Cyprus-Forum.com

[erolz66]

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.

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. It is an unsecured loan. What is more the interest rate on this credit is actual base rate (currently 0.5%) plus a £10pm charge.

Where do you get this idea that this HAS to be backed. It does not need backing but the banks want you to commit yourself into insuring them, if you don’t repay. In reality if you don’t repay ...... they lose nothing. Pyrpolizer, you said it yourself ..... they make nothing out of the collateral , only the interest is profit! Why? Because when you repay the ‘loan’ to the bank they just deduct it from your debt. This removes the NEW money they created from circulation .... they destroy it! That is because the ‘debt’ is no more tha a book keeping entry and that is all ..... no actual money changes hands because there is no money!!!!!!

Of course you need to pay. The Banks are in effect giving you an advance on Collateral you own. The other option is for you to sell it.

When I take a loan from the bank they create that money out of 'thin air' as an entry in my account. If I pay it back the money immediately this credit in my account is then removed and the money disappears again. However if I transfer the money to say my brothers account with say a different bank and then do not pay back the loan to my bank, my bank can not make this created money 'disappear'. The money still exists and my bank is liable for it, because when it was transferred to my brothers account my bank would have instructed the central bank to debit their reserve account with the central bank and credit in turn my brothers bank (which in turn then credits my brothers account).

The point is money is created out of thin air by the act of granting me credit but this does not mean that if I fail to pay that money back the bank I borrowed it from has 'lost nothing' because it 'never had it' to start with. The bank I have borrowed it from is liable for it and from the point I transfer it out of my account (or draw it out as cash) they have no means of getting it back from me, but they do still have to account for the transfer to another bank or the cash they gave me when I withdrew it.

And no it is a lot more than a book entry, because that loan has to go somewhere. Someone might use it to buy a house, an investment property or to set up a business. The bottom line is that the money is created, it is invested into the community in some way, creating growth and even jobs in some cases. Someone will as a result increase their Balance Sheet and hopefully make a profit (that is the whole idea) and someone else gets a nice IOU from the Banks.

It is just a book entry - 97% of all money is a book entry. I borrow 100k from my bank, they just create an entry saying I have 100k (and must pay back the 100k on agreed schedule + interest). I buy a house with it and transfer it to the sellers account and that 100k is a book entry in the sellers account. My bank and the sellers bank both have reserve accounts with the central bank, and the movement of the 100k from me to the seller is just a book entry in the central banks reserves accounts for each of them of -100k and + 100k. It is all just book entries - but that does not mean it has no real meaning.

Balance sheet thing is misleading in this case. I borrow 100k - I have a liability of 100k but I also have 100k in my account - thus net balance sheet wise is neutral (other than interest). I buy a house with it and I have 100k liability and a 100k asset of the house. The person I bought it from before the transaction had a balance sheet with 100k asset on it. After the transaction they have a blance sheet with 100k in their bank account on it.

I could use the 12.5k credit on my co op credit card to buy , say flour and water and a oven and make bread with those things and sell that bread for more than the 12.5k I used to buy the ingredients and oven. Or I could use the 12.5k to buy cocaine and snort it up my nose. Either way the co op just creates the 12.5k out of 'thin air' by book entries. However if I make bread with the 12.5k or snort it up my nose makes no difference. I either pay back the money lent to me or I do not. If I do pay it back then the money create is destroyed as I pay it back. If I do not then the bank I borrowed it from (or the bank that created out of thin air if you prefer) is liable for this money. It has to account for it at the point it leaves that bank (either via cash withdrawal or via a book keeping entry to a third parties bank via their respective central bank reserve accounts).

