German Central Bank Admits that Credit is Created Out of Thin Air

George Washington's picture

Washington’s Blog.

Preface: Most
people think that banks lend solely from their base of deposits.

also know that with fractional reserve banking, they can loan out many
times more than they actually have in reserves

But very few people – with the
exception of those in the banking industry and financial experts – know
where credit really comes from. Many ZH readers are in
the banking industry or financial experts, so this may seem obvious.

Germany’s central bank – the Deutsche Bundesbank (German for
German Federal Bank) – has admitted in writing that banks create credit
out of thin air.

As the Bundesbank states in a publication entitled “Money and Monetary Policy” (pages
88-93; translation provided by Google translate, but German speaker Festan von Geldern confirmed the basic translation):

4.4 Creation of the banks money


Money is created by "money creation". Both [central banks] and private commercial banks can create money.  In the euro monetary system [money creation] arises mainly through the granting of
loans, as well as the fact that central banks or commercial banks to
buy assets such as gold, foreign currencies, real estate or securities.
If the central bank granted a loan from a commercial bank and crediting
the amount in the account of the bank at the central bank, created
“central bank money.”



Money creation by commercial banks


The commercial banks can create money itself, the so-called bank
money. The money creation process through which commercial banks can be
explained by the related postings: If a commercial bank to a customer a
loan, they booked in its balance sheet as an asset against a loan
receivable the client – for example, 100,000. At the same time, the
bank writes down the customer’s checking account, which is run on the
liabilities of the bank’s balance sheet, 100,000 euros good. This
credit increases the deposits of customers on its current account – it
creates deposit money, which increases the money supply.

In other words, money is created as book-entry by purchasing assets
or entering credits on the left side of the balance-sheet and
corresponding deposits on the right side. In other words, credit is created out of thin air.

Frontiers of money creation


The above description might leave the impression that the
commercial banks are able to draw an infinite amount of money in bank
accounts. If this were really so, this could be inflationary. The
central bank therefore takes effect on the extent of lending and money
creation. It requires commercial banks to hold the reserve.

As I’ve previously pointed out, the Federal Reserve is taking the
same tack, creating conditions that guarantee that American banks will
have huge excess reserves so as to prevent inflation. Back to the publication:

Central banks,
commercial banks can typically obtain only by the fact that the central
bank granted them credit. For these loans, commercial banks have to pay
the central bank interest rate. Increase this rate, the central bank,
the “prime rate”, the commercial banks usually raise their part, the
rates at which they lend themselves. There will be a general rise in
interest rates. This, however, dampens the tendency of businesses and
households, the demand for loans. By raising or lowering the key
interest rate the central bank can thus influence the business sector
demand for credit – and thus on Lending and bank money creation. 


The commercial banks need central bank money to cover not only
for the reserve, but also to the cash needs of its customers. Each bank
customer may be credit in the bank account into cash to pay off. If the
stocks of the banks in cash to be in short supply, the central bank can
create only remedy. Because only they are permitted to bring additional
notes in circulation. To meet the cash needs of its clients, the
commercial bank must therefore include, where appropriate, with the
central bank for a loan. This leads to the creation of central bank
money. The so-purchased assets for central bank money can pay off the
commercial bank in cash
let. Thus, the cash is in circulation: from the central bank to commercial banks and from these to the bank customers.


Central Bank money is also to cover the non-cash payments are
required: a customer transfers money from its credit to a customer at
another bank, this results in many cases led to the sending bank
central bank needs to transfer money to the receiving bank. The central
banks then moves from one bank to another.




The commercial banks can use the surplus of central bank money and
to award additional credits to businesses and households. As previously
described, arises from the award of additional credits additional
demand for central bank money – which can be covered in this special
situation of great uncertainty among banks by the existing excess
liquidity. The abundant supply of liquidity relief, a bank that wants
to provide a loan, from the traditional consideration of how much money they need after the award of credit
is, how it is constituted, and at what cost. Using the so-called money
creation multiplier can be estimated how large the potential for
additional Credit limit is.

Do you get it now?

