Cyprus-Forum.com

[erolz66]

1) So, am I correct in saying that repayment is required to keep the books straight but that the bank actually has no obligation or liability to repay that amount to another physical entity? i.e. a person, company or another bank.

This is not how I understand it. When the created money leaves the bank - either as a transfer to another bank account or if I draw it as cash, then the lending bank is liable. If it is a transfer to another bank account then the liability is between the lending bank and the bank it is transferred to - via the 'clearing' system. So for example if the only transaction between Lloyds bank and Barclays on a given day is the transfer of £500 of lent (created by Lloyds) money from a Lloyds customers to a Barclay's customer, then Lloyds bank reserve account with central bank deceases by £500 and Barclay's increases by £ 500. If this means Lloyds does not have enough money in its reserve account to meet all that days clearing liabilities with other banks, then they must borrow (or buy in exchange for assets) such reserve account money either from other banks that have excess or from the central bank itself. So Lloyds does have a liability when it creates the £500 loan - at least as I understand it. Similar if I draw the £500 in cash. Ultimately Lloyds has to buy such cash from the central bank at face value. If it does not already have £500 on hand in cash to give to me it must buy it from the central bank for £500.

From what I have read from credible sources - these then is the real practical limit on how much money a bank can create and lend (not capital adequacy ratios) - how much liquidity it has in it's central bank reserve account used to 'clear' payments between itself and other banks on a daily basis. What happened post 2008 is banks with excess liquidity in their reserve accounts stop lending it to other banks with too little in their theirs, meaning they then has no option but to buy or borrow more reserve account money from the central bank.

2) Am I also correct in saying If the loan amount is not repaid the amount of new money remains in circulation ad infinitum. In which case in Law the bank has committed a crime? It has ‘printed’ currency which is specifically prohibited under the Bank Charter Act of 1844.

Am less sure about this. I think money created by giving credit to someone who then does not pay back that loan, remains on the lending banks books / accounts until such time as they 'write it down' - which as I understand it is them effectively having to themselves pay back the money they created from their own funds, in order for it to be destroyed and cease to exist again.

Banks can create money from nothing by giving loans but only for 'other people'. They can not create money for themselves in this way - that really would be fraud and a licensee to print money. They do therefore carry risk when they create money for other people as ledger entries. The risk is that the money does not get repaid and they in turn become liable for it and they can not just 'ledger entry' it back out of existence. They have to actually pay for it with their own money.

[erolz66]

1) Which of course is my argument, that it should be the State not Private Commercial banks, that create new money. The banks would operate as they do now but would become borrowers from the State to provide personal/business loans, but the State would fund itself with its own debt free and interest free currency as an investment rather than a loan. ( What this would do would be to break the spiralling debt. i.e. ‘Corbynomics’ take to the ultimate level!)

This is as I understand it the 'crux' of the problem with the current system. Now we are in an economic environment where the valid role of creating new money is almost entirely in the hands of private banks, we end up in situations when they create too much when it would be better for society to for them to create less and too little when it would be better for society to create more. In addition they tend to create it for people for 'risky' but potentially economically boosting activities, like say building NEW houses, when the economy is already booming and such loans just feed bubbles and when these bubbles burst and the economy/society actually needs such 'risky' investment the most they are less likely to lend to people building new houses but lend it to those seeking to buy existing houses, which does little to boost economic activity at the very time it is needed most.

In essence they try and make as much hay when the sun is shining and tighten their belts (reduce lending in total and aim it to safer but less potentially economy boosting activities, meaning make less profit) when the Strom clouds start. This is actually the opposite of what society needs - it actually needs those who create money to 'worry' when the sun is shining (worry that they are boosting the next bubble) and lend freely and riskily when there are storm clouds around (to boost economic activity that will bring back the sun shine economically). When they create 97% of all money in such ways boom and bust is inevitable.

Having said that I do understand the concerns of the idea that 'government' should therefore take back control of the creation of money. As bad as private banks are in meeting this valid and needed function it is not obvious to me that government would in fact be any better.

[Robin Hood]

Erolz66:

This is not how I understand it. .........etc.etc. ......................... at least as I understand it. Similar if I draw the £500 in cash. Ultimately Lloyds has to buy such cash from the central bank at face value. If it does not already have £500 on hand in cash to give to me it must buy it from the central bank for £500.

