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you ask why they need reserves – for the same reason you or i first need to have 20 million quid before we can lend 20 million quid.
Thats nonsense. You wouldnt have the 20m once its been lent and thus no reserve
Its just going round in circles now
if i have $100 in my pocket, the most i can lend on is $100.
if that same $100 goes into a bank’s pocket, under fractional reserve banking look what happens.
say the capital reserve requirement is 10%.
the bank that receives the $100 cash from a depositor, can then lend out $90 of that deposit to a borrower.
it does that by opening an account for the borrower and writing in its ledger that the borrower has $90 to spend.
the borrower then writes a cheque in favour of a third party for that $90.
the third party receiving the cheque pays it into his account with his bank.
the bank receiving that $90 cheque deposit can then itself lend out 90 per cent of that $90, ie $81.
as that process continues, the banking system can turn the original $100 deposit into up to $1,000 (ie $100 + $90 + 81 + 72.90 + 65.61 + 59.049 + 53.14 + 47.83 + 43.04 + 38.74 + 34.86 + 31.38 + 28.24 + 25.42 + 22.87 + 20.59 + 18.53 +16.67 + 15.00 + 13.50 + 12.15 + 10.94 + 9.84 + 8.85 + 7.97 + 7.17 + 6.45 + 5.80 …).
contrast a 20% reserve requirement, where the banking system could expand the initial $100 deposit into a maximum of $500 ($100 + $80 + $64 + $51.20+…).
now, tell me again how the banks don’t create money out of thin air under fractional reserve banking ?
the higher the reserve requirement, the less artificial money / credit the banks can create. so the more is maintained the purchasing power of the currency.
in 1998, before the recent asset bubbles and derivatives explosion, while the US worked to an average reserve requirement of 10 per cent as above, the equivalent UK figure was nearer 3 per cent. (HK by comparison was 18 per cent).
no, what bankers lend against is a promise by the borrower to repay.
Completely wrong. Anyone can promise to pay but would you lend to anyone? They lend on the judgement of ability to pay, secured or not (too often secured as many trade creditors would acknowledge) and frankly they get it wrong in a pretty tiny fraction of cases.
This is getting abit boring now and i am repeating myself
if the bank is lending against a secured asset, then its not "credit out of thin air" is it?
They may also feel its quite appropiate to lend against future earnings too adn secure that, which is fine provided that the business continues to earn. Say lending against future Man utd season tickets sales, which are not suddenly going to go down to zero
There is no problem with that at all in any economy
the only potential problem then is a "run on the bank" (which very rarely happens of course) and then the bank has to convert its loans either by selling them on or recalling them and grasping the secured assets.
You are assuming taht banks just lend to anyone and everyone regardless. There certainly have been periods when they "lost it" a bit (internet bubble and subprime) but the fundamentals remain the same. They make bloody sure that they are are not going to willingly incur a bad debt and will minimise that potential. and to do that they lend against realistic assets (and once again cash is NOT the only asset…far from it) only
end of
In their panic, all our politicians could think once they realised the scale of the economic crisis, was that the last straw would be if people realised. All that was needed was confidence – never mind that that requires trust! At the very least it would buy them some time.
If the public were to be informed of the reality, such confidence as they had retained in their political and business leaders would vanish all together, and trust in their competence as leaders and economic sages would be lost. Without integrity on the part of the ‘trust’ salesmen, they are exposed as snake-oil salesmen which, of course is what they are.
One of the key factors in the crisis has been the remorseless polarisation of the nation’s wealth by 30 years of right-wing government, as it has been transferred from the poor to the rich. When the poor had been squeezed dry, to continue to batten on them, it was necessary for the rich to extend credit/debt to them. But unconscionable greed has never known moderation, so the debt bubbles were bound to ruin the plnet eventually.
For an Establishment man, J M Keynes had some extraordinary things to say about the banksters, the financial sector, the politicians and the economists.