When the loan is repaid, the money ceases to exist, but not the IOU potentially. It depends what this person has done with the money. Maybe they bought a house and if that is the case, the money has gone. But not the assets both parties have. Which of course, can once again be used as Bank Collateral to create even more money, and so the cycle keeps repeating. The issue I have is, if you interfere with it, then quite literally, I believe we are all stuffed and will all be growing our own food like peasants.

lets say there is X amount of money in existence right now. I borrow Y from my bank and there is now X+Y money in existence. I pay it back immediately and then there is X amount of money in existence again. Or I pay back 50% after 6 months at which point there is X + 1/2Y in existence. The money is created as a ledger entry when I borrow it and it is destroyed again as I pay it back. It does not matter what I do with the money (by flour water and oven or cocaine) - this creation of new money and its destruction are the same and relate only to the act of borrowing and the act of repaying alone.

It is all very intricate, and it needs balancing, but you are not recognizing this, preferring instead your own agenda.

I do not think the way money is created today is 'fraudulent' per se but I do think there are very real problems with it. The core problem with it is that it makes boom and bust cycles inevitable because it places the control of the 'money supply' (how much total money there is in existence) in the hands of private banks who do not create it or not create it (and for whom) based on what society needs at any given point. How much new money banks choose to create is not based on what the general economy needs - it is based principally on how 'optimistic' the bank is. Which is why after the bust of 2008 the problem was a 'credit crunch' at the very point in time when society actually needs the banks to create more new money, but they in fact did the reverse. Hence the attempts of 'quantitative easing' to try and 'encourage' the banks to create more money - which seems to be of very little real effect. What society needs is for money to be created that can be used for 'productive' investment (like me buying flour and water and an over and making bread). However what the banks tend to do at times of bust is lend (create) less money and do so more for non 'productive' but safer (for them) investments (like buying a house that already exists - that does not generate any new economic activity or make existing activity more efficient). It is this 'loss of control' by governments as to the creation of new money and what newly created money is used for that is the core problem with the current system as I see it.

In addition to this there is the issue of the whole thing requiring ever expanding growth (of money in existence, which in turn means credit, which in turn needs ever growing economic activity) which is problematic in terms of needing to find sustainable means of living on this planet. It requires ever increasing growth because of the interest. If all money is created by credit, and the money owed is all that credit + interest, there is never enough money to pay it all back and the interest, thus more money has to be created by credit to pay the interest on the original credit and so and so on indefinitely. In that sense it is a giant nation wide and world wide ponzi scheme. This problem however is different from the on above and is more to do with 'sustainability' on a planetary scale than it is to do with banking per se.

[Paphitis]

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.

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. It is an unsecured loan. What is more the interest rate on this credit is actual base rate (currently 0.5%) plus a £10pm charge.

Where do you get this idea that this HAS to be backed. It does not need backing but the banks want you to commit yourself into insuring them, if you don’t repay. In reality if you don’t repay ...... they lose nothing. Pyrpolizer, you said it yourself ..... they make nothing out of the collateral , only the interest is profit! Why? Because when you repay the ‘loan’ to the bank they just deduct it from your debt. This removes the NEW money they created from circulation .... they destroy it! That is because the ‘debt’ is no more tha a book keeping entry and that is all ..... no actual money changes hands because there is no money!!!!!!

Of course you need to pay. The Banks are in effect giving you an advance on Collateral you own. The other option is for you to sell it.

When I take a loan from the bank they create that money out of 'thin air' as an entry in my account. If I pay it back the money immediately this credit in my account is then removed and the money disappears again. However if I transfer the money to say my brothers account with say a different bank and then do not pay back the loan to my bank, my bank can not make this created money 'disappear'. The money still exists and my bank is liable for it, because when it was transferred to my brothers account my bank would have instructed the central bank to debit their reserve account with the central bank and credit in turn my brothers bank (which in turn then credits my brothers account).

The point is money is created out of thin air by the act of granting me credit but this does not mean that if I fail to pay that money back the bank I borrowed it from has 'lost nothing' because it 'never had it' to start with. The bank I have borrowed it from is liable for it and from the point I transfer it out of my account (or draw it out as cash) they have no means of getting it back from me, but they do still have to account for the transfer to another bank or the cash they gave me when I withdrew it.

