Saturday 30 October 2010

'The Shadow Banking System' and 'Off-balance sheet finance'

These are two phrases that the conspiracy theorists like to bandy around - and our former Prime Minister popularised the expression shadow banking system in order to try and shift the blame - when I try to explain that the UK banking system is:
• nowhere near collapse. I calculated net total cash inflows from mortgage and other lending at £136 billion a year back in 2008, which might be down to £100 billion by now, as interest rates have fallen,
• would not go *pop* even if house prices fell by half, and
• is in no need of taxpayer-funded subsidies (unless your aim is merely to re-inflate the credit and house price bubbles, which would require subsidies that are so huge that the golden goose, the productive economy, would be slaughtered).

The conspiracy theorists mutter darkly that all my calculations don't include 'off balance sheet finance' or 'the shadow banking system', therefore they won't work, without offering any sort of explanation of what they are talking about - are the UK banks hiding assets or hiding liabilities? what sort of sums are involved?

The whole point is that UK banks are not omitting assets or liabilities from their balance sheets, they are wildly over-stating assets and liabilities - if anything there is too much on their balance sheets, making them look much bigger than they really are (see Note G below). Here is the consolidated balance sheet of UK banks. I'll explain all the double counting in the notes:
Notes:

A. The figure for loans to customers looks 'about right'. According to Credit Action, total residential mortgages and other household debts are £1,457 billion, plus add 50% for business lending. The Bank of England's Table C1.2 also shows £2,208 billion as at January 2010 (Excel).

B. I can't be bothered digging any deeper into this, but the 'securities for sale' (assets) are largely all the mortgage backed rubbish which they bought from other banks. Similarly each bank has repackaged its own mortgages and issued bonds secured thereon and/or the money they raised from bonds issued (liabilities) was lent on as mortgages, so the two B's are two halves of the same equation, and could in theory be netted off to very little indeed.

Some mortgages were genuinely 100% sold on and can be removed from the banks' balance sheets entirely, some were with recourse and so had to stay on. There is a theory that Northern Rock still included a lot of the former category on its balance sheet on the assumption that they were with recourse to the bank, whereas actually it should have excluded them.

C. The same logic applies to inter-bank lending, it's just two halves of the same equation. In this example, the amount borrowed from other banks is more than the amount lent to other banks, so I assume that the net figure of £121 billion is from non-UK banks.

D. The figures for derivatives looks big and scary, but I wouldn't worry too much about that either. This is because of accounting rules (see Note G).

To give a simple example of what this might be, let's imagine
i. A UK importer who intends to buy €120,000s worth of goods from the Euro-zone each year, who is worried that sterling will fall even further against the Euro, which will increase his sterling costs. So he enters into a forward agreement at today's exchange rate of say 1.2. He commits to pay the bank £100,000 next year and in return the bank will give him €120,000.

ii. A UK exporter who intends to sell €120,000s worth of goods to the Euro-zone each year, who is worried that sterling will bounce back, so he enters into a forward agreement at today's exchange rate to pay the bank €120,000 next year and in return the bank will give him £100,000.

The bank takes a small margin deposit from each business to cover counter-party risk, and even if the bank didn't hedge these payments elsewhere, you can see it runs no currency risk whatsoever - it will simply take the €120,000 from the exporter and give it to the importer; the £100,000 goes in the other direction. The bank couldn't really care less what happens to the exchange rate and still earns its commission.

But, because of accounting rules, the bank has to include £100,000 as an asset and as a liability; and it also has to include €120,000 as an asset and a liability (at whatever the relevant exchange rate is).

E. This is the aftermath of Quantitative Easing and the bank bail outs. The government gave the banks a couple of hundred billion in soft loans, included under 'bonds' (liabilities), but told them they had to invest in 'quality assets' (government bonds, natch). Then it told them it would overpay slightly for those bonds if the banks were prepared to leave the sale proceeds on deposit with the Bank of England (which is just a form of government borrowing, but as it was just one form of borrowing replacing another, is of little relevance to the outside world).

The Treasury could quite easily get a couple of hundred billion back off the banks by netting off the two figures.

F. Besides the bail out money, the banks also owed the government £5 billion in tax, but have a deferred tax asset (i.e. they can offset past losses against future profits) of £20 billion. This can be thrown in the pot with E, seeing as the Bank of England and HM Revenue & Customs are all part of HM Treasury, which is in turn part of the UK government.

G. Accounting rules discourage you from netting off closely related assets and liabilities (such as the £200,000 assets and £200,000 liabilities disclosed under D above, which don't really exist), and banks are quite happy to go along with it, because it makes them look 'too big to fail'.

The only UK banks that were sorted out properly via debt-for-equity swaps, being broken up etc are the smaller ones such as Northern Rock or the Bradford & Bingley. The point is that this would work just as well for the big banks. Of course it would have to be controlled and managed so that savers and depositors don't panic, separate topic.