Google his sayings and be amazed. Here is a small sample:
“Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.”
"I work for a Government I despise for ends I think criminal."
The following might have been written today:
"The decadent international but individualistic capitalism in the hands of which we found ourselves after the war is not a success. It is not intelligent. It is not beautiful. It is not just. It is not virtuous. And it doesn’t deliver the goods."
"The decadent international but individualistic capitalism in the hands of which we found ourselves after the war is not a success. It is not intelligent. It is not beautiful. It is not just. It is not virtuous. And it doesn’t deliver the goods."
Fortunately we have the wildly successful and truely humane systems of communism and facism to fall back on
There is no harm in being sometimes wrong- especially if one is promptly found out.
John Maynard KeynesYou were completely wrong before about French taxation, and you’re completely wrong again, Clivexx. When will you ever be right?
Why did you not express pleasure at being so wrong about French taxation? Did it not strike you that higher taxes on the better off were indeed a price well worth paying(as well as being only just) for a half-decent country, which people in foreign lands would vote year after year as the best county to live in? It must be that they thought most of the citizenry, rather than a monied elite, were blessed to live in such a country.
Could it be because you begrudge the minimal tax you pay. Shame on you. Shrouds don’t have pockets. What will you say to your Maker on Judgment Day, when he asks you why you were so money-obsessed at the expense of your fellow-countrymen? He wouldn’t be impressed by half-baked cracks about Communism and fascism.
Sorry
would you like to point out where i said that higher taxes for the better off were wrong?
and where did i say i begrudge the tax i pay?
But i suppose we must just accpet that your sweeping statements about capitalism are "right" of course
clivexx
a loan is ALWAYS made against a promise to repay, otherwise there is no ground to pursue the borrower, whether or not the bank has also taken security.
banks will credit-score borrowers to assess what value they put on a promise to repay.
and yes as part of that process of deciding whether to give a loan they may require the would-be borrower’s promise to repay to be supported by security.
but that doesn’t alter the fact that when it gets to the bank creating the credit, thst always happens against the borrower’s promise to repay.
you misunderstand the nature of security.
when a bank takes security over say a house, that doesn’t mean that the house then shows up in the bank’s balance sheet as an asset of the bank.
the house remains 100% the property of the borrower.
what the bank gets is a statutory charge over the house, meaning basically that the bank ranks ahead of the borrower’s other creditors in being able to seize and sell the house to repay its loan should the borrower go bust.
security is about where you are in the queue to be repaid if a borrower ends up with insufficient assets to meet all his liabilities.
as part of that, its about stopping other creditors of the borrower claiming any interest in the house until the bank’s claim is first satisfied.
security has nothing to do with the way fractional reserve banking operates, per the $100 example above.
if a loan is made, everything happens the same way per that example whether the loan is secured or unsecured or something inbetween.
in fact, picking up on France as a good example, you’ll find that security under French law is something quite different to security under English law.
the English law of security implements a policy that, if a lender is careful enough to protect himself in advance by following certain formalities (like taking a mortgage over property), then he should be rewarded for his care by being able to keep the mortgaged asset out of the hands of other claimants if the borrower goes bust.
the French law of security however has an underlying policy that, however clever and careful someone may be in advance, its only fair that everyone should share the pain proportinately when a borrower goes bust.
however none of that stops fractional reserve banking working the same way both sides of the channel. so forget security – its an irrelevance to the $100 example above.
you misunderstand the nature of security.
when a bank takes security over say a house, that doesn’t mean that the house then shows up in the bank’s balance sheet as an asset of the bank.
the house remains 100% the property of the borrower
Until they default…jesus
You really dont get this at all do you?
