Deutsche Bank - They think its all over.....
Discussion
basherX said:
He is and I am afraid the entry as so many others do not understand money. This is one of my pet topics.So heres how it really works.
In mylittlecountry MLC we decide to create an monetary economy based on the bong.
As a start the central bank of MLC prints 400 bong notes which it loans equally to Bank A and Bank B.
Balance sheets are now as follows:
Central Bank
Liabilities 0
Assets
Loan to Bank A 200
Loan to Bank B 200
We have agreed central bank balance sheets do not need to balance.
Bank A
Liabilities
Loan to Central Bank 200
Assets
Bong notes 200
Now lets say Fred wants to buy a fish but he needs money so he goes to Bank A and borrows 5 bong
He pays Ann 5 bong for the fish and Ann pays the money into Bank B
Balance sheets are now as follows:
Central Bank
Liabilities 0
Assets
Loan to Bank A 200
Loan to Bank B 200
Bank A
Liabilities
Loan from Central Bank 200
Assets
Bong notes 195
Loan to fred 5
Bank B
Liabilities
Loan from Central Bank 200
Loan from Ann 5
Assets
Bong notes 205
So the banks balance sheets have grown. However, this is not due to bank lending money they do not have this is due to a fish. Effectively the value of the fish was turned into money.
Please note no sticks or balloons where used during this experiment..
Mrr T said:
He is and I am afraid the entry as so many others do not understand money. This is one of my pet topics.
So heres how it really works.
In mylittlecountry MLC we decide to create an monetary economy based on the bong.
As a start the central bank of MLC prints 400 bong notes which it loans equally to Bank A and Bank B.
Balance sheets are now as follows:
Central Bank
Liabilities 0
Assets
Loan to Bank A 200
Loan to Bank B 200
We have agreed central bank balance sheets do not need to balance.
Bank A
Liabilities
Loan to Central Bank 200
Assets
Bong notes 200
Now lets say Fred wants to buy a fish but he needs money so he goes to Bank A and borrows 5 bong
He pays Ann 5 bong for the fish and Ann pays the money into Bank B
Balance sheets are now as follows:
Central Bank
Liabilities 0
Assets
Loan to Bank A 200
Loan to Bank B 200
Bank A
Liabilities
Loan from Central Bank 200
Assets
Bong notes 195
Loan to fred 5
Bank B
Liabilities
Loan from Central Bank 200
Loan from Ann 5
Assets
Bong notes 205
So the banks balance sheets have grown. However, this is not due to bank lending money they do not have this is due to a fish. Effectively the value of the fish was turned into money.
Please note no sticks or balloons where used during this experiment..
That's as I understand it, but say instead of a Fish I wanted to borrow something to buy a fancy financial product (or make a gamble) at a third bank, the example works the same, does it not, money is created and yet no one has had fish for tea...So heres how it really works.
In mylittlecountry MLC we decide to create an monetary economy based on the bong.
As a start the central bank of MLC prints 400 bong notes which it loans equally to Bank A and Bank B.
Balance sheets are now as follows:
Central Bank
Liabilities 0
Assets
Loan to Bank A 200
Loan to Bank B 200
We have agreed central bank balance sheets do not need to balance.
Bank A
Liabilities
Loan to Central Bank 200
Assets
Bong notes 200
Now lets say Fred wants to buy a fish but he needs money so he goes to Bank A and borrows 5 bong
He pays Ann 5 bong for the fish and Ann pays the money into Bank B
Balance sheets are now as follows:
Central Bank
Liabilities 0
Assets
Loan to Bank A 200
Loan to Bank B 200
Bank A
Liabilities
Loan from Central Bank 200
Assets
Bong notes 195
Loan to fred 5
Bank B
Liabilities
Loan from Central Bank 200
Loan from Ann 5
Assets
Bong notes 205
So the banks balance sheets have grown. However, this is not due to bank lending money they do not have this is due to a fish. Effectively the value of the fish was turned into money.
Please note no sticks or balloons where used during this experiment..
sidicks said:
Harris_I said:
And fundamentally this boils down to the nature of money itself: the whole world now views money as a commodity to be traded, something that itself has value, rather than viewing money as merely a medium of exchange or something that measures the value of real goods and services. As a result, not only can we create value out of intangibility (other people's debts can be bought and sold, derivative contracts can be created with the loosest of relationships with real underlying assets), but we have also created an economic system that allows banks to lend out multiples of what they have on deposit - something referred to as the fractional reserve banking system (since banks must keep on deposit a certain minimum fraction of money versus how much they lend out).
None of which has anything to with the main topic under discussion!Anyway back to the subject matter. The particular point above is absolutely of fundamental importance to the topic under discussion. It gets to the heart of why the global economy is in such a mess. Conventional economists, bankers and politicians refuse to consider credible alternatives either because they believe received wisdom is the only wisdom, or because they are too ignorant (hence my point about our MPs) or have vested interests that incentivise them to shut down any other narrative.