And no it is a lot more than a book entry, because that loan has to go somewhere. Someone might use it to buy a house, an investment property or to set up a business. The bottom line is that the money is created, it is invested into the community in some way, creating growth and even jobs in some cases. Someone will as a result increase their Balance Sheet and hopefully make a profit (that is the whole idea) and someone else gets a nice IOU from the Banks.

It is just a book entry - 97% of all money is a book entry. I borrow 100k from my bank, they just create an entry saying I have 100k (and must pay back the 100k on agreed schedule + interest). I buy a house with it and transfer it to the sellers account and that 100k is a book entry in the sellers account. My bank and the sellers bank both have reserve accounts with the central bank, and the movement of the 100k from me to the seller is just a book entry in the central banks reserves accounts for each of them of -100k and + 100k. It is all just book entries - but that does not mean it has no real meaning.

Balance sheet thing is misleading in this case. I borrow 100k - I have a liability of 100k but I also have 100k in my account - thus net balance sheet wise is neutral (other than interest). I buy a house with it and I have 100k liability and a 100k asset of the house. The person I bought it from before the transaction had a balance sheet with 100k asset on it. After the transaction they have a blance sheet with 100k in their bank account on it.

I could use the 12.5k credit on my co op credit card to buy , say flour and water and a oven and make bread with those things and sell that bread for more than the 12.5k I used to buy the ingredients and oven. Or I could use the 12.5k to buy cocaine and snort it up my nose. Either way the co op just creates the 12.5k out of 'thin air' by book entries. However if I make bread with the 12.5k or snort it up my nose makes no difference. I either pay back the money lent to me or I do not. If I do pay it back then the money create is destroyed as I pay it back. If I do not then the bank I borrowed it from (or the bank that created out of thin air if you prefer) is liable for this money. It has to account for it at the point it leaves that bank (either via cash withdrawal or via a book keeping entry to a third parties bank via their respective central bank reserve accounts).

When the loan is repaid, the money ceases to exist, but not the IOU potentially. It depends what this person has done with the money. Maybe they bought a house and if that is the case, the money has gone. But not the assets both parties have. Which of course, can once again be used as Bank Collateral to create even more money, and so the cycle keeps repeating. The issue I have is, if you interfere with it, then quite literally, I believe we are all stuffed and will all be growing our own food like peasants.

lets say there is X amount of money in existence right now. I borrow Y from my bank and there is now X+Y money in existence. I pay it back immediately and then there is X amount of money in existence again. Or I pay back 50% after 6 months at which point there is X + 1/2Y in existence. The money is created as a ledger entry when I borrow it and it is destroyed again as I pay it back. It does not matter what I do with the money (by flour water and oven or cocaine) - this creation of new money and its destruction are the same and relate only to the act of borrowing and the act of repaying alone.

It is all very intricate, and it needs balancing, but you are not recognizing this, preferring instead your own agenda.

I do not think the way money is created today is 'fraudulent' per se but I do think there are very real problems with it. The core problem with it is that it makes boom and bust cycles inevitable because it places the control of the 'money supply' (how much total money there is in existence) in the hands of private banks who do not create it or not create it (and for whom) based on what society needs at any given point. How much new money banks choose to create is not based on what the general economy needs - it is based principally on how 'optimistic' the bank is. Which is why after the bust of 2008 the problem was a 'credit crunch' at the very point in time when society actually needs the banks to create more new money, but they in fact did the reverse. Hence the attempts of 'quantitative easing' to try and 'encourage' the banks to create more money - which seems to be of very little real effect. What society needs is for money to be created that can be used for 'productive' investment (like me buying flour and water and an over and making bread). However what the banks tend to do at times of bust is lend (create) less money and do so more for non 'productive' but safer (for them) investments (like buying a house that already exists - that does not generate any new economic activity or make existing activity more efficient). It is this 'loss of control' by governments as to the creation of new money and what newly created money is used for that is the core problem with the current system as I see it.