Ill leave you to your weird websites now
you misunderstand the nature of security.
when a bank takes security over say a house, that doesn’t mean that the house then shows up in the bank’s balance sheet as an asset of the bank.
the house remains 100% the property of the borrower
Until they default…jesus
no, actually not even then.
foreclosure (ie an absolute transfer of the mortgaged property to the secured lender without a sale) is incredibly rare for real estate and other tangible assets. (and it is only slightly less rare in the financial markets, regarding securities taken as security).
in England, to execute foreclosure on real estate, the secured party needs to petition the court. the order has to be made in two stages (nisi and absolut), making the process slow and cumbersome.
historically the Courts have been hugely reluctant to grant orders for foreclosure – almost every time they instead order a judicial sale under which, if the asset is worth more than the secured obligations, the secured party has to account for the surplus.
because what the lender is enforcing is the obligation to repay and nothing else.
also, most mortgages over English real estate since 1925 have been statutory mortgages rather than old-time "true" legal mortgages, so enforcement has to be as set out in statute – ie no foreclosure but a sale required.
and quite apart from all the above, an event that may or may not happen some way down the line is hardly capable of recharacterising what happened back at the very outset of the relationship when the loan was given and the credit created by the bank.
so it still has nothing to do with fractional reserve banking.
foreclosure (ie an absolute transfer of the mortgaged property to the secured lender without a sale) is incredibly rare for real estate and other tangible assets. (and it is only slightly less rare in the financial markets, regarding securities taken as security).
So you are saying that banks are wasting their time securing their loans with charges then….?
I dont think so….
As any company that has gone into adminsiatrtion or liquidation would verify
And if you havent understood the link between secured lending and frational reserve by now, then i am not going to explain …yet again
foreclosure (ie an absolute transfer of the mortgaged property to the secured lender without a sale) is incredibly rare for real estate and other tangible assets. (and it is only slightly less rare in the financial markets, regarding securities taken as security).
So you are saying that banks are wasting their time securing their loans with charges then….?
no, you’re saying that to try and wriggle off the comments you made above and to which i’m responding.
i’m still saying that security has nothing to do with banks creating money via the fractional reserve process.
they are two separate things.
your style seems to be to retreat into bluster and patronising comments when you find yourself unable to produce a reasoned answer.
that persuades me that there’s nowhere further to go with you on this topic.
i’m still saying that security has nothing to do with banks creating money via the fractional reserve process
You can say it as much as you like.
Frankly i couldnt have explained it any clearer and have given example after example
If you think that that is "bluster" then thats up to you
The organizer of industry who thinks he has ‘made’ himself and his business has found a whole social system ready to his hand in skilled workers, machinery, a market, peace and order — a vast apparatus and a pervasive atmosphere, the joint creation of millions of men and scores of generations. Take away the whole social factor, and we have not Robinson Crusoe with his salvage from the wreck and his acquired knowledge, but the native savage living on roots, berries and vermin.
L. T. Hobhouse
Here is an article on the CDS, described by Warren Buffet, before the crisis arose, as ‘weapons of mass destruction’:
http://theautomaticearth.blogspot.com/
And another on Chile and its building code:
On Chile, for once i agree with you Grimes. Friedman would definately been against building regulation in (probably) any form
But hes the extreme end of free market thinking. Chile has certainly benefitted economically from free market influenece, but any senseible goverment knows that you do not impose such a theorectial doctrine from top to bottom
and whilst I havent had time to read the article right through , it would appear that the post Allende goverment didnt repeal the regulations did they?
Do you doubt that given more time, they would have, Clivexx? It’s the nature of the beast. Never satisfied.
That’s not bile, it’s a clinical observation none of us can have missed. They would have been in their seventh heaven during the build-up to this snow-balling economic depression, coining it in with the banksters, heedless of the economic consequences.
Do you doubt that given more time, they would have, Clivexx? It’s the nature of the beast. Never satisfied
Yes i do doubt. i think any goverment going to the electorate with a policy of loosening building regulations for earthquake damage prevention would be seen by any reasonable electorate as …. a bit weird
You ought to get the definition of a depression clear in your mind Grimes. We are not by any measure "in a depression"
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