44 comments:

Lola said...

Thank you for doing all that work. I really couldn't be arsed, and in any event it's not my skill. But it confirms what I'd suspected based on the balance sheet research we'd obtianed form third parties.

Nevertheless, the banks are still, IMHO, undercapitalised. I was taught many years ago that there was 'a rule' that banks not only were required to keep an 8% cash ratio but also an 8% equity ratio (if you see what I mean). When I learned sometime in the late 90's / early 00's that this had all been 'relaxed', I became anything but 'relaxed' and got our clients out of banks pdq. That 'getting out of' included 'not being in debt to' as well as 'not owning shares in'. Trouble is you are always faced with the (non) killer question - "OK you're so clever, when will they fail / it all go wrong?". This sort of technique makes me so effing tired. Ah well. Back to the Cote du Rhone.

Mark Wadsworth said...

L, 8% on either side seems a good rule of thumb. As to when it will fail, I refer you to Fred Harrison's 18 year rule, which is partly why I sold to rent in late 2007.

Lola said...

Yes, well. I didn't sell because I have a house I love - but my lady wife loves even more. In any event I don't care what its price is at any one time, and I'm not over-mortgaged. But, we have beeb trying to keep people out of house buying from ooooo 2006/7 and being discouraging from well before that.

I have heard of the 18 yr cycle but had not looked it up. Very remiss of me. I have now!

BTW I think I have been far too direct and open in my (educated and accurate) criticism of the FSA - they've started the 'ASH' treatment. (ASH = Authorised Systematic Harrasment; as popularised in the 1980's Edward Woodward series 1999).

James Higham said...

Yes but the bottom line is that it is imaginary money - balance sheet created money from FRB. This is the problem.

The books balance. So what? They're not the EU, where it doesn't matter.

However, if you delve deeper, you find the LBMA unable to explain away where the gold is or comment on the alloy and OTC derivatives is something no one will talk about.

According to the accountants and the City though - everything is shipshape and Bristol fashion.

Mark Wadsworth said...

JH: "it is imaginary money - balance sheet created money from FRB"

They are debts arising from contractual relationships. What better collateral is there? There was reckless lending and reckless borrowing, and those debts won't be repaid, that's life, but most of them will.

PS, what's the point in using gold as collateral to invest in something else? You might as well buy what you need with the gold, end of. What happens if the wicked Gold Fairy made all the gold in all the central bank vaults disappear - would we be any the poorer for it? Nope.

"According to ... the City though - everything is shipshape and Bristol fashion."

According to them it ISN'T!! That's why they're crying out for more bail outs and subsidies and saying "We can't tax land values because if house prices fell the financial system would collapse!"

They are lying, I am telling you how it actually is.

Lola said...

In the World According to Lola, banks would offer a range of savings accounts, the interest payment for which which would be inversely proportional to the risk. Thus the 'low risk savings account' would pay (say) 1% but would be backed by bullion or other universally acceptable commodity or other 100% capital secure thing and by reform of the banking system being ramked first in the event of insolvency. The banks would then offer progressively more risky saving accounts with less and less security for a bigger and bigger rate. 'Of course' this would be combined with repeal of the legal tender laws. In this way banks could carry on with FRB, but the lenders to them would know the risks. As we now have lots of different money makers a market in discount houses will spring up synthesing the market knowledge of which banks were poor security / good security....

...and so on.

I don't see a problem with this.

Lola said...

JUst to build on previous post, my business has just taken on a new software service that effectively turns all banks into utilities and removes their brand values. As a client you will be able to go to our website, click on a link and see all of your money information in one place. Investments,pensions,banks accounts, mortgages etc etc. This system effectively disintermediates the banks and reduces them to a utility. We (I am an FS business) are now able to compleetly own the client relationship. The next step for us is to capture the private banking market by offering mortgages at exceptional rates.

The purpose of telling you this is to show you that the concept of a retail bank with a high street prescence in a flash building is doomed, as long as the FSA don't cosk us / it up. The banks are going to have to think very carefully about what they are actually for. They have completely lost the trust of the UK citizen so something will grwo to fill there place. I think that they are beginning to get this and that a lot of what they have been doing recently is to desperately try and hang onto their franchise. The 'we are too big for you to let us fail' meme is all about this.

Mark Wadsworth said...

L, agreed with your first comment.

As to your second, yes, banks are utilities. What they do best is ATMs, Direct Debits and so on. Exactly who owns those cash machines and computers is about as interesting as whether a power station is bought up by EDF or Siemens.

'we are too big for you to let us fail' That's one of the bigger lies doing the rounds. It's up there with 'global warming' and 'house prices can only go up' and so on.

Robin Smith said...

