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Well done lads

Firstly, if there was a single commercial bank within a jurisdiction then the suggestion made that such a bank need never borrow as a consequence of making a loan would be true. In that situation, the deposit arising from any loan will necessarily flow back to the bank making that loan, and it would, as a result, always have a balanced loan and deposit ledger. In effect, the depositor loans their new funds back to the bank that made the loan that created them. I think this necessarily follow from the discussions noted above, and I am rather hoping that no one disagrees, but I am open to alternative suggestion.

Finally, he’s grasped it.

The banking *system* creates money – or credit – by lending. An individual bank does not, an individual banks finances its loan book from its deposits.

As we’ve been saying all along.

He’s still wrong though:

The lending bank that has the surfeit of deposits does, of course, charge for making this loan at a rate above Bank of England rate. This is despite that fact that the deposited funds made available to them will be paid a rate much less than that they will charge the bank that made the original loan. In fact, it is likely that the bank enjoying excess deposits will probably make a bigger margin on its making a loan to the bank that initially created the credit that gave rise to its surfeit of deposits than will the bank that created that deposit creating loan to a third-party customer.

No, overnight lending is very low margin. It’s lending out to real people that makes the money.

What’s infuriating here is, of course, that if he’d bothered to read any of the standard textbooks he’d have known all of this years ago.

11 thoughts on “Well done lads”

  1. He DID know all along, but it suited him to say what he knew wasn’t true. Now it doesn’t suit – but of course he never said it; that’s a Tim Worstall neoliberal lie.

  2. As I often explain about my writing of this blog, much of my motivation for doing so is to work out what I think about an issue. This is why I will, for example, put half-formed ideas on here to test reaction to them, and why I am, on many occasions, willing to change my mind about things that I have said because others have presented me with better ideas.

    Unless those offering the ideas disagree or question my intelligence or authority, in which case they’ll be dismissed as ‘neoliberals’, ‘fascists’ or some other ‘nom du jour’ and prevented from opining in future.

    It follows that if new commercial bank money is created every time that there is a loan made by a commercial bank, deposits in those commercial banks must always increase in exactly similar amount as a consequence of those loans. It cannot be otherwise.

    It necessarily follows that in principle commercial banks do not require deposits to lend, but create deposits by lending.

    What also necessarily follows, but which has not been much discussed here, is the fact that the reverse of the suggestions must also be true, i.e. the repayment of bank loans necessarily destroys commercial bank created money, and will reduce the quantum of bank deposits in the same amount. Once more, it cannot be otherwise.

    I’d argue his terminology here’s wrong but it’s taken him about twenty years to get to the understanding I’d expect of a second year analyst in a Banking treasury department.

    The entries in government and central bank ledgers represent base money. All entries in commercial bank ledgers represent commercial bank money. However, money does not move between these ledgers. All that happens when payments and receipts are made within either of these banking systems is that the balance on one account within that banking system is either increased or reduced, and the equal and opposite transaction is recorded in another part of that system. Whilst this gives the impression of money moving that is quite incorrect: bank account balances might change, but nothing ever moves. The impossibility of base money becoming commercial bank money, and vice versa, is explained by this fact.

    This is also a massive over simplification – It’s like something I’d read in ‘Junior encyclopedia brittanica’ – And this guy holds a position in a UK university?? Jesus Christ

    The problem with bank regulation which has taken up a great deal of time in this narrative arises because there are multiple commercial banks within the UK. It does, therefore, necessarily follow that a bank may make a loan to a customer who then makes payment to a person who uses the facilities of another bank, meaning that this other bank gets the benefit of the deposit that the loan the first bank has made gives rise to. The risk within the banking system arises because of this disaggregation between commercial banks, and nothing else.

    So the solution is to have one bank that is ‘too big to fail’ – sounds very ‘neoliberal’ to me

    Presuming that this logic is correct, then banking regulation creates a series of particularly perverse consequences. Firstly, those banks most able to lend have little incentive to do so: for them the accumulation of deposits that have no useful economic role within the economy, except to apparently be used as the basis for lending to those banks that do advance loans, is in itself one of their most profitable activities. The largest players within the banking market are, therefore, disincentivised from actually taking risk that they are able to bear, and they are instead incentivised to pass that risk to those banks least able to sustain losses. A more perverse outcome is hard to imagine.

    As tim says, interbank loans are not particularly lucrative – also note the arrogant assumption that the capital could be ‘doing something more useful’ – such as providing a sinecure for someone bereft of any talent whatsoever?

    Second, these banks are able to use their quasi-monopoly power to maintain the situation.

    An at least partly accurate statement but isn’t monopoly normally a good thing? (the NHS, State education?)

    Third, as a consequence, credit availability can be inappropriately rationed within the UK economy, giving rise to all the phenomena of under investment resulting in low productivity and other consequences that have been well documented for a long time.

    Has he been struggling to get a loan? Despite getting grants galore from taxpayer sockpuppets for producing intellectual belching he needs more? Does the grift ever end?

