No doubt about it, there is some "creative accounting" going on in the banking sector!
It's no secret that banks are NOT lending out money they have in the vault, but simply creating credit out of thin air. Your articles are doing a great job of showing the sleight of hand that is used to obscure this fact.
However I am not convinced that Tim's promise to pay $800,000 really does have a commercial value of $800,000. To me it seems like the customer's flipside of the banker's scam - "Here is my promise to pay $800,000 (which I don't have), now give me the $800,000 that you just created".
Without the existence of the banking scam, Tim's promise to pay $800,000 would have much less value. If he approached an average citizen and requested $800,000 in hard currency, in exchange for an unsecured promissory note, he would not get very far - they would want an enormous discount for risk, or more likely, would place no value on it at all.
The only person who WOULD be interested would be a banker who has the ability to create $800 K from thin air, in exchange for a promise. The banker performed no exertion to "get" the $800K, so they can take a much greater risk in "lending".
The idea that "a man's word is his bond" is certainly appealing, and might apply amongst people who knew and trusted one another very well. However I don't believe that a man's financial promise is a commodity that trades at its face value, in a world where we have to deal with strangers as a normal part of life.
However I might be arguing against you AND the great Henry Hazlitt! I think he would take your side on this matter:
"There is a strange idea abroad, held by all monetary cranks, that credit is something a banker gives to a man. Credit, on the contrary, is something a man already has. He has it, perhaps, because he already has marketable assets of a greater cash value than the loan for which he is asking. Or he has it because his character and past record have earned it. He brings it into the bank with him. That is why the banker makes him the loan."
Thanks for this great comment. Prior to the GFC, banks were selling bundles of mortgages worth 100’s of millions, through special purpose vehicles (SPVs), to interest-hungry investors and they’re still doing it today. Those “derivatives” were (and still are) based on the commercial value of bank mortgage-loans: at 8.05%, paying ~$10,000 per month, over 10 years, interest on Tim’s $800,000 ‘loan’ amounts to well over $350,000, so the (potential) value of that one document is over $1 million.
Your comment seem to imply it’s a good thing we have banks, and I agree, but they have to play by the same accounting rules we abide by, otherwise we might as well swap personal IOU’s and save ourselves their parasitic interest charges. When they falsely pretend to be “withdrawing” what we just deposited, so they can “lend” it to us, it’s time to call them out.
As for good old HH and his “Economics in One Lesson”, which you quote, much as I like his philosophy and his methods, he falls short in his treatment of banking and so-called “bank-credit”. First, he fell for the “banks lend money deposited by others” myth, but he really lost me when he wrote, “All credit is debt”. For him, “credit” was a confusing word and he needed his best rhetorical style to get around the difficulties such ambiguous words create.
If you want to have a simple, coherent discussion of “credit” in the context of banking, stick to the definition in accounting; all other meanings are distractions. That way, a credit-balance in a customer’s account – whether it arises from their deposit of a cheque, cash or “other valuable consideration” - has only one possible meaning: it represents the bank’s obligation (as debtor) to pay that amount to the customer (as creditor).
Quoting the Monetary Analysis Directorate of the Bank of England [see my article #4]: “Bank deposits [i.e., credit balances in bank accounts] are simply a record of how much the bank itself owes its customers. So[,] they are a liability of the bank, not an asset that could be lent out.” And if “bank-credit” can’t be “lent out” and it is a “bank liability”, such “credit” is certainly NOT a customer’s debt; it’s actually the bank’s debt, owed to the customer. Sorry, Henry!
The conundrum people like Henry can’t resolve is that the so-called “loan” principal [credit], which arises from the deposit of a customer’s mortgage [i.e., promise] in a bank, must still be paid, as promised, even though there is clearly no DEBT obligation.
I will have to deal with that conundrum in more detail in a future article. It seems so contrary to what the entire world presently believes. The “wrong side of the force” is strong in that one. Those who can’t resolve it are deeply under the influence of a real, live, “Jedi Mind Trick”, or what I called a “Trojan Mind-Worm” in article #4.