MW this is really good stuff. Is there any way you could summarise it further or expalin in a different way? I dont get your main point.

Darker mutterings might include the mortgage frauds. See FSK blog. Not sure if these remain off balance sheet. And then you have the systemic insider trading. And then the insider bankruptcies. And then you have etc etc. These are not conspiracy theories. They are coincidence theories at worst. You only have to look to see them in the press and courts!. They may not come up on the balance sheet. They are externalised.

On the FRB idea, the mainstream may not really understand how it works. Who does? Try here.

Prof Steve Keen on credit money

Basically it is saying that reserve requirements are a myth as I've always said. Credit money is always created first. Base money is created afterwards by central if needed to inflate the supply though this too is flawed because they think they are leading it. Tail wagging dog though.

Mark Wadsworth said...

RS: "I don't get your main point."

My main point is that YOU fluffed it with HM Treasury. Falls in the value of house prices are nothing to worry about. The banks will do just fine.

Please specify "off balance sheet". The losses from 'mortgage fraud' remain 'off balance sheet' until the banks are forced to write down their mortgage assets accordingly (see part 3/3) and then the balance sheet is adjusted accordingly.

FRB is nothing to worry about, never has been.

Robin Smith said...

MW This is a really confusing response. What have the Treasury got to do with anything? And so what if the banks do just fine?

I was asking YOU to specify off balance sheet? Please...x Anyway the stuff I'm talking about is never on balance sheet. Its long gone.

FRB is a lot to worry about. It seems most people think it works this way or that way. When it doesnt even exist.

This is a bad comment thread going nowhere. I'd be happy to leave it till we both know what we are talking about.

Mark Wadsworth said...

RS, now that's a novel approach! "FRB is a lot to worry abut... it doesn't even exist"

Either it exists or it doesn't, and if it doesn't, why should we worry about it?

PS, I know perfectly well what I am talking about. I am debunking the myth that there is a 'shadow banking system' that none of us now about apart from conspiraloons. It's all there, all the facts and figures reconcile.

Robin Smith said...

MW On FRB if you read the link I posted above you would see why. Monetary policy is being carried out in the belief it is! Bit of a problem if Govt tinkering is having no effect or the wrong, except to tax us more.

Oh I see. Yes I agree there is no shadow banking system I agree. There is an elite who syphon off the wealth all the same. Its not a conspiracy theory. Its there. I only have a rough idea how it works and why its there. I may post some of my own primary evidence later but not sure if I have the bottle.

I think that's sorted then? Apologies for the confusion.

Mark Wadsworth said...

RS, the elite siphon off the wealth quite openly and blatantly, the payments are all accounted for and easily accessible (except with the EU, who just take the money and give it to their mates).

'Monetary policy; is not being carried out in the belief in anything, flawed or otherwise, it is being carried out to bail out wealthy bankers (not the small shareholders) and to prop up house prices and land values.

Mark Wadsworth said...

RS, and Steve Keen's article starts off by pointing out that something that most people believe to be true (apart from me) is not true, which I already knew.

He then explains that banks don't for people to make deposits before making loans - they make the loans as soon as they find a willing borrower and the corresponding deposit creates itself. That is also what I have been saying for a long while.

And I'm pretty tired of people waffling on about 'FRB' and 'fiat money' and all these other fancy terms. All I care about is the world as it actually is, not which fancy terms we use to describe it.

DBC Reed said...

Been round this course with Mark before-many,many times!I get the feeling that he cannot accept that the standard money multiplier which Keen takes as his starting-point: how banks create 10k out of Ik.Or that this is essentially fraudulent to use the kind of language the libertarian Murray Rothbard uses in his diatribe about FRB.
Since banks create money then charge interest on it,they should be nationalised to put it baldly, since the rise in the money supply is public property in exactly the same way as the rise in land values.Converting privately levied interest rates into a national tax
on money issue is no different from gathering for public use all the rises in land values which have become a private tax by landowners on the workers and entrepreneurs.

Mark Wadsworth said...

DBC: "the standard money multiplier which Keen takes as his starting-point: how banks create 10k out of Ik."

That is exactly the myth that Keen is trying to debunk. We agreed a long time ago that banks did not require deposits, or even shareholders' funds to make loans - they make the loan first and the deposit creates itself. It's as simple as that. Basel capital ratios are just tacked on at the end.

"Converting privately levied interest rates into a national tax on money issue is no different from gathering for public use all the rises in land values which have become a private tax by landowners on the workers and entrepreneurs."

Completely agreed. I don't believe in nationalising banks or anything else, but in the income tax free world I envisage, besides LVT there will of course also be a tax on mortgages secured on land and buildings of about 2% of the outstanding balance at the year end.

See item 3.iii. of my draft budget here.

Robin Smith said...