    Fourth, the Bank of England, by refusing to recognise that it could overcome this deficiency in the banking market by using central bank reserve account balances as a form of capital moderation within the market, facilitates this situation.

    So the BOE would lend out reserves from Banks to somebody? An interesting notion? What happens when the debts go bad? Who is on the hook?

    Fifth, the apparent failure of banking regulation to take account of the systemic risk within the market as a whole when creating these obligations represents a failure on the part of those promoting that regulatory system.

    Murphy, a man with utter ignorance of basic economics, Markets and banking knows more about systemic risk than the participants in three rounds of international banking discussions?

    The diagnosis is one thing – the prescription something else.. .. More to follow

  3. Firstly, the opacity of banking makes this a subject of inherent interest.

    I’d agree it’s opaque – it also requires a degree of understanding of basic concepts of economics and finance, something he has demonstrated on numerous occasions that he has very little knowledge of .

    Secondly, as is apparent from data that I have already published, banks are profiting enormously as a consequence of the boost in the size of the central bank reserve accounts and the decision of the Bank of England to pay base rate interest on these sums when the banks had no involvement in the creation of these assets that they have had transferred to them, makes this an issue of real public concern.

    This canard again – who called for the banks to be bailed out in 2008? who created the entire edifice on which this is built? Let me give him a clue – it wasn’t the ‘neoliberal right’. The problem, such as it does exist (and I’ll grant there has been a short term boost has been amplified because of responses to COVID which he advocated and supported. That is the sole reason here – the inflation caused largely by Murphy is the reason behind the interest rate increases – so to a great extent he is responsible for those ‘excess’ profits.

    Third, if as seems likely, banking regulation exists not so much to support the effectiveness of banking, but more to facilitate the transmission mechanism for Bank of England base rate decisions into the economy then this, too, is a matter of public concern, most particularly when the bank of England’s base rate decisions are creating destitution for UK households and firms and a recessionary environment in the economy as a whole.

    I don’t think the aspect of regulation he is citing has anything other than a tangential relationship to the base rate. We know the consequence of low interest rates would have been even more persistent inflation caused as already mentioned by:

    – The insane Ukraine War and resultant commodity spikes
    – QE
    – The COVID responses
    – Unlimited immigration

    All of which (maybe barring Ukraine) he supports. So, as already mentioned, he has caused the rate increases.

    Fourth, if as seems likely, banking regulation assists the extraction of monopoly profits from the economy, then that is a matter of public concern.

    As mentioned by him already, there’s an oligopoly in both retail and Investment Banking – there are barriers to entry for new entrants for sure – and there is an element of public concern. I’m far more concerned about the influence of people who would think MMT is anything other than a fraud than anything the banks might do.

    Fifth, the absolute absence of scrutiny of these arrangements because of their complexity and opacity makes this discussion worthwhile.

    I’d say he’s on the right track but again – given his utter ignorance of the system and consistent dismissal of comments from those in the industry, I think you’d get more sense from Infowars

    Sixth, I cannot help but think that a better system of banking regulation is available that would recognise the integral nature of banking as a whole, the systemic risks inherent in it, and the fact that the pretence of a market in banking when the whole banking edifice is underpinned by public funding is a sham.

    the only silver lining is that his speculation might keep him occupied and provide fertile grounds for mockery of his utter ignorance once again

  4. Van Patten said:
    “Has he been struggling to get a loan? “

    Oh, when did he move to the end terrace in Ely? Wonder if he’s got a fixed term mortgage coming to an end?

  5. Harry Haddock's Ghost

    The banking *system* creates money – or credit – by lending.

    Does it? So at the famous 4pm, when everybody’s loans = deposits, how much additional money has been created?

  6. overnight lending is very low margin.

    Is it? ISTR many years ago when I was involved with a company that had a significant cash pile that we made good returns by floating it onto the “Interbank Overnight” market. I also remember the story about BP’s (possibly) first-ever dedicated Finance Director (I have a sneaking suspicion that he was nicknamed “Q”) who, on discovering that the company normally left millions of pounds in its current account between the bank’s closing and opening times, offered to take no salary if he was allowed to use the account overnight…

  7. That’s gross return. Don;t forget, the bank is looking at net return – the difference between interest rate on lending minus that paid to depositors. Current net interest margins – on average across the loan book – for UK banks are about 3%. You’d not get that lending the deposit base out overnight – not net you’d not.

  8. Joe Polito says:
    January 10 2024 at 1:25 pm
    Richard, at times your blogs are like watching Tiger Woods play golf at his best – takes our breath away.

  9. Firstly, if there was a single commercial bank within a jurisdiction

    …and if there were no other jurisdictions on Earth, or no way to move funds to or from those other jurisdictions. Capital controls rarely work as well as their proponents expect.

  10. I think that dcardno has already made the same point but to illustrate it in a simple example:
    If the Murphonia Unibank lends Unigrocer 50,000 Murdinars to pay for the wheat imported from the USA and another 10,000 Murdinars to pay for the Guinness imported from Dublin, the money will not automatically flow back as a deposit

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