So, imagine you could ask a question that I could answer in five minutes or so. What would that be? Suggestions are welcome. We are genuinely looking for ideas.
If banks do not require deposits, do not need them, make no use of them, why do they pay interest on them?
Not that I’d expect it to be answered even if it were not posed by me.
When Mr. A. Bank is creating money, he finds it convenient, since it comes at zero cost, to create a little extra to pay depositors just to keep up the neoliberal pretence.
“Why are you such an insufferable cunt?”
What “rights” do lazy, stupid people who can’t be arsed to look after themselves have to stick their hands into the pockets of those who do make an effort to go out and better themselves (even when it’s a struggle for them to do so and it’d be much easier to just rely on the state)?
If he answered: “Because banking administrators acting on behalf of wealthy depositors needlessly force the banks to accept deposits in exchange for loans, and the banks are thus forced to offer interest on those deposits in order to attract them,” how would you counter that?
f he answered: “Because banking administrators acting on behalf of wealthy depositors needlessly force the banks to accept deposits in exchange for loans, and the banks are thus forced to offer interest on those deposits in order to attract them,” how would you counter that?
Ha ha ha.
It’s a genuine question. It’s what I would say if I were R Murphy, and I don’t know enough economic theory to counter it.
Paying unnecessary interest upon deposits is a loss to the shareholders. The shareholders would have fired any management that paid it.
OK, well I expect the first thing to be evidence that banking administrators acting on behalf of wealthy depositors needlessly force the banks to accept deposits in exchange for loans needlessly force the banks to accept deposits in exchange for loans, rather than the mere assertion.
Perhaps it’s written somewhere in the Protocols of the Elders of Zion.
The whole thing is laughable precisely be there would be no banking administrators acting on behalf of wealthy depositors because there’d be no depositors; wealthy and powerful people would just have access to some sort of Zil lane ATM system denied to everyone else (or pull some other scam, the assertion being that they’re pulling a scam).
(Apologies for the odd bit of double cut and paste.)
Okay. As Tim says, the reason we know that banks have to take deposits (or obtain money by some means) is that deposits and loans have to match up at 4.30 pm, as a condition of the bank’s licence. If they don’t balance out, then the banking authorities would declare that bank bankrupt (I hope I’ve got that right). And that is the killer argument against Murphy’s view that banks don’t need deposits.
That’s not in dispute. It’s clear-cut, and Murphy can’t argue against it. Except he could argue that the need to balance deposits against loans at 4.30 is entirely arbitrary and unnecessary. In fact, that is what he does argue: that but for that daily 4.30 deadline imposed by the administrators, banks could make loans without the need for deposits. And if a lefty confronted me with that argument I don’t know enough about the banking system to counter it.
Even the mohammadeans, where riba is haram, manage to weasel around it enough to ensure the lender is compensated by the borrower.
Maybe that was forced on them by the rich evil Jooz.
I’d ask:
– Do you agree with the Hamas Charter?
– do you think that to want all Jews removed from the Middle East might constitute something akin to a Fascist agenda?
Banks only need deposits to make loans in excess of their free capital (the amount provided by shareholders less the cost of their premises and other fixed assets, working capital and forced loans to the government and its lackeys).
So Rothschild Bank can function without depositors but Lloyds cannot.
“imagine you could ask a question that I could answer in five minutes or so.”
Why don’t you fuck off?
God knows. That “or so” is doing some heavy lifting there, I feel.
Thank you for the reply, Tim. I do understand that. But it doesn’t explain why a world where Murphy controlled the banking authorities and decreed that banks do not need to cover loans with assets and deposits on a daily basis would be infeasible . Because in that world those shareholders would surely indeed rise up and demand that their bank stops paying interest on deposits.
I’m no arguing that such a Murphy World is desirable, just that I don’t understand why it’s not theoretically possible.
Do you accept that a reasonable objective analysis of your blog output shows you to have the classis traits of each of a narcissist; a sociopath; and a fascist and that combination makes you a particularly repellent individual?
@ Paul
The requirement that banks balance their books daily is to prevent shysters stealing the depositors money *by increasing amounts* day-by-day. Murphyworld is theoretically possible but it has too much in common with Pol Pot-world to be comprehensible to those raised in the comforts of post-Attlee UK
“Because banking administrators acting on behalf of wealthy depositors needlessly force the banks to accept deposits in exchange for loans, and the banks are thus forced to offer interest on those deposits in order to attract them,”
Why would banks accept their deposits if they did? Given that you supposedly don’t need depositors, some bright spark would set up a depositorless bank and thus be able to offer interest-free loans, out-competing their rivals on price.
