Six Myths About Money & Banking (Josh Ryan-Collins)

www.positivemoney.org.uk/ - Josh Ryan-Collins of the New Economics Foundation explains how banks create money, out of thin air, through the accounting process they use when they make loans.
"Independent Commission on Banking told us that there was a "disagreement" amongst the commissioners about whether or not the banks created money!
...So, that's the situation we're in. These are the people who are charged with recreating our banking system! And they don't even understand that banks create credit when they make loans"
The 6 myths about banks and money are:
That banks are intermediaries between savers and borrowers
That money is created through the 'money multiplier' and the amount of money depends on the amount of 'base money' created by the central bank
That interest rate adjustments affect bank credit creation
That credit allocation is demand driven, rather than controlled by banks
That the banks know what's best for the economy
Regulating (or democratising) credit creation doesn't work.
Where Does Money Come From?, referred to in this video, can be bought from Positive Money. You can also see more information on the book here:
www.positivemoney.org/product...
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ABOUT POSITIVE MONEY:
Positive Money is a not-for-profit research and campaign group. They work to raise awareness of the connections between our current monetary and banking system and the serious social, economic and ecological problems that face the UK and the world today. In particular they focus on the role of banks in creating the nation's money supply through the accounting process they use when they make loans - an aspect of banking which is poorly understood. Positive Money believe these fundamental flaws are at the root of - or a major contributor to - problems of poverty, excessive debt, growing inequality and environmental degradation. For more information, please visit: www.positivemoney.org.uk/
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TRANSCRIPT:
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[@roufditta4156]

10 years later and still only 160 or so likes. This is indicative of the challenge we face.

[@intersweat]

These are great lectures guys. For an amateur like me this is definitely making more sense now.

[@lunarmodule6419]

I can understand the Commission position. The theory says that as the loan is paid off, the money is no longer in circulation. Therefore it was there just for a finite amount of time.

[@DavidByrne85]

Wow, so many questions. I better order that book.

[@Dai7261]

good video keep up th egood work.

[@PositiveMoneyUK]

@laskji The thing is, the banks need a signature to create money. That's the trick. They can't just sit there all day and night creating money willy-nilly. They need that signature. They can't create the money alone, as the IOU from the borrower is real money to them, just as IOUs from banks (tenners, fivers, 20 quid notes - I promise to pay the bearer) are money to the rest of us. Banks can follow, they can match an IOU with an equivalent, but they can't initiate. More in FAQ section on website

[@carolking7748]

At the year 2013 was discovered The Progressive Growth of Money Supply Principle, which say you how much the Money Supply must growth, i.e., the quantity of money that markets needs: kzbin.info/www/bejne/n5quo2CfZZdlo7s Once the Fractional Reserve Banking is forbidden, if the Central Bank increases the money supply by an amount equal to the sum of interest generated by the financial system during the preceding period, the market interest rate will be the natural interest (Wicksell) and we won't have bubbles (tulips, gold, stocks, etc.) Thanks to the Progressive Growth of the Money Supply Principle we know today that it is impossible to return to the Gold Standard. The Principle will force Central Banks to change de monetary policies.

[@shooter7a]

The primary mode of failure of the modern credit system is the POSITIVE FEEDBACK LOOP. Once you understand how the credit system works, the next critical step is to understand how it fails. The first key is to understand that the constraint on banks making loans is the fact they derive their profit from the repayment of loans with interest. After the whole process is done, the asset (loan) and liability (deposit...which may exist elsewhere in the system) are extinguished, but the interest is left over - the banks return. This means that the bank's willingness to make a loan at a given rate is dependent on their confidence that the lender will repay it. The problem comes when this "confidence" is influenced by the asset trends of the asset that is collateralizing the loan. As soon as that happens THEY SYSTEM IS ON A PATH TO FAILURE. Do you see why? If loans are being aggressively extended against the asset class, what happens to the demand for that asset class? It rises, and the price (value) that asset class rises. This makes is MORE likely for the bank to feel confident that the loan is a good risk, and more loans are extended. As more loans are extended at better terms, the price (value) of the asset class rises further, and the positive feed back loop feeds on itself. Eventually, the asset prices grow so our of proportion to the underlying true value (cash flow arbitrage) that the debt can never be amortized. At that point, the only rationale for extending a loan is further asset price increases. This is the terminal phase of the financial mania. I hope this makes sense. I really wish some of these academics would put together a presentation to this effect. There is nothing wrong with the system we have. ALL YOU HAVE TO DO IS STAMP OUT THE FEEDBACK LOOP!

[@montmorencyyou]

It seems to me that the whole interbank lending of BoE reserves situation, described here, makes it clear that the "creation of money" cannot be quite as simple as the Positive Money people explain it.

[@montmorencyyou]

The author/economist Joseph Schumpeter, whose 1954 book was referred to, died in 1950. However, the Wikipedia page makes it clear that this book, edited by his wife, was published posthumously. (In case anyone else is wondering, as I was for a while).