I honestly have no idea whether you are right or wrong .................. I assume we are talking here about private (personal ) debt, not government debt?

I was thinking more about the liability to repay the originally created debt/loan, if the borrower defaults. I am also assuming that the collateral is not available ...... i.e. the buyer lodged their sales contact before the developer took out the loan and the developer has disappeared.

If we accept that a bank creates new money by making a loan and that loan is written off when the debt is repaid ..... the net sum is zero What was originally created, has been taken out of circulation .... it has been destroyed. If what you are saying is valid then the money supply would never expand because the bank would have to write of any default debt out of its profits. If collateral is available it is sold and also writes off the loan. That scenario does not seem to reflect what the records show.

Am less sure about this. I think money created by giving credit to someone who then does not pay back that loan, remains on the lending banks books / accounts until such time as they 'write it down' - which as I understand it is them effectively having to themselves pay back the money they created from their own funds, in order for it to be destroyed and cease to exist again.

The debt is on the books but the created currency is in circulation because the only way it can be recovered is by recovering it, crediting it to the loan account to write of the debt.

It truly seems incredible to me that a bank would deplete its profits just to write off a debt on the books. It is tantamount to burning bundles of bank notes just to keep the banks books straight. Again, if they did this the money supply would never grow. Looked at in the extreme if all debts are repaid ......... 98% of the money disappears from circulation.

Banks can create money from nothing by giving loans but only for 'other people'. They can not create money for themselves in this way - that really would be fraud and a licensee to print money. They do therefore carry risk when they create money for other people as ledger entries. The risk is that the money does not get repaid and they in turn become liable for it and they cannot just 'ledger entry' it back out of existence. They have to actually pay for it with their own money.

That would seem logical. They have to lend ........ without lending the banks will collapse! But they are not lending, at least not very much, to the wealth creators; it is, in the main going into assets by the bank giving mortgages on existing property, buying bonds from pension funds and from other financial institutions such as insurance companies. This does not create wealth it causes bubbles and they have a habit of bursting, Cheap money has definitely been the primary causes of these bubbles.

Bonds, shares and property prices are at an all time high, as is private debt! (at least in the US/UK) I heard on the radio that companies now use their own money to buy back shares, that then increase in value because computers see the buying and up the value due to ‘demand’. They don’t borrow from banks they create their own money by buying and selling their own shares.

I find the whole financial system bizarre .............. and they do not directly create wealth, only on paper.

[Robin Hood]

Erolz66:

This is as I understand it the 'crux' of the problem with the current system. Now we are in an economic environment where the valid role of creating new money is almost entirely in the hands of private banks, we end up in situations when they create too much when it would be better for society to for them to create less and too little when it would be better for society to create more. In addition they tend to create it for people for 'risky' but potentially economically boosting activities, like say building NEW houses, when the economy is already booming and such loans just feed bubbles and when these bubbles burst and the economy/society actually needs such 'risky' investment the most they are less likely to lend to people building new houses but lend it to those seeking to buy existing houses, which does little to boost economic activity at the very time it is needed most.

I agree with you completely.

In essence they try and make as much hay when the sun is shining and tighten their belts (reduce lending in total and aim it to safer but less potentially economy boosting activities, meaning make less profit) when the Storm clouds start. This is actually the opposite of what society needs - it actually needs those who create money to 'worry' when the sun is shining (worry that they are boosting the next bubble) and lend freely and riskily when there are storm clouds around (to boost economic activity that will bring back the sun shine economically). When they create 97% of all money in such ways boom and bust is inevitable.

I once had a banker described to me as: ‘Someone that will lend you an umbrella when the sun is shining but wants it back when it starts raining!’ Again I agree with you.

Having said that, I do understand the concerns of the idea that 'government' should therefore take back control of the creation of money. As bad as private banks are in meeting this valid and needed function it is not obvious to me that government would in fact be any better.

But you trust the BoE now and their involvement would remain as it is now! They would remain the controlling factor, not the Government. The Treasury and the BoE would be opposite sides of the same coin.

Effectively the money the Government requires would be funded from collected taxes not by willy-nilly throwing money at the government. The provision of greater sums would be to boost Government expenditure on capital projects, to boost the economy by creating more jobs. The taxes collected would increase, the Government would be able to spend more on education and health ....... and all because it was no longer paying back loans to banks at interest.