Great! We are all more or less in agreement. Sorry for "getting it" a bit late.

DBC Agreed on everything you say. I arrived at the "social" credit idea independently from the much argued about social credit idea, just recently.

What is still open is that credit should be made common property by taxing or nationalising it? And why bother with money reform if land reform will do the ultimate job.

But money has the minds of the people where land has none of them. Leading on land reform, though correct will lose them. So I believe in doing both and it'll all come out in the wash

On money the decision must be made on which way :

1) will happen
2) be the simplest
3) be the least corruptible

This could be a really good new thread. The money reformers only have half the picture, just like the land reformers. Either side is always incomplete.

Mark Wadsworth said...

RS, taxes are usually better than regulation or nationalistion.

So as well as tax on land values, we could have a tax on outstanding mortgages secured on land and buildings (or indeed on shares in companies), which would have the effect of reducing the amount of credit that banks are prepared to 'create' because they would restrict lending to the truly profitable stuff and not 'chase market share' by lending below cost and hence driving up land prices.

PS, the amount that people 'save' is not much driven by the interest they can earn, it is largely driven by how much they expect their regular income to fall in future. With less lending there'd be less saving as well, but everybody gets a share of that bank tax via the Citizen's Income/Pension so all it 'comes out in the wash'.

DBC Reed said...

@MW
The required reserve ratio is just added on after the event but money is still created by the multiplier.Keen's argument is not that the multiplier does n't exist : it is that money creation by banks is much worse than that.They don't even check their reserves,just create new money ad lib and worry about the reserve ratio afterwards.
@RS
Amazing.You are the first person I 've come across to use the term social credit,not just with any degree of comprehension but at all.
I have spent some time in the past trying to get MW to adapt his Citizen's Dividend to include Government created new money so it becomes more like Douglas's old National Dividend but no dice.For an economic heretic deep in Georgist unorthodoxy he is disconcertingly strait laced and un rock'n'roll when it comes to the monetary system.

Mark Wadsworth said...

DBC, agreed on your first comment. They worry about reserve ratios after the event.

Sort of agreed on your second, but we are bickering about terminology again. You say 'social credit out of government created new money' and I say 'paying out a tax on bank mortgage lending as a Citizen's Income'.

Only I am being quite specific about how and how much (£30 billion = £500 a year each) and your version might mean Zimbabwe style money printing.

Robin Smith said...

All - maybe we should define terms clearly in the future? "A rose by any other name?"

Would it be better to use the term "collecting the 'rent' (not tax) as the superior form of 'regulation' for the social good?" No matter from where it comes, credit or land?

I'm not comfortable with the phrase that banks 'create' the credit. Isn't it more accurate to say that the are 'releasing' credit already there by virtue of the social system that makes it valuable. Much like a planning authority releases the land value rather than charges for its scarcity. The thought here being that the banks are providing a service and should rightly be paid for that. And that all the rest is a tax(rent) liability. Keen seems to approach this and then skips over it.

Agreed that saving (hording) is not really needed on the whole. Only credit. It feels wrong that you should hoard wealth when it could be better used to create more wealth right away. Indeed it seems silly not to do this. And seems speculative just like holding land vacant. Especially if the CI was in the bank each month and savings become unknown

Mark Wadsworth said...

RS: "Would it be better to use the term "collecting the 'rent' (not tax) as the superior form of 'regulation'?"

Possibly yes.

As to your second and third para's, remember that banks are ultimately just middlemen. I can either invest my money directly in productive capital or reward others for their labour by spending it; or I can lend it to a business directly; or I can entrust it to the bank to on-lend it (and save me the hassle).

We have agreed that the amount of credit or money sloshing round depends on people's desire to borrow - the maximum amount that people can or will save depends largely on this desire.

One thing you cannot do with 'money' is to 'hoard' it. Even if I went the whole hog and kept half a million in coins and notes under my mattress, then that it just an interest free loan to the government and this makes me a bit poorer and everybody else (by definition) a bit wealthier.

DBC Reed said...

Banks are not middlemen.If they were just on-lending savers' money the poor savers accounts would be permanently empty.

Mark Wadsworth said...

DBC, although we are agreed they do not on-lend saver money to create mortgages (they create mortgages first and this automatically creates 'deposits') you still miss a fundamental point:

1. I give bank £100 coins and notes and they credit me with a £100 deposit.

2. The bank lends this to borrower, who takes the £100 and spends it in a shop.

3. The shopkeeper empties his till at the end of the day and puts the £100 coins and notes in the bank.

4. The next day, perhaps I or the shopkeeper want to withdraw some of that money.

5. Perhaps I withdraw £10 and spend it in the same shop. So the coins and notes go back into the bak's vault a few hours later. His deposit balance is now £110 and mine is £90. The bank still has £100 in coins and notes in its vault.