[@55jonesc]

this is true, but not as important as you think. If I get a 100k mortgage from Natwest and pay someone with a HSBC account then yes, the bank does have to get credit reserves from it's "vaults" BUT if on the same day a HSBC customer gets a loan for 90k loan to buy a car from someone with a Natwest account. Natwest now only needs 10k of "real" money, but there has been 190k worth of spending. Of course if the buyer and seller are both Natwest they don't need anything.

[@shooter7a]

Here in the US, the resistance to acknowledging these truths of banking are even more ingrained. Appalling is not a strong enough word. It is criminal, and the mainstream academic economics establishment is 100% responsible.

[@arcanekrusader]

Are you familiar with Bill Still and if so, what do you think of the ideas he espouses?

[@bgold1212]

I don't understand the difference between productive loans and speculative loans. For example, how is a loan (really an investment) in speculating the price of grain is going to go up and therefore purchasing stock in grain, not helpful to production when the grain company can use that money to improve yields and expand business? Or when you say financial speculation is this limited to derivatives such as shorting the price of grain and buying it back speculating a price drop to make a profit?

[@lunarmodule6419]

bgold1212 Most of the time stocks are bought and sold between 2 parties. Therefore no money is given to the company. So its improductive. Companies make money only when stocks are sold for the first time.

[@laskji]

Thanks for the video. Weird question here: So it is said that banks loan primarily based on likelihood that the borrower, will pay back the loan plus interest. But why do they care whether the borrower can pay back the loan, since they are simply typing the loan into existence on a computer. It seems the bank doesn't really stand to lose anything real, if the loan doesn't get paid back.Is it just the risk of carpal tunnel from typing all those zeros?

[@rahmanrejepov4283]

my answer is a quite late ofc but anyway, when a bank gives a loan lets say for 100000$ it increases its assets(loan) and liabilities (new created deposit) for 100000$. So now imagine that borrower buys a car for this amount, and if bank doesn't get paid for its loan, asset will be reduced because now the loan worth nothing but liabilities didn't change in its amount

[@tedarcher9120]

Bank doesn't care if the deposit stays in the same bank. If it is transfered into another bank, it has to pay real money from reserves. If enough people withdraw their money, the bank will ran out of reserves and go bust

[@55jonesc]

but the cheques bounce. It's like giving out 100 cheques and hoping only three people cash them. The point is that with most transactions being done without cash M4 IS money. Just like when only a tiny percentage of transactions were done with gold the paper money IS money. So you don't need to separate M1 and M4 really. The only reason you need to separate them is that we have some control of M1, and no control of M4.

[@55jonesc]

I don't understand why we are arguing, what you are describing is the problem. What in the video don't you agree with?

[@55jonesc]

true, but when you borrow money it's brand new purchasing power.

[@lunarmodule6419]

Chris Jones Yes new money. Now if you buy a carpet, the economy gets a small bump up. If you buy a stock, zero bump. If you start a business - now we really have something for the long term.

[@se7ensnakes]

Lamneck - April 19, 1937 issue of The Scranton Times Washington, April 19 - Representative Lamneck (D Ohio) told the house today the federal reserve system is committing legally "the greatest burglary in history." Criticizing the system in the midst of a plea that the budget be balanced to avert "calamity," the Ohioan said that for a $300 investment a bank could get a $30,000 return. "If a burglar had a license to steal, he said, "he would at least have to carry away his loot. The federal reserve system has its loot brought to it." Lamneck said this was a procedure for a "steal" authorized by congress. The treasury asks bids for several million dollars worth of bonds. A banker says he will take a million dollars worth and credits the treasury on his books with a million dollars. Then he deposits the bonds with a federal reserve agent as collateral security for a million dollars in federal reserve notes and agrees to pay the cost of printing the currency - about $300. He now has a million dollars in currency to balance the million dollar deposit he credited to the treasury. He still owns the bonds and can collect the interest, about $20,000 a year on an investment of $300.

[@tedarcher9120]

What is the difference between banks buying government bonds and banks lending directly to government, packaging this debt and selling it for a profit? There is no difference, it's stupid

[@biglabrador]

I disagree with the statement that banks do not customers' deposits to make loans, but only to assure that their balance sheets balance (BS) over time. BS has to balance precisely because loans and other bank's assets need funding. A new loan can be created out of nothing - it's true, but as soon as this new purchasing power created by the new loan has to be transferred to another bank (borrowers do not take out new loans to keep the money on their current accounts, but to make payments to someone else, potentially having their accounts with another bank, e.g. for car or home purchase, etc.), a funding is needed to make a reserve transfer to another bank. Of course only net amounts of banks' mutual payments are transferred between banks' account with the central bank. But this doesn't alter the fact that loans are not made solely out of thin air but need funding.

[@DavidByrne85]

Way to paraphrase the 'basic' vid and add some non-helpful sensationalism for us. Thanks.