—
To answer the question you have to understand the concept of liquidity. Put simply, liquid money is money you can spend now, and illiquid money is money that is worth just as much but that you will only be able to spend at a later date.
When a borrower goes to the bank to take out a loan, they sign a contract promising to pay the bearer an agreed amount on an agreed schedule. When the borrower signs the contract, it turns it from a worthless sheet of paper into money. If you promise to pay £100k over the next 25 years, that sheet of paper sat in the bank’s vault is now worth £100k. But you won’t be able to spend it for 25 years, so it is illiquid.
In exchange for giving the bank this illiquid money, the bank gives you a slightly smaller amount of liquid money in exchange. You can go out and spend it straight away, buying a house or a car or a boat. It is to provide the liquid money that the bank needs the depositors for. Note, the bank is value-neutral in this exchange. They charge a small admin fee, but the bank is not creating the money, or changing the total amount of money it has. It has simply exchanged one form of money for another. Only the borrower creates money.
Depositors do the reverse. They exchange liquid, can-spend-it-now money for illiquid money – a contract with the bank to repay it when they ask. Thus, the bank is really acting as a liquidity exchange. The liquid, you-can-spend-it-now money is temporarily provided to the people who need to spend money now. You only need enough of it to cover the transactions that are currently ongoing. All the money that is just sitting around, not needing to be spent yet, can be in illiquid forms.
You also need interest to cover the risk of default. Some people promise to pay, but later prove unable to. So if 10% of the money doesn’t get paid back and has to be written off, you have to charge 11% interest over the typical loan period to balance the books. (This was a big part of the reason payday loans had such large interest rates.)
There is also admin/overheads (as already mentioned), inflation (future money will be worth less), and opportunity costs (while it is loaned to someone else, the owner can’t use it for their own benefit).
It’s not very intuitive, and lots of people get it wrong. But most of those people don’t claim to be expert economists.
Thanks, NiV. That is exactly what I was looking for. And thanks for taking the trouble to explain it step-by-step, with examples, because that is what is needed when confronted by people who have been taken in by Murphy’s breezy, confident ignorance.
@ NIV
Thanks
Also gives the explanation why pawnbrokers, despite their higher admin costs as a %age of loan values, can charge a lowerinterest rate than banks do on overdrafts
A while ago, when interest rates rapidly increased, Murphy made the point that the banks would making many billions extra because the money they lent was simply created by the banks and so at virtually zero cost.
Can he explain why those many billions never showed up in the bank’s P&Ls?
His answer should be:-
Banks like deposits because they provide a cheap, stable source of funds to lend out, boosting profitability, even though they don’t strictly need them due to other funding options. They also help meet regulatory requirements like liquidity coverage ratios.
Why is your financial position so poor that you need to ask for donations on your blog? What did you invest your pension and savings in?
@Andyf
They also help meet regulatory requirements like liquidity coverage ratios.
Implicit in the question is the suggestion that the ‘regulatory requirements like liquidity coverage ratios’ are part of the scam perpetrated by the ‘banking administrators acting on behalf of wealthy depositors’ who ‘ needlessly force the banks to accept deposits in exchange for loans’.
@Sam Jones
Why is your financial position so poor that you need to ask for donations on your blog? What did you invest your pension and savings in?
I doubt Worstall will be arsed to respond to you, but the answer would seem to be that he’s working as a writer and this is one way he can receive income for it. Seems fair enough to me. What has it got to do with pensions and savings?
Norman said:
“Why are you such an insufferable cunt?”
Surely that would need a lot more than 5 minutes to answer
>Because banking administrators acting on behalf of wealthy depositors needlessly force the banks to accept deposits in exchange for loans
Apparently not:
https://www.taxresearch.org.uk/Blog/2025/05/20/any-suggestions-for-questions-youd-like-to-be-answered/#comment-1021755
I have no idea what he thinks does happen, as he doesn’t seem to want to elaborate.
Interested – I think Sam Jones’ question was to be put to Murphy, not Timmie,
I don’t know Tim’s motivations, but I’ve always assumed that he writes to keep himself sharp, so his paid-for scribblings are more desirable, and hence bring in a bit more filthy lucre. And for his amusement, of course. Tim asking for money is becasue, well, everyone likes money, and also so a hobby and practice round don’t come too dear with server costs and the like
@Interested, my question was for Murphy not Tim.
‘Gregory Plowman’ has managed to get Tim’s question published by Murphy (May 20, 2025: 11:03pm), let’s see whether he actually tries to answer it!
@Sam Jones
@Interested, my question was for Murphy not Tim.
Ah, sorry Sam. He who snarks first lives to regret it, or something.