lose, a fact aided by the government guarantee for all customer deposits to £85,000, which means the banks know that they have no responsibility with regard to such sums.

Why don’t banks lend without limit then? As the Bank of England says:

Although commercial banks create money through lending, they cannot do so freely without limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system. Prudential regulation also acts as a constraint on banks’ activities in order to maintain the resilience of the financial system. And the households and companies who receive the money created by new lending may take actions that affect the stock of money — they could quickly ‘destroy’ money by using it to repay their existing debt, for instance.

That last point is very important. What it says is that loan repayment destroys commercial bank-created money.

To summarise:

Banks do not lend other people’s money. They create all the money they lend;
The money created in this way is how bank deposits are created;
Repaying loans destroys money.

This is all true until 4.30 in the afternoon. When a bank must balance its books. So, you lend out money during the day. Some will, of course, also be repaid during that day. Money creation and destruction if you like.

Then comes balancing the book. At 4.30 pm your loan book must be backed by deposits plus equity. That’s just the way the system works. So, if you’ve lent out more money that day than you’ve taken in then you must find some further deposits so that the books balance.

This is what the interbank market used to do. This function largely being done by those central bank reserves these days.

What Professor, Professor, Professor Murphy is doing is looking at the short term – the deposit base does not determine lending – and thinking that’s the long term outcome. When, in fact, if you cannot attract the deposits to cover your loans you, as a bank, are bust – at 4.30 in the afternoon you are.

Which is exactly what happened to Northern Rock.

Man#s a cretin, obviously.

14 thoughts on “Yes, he’s being a cretin again”

  1. Was Northern Rock technically or really bust? Sure there was some depositor flight and interbanks were scared. But BoE could have saved it quite cheaply. In the end its loan book was proved sound.

  2. The other way they balance their books is with loans from other banks. They use a layered combination of long low rate loans and short high interest ones to balance the books. The exact position is a very closely guarded secret that very few in a bank ever get to see. When you get problems like 2008 the risk is that a big “safe” loan you have made is bad. All the banks could see well in advance where Bear Stearns was heading so no one had been loaning them money, so it wasn’t too bad. Lehman Brothers suddenly going bust was a surprise and it looked like they would take others with them. That day at some nervous banks IT staff were told to sit at their desks and to do nothing but fix anything that breaks and wait for the phone to ring.

  3. “Man’s a cretin, obviously.”

    I’m increasingly thinking not. I think its all graft. He’s identified a rich seam of idiocy to mine, and is mining it as furiously as he can. Face it, its giving him an income for doing nothing other than spout bollocks, so who is the stupid one, him or us who do real work for a living?

  4. But is it giving him an income? He shows every sign of desperately circling the drain, frustatedly wondering why his puke-flavoured carrots aren’t selling.

  5. Do banks actually create money except in the accountancy sense? Apart from unsecured loans (which must be trivial) banks want security to back the loan.
    Let’s say someone wants to borrow money against the security of a house. The money goes to the borrower. The lien on the house goes to the bank. The householder now doesn’t have unencumbered ownership of that proportion of the property. Money is that which is exchangeable for goods, services or assets in an economy. That is what just happened. The money value of the asset was always there in the economy. It just changed hands So if assets & money are exchangeable, the money must have always been there as well.

  6. @bloke in spain

    The number and value of assets grow over time. Money and assets are interchangeable, so effectively the money in the system must have grown over time too.

  7. That’s a facet I’ve been thinking about. But a lot of that asset gain is banks being willing to revise existing assets values upwards when lending against their purchase. Prices rise because there’s more money available to buy them. It’s a self feeding loop. I suspect all the players have influence in this have an incentive for continuing inflation. Somewhere at the bottom of it is a continual transfer of wealth from savers to borrowers. And banks don’t have any money, do they? It’s always somebody else’s.

  8. Wrong question, jgh. The right one is what else could he do to produce an income? It may, for him, be the only game in town. Why I’ve always suspected Richie Murphy TAXMAN! is purely a gig.

  9. “unsecured loans (which must be trivial)”

    I’m not sure about that – credit cards are unsecured, and they don’t seem trivial as a percentage of all credit (I am not an expert in this though).

  10. UK household debt £1,780 billion or so.

    Total UK credit card debt – £60 billion or so.

    The meaning of trivial is what?

  11. Tim i see that someone has pasted your piece onto tax research!

    would join the discussion but been banned for a good while

  12. @ Stiv baters

    I’ve been banned dozens of times. Download Tunnel Bear (or similar – it’s free) and you can message him from anywhere in the world.

    Assemble a list of rugby players, darts players, former KGB officials or whatever.

    [email protected] (or whatever) as your email address and away you go.

    I’ve even had arguments with myself on his site – one email address counters his argument, the other spouts obviously nonsensical arguments in support of Spud (which always get a ‘thank you’ or ‘agreed’ from him).

    It’s childish, I agree.

    You can say pretty much ANYTHING so long as you start the message with “I agree with you Richard”.

  13. Bloke in North Dorset

    Andrew C,

    Everyone needs a light hearted pastime, yours sounds like quite fun.

    Keep up, the good work.

Leave a Reply

Your email address will not be published. Required fields are marked *