In addition to this there is the issue of the whole thing requiring ever expanding growth (of money in existence, which in turn means credit, which in turn needs ever growing economic activity) which is problematic in terms of needing to find sustainable means of living on this planet. It requires ever increasing growth because of the interest. If all money is created by credit, and the money owed is all that credit + interest, there is never enough money to pay it all back and the interest, thus more money has to be created by credit to pay the interest on the original credit and so and so on indefinitely. In that sense it is a giant nation wide and world wide ponzi scheme. This problem however is different from the on above and is more to do with 'sustainability' on a planetary scale than it is to do with banking per se.

I already mentioned Unsecured Loans, in the form of personal loans and Credit Cards. That is why you pay very high interest too.

There are limits to everything. The Bank has to allocate its ledger very carefully. It can't for instance issue every person with an unsecured facility and expect to remain in business.

Oh well Erolz. I can't help you with the rest of it. The fact of the matter is, either we look for growth and keep people fat and content, or the vast majority live in poverty. There are many ways to look at sustainability, such as Green Energy. And yes, growth actually funds that too and in turn so do the Banks. No growth, then keep burning dirty coal for electricity just like in the poorer Nations.

BTW, you should reduce your limit. That is BAD DEBT. It doesn't benefit you.

The other thing is, loans are not just a book entry. You would be very irresponsible to think so. It is actually YOUR MONEY! You have provided the Collateral (YOUR WEALTH) to support your 100K loan. The Bank is giving you an IOU based on the collateral you have provided and ability to pay.

You have gone to a Bank, provided Collateral and the Bank has given you a CREDIT into your own Bank Account, which is actually an IOU now which the Bank needs to support.

The Bank does this to make interest from you, and if you don't bay, the Bank is actually secured by YOUR OWN asset you used as Collateral.

So no, it is not quite correct that it is just a Book Entry. The loan is backed up and secured. Without the security, there is no Book Entry.

It is YOU who is creating this money through a Financial Institution which is licensed and able to support support it through its own liquidity. Yes, it has to Capitalised in order to provide you with the loan otherwise no cigar I'm afraid. Or more to the point, there will be a Banking Collapse.

BTW, Bank Capital to assets ratio is a lot higher than most people think. The Central Banks keep this data as well as the supply of money and report to the World Bank.

http://data.worldbank.org/indicator/FB. ... /countries

And some countries have a Money Supply index which is greater than their entire GDP (M2 Index)

http://data.worldbank.org/indicator/FM.LBL.MQMY.GD.ZS

There is actually an exact science in the world of finance. People just don't understand it, and it is quite confusing.

But what strikes me is how well the system actually really does work. It's very complicated and a bit of a maze, but the system is designed to give maximum growth and it has taken Billions out of a cycle of poverty. Everyone in Finance and in Business actually understand, that the more people getting out of poverty, the better the environment for Banks, Business, and Employment.

Every now and then, there will be corrections, because little bubbles develop.

[Robin Hood]

Erol ..... a brilliant reply and absolutely 100% accurate. You obviously explain it better than I can as Paphitis is still arguing against my explanations. I have no comment to make that could in any way question anything you have said that would make any difference to your explanation!

I believe Paphitis is getting confused between ‘money/currency’ and ‘wealth’? ‘Currency’ is both a means of transfer and a means of putting a value to wealth ..... it is not of value in its own right.

Can I make a couple of points?

The point is money is created out of thin air by the act of granting me credit but this does not mean that if I fail to pay that money back the bank I borrowed it from has 'lost nothing' because it 'never had it' to start with. The bank I have borrowed it from is liable for it and from the point I transfer it out of my account (or draw it out as cash) they have no means of getting it back from me, but they do still have to account for the transfer to another bank or the cash they gave me when I withdrew it.

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.

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.