No doubt about it, there is some "creative accounting" going on in the banking sector!
It's no secret that banks are NOT lending out money they have in the vault, but simply creating credit out of thin air. Your articles are doing a great job of showing the sleight of hand that is used to obscure this fact.
However I am not convinced that Tim's promise to pay $800,000 really does have a commercial value of $800,000. To me it seems like the customer's flipside of the banker's scam - "Here is my promise to pay $800,000 (which I don't have), now give me the $800,000 that you just created".
Without the existence of the banking scam, Tim's promise to pay $800,000 would have much less value. If he approached an average citizen and requested $800,000 in hard currency, in exchange for an unsecured promissory note, he would not get very far - they would want an enormous discount for risk, or more likely, would place no value on it at all.
The only person who WOULD be interested would be a banker who has the ability to create $800 K from thin air, in exchange for a promise. The banker performed no exertion to "get" the $800K, so they can take a much greater risk in "lending".
The idea that "a man's word is his bond" is certainly appealing, and might apply amongst people who knew and trusted one another very well. However I don't believe that a man's financial promise is a commodity that trades at its face value, in a world where we have to deal with strangers as a normal part of life.
However I might be arguing against you AND the great Henry Hazlitt! I think he would take your side on this matter:
"There is a strange idea abroad, held by all monetary cranks, that credit is something a banker gives to a man. Credit, on the contrary, is something a man already has. He has it, perhaps, because he already has marketable assets of a greater cash value than the loan for which he is asking. Or he has it because his character and past record have earned it. He brings it into the bank with him. That is why the banker makes him the loan."
Thanks for this great comment. Prior to the GFC, banks were selling bundles of mortgages worth 100’s of millions, through special purpose vehicles (SPVs), to interest-hungry investors and they’re still doing it today. Those “derivatives” were (and still are) based on the commercial value of bank mortgage-loans: at 8.05%, paying ~$10,000 per month, over 10 years, interest on Tim’s $800,000 ‘loan’ amounts to well over $350,000, so the (potential) value of that one document is over $1 million.
Your comment seem to imply it’s a good thing we have banks, and I agree, but they have to play by the same accounting rules we abide by, otherwise we might as well swap personal IOU’s and save ourselves their parasitic interest charges. When they falsely pretend to be “withdrawing” what we just deposited, so they can “lend” it to us, it’s time to call them out.
As for good old HH and his “Economics in One Lesson”, which you quote, much as I like his philosophy and his methods, he falls short in his treatment of banking and so-called “bank-credit”. First, he fell for the “banks lend money deposited by others” myth, but he really lost me when he wrote, “All credit is debt”. For him, “credit” was a confusing word and he needed his best rhetorical style to get around the difficulties such ambiguous words create.
If you want to have a simple, coherent discussion of “credit” in the context of banking, stick to the definition in accounting; all other meanings are distractions. That way, a credit-balance in a customer’s account – whether it arises from their deposit of a cheque, cash or “other valuable consideration” - has only one possible meaning: it represents the bank’s obligation (as debtor) to pay that amount to the customer (as creditor).
Quoting the Monetary Analysis Directorate of the Bank of England [see my article #4]: “Bank deposits [i.e., credit balances in bank accounts] are simply a record of how much the bank itself owes its customers. So[,] they are a liability of the bank, not an asset that could be lent out.” And if “bank-credit” can’t be “lent out” and it is a “bank liability”, such “credit” is certainly NOT a customer’s debt; it’s actually the bank’s debt, owed to the customer. Sorry, Henry!
The conundrum people like Henry can’t resolve is that the so-called “loan” principal [credit], which arises from the deposit of a customer’s mortgage [i.e., promise] in a bank, must still be paid, as promised, even though there is clearly no DEBT obligation.
I will have to deal with that conundrum in more detail in a future article. It seems so contrary to what the entire world presently believes. The “wrong side of the force” is strong in that one. Those who can’t resolve it are deeply under the influence of a real, live, “Jedi Mind Trick”, or what I called a “Trojan Mind-Worm” in article #4.