6. Over the course of time, the borrower will earn £100 and repay his loan. Perhaps he is a hairdresser, so over the next few years both the shopkeeper and I will spend £100 at his shop. He too will take the coins and notes back to the bank.

7. By the time his loan is repaid, his loan is £nil and the total of mine and the shopkeeper's deposits will be £100 again, and the bank still has £100 in coins and notes in the vault.

8. And so on ad infinitum.

DBC Reed said...

1 Saver sticks money in bank
2 Borrower takes it out as a loan
with the valuable assistance of bank as middleman.
3Saver goes back to bank says where's my money? Bank says Tough its been lent out.But we'll give you a cheque.Don't worry its not backed by anything,everybody will accept it.
4 Should the cash ever return to the bank that will be lent out too so the saver's money's never there
only that percentage on reserve.Plenty of cheques get generated though.

You just don't accept the standard money multiplier (see Keen) by which banks increase the money supply.
Nationalise the banks ! Nationalise the money supply!
Divide it out equally as a National Dividend determined by the aggregate under-capacity to stimulate demand.
Lets all sing the Green Shirt Anthem! (on Net)

Robin Smith said...

MW sorry for the length of this. I'll buy a round Friday if you manage to get to work. OK I'm gonna take a punt at terminology and credit. Its relevant but at the same time asks more questions.

Imagine an ideal world... we can plug in the corruption later piece by piece and see what happens.

What is money used for? To buy things with. In the end to exchange work for work.

Is money = credit? Yes, just with varying lifetime but it is always money in the end. (Cash, Debit, Credit Card, Long term debt).

What is credit? Work in the course of production and exchange(P&E). Someone else trusts you enough to supply you with their work until you have finished your work, can exchange it and then return all the credit in whatever form they desire(it will be money).

Interest on credit? No! Interest is the return to capital employed by work. And capital does not employ work. Work employs capital.

What is the proper return to credit then? = Simply return the credit from whence it came, no more, no less. The entire community will already have benefited in kind. Logic will appear later.

How much credit do we need? As much work as there is outstanding in the entire network of P&E. It is therefore a social good, with its value created by the entire network. A community created thing for the benefit of the community. I think this might be known as social credit but am not sure.

How do you regulate the amount? I don't know. Govt or Private? I still need help here please.

What is inflation? If there is too much credit. More credit than is needed for work to produce. Deflation is the opposite. We trusted in either too much productive activity or too little. But in a fully functioning economy there can be no such scenario. There would be just enough credit available.

In a growing economy work will be more productive so aggregate credit will increase without inflation. Visa versa for a receeding economy. Economies should normally grow for ever. Not in quantity of production, but quality. There is really no limit to this I can think of, short of becoming etheral beings. And then we will no longer need to work. We will live in stars or something. Credit and money no longer needed .

Imagine no growth or recession. A fixed amount of credit is all that's required.

Imagine no inflation or deflation. The credit system is working perfectly. So this is the result we want? Yes.

So why are there always longer periods of higher inflation, interspersed with shorter and smaller bouts of deflation? Because something is deliberately screwing the system. What might that be?

It cannot be stuff being produced, wealth as capital or consumption goods, as that has an automatic supply and demand and is illimitable. The credit system would just keep adjusting. There will never be a problem with it until people stop wanting stuff. That has never happened in history.

So it must be something that is exchanged, not produced and in fixed supply. No doubt. There is nothing else it can be.

Keen says it is ponzi investors "assets". I say that economic crises are very much more specific and well rooted: ponzi investment in land. Sometimes it appears to be a money problem. But money is just the means of exchange used to buy the land

If any of this sounds commie or nazi, let me know and I'll go and dig out the keys to the gun cabinet.

Mark Wadsworth said...

DBC, this 'money multiplier' is a red herring. Simple fact is, in the grander scheme of things the formula is dead simple:

Total loans = total deposits (plus minus bits and pieces).

That's why I go to the trouble of doing consolidated balance sheets so that you can see for yourself.

Another thing to remember is that coins and notes don't matter! The total value of coins and notes is about 0.1% of all 'money' sloshing around, and it would be quite easy to phase them out altogether.

RS: "How do you regulate the amount [of credit]?"

Firstly, why 'should' we? Having decided 'why', we decide 'how' using various mechanisms:

1. Slap a tax on lending to unproductive uses, like buying land or shares.

2. Expect banks to hold a minimum of 8% of their total assets in cash or near-cash (or whatever percentage you think best).

3. Expect banks to fund themselves to at least 8% with 'own capital' (or whatever percentage you think best, it is a coincidence that 8% seems 'about right' on both sides).

