Commentaries (some of them cheeky or provocative) on economic topics by Ralph Musgrave. This site is dedicated to Abba Lerner. I disagree with several claims made by Lerner, and made by his intellectual descendants, that is advocates of Modern Monetary Theory (MMT). But I regard MMT on balance as being a breath of fresh air for economics.
Wednesday, 12 November 2014
Bank subsidies explained.
There is a PDF version of this cartoon here. I was inspired to create this cartoon by Giacomo Corsini. Any mistakes are entirely my responsibility. - Ralph Musgrave.
when you write about bank account types where the banks can 'lend on' your money, are you describing a situation where I couldnt withdraw my money for a period of time, like a CD?
As a purely technical matter, no matter what type of system you have, its impossible for a bank to lend out someone's bank deposits. Bank deposits are just accounting entries on the bank's computers, you cant lend those to anyone else.
Non-bank lending involves you forgoing your "money" for some period of time. I give you my hundred dollar bill and I cant spend it until you pay me back.
Bank lending is inherently different
So I'm a little fuzzy on what your meaning with this.
The whole business of banks lending on depositors money is “fuzzy”. E.g. banks under the existing system lend on most of what is deposited with them, at the same time as promising depositors that depositors can have instant or near instant access to their money. In a sense that’s a flagrant self-contradiction: it’s a bit of “fuzziness”. So has that money been loaned on or not? Hard to say.
Also a bank cannot do without depositors, but at the same time, banks can create loans a few hours or days before the relevant newly created money is deposited. In the latter sense they DON’T NEED depositors.
So when someone (like me) says banks “lend on” depositors money, that’s a traditional and simple way of looking at what banks do. But it’s equally legitimate to look at what banks do from a different angle.
Don’t know whether I’ve clarified the issue or muddied it there!!??
"banks under the existing system lend on most of what is deposited with them, at the same time as promising depositors that depositors can have instant or near instant access to their money. In a sense that’s a flagrant self-contradiction: it’s a bit of “fuzziness”. So has that money been loaned on or not? Hard to say."
This is not fuzzy at all Ralph. Banks do not and cannot lend out their customer deposits.
What I am fuzzy about is your full reserve idea that somehow they could and that is what I was asking about.
Another question: In the 2nd teacher thought bubble, you say that we could set up state back bank accounts that are 100% safe and pay low interest. how is that any different then what we do know with deposit insurance?
“Banks do not and cannot lend out their customer deposits.” Well that’s flatly contradicted by a typical bank balance sheet which consists typically of (on the liability side) 5% capital and 95% deposits in the broadest sense of the word (i.e. retail deposits, loans from the wholesale money market and funds obtained by bond-holders).
The asset side will consist about 90% of loans and investments, about 5% reserves and a small amount of physical cash.
Any claim by a bank that it can repay all deposits if all or even half of depositors demanded their money back is a straight lie. But it’s a lie they’re allowed to get away with.
Full reserve is more honest (not that this is the main merit of FR). Under FR loans are funded by shares or something akin to shares. And when you buy a share in a firm, the firm makes no promise you’ll get anything back at all.
Re the speech bubble, the above mentioned promise by banks to repay depositors is clearly dodgy. And the brute reality is that decade after decade ever since Roman times banks have gone bust: they CAN’T repay depositors. That problem can be solved by taxpayer backed deposit insurance, TBTF, etc. But that’s a SUBSIDY, and subsidies misallocate resources. In contrast, under FR, depositors’ money is safe, not because of a subsidy, but because nothing the slightest bit risky is done with the money. So no subsidy is involved.
Ralph-
ReplyDeletewhen you write about bank account types where the banks can 'lend on' your money, are you describing a situation where I couldnt withdraw my money for a period of time, like a CD?
As a purely technical matter, no matter what type of system you have, its impossible for a bank to lend out someone's bank deposits. Bank deposits are just accounting entries on the bank's computers, you cant lend those to anyone else.
Non-bank lending involves you forgoing your "money" for some period of time. I give you my hundred dollar bill and I cant spend it until you pay me back.
Bank lending is inherently different
So I'm a little fuzzy on what your meaning with this.
The whole business of banks lending on depositors money is “fuzzy”. E.g. banks under the existing system lend on most of what is deposited with them, at the same time as promising depositors that depositors can have instant or near instant access to their money. In a sense that’s a flagrant self-contradiction: it’s a bit of “fuzziness”. So has that money been loaned on or not? Hard to say.
DeleteAlso a bank cannot do without depositors, but at the same time, banks can create loans a few hours or days before the relevant newly created money is deposited. In the latter sense they DON’T NEED depositors.
So when someone (like me) says banks “lend on” depositors money, that’s a traditional and simple way of looking at what banks do. But it’s equally legitimate to look at what banks do from a different angle.
Don’t know whether I’ve clarified the issue or muddied it there!!??
"banks under the existing system lend on most of what is deposited with them, at the same time as promising depositors that depositors can have instant or near instant access to their money. In a sense that’s a flagrant self-contradiction: it’s a bit of “fuzziness”. So has that money been loaned on or not? Hard to say."
DeleteThis is not fuzzy at all Ralph. Banks do not and cannot lend out their customer deposits.
What I am fuzzy about is your full reserve idea that somehow they could and that is what I was asking about.
Another question:
In the 2nd teacher thought bubble, you say that we could set up state back bank accounts that are 100% safe and pay low interest. how is that any different then what we do know with deposit insurance?
“Banks do not and cannot lend out their customer deposits.” Well that’s flatly contradicted by a typical bank balance sheet which consists typically of (on the liability side) 5% capital and 95% deposits in the broadest sense of the word (i.e. retail deposits, loans from the wholesale money market and funds obtained by bond-holders).
DeleteThe asset side will consist about 90% of loans and investments, about 5% reserves and a small amount of physical cash.
Any claim by a bank that it can repay all deposits if all or even half of depositors demanded their money back is a straight lie. But it’s a lie they’re allowed to get away with.
Full reserve is more honest (not that this is the main merit of FR). Under FR loans are funded by shares or something akin to shares. And when you buy a share in a firm, the firm makes no promise you’ll get anything back at all.
Re the speech bubble, the above mentioned promise by banks to repay depositors is clearly dodgy. And the brute reality is that decade after decade ever since Roman times banks have gone bust: they CAN’T repay depositors. That problem can be solved by taxpayer backed deposit insurance, TBTF, etc. But that’s a SUBSIDY, and subsidies misallocate resources. In contrast, under FR, depositors’ money is safe, not because of a subsidy, but because nothing the slightest bit risky is done with the money. So no subsidy is involved.