Tuesday, September 11, 2012

A split second in a bank

In the UK Times yesterday (10 Sept 2012) 'Sir Humphrey rides...'  Andrew Clark reports of Clive Maxwell who has been appointed head of the Office of Fair Trading - an undertaker's job where he is to prepare the OFT corpse for burial when it becomes 'subsumed' into a new authority in 2014.  Maxwell is a public champion as he tackles suspect monopoly behaviour. When the OFT is successful we pay a little less for products or services, the price of which has been previously inflated by a conspiratorial group of suppliers; or things are explained more clearly to us, so that changes on ISA interest rates are not quietly lowered by banks without us noticing.  The book The Free Lunch - Fairness with Freedom shows how much  unfairness in our society is sourced in particular monopolistic cultures. So 'hats off' to Clive Maxwell for doing this essential job for us, especially at only a half-salary (£135,300 pa). 

Is the OFT moving into new territory about the general (legally authorised) banking monopoly? Maxwell wants banks 'directing savings with sectors of the economy in need of investment'. I take this to mean that he thinks that banks received savings (deposits) from some customers which they then lend on to business for investment. He calls this a fundamental role of banks.  Maybe he was misquoted, but he seems not to have understood how banking works. He might look at the Prof Richard Werner video interview on YouTube: Banking and the Economy. Banks create the loans they make, out of nothing, not out of 'savings'.

Martin Wolf renowned columnist for the FT puts it this way Nov. 9 2011 'The essence of the contemporary monetary system is creation of money, out of nothing, by private banks' often foolish lending.'

The confusion probably arises because in that split second when the bank manager has said yes to a loan to the customer and entered the amount on a screen showing the loan as an asset for the bank, the identical amount appears deposited in the customer's account waiting to be used. But the deposit appears after the loan has been created and not before. Savings did not have to arrive first to create a deposit to be subsequently lent. 

As the recent IMF paper The Chicago Plan Revisited states on page 9 para 2:  'banks do not have to wait for depositors to appear and make funds available before they can on-lend,...Rather, they create their own funds, deposits, in the act of lending.'
posted by Charles Bazlinton

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