4. Change bankruptcy laws to discourage reckless lending so that the bank takes the loss.

5. LVT to keep land prices down to next to nothing.

6. Allow markets to set interest rates.

7. End implicit or explicit guarantees, subsidies, bail outs etc to banks, as a matter of fact, they hardly ever 'fail' provided there are debt for equity swaps etc.

8. Remove limited liability from senior directors of banks.

9. Ban bank-to-bank lending, like in Canada, Spain and other countries, which has worked very well for them.

10. Further details in Lola's Financial Services Manifesto which has henceforth been adopted as mine. Link further up this thread.

DBC Reed said...

Kinda figured you did n't believe in the standard money multiplier.Strange we have a)any expansion in the money supply at all b)bank runs where the depositors know they're not likely to get their money unless they get there early because there's more depositors than money.Of course the loans and deposits appear equal,the same money is being counted twice as loans and deposits.
Talking of rounds,you owe me a case of something tasty when you realise I'm right.I'll do the same if I start to see things your way .Nominate Jock Coats as adjudicator to speed a resolution.

Robin Smith said...

MW sort of get you on this.

Trouble with regulating a social good that is privatised is a tendency for more corruption than the govt doing it itself internally. Do we really need more evidence of this?

If it must be privatised I'm OK with 1 but it seems like extra work and more complex. So there will be a cart and horse somewhere waiting to drive through it.

2 is unrequired in a national system

3, 4, 5, 7, 8, 9, 10 ditto

6, this would be good but if you remember there is no natural return to the use of credit. Only to capital and the labour that employs it and receives it. And taxing capital is very bad indeed as you know. Read my email for the logic. The mainstream misterm 'interest' on credit confuses from force of habit that credit is capital. Forget it ASAP and things will be easier for you.

So as you can see, as a simplification campaigner, nationalising the making and exchanging of credits is the preferred option.

As an anti-corruption/monopoly campaigner it also wins.

Are you convinced?

Mark Wadsworth said...

DBC, if you prefer to believe the Home-Owner-Ist vanguard like the Bank of England and all their money multiplier mumbo jumbo, feel free to do so. I am quite simply saying that as a matter of fact and logic and observation, loans = deposits (plus/minus bits and pieces).

"Of course the loans and deposits appear equal, the same money is being counted twice as loans and deposits."

From the bank's point of view, the loan is positive, it is an asset; the deposit is negative, it is a liability.

Imagine you are the bank of DBC, a middleman, who takes a £100 deposit from your neighbour on the right and lends £100 straight on to your neighbour on the right.

Your own capital is £nil, you have not become richer from the transaction itself - you become richer from the interest margin because you pay one neighbour £3 interest and charge the other neighbour £5 interest.

I keep telling you to pop to the bookshop and buy yourself a basic text book on bookkeeping. have you done this yet?
---------------
RS, what you are saying is that the government should hand out loans to all who ask for them.

That's exactly what our Home-Owner-Ist governments would love to do - nationalise the banks, force them or pay them to make outrageous loans to first time buyers at low interest rates to keep the house price bubble going, reduce taxes on banks, bail them out etc etc.

And when have I ever said that "credit is capital"? Never, ever, ever. I don't even like the term "capital", to be honest.

Credit is one person thinking he can employ 'money' for a higher rate of return that somebody else who has a bit of spare 'money'. So there is very much a return to the use of credit, which (in a perfect world) is to the mutual benefit of borrower and lender.

So no I am not convinced, not in the slightest. I have slaved for years over my banking manifesto, which happily Lola had arrived at independently and that is the end of that.

Lola said...

Well, thank you DBC, RS and MW for that interesting debate.

I confess to lacking each of your skills at the dialectic. I just worked on what I had seen and suspected. In the same way I'd become an 'Austrian' even before I knew they existed or what they were.

Even though you are clever buggers implementing this manifesto will bring you up against even cleverer buggers in banking who do not have one tenth part of your moral courage.

I'll see you on the barricades - or earlier somewhere in London for a beer. I up there once or twice a month.

DBC Reed said...

Then you get the original money back from the shop where second neighbour spent it.You are going to hang onto it in case first neighbour wants it? Or are you going to hang onto a bit of it in the hope that he won't want it all at once ,and go on to construct a money multiplier like all the standard economics texts say and which you ignore.
This mistake on banking is a flaw in the proposed manifesto.Suggest reference to a dinterested third party.Where's Jock when he's needed? (He 's all over other blogs)

Robin Smith said...

MW what you are saying is that the government should hand out loans to all who ask for them.

Not at all. They are your words. What I am saying is

1) who is the most likely to be corrupted? As we can see, private banks
2) which is the simplest? As we can see, national

Do you require infinite evidence here? Something is clearly blinding you on these observed facts and self evidence. What is that thing? Lets take a look...