It is this 'loss of control' by governments as to the creation of new money and what newly created money is used for that is the core problem with the current system as I see it.

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!)

The following, which I have posted before, supports what you and I have both stated to be the method the banks use to create currency/money out of thin air.

Can banks individually create money out of nothing?

The theories and the empirical evidence - Prof. Dr. Richard Werner......... His Profile - http://www.southampton.ac.uk/risk/about/staff/werner.page

This paper presents the first empirical evidence in the history of banking on the question of whether banks can create money out of nothing. The banking crisis has revived interest in this issue, but it had remained unsettled. Three hypotheses are recognised in the literature.

According to the financial intermediation theory of banking, banks are merely intermediaries like other non-bank financial institutions, collecting deposits that are then lent out. According to the fractional reserve theory of banking, individual banks are mere financial intermediaries that cannot create money, but collectively they end up creating money through systemic interaction. A third theory maintains that each individual bank has the power to create money ‘out of nothing’ and does so when it extends credit (the credit creation theory of banking).

The question which of the theories is correct has far-reaching implications for research and policy. Surprisingly, despite the longstanding controversy, until now no empirical study has tested the theories. This is the contribution of the present paper. An empirical test is conducted, whereby money is borrowed from a cooperating bank, while its internal records are being monitored, to establish whether in the process of making the loan available to the borrower, the bank transfers these funds from other accounts within or outside the bank, or whether they are newly created.

This study establishes for the first time empirically that banks individually create money out of nothing. The money supply is created as ‘fairy dust’ produced by the banks individually, "out of thin air".

5.2. The empirical evidence: credit creation theory supported

Thus it can now be said with confidence for the first time – possibly in the 5000 years' history of banking - that it has been empirically demonstrated that each individual bank creates credit and money out of nothing, when it extends what is called a ‘bank loan’. The bank does not loan any existing money, but instead creates new money. The implications are far-reaching.

5.4.4. Monetary reform

The Bank of England, 2014a and Bank of England, 2014b recent intervention has triggered a public debate about whether the privilege of banks to create money should in fact be revoked (Wolf, 2014). The reality of banks as creators of the money supply does raise the question of the ideal type of monetary system.

http://www.sciencedirect.com/science/article/pii/S1057521914001070

[Paphitis]

Erol ..... a brilliant reply and absolutely 100% accurate. You obviously explain it better than I can as Paphitis is still arguing against my explanations. I have no comment to make that could in any way question anything you have said that would make any difference to your explanation!

I believe Paphitis is getting confused between ‘money/currency’ and ‘wealth’? ‘Currency’ is both a means of transfer and a means of putting a value to wealth ..... it is not of value in its own right.

Don't kid yourself.

You are refusing to understand what I am explaining to you.

You are saying that Banks create money. That is not completely true at all. They don't create money at all. They only unlock the Wealth held on a Balance Sheet when they apply CREDITS against collateral.

The Wealth already exists in the form of dormant money. The Collateral has a value, which could otherwise be sold and converted to cash. But instead, a borrower is using it as collateral to borrow from the Bank which in turn issues an IOU. This IOU in turn becomes the Banks or some other Banks liability. So yes, it is all very much a controlled process otherwise, Banks will fall one after the other when their liquidity falls to critical levels. Every data entry has an impact on their liquidity. The M2 index is always fluid.

What is so hard to understand about that?

[Robin Hood]

Paphitis:

Don't kid yourself. You are refusing to understand what I am explaining to you.

You are saying that Banks create money. (As is Werner, the BoE, The FED and now Erol!!!)

That is not completely true at all. They don't create money at all. They only unlock the Wealth held on a Balance Sheet when they apply CREDITS against collateral.

Because you are WRONG! How much proof do you need? You are doing exactly what I said you are doing ...... confusing ‘wealth’ with ‘currency/money’. Please read Werner’s paper and understand what he is explaining .......... he is an accredited authority on the subject and he could not be more clear .......... private commercial banks create money out of thin air! And that, and only that, is what we are talking about simply ....... how is money created and how does it get into circulation?

