[P2P-F] Fw: The Credit Creation Controversy......A Need For A Resolution..?

[robert searle]

----- Forwarded Message --


The following comes from myself and Facebook of all places, but exposes an important area of controversy that needs to see the light of day more, and more.It revolves around HOW exactly banks create new money. There are two basic versions..

i) "Old " Fractional Reserve Banking.

This is the idea that banks create new money as repayable loans based on a small fraction of their reserves. In other words, they create more money than they have which when paid off is said to be deleted otherwise it could be seen as fraud. This scenario is accepted by many experts, and textbooks, and the detail may vary. 

ii) "Modern" Credit Creation.

This is the notion that banks do not create more new money than they have, and may quickly back it up notably by a loan from other banks, or the Central Bank. Unlike Fractional Reserve Banking the books are properly balanced.This is espoused by Chris Cook who describes it as follows....(ref  Heterodox Economics FB)


.

I go in to the bank for a loan of $1,000.

It creates the $1,000 as virtual money and deposits this virtual cash in my account at the same instant.

So - intraday - it is holding a demand 'cash' deposit for me on the one hand, and I am now a debtor to the bank on the other hand for a defined loan period. But your cash deposit is not a 'loan' to the bank, who is merely acting as custodian for you in respect of it at this point.

The bank's books are now unbalanced, because an undated demand deposit is not an accounting liability of the same type as a dated loan to the bank from a retail depositor, or another bank.

The bank must therefore seek out and obtain the necessary dated loans (known as 'term deposits'), typically overnight or weekly term, to balance its credit and debt obligations. The necessary ultra short term deposits come from other banks, and from the central bank.

The bank then continues to hold the demand deposit to your order until you give it instructions to transfer some or all of it by lending or spending it.

Every night there is a 'clearing run' carried out at the central bank at which all of the day's payment transactions are cleared and a net balance is transferred. 

eg if Bank A is due to pay Bank B $1500, and Bank B is due to pay Bank A $500,then only the net $1000 is transferred from A to B. 
about an hour ago

Elsewhere on the FB Heterodox Economics site he says the following, and presents three references for consideration....

.............As J A Wheeler put it, Reality is defined by the questions you put to it.

I think the problem is that Economics as practised is an ideological distortion of reality. The reason why I have taken such time and trouble to analyse and understand the reality of money creation is that the general misconception as to the relationship between credit and money is completely and fundamentally crucial.

The entire body of Keynesian, Neoclassical and Austrian economics is invalidated by this misconception.

I have written to the authors of the new book referred to - most of whom I know personally - complimenting them on an admirably clear exposition of the UK system, and pointing out exactly why and how their assumption as to the accounting polarity of bank credit is diametrically wrong.

These articles of mine in Asia Times covered the subject

http://www.atimes.com/atimes/Global_Economy/MG27Dj02.html

http://www.atimes.com/atimes/Global_Economy/MH04Dj02.html

No-one has yet demonstrated that my analysis of the banking system is incorrect, and most people are in agreement that this analysis of the relationship between the Treasury and the Central Bank is accurate. 
Asia Times Online :: A very secret agent www.atimes.com 
Asia Times Online. The Asia News Hub providing the latest news and analysis rega...rding economics, events and trends in business, economy and politics throughout Asia.
 
 The Following Points Should Be Made...
 

a) Chris Cook gives three references in the above.. But they are all articles by himself, and only gives one "credible" reference to back up his credit creation claim!!! To be fair on FB he gave a Wikipedia ref on FB which does not explain much (ie.it makes a technical subject overly technical, or complex, and hence, "incomprehensible" to most non-initiates).

b)  It maybe a good idea to find how credit creation really works with the help of solicitors specialising in  banking law. 

c) Even the trade organizations might be willing to "divulge" how it "really" works..but ofcourse top bankers can be notoriously secretive about such matters..or express what they do in an "incomprehensible" language..

d) A book called Modern Money Mechanics was published by the Federal Reserve Bank of Chicago which seemed to support the "old" fractional reserve system. This was pounced as being "authorative" and relevant by monetary reformers including Ellen Brown.
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