You didn't say capital is money but you implied it through your words, without even recognising it. This is common Austrian behaviour. The term used doesnt matter. What does matter is what you mean. Exactly why I went to the trouble of defining it all above. Something critically lacking in your approach. Economists avoid defining terms so that their prejudicial idea can proceed. Its a classic mistake.

Proof? No need to go far. For example you did it again here:
Credit is one person thinking he can employ money

But people don't employ money. Labour employs itself and/or capital, no more. Money is just a means of exchange for what is produced by work. See my point yet? This disease you suffer from is caused by habit of thought. From not defining EXACTLY what you mean before moving on. And then sometimes changing what you mean half way through. Read what I defined above more carefully. You cannot proceed before terms have been defined precisely. Why would you be so afraid of a term if you were confident about it? You either do not like what it means or you are not confident about it. Which?

The return to capital, is called interest proper, and it goes to who employs it with their labour, not the owner. Avoiding this simple fact shows how capital concentrates into monopoly power. Another disease symptom. John Redwood suffers acutely from it. Interest appears as a result of the increased power NATURE gives to the labour that employs capital. Not to the exclusive private owner. This is the land problem all over. More disease from habit of thought.

The return to credit if there even is one, goes to who created it, the community. Just like land. And its rent not interest. This must be paid in kind via the myriad of exchanges in the entire network of production in the form of more effective exchange. It is the beauty and nature of money. It is a natural dividend from a natural law. It is rent. Privatising it must be unjust and unsustainable. Austrians have a real problem with this, just as they do with land. Its about private property again. They are terminally ill.

There is a remedy though, we are all fully aware of what that thing is. Applying it requires a change of mind. Its not the end of that until you can show with logic the manifesto is true unless you enjoy failure. Right now it is full of prejudicial barn doors around what is private property and what is not. Horse and cart? I do not want to live in a fascist state thanks.

There is some way to go yet. This sounds like blow off but not at all. The entire thing is more effort and has more value by a mile than I see on any other forum. It is leading but just has some way to go yet. I'm not perfect either and still learn. I am only certain that we are not there yet.

Mark Wadsworth said...

DBC, I am just saying how things actually work in real life. I just don't see how I can push a debate forward that is based on anything else apart from "what actually happens".

The money multiplier is a convenient myth*. Demand for credit creates credit and deposits follow on from there**.

It is perfectly possible to have a banking system with no "shareholders' funds" at all, i.e. building societies, in which case the 'multiplier' is actually infinity. Or the example where DBC Bank borrows £100 from A and lends it straight to B - your own 'capital' investment in this venture is £nil and any number divided by nil is infinity.

But that does not mean that there will be infinite credit available, i.e. that everybody could borrow £1 million at the drop of a hat, because people don't want to borrow that much.

To cut a long story - the total amount of credit depends on people's willingness to borrow (which in turn depends on their estimate of how much principle + interest repayments they can afford) and has very little to do with how much 'capital' the shareholders are prepared to invest in the bank.

* The fact that banks are expected to finance their activities with a certain small percentage of "shareholders' equity" or to invest a small percentage of their total assets in "cash or near cash" is just to build in a safety cushion.

** Why do non-gold coins and notes exist at all? Because the government ran out of proper money (gold) and wanted to borrow to finance wars and stuff. It cleverly realised it could borrow interest-free by giving people bits of paper or metal instead of borrowing at interest.

Robin Smith said...

Lola

You are welcome. But you are being too modest. The manifesto is a bloody good effort. Keep up the good work.

One thing. Please dont call me clever. I got no O levels, dropped out of school to be a sheet metal worker/welder and take drugs which was fun but stupid. I went to hospital many times to have metal shards removed from my eyeballs because I was stoned while grinding metal. The sparks looked cool though!

One thing we do all do that is alien to the so called clever ... is think. And do not flinch when that thinking delivers an inconvenient truth. This is manifest in this blog generally.

If we can all just keep doing this with discipline, then we can bury the so called clever out of site and move on with our happy lives.

Ciao!

Mark Wadsworth said...

RS: "Proof? No need to go far. For example you did it again here:
Credit is one person thinking he can employ money..."


FFS, please apply commonsense to what I say.

If I start my delivery business but can't afford to buy a van outright, I might rent one instead of buying. I then 'employ' that van in my business.

Or I might work out that it is cheaper borrow money from the bank to buy that van. Or I might go into partnership with a wealthy relative who buys the van and I drive it round and give him a profit share.

Of course I don't 'employ' the money directly, I 'employ' it by buying the things I need to run my business (like a van).

There is no fundamental difference between:
1. Renting a van.
2. Borrowing money to buy a van.
3. Going into partnership with a wealthy relative who buys the van and who receives a commensurate profit share.

In 1. I pay rent for the van,
in 2. I pay 'rent' (or interest) for the money which I 'invest' in the van, and
in 3. I pay my relative a profit share which is approx. equal to the rent or interest I would have been paying. (This is the whole logic behind 'debt for equity swaps').