But instead, a borrower is using it (existing dormant wealth?) as collateral to borrow from the Bank which in turn issues an IOU.

Wrong again! In return for you securing the loan against your wealth ...... the banks awards you a DEBT! It isn’t an IOU from the bank ........ it is a UOMe FROM the bank!

This IOU in turn becomes the Banks or some other Banks liability.

Wrong again! The debt is your liability ..... but it is a bank asset! When you repay your debt the bank looses an asset to the value of the debt.

What is so hard to understand about that?

Absolutely nothing! It shows me just where your thinking is wrong. Why not just swallow your pride and admit that banks DO create money out of nothing ...... then we can get back to talking about how to even the financial playing field and eliminate the growing gap between the 99.99% and the 0.01%, without collapsing the capitalist system?

[Paphitis]

Because you are WRONG! How much proof do you need? You are doing exactly what I said you are doing ...... confusing ‘wealth’ with ‘currency/money’. Please read Werner’s paper and understand what he is explaining .......... he is an accredited authority on the subject and he could not be more clear .......... private commercial banks create money out of thin air! And that, and only that, is what we are talking about simply ....... how is money created and how does it get into circulation?

I am wrong am I?

Then how is money "created"? So the Bank just goes right ahead and makes an arbitrary "data entry" into someone's account without collateral.

My my, thank heavens you're not in charge of any Banks, because what you are saying isn't even subprime lending. It would be way beyond that.

It doesn't sound like you have any experience with lending at all. I strongly advise that you go to a Bank and inquire about applying for a Loan so that you can see what is required from you in order to be an approved borrower. You will need Collateral, and that does not sound like an arbitrary "data entry" to me.

But instead, a borrower is using it (existing dormant wealth?) as collateral to borrow from the Bank which in turn issues an IOU.

Wrong again! In return for you securing the loan against your wealth ...... the banks awards you a DEBT! It isn’t an IOU from the bank ........ it is a UOMe FROM the bank!

You see, you are either doing it deliberately or you are completely misunderstanding. It is a DEBT for a borrower, but the funds can be transferred into a link account making it an IOU. Once the funds are transferred to another account, it becomes an IOU for the beneficiary. Or it can become an IOU for another bank and that is a liability that isn't even supported by lending.

Once a credit has been applied into an account, it is an IOU.

This IOU in turn becomes the Banks or some other Banks liability.

Wrong again! The debt is your liability ..... but it is a bank asset! When you repay your debt the bank looses an asset to the value of the debt.

I'm afraid it is dead correct. The funds can transfer to another Bank electronically. That is an IOU.

Have you ever transferred funds to another account or Bank? What do you think happens when you buy a property?

What is so hard to understand about that?

Absolutely nothing! It shows me just where your thinking is wrong. Why not just swallow your pride and admit that banks DO create money out of nothing ...... then we can get back to talking about how to even the financial playing field and eliminate the growing gap between the 99.99% and the 0.01%, without collapsing the capitalist system?

I'm sorry, but you understand nothing at all about the Banking system. I will go further and say, that you are applying very flawed assumptions and mistruths about the Banking sector as a whole because you don't like them very much. Not many people do.

As for me, I am a little more pragmatic. I know what I need to do to achieve outcomes. So I play by the rules and do what I need to do, like Billions of people around the world.

I know that wealth is unevenly spread and that there are ridiculously super wealthy people on the planet. But there is nothing I can do about that and I don't need to be super wealthy either. But I like to achieve certain things and use the Banks as much as they use me. Because of them, I have been able to benefit from a number of opportunities over the last 20 years, and I have made a lot of money out of it which I ordinarily would not even come close. And the Banks are very happy to see a healthy Balance Sheet from their clients.

[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

[erolz66]

I already mentioned Unsecured Loans, in the form of personal loans and Credit Cards. That is why you pay very high interest too. BTW, you should reduce your limit. That is BAD DEBT. It doesn't benefit you.

