Fallacies about the banks

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Noa Rodman
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Apr 8 2017 15:25

I already mentioned Keen (linked an interview where he apparently tried to reject 100% reserve by arguing that if the bank would lend out the money of someone else's deposit to you, and then that someone else wants to withdraw money, how can the bank give that money to them, since it is still lend out to you...)

Anarcho wrote:
the notion that banks hold gold/money and loan that

That notion is correct.

(btw on gold, since 2011 JP Morgan accepts it as collateral "to satisfy securities lending and repurchase obligations with counterparties")

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Noa Rodman
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Apr 13 2017 08:47

Again, there's no single clear understanding of the claim (by post-Keynesians et al.) that banks create money out of nothing.

For example Varoufakis in a talk referred to Certificates of Deposit (CDs). So in this specific case CDs are said to be money created by banks. But if we look at a basic definition of a CD we read:

Quote:
To buy a CD, customers agree to deposit their money for a specified period of time. The shortest timeframe is usually one month, with the longest running up to five years.

In return for committing their money for a period of time, the customer earns interest. The interest rates are pre-determined by the institution, and typically remain fixed over the length of the CD - though some institutions may offer CDs whose rates can increase. The longer the length of the CD, typically the higher the interest rate paid.

When the CD's time period is complete, a CD is said to “mature.” Shortly before this, the institution will notify the customer, offering them the option to either withdraw the money with interest earned, or re-invest the money for another period.

http://www.investopedia.com/video/play/certificate-deposit-cd/

So when a bank issues a CD, it does not at all create money out of nothing, but on the contrary borrows money from customers in order to use it, which otherwise would be sitting idle (in the customer's pocket). The same as with ordinary bank accounts.

Quote:
CDs pay slightly higher rates than savings and checking accounts because the customer commits to not withdrawing their money for a specified period of time - whereas money in savings and checking accounts is able to be withdrawn at any time.

petey
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Apr 13 2017 14:56

someone thought CDs are money created by banks?
depositors deposit money in savings accounts; a CD is a larger than average savings deposit, for a fixed period under penalty of early withdrawal, in return for which predictability there is higher interest paid. the bank doesn't "issue" a CD, the depositor opens one.

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Noa Rodman
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Apr 13 2017 18:28

seems I inexactly understood the remark (at min. 50) in Varoufakis' lecture, he actually said collateralized debt obligation (CDOs), not CDs. But my point stands that it is sowing confusion to equate such instruments to money:

Varoufakis wrote:
[Hayek] argued in favor of private money and what was his idea? that anybody should be able to issue currency and let currencies, different currencies issued by you, me, the University of Berkeley of California, the Bank of America, Apple, whoever wants to issue currency, let those currencies compete against each other
... now Hayek unbeknownst to him and in a way that he'd not have appreciated, was very prophetic: by the late 1990s we had private money, they were called CDO's and CDO-squares and ABSs and all these toxic derivatives that Wall Street produced, what were these derivatives? They were means of exchange and stores of value, that Lehman Brothers and JP
Morgan and Goldman Sachs were producing and procuring without any regulation, and still that money reached 750 billion dollars inside the West's banks, and it's the money that burnt out in 2008, and of course Main Street had to bail them out.

Spikymike
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Aug 26 2019 15:55

Since Noa has re-appeared elsewhere to offer some criticism of one related aspect of a recent CWO book review it's worth mentioning this more concise critical summary of various misunderstandings and errors by the likes of 'Positive Money' a good few modern capitalist economists as well:
https://www.worldsocialism.org/spgb/pamphlet/the-magic-money-myth/
You still need some patience to follow through and understand the different terminology but it's worth it.

Anarcho
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Aug 31 2019 21:14
Noa Rodman wrote:
Anarcho wrote:
the notion that banks hold gold/money and loan that

That notion is correct.

It really is not. I would suggest reading some post-Keynesian economic theory -- particularly the empricial evidence used to support their argument.