Private banks don't make loans because they have extra deposits lying around. The process is the exact opposite:

(1) Each private bank "creates" loans out of thin air by entering into binding loan commitments with borrowers (of course, corresponding liabilities are created on their books at the same time. But see below); then


(2) If the bank doesn't have the required level of reserves, it simply borrows them after the fact from the central bank (or from another bank);


(3) The central bank, in turn, creates the money which it lends to the private banks out of thin air.

It's not just Bernanke ... the central banks and their owners - the
private commercial banks - have been running the printing presses for
hundreds of years.

Of course, as I pointed out Tuesday, Bernanke is pushing to eliminate all reserve
requirements in the U.S. If Bernanke has his way, American banks won't
even have to borrow from the Fed or other banks after the fact to have
reserves. Instead, they can just enter into as many loans as they want
and create endless money out of thin air (within Basel I and Basel II's capital requirements - but since
governments are backstopping their giant banks by overtly and covertly
throwing bailout money, guarantees and various insider opportunities at
them, capital requirements are somewhat meaningless).

The system is no longer based on assets (and remember that the giant banks have repeatedly become insolvent) It is based on creating new debts, and then backfilling from there.

is - in fact - a monopoly system. Specifically, only private banks and
their wholly-owned central banks can run printing presses. Governments
and people do not have access to the printing presses (with some
limited exceptions, like North Dakota), and thus have to pay the monopolists to run them (in the form of interest on the loans).

See this and this.

At the very least, the system must be changed so that it is not - by
definition - perched atop a mountain of debt, and the monetary base
must be maintained by an authority that is accountable to the people.

Note: When I receive a better translation I will post it.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
godzila's picture

Could anyone elaborate on the North Dakota mention ?!

seek's picture

I did not know this until googling, but apparently North Dakota is the only state in the U.S. with its own bank -- so technically ND has its own central bank ala the Fed, but at a state level.





Johnny Dangereaux's picture

Hey Now!....greetings from snowy Chicago.

 VFR et al......

This is where to:

A. Watch Money Masters in it's entirety

B. READ "The Secret History of the Federal Reserve"


VFR's picture

thanks johny D . i think I might rewatch monemasters. I found it quite enlightening. 

Instant Karma's picture

"The President, Vice President and all civil Officers of the United States, shall be removed from Office on Impeachment for, and Conviction of, Treason, Bribery, or other high Crimes and Misdemeanors."

Keep hope alive.

Tera€'s picture


signature test


why do I have to come here, to read this ...

Greetings from Germany


Tera€'s picture

ok fail :-(

2nd try vs. I give up

signature activation help needed

feel free to delete

emsolý's picture

you know you can preview your post (and, eventually, your signature)  before actually posting...

Tera€'s picture

thx for the help

ofc i Know the "preview function", but

manual insertion / copy/paste isn't exactly my idea of "automatically appended" to postings.


"Names will be changed to protect the innocent, if we find any..."
Borrowed (with permission) from my (little german) blog


(*via copy/paste* still testing *)

VFR's picture

this worth a watch. its called the money masters and has been on you tube for several years. in 22 parts it explains the above and more.

emsolý's picture

Nice, thanks.
There is also a 47min Google video, "Money as Debt" ( TD was referring to it a couple of days ago.

VFR's picture

Interesting emsoly, I have seen debt is money and would also recommend that its worth spending the 45 mins watching.

M.G. in Progress's picture

What is the difference between money created out of thin air and a Ponzi scheme? I do not see it particularly when banks buy governemnts bonds (that is they lend money to governments) and governemnts then intervene to save banks and central bank continue to lend cheap money to banks accepting governments' bonds as collateral. If you run this system cross-border like Germany-Greece crisis one could wonder if we should not stop this creation of money out of thin air and let Greece default (German and ECB will have to stop the money creation).

Instant Karma's picture

The more I learn about how banks work, and credit works, and all this other arcane stuff, the more I understand how 100 years ago a $20 US gold coin was worth less than $20 in gold, and now is worth $1100 in gold and climbing. Paper money is crap.