The interest rate I am paying on my credit card is 0.5% (plus a £10 pm charge). That is half a percent. It is not a high rate at all. It is actually less than the bank itself can borrow money at and less than I can get in interest by depositing that money in an interest bearing account. It is for me GOOD DEBT - which is exactly why I maintain the card at it's maximum limit. Each month I pay the min amount off I then spend it again in order to maintain this good debt. You might not believe such a credit card exits but it does. You can not get this card / deal TODAY. It was created way back before 2008 when the base rate was 4 or 5 % and 'optimism' was high at the banks leading to them lending (creating) money at a furious rate. Whilst the UK base rate remains at 0.5% it would be madness for me to pay this debt off. There is even an outside chance the base rate couyld be set to a negative amount (unlikely but has been done in some countries) and if that happens the co op bank will have to pay ME for borrowing on this card !

There are limits to everything. The Bank has to allocate its ledger very carefully. It can't for instance issue every person with an unsecured facility and expect to remain in business.

This is true and it is effectively exactly what happened in and leading up to 2008 and it is the core of the problem we have - boom and bust cycles.

The Bank is giving you an IOU based on the collateral you have provided and ability to pay.

In the case on my credit card there is no collateral securing my loan. The bank has given me an IOT (I owe them) based on their belief that I can and will repay it. Based on their optimism that I will be able to do so. In 2004 when I took the credit card out they were VERY optimistic that I and others could and would pay this money back. Today they are not so optimistic and thus they do not offer this deal any more and are lending vastly less across the board to anyone (meaning the total amount of money in existence is shrinking). What 'society' actually needed was for them to be less optimistic in 2004 and more optimistic now - but they do not operate based on what society needs and that is why the system is problematic and leads to boom and bust cycles.

But what strikes me is how well the system actually really does work. It's very complicated and a bit of a maze, but the system is designed to give maximum growth and it has taken Billions out of a cycle of poverty. Everyone in Finance and in Business actually understand, that the more people getting out of poverty, the better the environment for Banks, Business, and Employment.

Every now and then, there will be corrections, because little bubbles develop.

What happened in 2008 was not a 'little bubble'. It was a massive crisis plunging millions if not billions of people into poverty they had not experienced before. Not just in Greece but globally. We are still struggling to recover from it some 8 years later. What is more we are in uncharted territory here. We are doing things that have never been done before, things without precedent in the 'hope' that they will work. The ratio of cash to 'ledger created money' is at unprecedented levels. The use of negative base rates in some countries is unprecedented. The billions being poured into QE are unprecedented. Even if the 'world' does manage to bring things back to an even keel again it will simply only be a matter of time until the boom cycle again returns to bust because the system makes such inevitable. That is what critics of the current system are arguing as far as I understand it.

BTW I strongly recommend this book for anyone interested in this subject.

http://www.amazon.co.uk/Where-Does-Mone ... lpage_o00_

[erolz66]

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.

[Robin Hood]

Paphitis:

I am wrong am I?

YES!

Then how is money "created"? So the Bank just goes right ahead and makes an arbitrary "data entry" into someone's account without collateral.

Me, Erol, Prof. Werner, the BoE, the FED and the German Central bank have all told you , but you seem to believe that collateral is a requirement to create currency and IT IS NOT.

The collateral is no more than security with a ~known value, against which they will create a debt by awarding you credit up to 80% of its current value. The banks need to protect their ledger entries in the event you don’t pay.(NPL) Your collateral can only realise its value (£’s/€’s/$’s) if it is converted into currency ...... i.e. you sell it!

It can make an arbitrary data entry and in many cases in Cyprus that is exactly what happened. The ‘collateral’ was previously mortgaged ...... the cowboy had built a property on it ..... then, the cowboy who had a lot of the original mortgage left (Invested in the New Merc. or his wife’s BMW) sold the property on, pocketed the proceeds and then duped buyer took out another mortgage on that, ...... often from the same bank!

