Rizal Philippines
April 18, 2017
97% owned
I just watched a documentary from ANC which is in the You Tube, about money creation by private commercial banks. Banks create money by lending. I have understood it early on when we founded a savings and loan association. The largely held belief was that:
1. Deposits generation or money is a zero sum game. The deposits, money in circulation is fixed. That if you campaign for deposits, it would be taken from another bank. Thus the rural bank which was our competitor which had only P1 million in deposit (I used to work there) would lose a part of that deposit to us. However it did not happen that way. We ended the year with P5 million in deposits and the rural bank had two million deposits.
2. That deposits are just like money in piggy bank. Deposits are just like coins and bills put in a piggy bank and you take it when you break the piggy bank
Being a non banker,
1. I found out that the CB and commercial banks create money And you create money by lending. That money is an IOU a debt paper issued by the central bank
2. There is no gold reserve. It is fancy money. Created only by accounting system. It looks like crazy system
An entity like a savings and loan association can create money. 5 years later, the deposit of the bank was up to P100 million and they did not just come from savings of depositor. Some of them came from lending
3. That a business cant grow fast enough if you do not create your own money. SM created money by creating gift check. Now it creates more through credit cards. As far as our business is concerned we created money by lending retail mortgage loan to the buyers of the real estate company we organized. We lent to buyers, the buyers paid the real estate company, the real estate company deposited the sales proceed to the bank. The sales of the real estate company grew, the deposits, (deposited by the real estate company)assets of the bank (in the form of loans) grew. And these were all legal
This is the description of the monetary system in this video 97% owned
Some of the things mentioned in the video:
1. Only 3% of the money is created by govt controlled banks or the treasury. 97% of the money is created by the bank by creating credit (loans) There is no limit on how much the bank can lend; (not true: there is SBL risk asset ratio) The video and activists suggest that the ability of private banks to create credit be regulated (it is)
Much of money creating is mostly digital and accounting entries. The fractional reserve system makes it possible for deposit to grow by as much as 20x the deposit, or assets in the bank. In a 10% risk asset ratio, a capital of P1 million enables a bank to lend P10 million.
Thus the Fed through Fed Chairman Bernaike easily bailed out AIG for $160 billion just happened because of the ability of the fed and the member banks to create that money from nothing
2. That this activity is largely responsible for economic and social growth Agora notes that there is a big gap between real income in US and assets held. Much of the assets of individual, as well as consumption is bridged by loans and credit And this comes from commercial bank
3. Again there is a misconception about how banks operate: that money comes from savings (that many economists suggest that we have to increase savings rate to have economic growth) and that money in banks is static.
4. The way it really operates, we support economy through lending and credit. We disdain govt borrowing and deficit (Keynesian theory) but that is the way it really works.
5. That we must not support the bail out of banks because the excesses belong to the bank executives. But when banks fail, 97% of the money would disappear and make more difficulty
With this, compared to the traditional thinking that borrowing is bad is largely unsupported argument. Borrowing, OPM is a good practice. There has to be leverage after evaluating the marketing and the sales risk. ROI improves by leverage.
Thus the banks must be kept strong, its supervision be strict and disciplined.
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