Beyond “Money as debt”7-The need for bubbles

February 15, 2009

Part 7

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Beyond “Money as debt”6-Bank runs

February 15, 2009

Part6

Here’s the “text to speech” text and I should very much appreciate corrections in grammar and other issues concerning the language – since English is not my native language. Feel free to come with pedagogical remarks as well – where I’ve been to vague and so on. This is meant as an outline so I’m opened for suggestions.

Please refer to the number you think should be altered. It will be an easy thing to correct and replace it in the “text to speech” engine and put it back into the video.

1) So the bank reserves are the the base from which the banks expands credit. The bank has promised to pay the depositors multiple times the amount the banks have as reserves – the so called leverage. Note that the deposits are NOT money! They are only claims the depositors have on the bank on money. The only way for a depositor to receive full payment on your claim on the bank is to withdraw physical cash.

2) What will happen if many depositors withdraw their cash? The answer is of course that the banks reserves fast will be depleted. This is called bank run and is the banks worst nightmare.

3) The banks can solve this, as we already have seen , by interbank lending other banks surpluses of bank reserves. But if depositors withdraw cash from several or all of the banks the central bank needs to step in and inject cash into the system in order to restore the banks reserves.

4) So bank runs will pull off the foundation for the banks credit creation and the pyramid scheme fall when people withdraw their cash.


What will happen if people withdraw their cash from the banks?

February 3, 2009

dollar_ras2

Here’s another one. Will also be used in the film.  Showing what will happen to the banks if people withdraw their cash. The green dollar sign represent cash and the gray represent credit created from out of cash by the banks.

Here’s a smaller version if you want to download and use it.

dollar_ras32

And an even smaller:

dollar_ras4

And a tiny one

dollar_ras6

They almost form a new triangle together.


Money meltdown

February 2, 2009

money meltdown

Will be used in the film. Here’s a smaller version if you want to download and use it. Showing how the banks computer credit is melting down.

Money meltdown


Beyond “Money as debt”3

February 1, 2009

I made this video as a starting point in explaining the how banks creates money (or more accurately credit) and correct some misconceptions in the video “Money as debt”. I would like to have feedback and proposals on how to improve it The voice in the video is made by a “text to speech” engine and should be replaced by a more pleasant voice (is there anyone that wants to do it voluntarily? When the text is finally edited?)

Most of this is based on a blogg written by “Sunda pengar” and in particular his excellent blogg dealing with Basel 2:

Here’s the “text to speech” text and I should very much appreciate corrections in grammar and other issues concerning the language – since English is not my native language. Feel free to come with pedagogical remarks as well – where I’ve been to vague and so on. This is meant as an outline so I’m opened for suggestions.

Please refer to the number you think should be altered. It will be an easy thing to correct and replace it in the “text to speech” engine and put it back into the video.
1)

Let’s say Paul is buying a house from Kate for 500000 dollar.

2)

The banks then use a portion of their reserves and in order to expand their balance sheet. Note that the proportions are grossly exaggerated : in reality a very small portion of the banks reserves are needed in order to create the loan.

3)

The banks then expand their balance sheet on both sides with 500000 dollar. Paul will get a 500000 dollar loan, which the bank register as an asset and Kates will get 500000 on her deposit on the other side of the balance sheet, which the bank will register as an liability. Note that no deposits are used in the process. The bank just expand the balance sheet on both sides based on a portion of their bank reserves.

4)

Now let’s say Paul and Kate fall in love and get married. Kate pays off Paul’s loan with her 500000 dollar and the money, or more accurately credit, will cease to exist.

5)

Both the banks liabilities and assets will then shrink simultaneously on both side on the banks balance sheet.

6)

This will also free up the portion the bank used of it’s reserves, which then can be reused.

Note again that no deposits are used in the process.


Beyond “Money as debt”2

January 31, 2009

Here’s the second part.As before:

I would like to have feedback and proposals on how to improve it The voice in the video is made by a “text to speech” engine and should be replaced by a more pleasant voice (is there anyone that wants to do it voluntarily? When the text is finally edited?)

Most of this is based on a blogg written by “Sunda pengar” and in particular his excellent blogg dealing with Basel 2:

Here’s the “text to speech” text and I should very much appreciate corrections in grammar and other issues concerning the language – since English is not my native language. Feel free to come with pedagogical remarks as well – where I’ve been to vague and so on. This is meant as an outline so I’m opened for suggestions.

Please refer to the number you think should be altered. It will be an easy thing to correct and replace it in the “text to speech” engine and put it back into the video.

1)

Another misconception is that banks transfer money directly between themselves. It’s commonly believed and perhaps according to the publics intuition that one bank send over the money directly to another bank in transactions between the banks. But the only time this occur is when a customer of his or her bank take physical cash out from his or hers deposit and walks over to the other bank and hand it over to another bank. But even then central banks money also known as bank reserves , in the form of cash, is used.

In all other instances the process is as follows:

2)

Lets say that a customers transfer 1000 dollar from one bank to the other through Internet. The 1000 dollar is then taken from the banks reserves and transfered to the other banks reserves through the central banks clearing system. The bank sending the money will decrease their reserves by 1000 dollar and the receiving bank increase their reserves with 1000 dollar. Note that nothing is changed in the banks balance sheets.

3)

But the first banks reserves have now shrank below the reserve requirement for the bank so it will have yo lend some central bank money back from, for instance, the bank that received the 1000 dollar, since this bank now have a surplus of central bank money. The second bank can then lend back the money to the first bank at an interest, the so called LIBOR rate, and restore the first banks reserves. So banks coordinate their transactions between them selfs through their reserves via the central banks clearing function. The process is called interbank lending.

Again: note that the balance sheets of neither banks are touched.

4)

But what if the second bank don’t want or can’t lend back the money to the first bank?

5) The central bank can then step in an lend money to the bank with a deficit in their bank reserves. This is done by something call repurchase agreement, also known as repo. This repo also has an interest an is an instrument for the central bank to control the banks reserves and hence the banks interest and credit expansion.