Some were even duped into taking the mortgage out in Swiss Francs ‘.......because it had a lower interest rate!’ No mention by the banks that it was a strong currency and likely to rise in comparison with the Cyprus Pound/Euro.

My my, thank heavens you're not in charge of any Banks, because what you are saying isn't even subprime lending. It would be way beyond that.

I think I know a lot more about the creation of money than you do. Banking? ....... that would just require me to learn the procedures ........ working in a bank would be very unlikely to teach me much about money creation.

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.

It doesn't sound like you have any experience with lending at all.

How wrong can you be! Let me tell you a secret!

I personally took on one of THE biggest names in banking because they were trying to screw me. I had two meetings in Guernsey with their CEO/MD, Loans Director and their head of the loans department. Long story ........... but I beat them at their own game and, as the CEO told me at the time, he awarded me the largest compensation he could, (a significant 5 figure sum!) without me taking them to court! Not a bad result for someone who knows nothing about lending/banking, is it? BTW; They also paid all my expenses to get there from Cyprus, hotel bill and a very nice golf umbrella ...... which I still have to this day ....... as a reminder.

I strongly advise that you go to a Bank and inquire about applying for a Loan so that you can see what is required from you in order to be an approved borrower. You will need Collateral, and that does not sound like an arbitrary "data entry" to me.

You are still confusing getting a ‘loan’ and meeting the Banks requirements for that ‘loan’(another bit of banking subterfuge!) with the process of creating that equivalent amount of currency as a credit/debt ............ it just seems to miss you completely! They are two completely different subjects.

You see, you are either doing it deliberately or you are completely misunderstanding. It is a DEBT for a borrower, but the funds can be transferred into a link account making it an IOU. Once the funds are transferred to another account, it becomes an IOU for the beneficiary. Or it can become an IOU for another bank and that is a liability that isn't even supported by lending.

Once again you are adding two procedures together and confusing the criteria of one with the other! Your credit account, holding your debt to the bank is liability for you but it is an asset to the bank. When you transfer your loan/debt to another account it becomes New money in that account, which is an asset to the account holder but it is a liability to the bank ..... because they have BORROWED that deposit from the account holder!

Once a credit has been applied into an account, it is an IOU

.
I think you mean ....... when an account is credited with a deposit, the account entry is an IOU? If so, that is correct, see the above; it is an IOU from the bank acknowledging they owe the account holder, that amount! BTW: As you will now have provided the bank with a loan ..... did you ask them what collateral they were offering to secure the loan? You are now an unsecured creditor of the bank, ........ they have no collateral.

I'm afraid it is dead correct. The funds can transfer to another Bank electronically. That is an IOU. Have you ever transferred funds to another account or Bank? What do you think happens when you buy a property?

You are confused ........ see the above explanation.

I'm sorry, but you understand nothing at all about the Banking system. I will go further and say, that you are applying very flawed assumptions and mistruths about the Banking sector as a whole because you don't like them very much. Not many people do.

I would challenge your assumption!

As for me, I am a little more pragmatic. I know what I need to do to achieve outcomes. So I play by the rules and do what I need to do, like Billions of people around the world.

You are not pragmatic ..... you are totally confused! As you say, so are billions of others around the world ......... and many of them a dirt poor because they are mislead by the banks to believe things that are just not true.

Here is what other revered people have to say ..........

“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” – Thomas Jefferson in the debate over the Re-charter of the Bank Bill (1809)

“The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.”
The Rothschild brothers of London writing to associates in New York, 1863.

“It is well enough that people of the nation do not understand our banking and money system, for if they did, I believe there would be a revolution before tomorrow morning.” Henry Ford, founder of the Ford Motor Company

“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled. With something so important, a deeper mystery seems only decent.”
John Kenneth Galbraith (1908- ), former professor of economics at Harvard.