I'm not saying I have a solution, I'm saying that the incumbents are willfully ignoring the system is hugely flawed. Tinkering at the edges through greater regulation is only prolonging another inevitable bust, of which Deutsche (incidentally where I spent 11 years) may be the start.
Why be polite when passive aggression is so much more PH?FredClogs said:
I understand derivative trades and IRS and there is no way you can convince me its not gambling.
And that's the issue - you clearly do not understand how and why interest rate swaps are used and the bank's role in such transactions.FredCloggs said:
It is gambling, most investments or pure monetary transactions are gambling.
Given you can't understand and seemingly have no intention of trying to understand, why don't you just go away and leave the thread to those who have a genuine interest, either to share knowledge or to gain knowledge?FredCloggs said:
I don't work in finance or banking,
You do surprise me...FredCloggs said:
I am a layman, but i do have investments and also hold a fair amount of bit coin and have done my best to understand the economics of money creation because of my buy in to bit coin, i might not know the jargon but i understand the principles at play in the current capitalist banking and I'm pretty much convinced its just about gambling and has very little to do with providing investment for firms to create real wealth and provides very little value for society in general.
Just because you are 'convinced' doesn't make you right.'And, as you repeatedly demonstrate, you are wrong. Very wrong.
Edited by sidicks on Wednesday 28th September 15:43
Mrr T said:
Sorry bad day at the factory.
No problem.OK, now let's expand your example. Say there are thousands or even millions of Anns depositing 5 bong into their accounts at Bank B. Now Bank B knows that not all the Anns will come and redeem their deposits all at once. So it realises it can lend out the deposits to others.
And since the depositors are "sticky" money, Bank B knows it can get away with lending out much more than it has on deposit. It creates a liability in the account of the borrower and an equal and opposite asset in its own account. Where has that money come from? It didn't come from the central bank, it created it itself.
The system depends on confidence. If that confidence evaporates for some reason, depositors come running and the bank needs to find the money it doesn't have.
trickywoo said:
Mrr T said:
Stuff
Isn't this just a long winded way of saying the capitalist system as we experience it is built on confidence?If the confidence disappears then so does everything built on it.
Gives a whole new nuance to the traditional description of a con man.
Zod said:
he same goes for gold: if people stop ascribing value to it, it becomes worthless. (Ignore electronics applications - I'm talking pre-20th Century). Lord Percy made a valiant attempt at creating a gold replacement called Green, but unfortunately nobody ascribed value to it.
Ah, yes....alchemy 
sidicks said:
BigLion said:
Derivatives are all very well, but when the market starts to operate outside of the risk model parameters that's when problems occur and Lehman type scenarios develop. Investment banking will support in-house treasury and corporate divisions to mitigate risk for their own parent retail business and their larger external corporate clients, but the bit where the investment bank takes punts on the market is where issues arise.
Surely one of the main conclusions of the banking crisis was that the banks were operating within their risk model parameters, but those parameters were wrong i.e. didn't align to the real world?!Anything change Do?
crankedup said:
Yes that and the fact that the governance of such financial activities was such that some employees simply ran amok thinking nothing could possibly go wrong. Even more disturbing was that the CEO and Directors of some banks thought they were god like and untouchable.
Anything change Do?
To be fair, the CEOs did mostly turn out to be untouchable: Dick Fuld and Stan O'Neill are still very rich men. That, I think, is a disgrace and a failing of the system.Anything change Do?
Harris_I said:
No problem.
Thanks.Harris_I said:
OK, now let's expand your example. Say there are thousands or even millions of Anns depositing 5 bong into their accounts at Bank B. Now Bank B knows that not all the Anns will come and redeem their deposits all at once. So it realises it can lend out the deposits to others.
Correct.Harris_I said:
And since the depositors are "sticky" money, Bank B knows it can get away with lending out much more than it has on deposit. It creates a liability in the account of the borrower and an equal and opposite asset in its own account. Where has that money come from? It didn't come from the central bank, it created it itself.
In order for a bank to create a asset (i.e. a loan) there must be an equal and opposite deposit from someone. That's why we have the accounting principal Assets = Liability + Capital.So if 5 Ann's have each deposited £5 with Bank B its balance sheet would be:
Assets
Bong notes 225 bong
Liabilities
Central Bank 200 bong
Deposits from Ann's 25 bong.
So the maximum Bank B can lend is 225 bong. It cannot create money.
If Bank B lent more by creating a fake liability in its balance sheet it would be in breach of accounting regulations, its auditors would qualify its accounts, and as ruler of Mylittlecountry I would send all the directors to prison.
