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

February 15, 2009

Part 7


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.


Beyond “Money as debt”5

February 6, 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.

Film 5

1)

The formula is as follows.

The size of the loan * (Capital Adequacy Ratio * Risk weight) = needed capital base,

  1. Let the loan be L

    Let Capital Adequacy Ratio (CAR) be C.

    Let Risk weight be R.

    Let needed capital base be N.

3)

Then the the formula can be written as:
L*C*R=N.

We see immediately that if the Risk R is 0 then the Needed capital N is also 0 and the bank can hence create an arbitrary large loan based on no capital what so ever.

4)

In order to get the formula for how large loan L the bank can create on an given portion of there reserves, we only need to rearrange the formula a bit

5)

And again we see that if the risk weight goes to 0 the bank will be abe to create an arbitrary large loan based on a arbitrary small capital base.

6)

This means, since loans to municipalities and states have the risk weight 0 , that loans municipalities and states are basically created from thin air and the taxpayer are paying the banks interest and amortizations on these “loan”.

The philosophical discussion if a loan can be seen as a loan if it’s created out of nothing is something we leave to the viewer to judge.

7)

Some of the actual risk weights for different loan categories in Sweden in accordance with Basel 2. Their might be some minor variations in other countries following Basel 2.


Debt handcuffs

February 5, 2009

Debt handcuffs

Will be used in the film. Showing how debt as cumputer ones and zeros makes debt slaves of us and how the meltdown can be a start for a better system.


Beyond “Money as debt”4

February 3, 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)

So the banks takes  portions of their bank reserves and multiplies it with a factor depending on different borrowers. The multiplier can  be from 10 times to almost infinity.
We will skip the math this time but it’s actually very simple.

Let us instead take a look on how a banks balance sheet with different sorts of borrowers. How high the multiplier varies  for different borrowers within the same group but we will assume an average.

2)
Funds can be one sort of borrowers .
Note that a portion of the bank reserves are multiplied and create a multiple times more credit.
Note that this credit is created from nothing, backed only by the small portion of the banks reserves.

3)
Households can use another portion that is multiplied with another factor.

4)
Households with security a third

5)
Companies can be a fourth

6)

You might think that the bank now almost have taken all of their reserves and ballooned them up and that their ability to lend has reached it’s limits.

But banks can use this small portion left and lend to municipalities and states with an extreme multiplier.

7)
As a matter of fact banks don’t even  have to have any bank reserves what so ever in order to lend to municipalities and states according to the Basel  2 accord .

I will repetae that! Banks don’t need any bank reserves what so ever in order to lend to municipalities and states.

9)
Contemplate the consequences of this. The tax you are paying is going to banks that created them from absolutely nothing!


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”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.