Thursday, September 18, 2008

An unintelligent guide to the banking crisis

Oliver James strikes again with this howler:

we have many financial institutions that exist through lending borrowed money, rather than their own.

Private banks are not the Government. They cannot print money. Therefore, they need to get it from somewhere else, namely people who lend them it.

I'm also fascinated by the 2000 study he quotes, with its large sample size of 26 people. Did the brokers studied masturbate and fish simultaneously? Or were these hobbies mutually exclusive?

2 Comments:

  • At 3:18 pm , Anonymous lifeonmars said...

    "Private banks are not the Government. They cannot print money. Therefore, they need to get it from somewhere else, namely people who lend them it."

    Private banks do indeed create money - thanks to the magic of fractional reserve banking. When I borrow money from a bank to buy a car I'm not borrowing other people's money (as was once the case), the bank 'creates' money (allowing for a small reserve) as a corollary to my promise to pay it back - see Irving Fisher, J.K. Galbraith (""The process by which banks create money is so simple the mind is repelled.") et al.

     
  • At 7:59 am , Blogger LibertyCat said...

    You are right - banks can create money in the form of bank account balances. But this involves borrowing and lending at the same time, so the money is still "borrowed money".

    From the bank's point of view, money in bank accounts is money depositors have lent the bank. Hence the expression on a banker's face if you withdraw a large amount of money from your account - from his perspective he borrowed money from you and you have just asked for it back.

    The magic of fractional reserve banking is that a transaction that looks like debt from the bank's end can look like cash from the customer's end. Of course, this only works if people are confident that the bank can repay its debts. Which is why banking crises are so dangerous.

     

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