Conspiracy theory about how banks create money
becomes fact as BOE explain....
1.Bank Lending creates deposits
2.Account holders are unsecured creditors
"They state that the way money is created is different than what is found in the description of “some economics textbooks.” How about different from what 99.9 percent of the normal people outside of the banking system believe when they refer to their account? It is not just a slight misunderstanding but really quite a monstrous fraud that has been perpetrated on savers and wealth holders in general."
"Most account holders would also be shocked to know that they are merely unsecured lenders to the bank once an account is opened. The bank has no fiduciary duty as to how customer funds are invested. This has been settled law for almost two centuries. If the bank goes under, uninsured deposits are at risk. In the case of Cyprus even the insured deposits were at least partially forfeited for one bank’s customers. In the case of the other insolvent bank, all deposits were lost despite the insurance.
The paper is titled “Money creation in the modern economy”. Here's a bit from the overview:
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.
* The reality of how money is created today differs from the description found in some economics textbooks:
* Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.
In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.
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.
Not lending out deposits? Here's a bit more on the topic:
The vast majority of money held by the public takes the form of bank deposits. But where the stock of bank deposits comes from is often misunderstood. One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them. In this view deposits are typically ‘created’ by the saving decisions of households, and banks then ‘lend out’ those existing deposits to borrowers, for example to companies looking to finance investment or individuals wanting to purchase houses.
In fact, when households choose to save more money in bank accounts, those deposits come simply at the expense of deposits that would have otherwise gone to companies in payment for goods and services. Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money. This article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.(3)
Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach. In that view, central banks implement monetary policy by choosing a quantity of reserves. And, because there is assumed to be a constant ratio of broad money to base money, these reserves are then ‘multiplied up’ to a much greater change in bank loans and deposits. For the theory to hold, the amount of reserves must be a binding constraint on lending, and the central bank must directly determine the amount of reserves. While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality. Rather than controlling the quantity of reserves, central banks today typically implement monetary policy by setting the price of reserves — that is, interest rates.
In reality, neither are reserves a binding constraint on lending, nor does the central bank fix the amount of reserves that are in the reverse way to that described in some economics textbooks. Banks first decide how much to lend depending on the available. As with the relationship between deposits and loans, the relationship between reserves and loans typically operates profitable lending opportunities available to them — which will, crucially, depend on the interest rate set by the Bank of England.
We'll revisit this amazing paper in coming days. George Bailey must be spinning in his grave."
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2014/3/27_This_Is_What_Is_Going_To_Destroy_The_Worlds_Financial_System.html
| 