This what was supposed to happen with QE but that was just money down the drain as 98% of the money created was given to the banks to lend ..... which they did ......but not to the wealth creators. Almost all of went into boosting asset values.

There are countries where this, or similar scenarios work! Norway being one and another being Monaco. The two things they both have in common is, no external debt, which means they live within their means and do not have to borrow, and both have their own sovereign currency. I am sure there are others but I can’t be bothered to search for them!

I see no apparent reason why the BoE creating money, instead of private commercial banks, would in any way effect the normal capitalist society or be a threat to entrepreneurs ...... in fact it would be exactly the opposite. A buoyant economy would provide greater opportunities. This fear that it would be like communism is ill founded!

It would however allow for a more social society as austerity would be a thing of the past. The rich would still be rich but the poor would see a light at the end of the tunnel and their lifestyle would improve as more jobs came onto the market...... a bit like it was in the 50’s and 60’s in the UK..... when there was nothing to stop anyone, even the relatively poor, from owning their own house, having a car and a telephone. Jobs were far more secure and it was possible to plan the future.

Very little would change, except that we would see Government debt disappear as they would have access to debt free finance and no interest to pay the banks. You would even be able to write down Government debt in a very short time.

This is why I quite admire Corbyn because I think he knows what the benefits would be. However, whilst he may see the benefits of having ALL government expenditure funded this way, I am sure if he called attention to himself (like Trump) he would meet with a tragic accident or sudden fatal illness within a few days of him suggesting it. That is the biggest problem ..... the banks have been allowed to become too powerful and of course Bankers (the 0.01%) far too wealthy ........... then ask yourself who would lose?

A Banker would end up about as important in society as a hair dresser!

[Pyrpolizer]

I have a credit card with the co-operative bank in the UK, with a 12,500 credit limit that is not secured against any specific collateral.

The collateral in this case is your own flesh and blood and whatever comes with you as assets. You must worth more than that erolz...You probably have a life insurance as well

If I refuse or am unable to pay back my CC debt to this bank and I am forced into bankruptcy there is a chance the bank can get it's money back against any assets that I may have. However they will be behind any and all creditors who have given me secured loans against my assets. The possibility is very real that when all my assets are sold (in a fire sale manner) and all my liabilities added up, that there is in fact more liability than asset - in which case the co op bank gets sweet FA. The Co op bank lent me this money in the belief / optimism that this would not happen, not in the knowledge as fact that they could always get their money back against assets I have in the event I stop paying.

Firstly you have to apply for that and they would check on you before approving your application. They would even use the services of credit reference agencies. So they would initially have a good idea of how trustworthy you are. Notice you have to make monthly payments.Therefore they would be among the first to know something's going bad with you when you are not paying.
As long as you are alive and as long you don't get totally bankrupt/jobless they would chase you and drag you to courts until you pay what's due to them. So the collateral is your own flesh and blood, the mere fact that you exist and you are alive. as for your other creditors who gave you loans by taking your assets as security the courts would ask for liquidation and each of your creditors would get his share.


From their web site:
http://www.co-operativebank.co.uk/credi ... redit-card

What are the primary consequences of not
keeping up with my repayments?
Missed or late payments could have a severe impact
on your finances, including making obtaining credit
more difficult as we report non-payment to the credit
reference agencies. Ultimately it may lead to us or a
third party debt collector bringing legal action against
you to recover the debt.
Failing to pay your minimum payment on or by the
relevant due date will be a breach of your agreement.
You will be charged interest on late payments at your
product’s interest rate and may also incur fees such
as a late payment charge of £12 or an unpaid Direct
Debit charge of £12. Where you fail to pay your
minimum payment the total of your debt will increase.