It doesn't make a huge difference to me whether I do 1, 2 or 3. They are all forms of 'credit' (or else none of them are, which seems unlikely).

Which is another way of saying "Money is just a means of exchange for what is produced by work." Exactly. Where have I ever said otherwise?

You're getting as bad as these Home-Owner-Ists who constantly accuse me of having said things which I never said.
---------------------
"Right now it is full of prejudicial barn doors around what is private property and what is not."

My manifesto makes it quite clear that 'privately owned land' is only 'private property' in the sense that 'it is not physically accessible to the general public'. Go and read it again!

We have discussed this to death already. LVT is compensation to 'the general public' for them respecting your exclusive possession. End of.

Lola said...

RS. Thanks for your response.

Erm, don't wish to antogonise you, but money isn't capital, strictly speaking. We all call it that, I suppose for want of a better word. Money is just a medium of exchange and a store of value over time. We could use anything we like as 'money' and have done so. Cows (i.e rupee), shells, camels, whatever. It's just that over time people (not governments) have evolved the 'money' we use today. Money, like we use today, existed before governments nationalised it. Think of the private mints in te Midlands in the 17th Century.

Loosely, Capital is producer goods and some consumer goods. It's not land and houses. It can be factories. I think this (although it did shimmer a bit in the middle) is sort of at the core of what MW is banging on about.

Lola said...

Serendipitouly I just found this:

http://www.google.co.uk/search?q=history+of+private+mints&hl=en&rls=com.microsoft:en-us:IE-SearchBox&rlz=1I7GGLR_en&prmd=b&tbs=tl:1&tbo=u&ei=k6nOTI_cIZSSjAflhY3YBw&sa=X&oi=timeline_result&ct=title&resnum=11&ved=0CEQQ5wIwCg

Mark Wadsworth said...

L, excellent summary. Completely agreed, except houses (i.e. the buildings themselves, the drainage, mains gas and water pipes etc) are very much 'capital' in the sense you are using it. They have to be built, maintained, insured, heated etc.

'Land' is in its own category, for various reasons.

Lola said...

I agree about 'house' strictly speaking being 'capital'. Trouble is people think this equals 'wealth'. In a sense all houses are a cost, the opportunity cost of having to house workers rather than spend that wealth on production. I mean you could put us all in dormatories at far lower cos (!).

Lola said...

...or even better this link:

http://www.google.co.uk/search?hl=en&rls=com.microsoft%3Aen-us%3AIE-SearchBox&rlz=1I7GGLR_en&tbs=tl%3A1&q=history+of+private+mints+in+England&aq=f&aqi=&aql=&oq=&gs_rfai=

Robin Smith said...

MW FFS start thinking outside the Austrian Matrix envelope first. Funny how the term common sense covers so much un-think

The van owner does not do any work. You do. So you keep all the interest. You return the van in its original condition. We are all happy. This approach prevents the concentration of capital from ever happening. This is what socialists do not get. They too do not think.

If he complains ask him to do the work next time. And then ask him why he expects you to pay him rent on top of the depreciation charge. You just fell into the same trap that you accuse anti-LVT folks.

Labour employs capital. Capital does not employ labour, that is Austrian Matrix thinking and is central to why people think wages are paid from capital. And the biggest fallacy of wage theory since Karl Marx. And just as dangerous. See here for more detail if you have time to think about it.

Why Traditional Theories of Wages Are Wrong

Remember: The capital owner deserves no rent. Interest proper, on capital goes to the worker and producer.

SIMPLE!

Try and snap out of this Austrian thinking. It is false. I have just shown the simple logic. There is no excuse

Mark Wadsworth said...

RS:

"The van owner does not do any work."

Dude, WTF? What about the people who manufactured the van? Do the designers, testers, miners, smelters, production line workers, paint spray people, lorry drivers etc not "do any work"? Of course they do, and they have to be paid for it, by selling the van. Whether they sell it to the car hire company, the driver himself or to the driver's wealthy relative is neither here nor there.

"You return the van in its original condition."

No you don't.

"Labour employs capital."

Correct. Our delivery driver uses (or 'employs') the van.

"The capital owner deserves no rent. Interest proper, on capital goes to the worker and producer."

Again, WTF? The gross income of the driver is shared betweeen him (who gets the bulk); the factory that made the van (about a fifth); and the rent, interest or profit share (a very small percentage) goes to the hire company, the bank or the wealthy relative for smoothing the wheels.

If you hate the idea of their being 'an owner' then consider this: Option 4 is that the manufacturer and driver cut out the middleman, and they rent the van directly to him. No doubt the manufacturer will expect a total cash income that is slightly higher than selling him the van for cash to make up for time value of money/risk element etc.