Harris_I said:
The system depends on confidence. If that confidence evaporates for some reason, depositors come running and the bank needs to find the money it doesn't have.
Correct but it must be recognised there are 2 reasons a bank may not have the money to repay deposits:1. Borrowers have defaulted - Credit risk which is why bank have strict capital requirements.
2. Borrowers have not defaulted but just cannot pay immediately - Liquidity risk also now strictly controlled.
I doubt most on here are aware that it is likely both Lehman INC and Lehman UK where not insolvent (it seems likely the administrators will repay all the creditors and there may even be some left over for shareholders) when they call in administrators the issue was liquidity.
Harris_I said:
Where has that money come from? It didn't come from the central bank, it created it itself.
I know what you're getting at. The problem with these discussions in open forums is, by necessity, the language used. 'Creating money' whilst kind of true gives the seriously missleading impression that banks can just create an asset out of thin air, like a central bank. They can't. It's no more true than if I write an IOU, what I've done is create myself a liability and the last time I checked I wasn't either a bank or a government. Anyway good luck; discussions about the meaning of money never go well even when everyone knows what they are talking about!Zod said:
crankedup said:
Yes that and the fact that the governance of such financial activities was such that some employees simply ran amok thinking nothing could possibly go wrong. Even more disturbing was that the CEO and Directors of some banks thought they were god like and untouchable.
Anything change Do?
To be fair, the CEOs did mostly turn out to be untouchable: Dick Fuld and Stan O'Neill are still very rich men. That, I think, is a disgrace and a failing of the system.Anything change Do?
fblm said:
I know what you're getting at. The problem with these discussions in open forums is, by necessity, the language used. 'Creating money' whilst kind of true gives the seriously missleading impression that banks can just create an asset out of thin air, like a central bank. They can't. It's no more true than if I write an IOU, what I've done is create myself a liability and the last time I checked I wasn't either a bank or a government. Anyway good luck; discussions about the meaning of money never go well even when everyone knows what they are talking about!
Money and balance sheet are too often confused. Leverage is a highly complex area, and the ducking around by regulators with LCR and NSFR potentially creates dangerously immobile bank balance sheet - which is deemed systemic risk! It's nuts I tell thee.fblm said:
I know what you're getting at. The problem with these discussions in open forums is, by necessity, the language used. 'Creating money' whilst kind of true gives the seriously missleading impression that banks can just create an asset out of thin air, like a central bank. They can't. It's no more true than if I write an IOU, what I've done is create myself a liability and the last time I checked I wasn't either a bank or a government. Anyway good luck; discussions about the meaning of money never go well even when everyone knows what they are talking about!
Appreciate the constructive comment. It is a discussion that needs some nuance and not so easy in an open forum. As I think you acknowledge, I am not setting out an easily dismissable crackpot theory. And even though I'm an insider, I'm keen to recognise the failure to engage with the general public on matters of the economy, or the nature of money. On a daily basis I meet bankers who have only the faintest understanding of these absolutely critical issues of our time. What little knowledge they have of economic theory is treated as if it were dogmatic religious instruction, never to be questioned.Going back to money creation, the Bank of England themselves have stated that "banks create money when they lend to someone in the economy or buy an asset from consumers", a view echoed by Mervyn King. Here's the link to their Q1 2014 quarterly bulletin:
http://www.bankofengland.co.uk/publications/Docume...
Here's a cut and paste from that report:
Commercial banks create money, in the form of bank deposits,
by making new loans. When a bank makes a loan, for example
to someone taking out a mortgage to buy a house, it does not
typically do so by giving them thousands of pounds worth of
banknotes. Instead, it credits their bank account with a bank
deposit of the size of the mortgage. At that moment, new
money is created. For this reason, some economists have
referred to bank deposits as ‘fountain pen money’, created at
the stroke of bankers’ pens when they approve loans
Martin Wolf, the chief economics commentator at the FT, says "the essence of the contemporary money system is the creation of money, out of nothing, by private banks' often foolish lending". He also writes that the economic system is a confidence trick and is bound to crash repeatedly. And finally going back to Adair Turner, he says that global macroeconomic stability relies on debt creation. And low interest rates are only creating more demand for debt: "We are in the absurd position where we have so much debt that we can only afford it by having interest rates at zero, which creates an incentive to create some more debt."
These are not only heavyweight commentators, they are insiders. Despite what these people are saying, bankers and politicians seem content to cover their ears and shout la la la.
FredClogs said:
I understand derivative trades and IRS and there is no way you can convince me its not gambling. It is gambling, most investments or pure monetary transactions are gambling.
IRS are used for things as mundane as fixed rate mortgages - not really sure why you see it as gambling??https://www.cml.org.uk/news/news-and-views/jargon-...
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