At today's conditions charges look too high to me

3. Costs of the credit
The rates of interest which apply to the credit agreement. Initial rates
The initial interest rates set out below are fixed for the period of three years from account
opening
Purchases 6.9% per annum (fixed)
Balance Transfers 6.9% per annum (fixed)
Cash transactions 25.9% per annum (fixed)
At the expiry of the fixed rate period for the initial interest rates, the following variable
rates will apply
Purchases 15.9% per annum (variable)
Balance Transfers 15.9% per annum (variable)
Cash 25.9% per annum (variable)
Interest is calculated using the interest rate applying as at the statement date. Interest is
calculated on the daily balance since the date of your last statement to the date of your
present statement, taking into account any payments and/or refunds that have been
made or received.
Except where any interest rates are stated to be fixed, all interest rates are variable.
The reasons we may vary them will be set out in your agreement. Where a change is to
your advantage we will give you prior written notice of the change. Otherwise we will give
you at least 30 days’ written notice.

[Pyrpolizer]

As Erol has pointed out to you ........ he has extended credit of up to £12.5K! To get that, no collateral is asked for ...... they don’t even want to know what your salary is, or the value of your property or the level of the outstanding debt.
.

What?
Have you looked at their application form? Furthermore the credit is not that big in fact it looks like Erolz got the maximum possible. These are just facilities for the middle class working people with rather guaranteed income.
Notice that similar schemes exist in Cyprus. Usually approved for the Public Servants and Bank employees.

[erolz66]

Firstly you have to apply for that and they would check on you before approving your application. They would even use the services of credit reference agencies. So they would initially have a good idea of how trustworthy you are. Notice you have to make monthly payments.Therefore they would be among the first to know something's going bad with you when you are not paying.
As long as you are alive and as long you don't get totally bankrupt/jobless they would chase you and drag you to courts until you pay what's due to them. So the collateral is your own flesh and blood, the mere fact that you exist and you are alive. as for your other creditors who gave you loans by taking your assets as security the courts would ask for liquidation and each of your creditors would get his share.

To be honest I have lost track of what we are 'arguing' about here. I gave the example of my credit card in response to Paphitis saying

You go and tell a Bank to give you a CREDIT if you got no Collateral and come back and tell us how you get on.

The bank did give me £12,500 and without any requirement for collateral. The requirements were I was over 21, could show an income of £15,000 or more pa and already had a credit card. That was it. Yes I was credit checked and because I had a history of paying my debts previously I was accepted. However the idea that because I had paid my debts previously it meant there was no chance I would do so in the future is a dangerous assumption. Barings Bank paid all their debts for hundreds of years - right up until the point when they did not. As with Lehman brothers. The point is 'collateral' was never relevant at all - if I owned a house and if so how much was paid off, not relevant. If I owned shares or car or other assets - not relevant. All that was relevant at that time was my income and my track record of debt paying previously. That is what I was saying in response to what Paphitis said above.

That they were prepared to lend me such large sums without any specific collateral securing that loan - and all at a rate of 'base rate for life' + £120 annual fee (£10pm) was a reflection of how 'optimistic' they were about the future (based on the same dangerous assumption that the economy had been steadily growing for a number of years previously and thus most likely would continue to do so going forward in a similar manner, which it did, right up till the point when it did not.). If I had tried to get the same deal post 2008 from the same bank on the same conditions I would not have been able to - they ended the whole 'base rate for life + small annual fee' deal exactly when their 'optimism' about the future economic outlook turned in to pessimism and fear. Indeed I almost certainly could not have got a CC from them with £12,500 limit at any interest rate without income far in excess of the £15,000 they required pre 2008.

The point for me is, when these people behaving in these ways also end up being the primary means by which money is created, we have a problem. The problem being that such behaviour by the only people who can create money supply will inevitably lead to boom bust cycles and to them essentially doing the wrong thing for the needs of society as a whole - creating too much new money when times are good, thus feeding bubbles and creating too little when those bubbles burst and times are bad , thus extending and prolonging downturns.

[erolz66]

Furthermore the credit is not that big in fact it looks like Erolz got the maximum possible.

Actually I originally took out the credit card with a limit I think of £9,000. I did so at that time because I was looking to borrow money to buy a car and this CC deal worked out as the cheapest means for me to do so. It was cheaper than an unsecured loan from my own bank. Cheaper even than a specific car loan that would take the purchased car as collateral. On their website the APR on this CC deal looked terrible, because of the way APR was calculated - basically assumed only borrowing £100 - so the flat fee of £120 added to that made the overall APR rate something like 27%. But I did not want to just borrow £100, I actually wanted to borrow £9000 so adding the £120 annual fee to that borrowing at base rate made it the cheapest loan I could get. As the base rate fell to 0.5 it makes it cheaper borrowing than the Bank themselves can get ! As soon as I used near to max on the original limit (and pre 2008), the bank automatically increased the credit limit ever upwards, without even telling me. The kept doing this right up until the point that they suddenly changed their mind about how 'optimistic' they were about the future. At that point in time the limit was on my card was £12,500 (actually having just looked at my statement its 12,300). However if they had of remained optimistic then the level would have kept ever-increasing as I continued to use it and pay the monthly interest fees. My brother has the same card, he was the one who suggested it to me when I was looking for a car loan. His card had been upped to a limit of 21k pre 2008 (from him previously using up to his limit but then subsequently paying back large chucks) but come the crash he was only using around 7k of that 21K and within a very short period of time the bank had reduced his credit limit to match what he had actually used - ie DOWN to the 7K. If I were to pay of 5k on my credit card tomorrow they would move my credit limit down as well by 5K. Now they are pessimistic about the future they do not want to be lending me £12,500 at base rat + 120pa fee at all - especially since base rate has been 0.5% for many many years now. Which is why I do NOT pay off what I could - I re use up to my limit as soon as I make a min payment each month to stop them taking away this credit.

Again the point is the willingness and behaviour of the Bank in regard to how much credit they were willing to lend to me (unsecured in this case) was and is totally a function of how 'optimistic' they are in regards to the future. This is to my mind a problem when such lending is the only / near only way that money supply is controlled given how important money supply is to all our lives and futures.

These are just facilities for the middle class working people with rather guaranteed income.

There was nothing 'guaranteed' about my income. In fact I came close to not having sufficient income to support that CC debt directly as a result of the crash of 2008 - the very thing that also made the bank not want to lend me the money any more but found itself contractually obliged too (as long as I stopped them whittling it away by reducing the credit limit by salami slices).

From my last Credit Card statement

Current Balance £12261.08

Total interest for that month £4.64
Monthly fee - £10

Total effective interest rate including monthly fee - approx 1.5% !

[Pyrpolizer]

To be honest I have lost track of what we are 'arguing' about here. I gave the example of my credit card in response to Paphitis saying "You go and tell a Bank to give you a CREDIT if you got no Collateral and come back and tell us how you get on."The bank did give me £12,500 and without any requirement for collateral.

My point was that their security/collateral was your very existence as a living human being.The fact that the precondition was to have a minimum annual income meant you had a value that could be used as collateral for some small CC loans, just like a piece of land would. The only difference between you and a piece of land is that you are a money producing machine, whereas the piece of land has some fixed money value. A lemon tree that produces nothing every year cannot be used as collateral since it has no value, whereas a tree that produces 1 ton of lemons/year has a value that can be used as collateral.
Mind the fact that the Mafia gives loans to people as well. Now you tell me what is the collateral/ their security for that.
You may say the have nothing tangible to get their money back, I say they have YOU alive and kicking that they would drag to courts until they get it.
May sound too philosophical but that’s how I see it.

The point for me is, when these people behaving in these ways also end up being the primary means by which money is created, we have a problem. The problem being that such behaviour by the only people who can create money supply will inevitably lead to boom bust cycles and to them essentially doing the wrong thing for the needs of society as a whole - creating too much new money when times are good, thus feeding bubbles and creating too little when those bubbles burst and times are bad , thus extending and prolonging downturns.

Agreed. What is the alternative? RH’s proposal in which the Banks would have no reason to exist, while the Government itself would turn itself to a huge Banker???

[erolz66]

I see no apparent reason why the BoE creating money, instead of private commercial banks, would in any way effect the normal capitalist society or be a threat to entrepreneurs ...... in fact it would be exactly the opposite. A buoyant economy would provide greater opportunities. This fear that it would be like communism is ill founded!

My 'concerns' over your proposed alternative - at least as far as I understand it - is not that it would represent an assault on capitalism and it's ability to function or represent communism. My 'concerns' are more of the nature that such systems, the modelling of then, the predictions as to how they would function in reality are inherently 'un knowable' to a significant degree. I remain concerned about 'unintended consequences' would be a fair description. Having said that I do think there are serious and inherent flaws in the current system. I also think we all do kind of have a 'social duty' to try and understand and question these things (what is money, where does it come from and the like).