Stranger's picture

Even Jon Stewart has figured it out by now. (Watch Wednesday's Daily Show)

Squid-puppets a-go-go's picture

old news - 'fractional reserve' banking. But the salient reminder of this information is that were the banks to write down the debt of underwater borrowers, the banks dont lose the money. Well, they do , but its only money that they made up to start with. All the banks would be doing in write-downs is acknowledging that they made too much money to start with and it has causes upheaval from imbalances.

But of course, no, they want to try and hang on to the money they created. Parasites. But then, one bank can't cut its own throat with writedowns if it isnt sure that all its competitors are doing likewise. This is why 'competition' when taken to extremes becomes uncompetitive, and its why we need serious government no bullshit ham fisted regulation at this point in history

anonnn's picture


First a SECRET note from Ambassador Bullitt to Pres FDR in 1936.

Then read the most concise IMHO treatise on Financial a real insider...Hjalmar Schacht.


William Christian Bullitt, Paris, 20 December 1936 to Franklin Delano Roosevelt

For different reason, the British, Italians and Russians are all opposed to Franco-German reconciliation. The only great Power which favors it genuinely is the United States. Poland desires it ardently and so do all the small countries of Europe, except Hungary and Bulgaria.

You will have seen from my recent cables that I have attempted to do what I could, in a quiet way and without involving the United States in the least, to encourage the idea of Franco-German rapprochement. I think it might be most useful if, when you see de Laboulay and Luther, you should stress the idea that peace in Europe is purely a question of Franco-German reconciliation; that the modern bombing plane has confronted Europe with the alternative of unification or destruction and that we ardently desire to see France and Germany reconciled.

If on some occasion, you should have an opportunity to say to Ronald Lindsay the we should be shocked if we should find that England was not genuinely doing everything possible to promote Franco-German rapprochement, it might be very helpful.

The British, of course, will say that they favor it and will do everything possible to sabotage it. But they may be less active if they think your eye is on them.

Delbos again this morning reiterated to me his remarks about Great Britain’s absolute opposition to any concessions to Germany in the matter of colonies. As he pointed out yesterday to me, it was the frown of Britain which prevented France from following up Schacht’s conversations with Blum.

Inasmuch as we can not involve ourselves directly in European politics, inasmuch as Great Britain, Italy, and the Soviet Union will do everything possible to prevent Franco-German rapprochement and inasmuch as the French and the Germans fear and suspect each other deeply, the chances are slim, but I feel that there is nevertheless a chance — the only chance.

For the President

Personal and Secret
Correspondence Between Franklin D. Roosevelt and William C. Bullitt
Boston : Houghton Mifflin, 1972, pages 200-201.


Hjalmar Schacht [1877-1970] led Germany out of hyperinflation in the 1920s. He was born in part of Denmark that later became part of Germany. He resigned from Hitler's government before WWII and was cleared of war-crimes at Nurenberg.

...from Account Settled, Hjalmar Schacht 1949 [all emphasis mine]

. . . By the autumn of 1923 the unrestricted depreciation of the currency had reached such a pitch that it threatened to break up the whole structure of Germany’s national life. Wage-earners’ wives were in despair. Whenever they went out to buy food they were involved in a hopeless struggle against the depreciation of the mark. The wages of their menfolk ran through their fingers like water even when, as was finally the case, they were paid daily, In this extraordinarily difficult situation the authorities called upon me to put a stop to the depreciation of the mark and stabilize the currency. . . .

. . . Oddly enough, for the average citizen there is something very mysterious and incomprehensible about finance. The only thing about it which is quite clear to everyone is its importance. The obvious essential is that money should retain its purchasing power. Above all, it must allow people the chance to save, to put aside wealth for future use. It must therefore maintain its value in relation to all other commodities. The great the number of people who, in the course of historical development, are excluded from the possession of landed propertythe more important it is that the value of money should remain stable, because only then can they store up the product of their labours and preserve the property they have acquired. Money, in short, must retain its value ; it must be sterling. ,

That money is sometimes cheap and sometimes dear ; that it is worth more in our youth than in later years ; that the relation between the value of money and the value of commodities changes constantly—these are problems which are difficult for the average man to understand, and he cannot protect himself without help against his ignorance. During the terrible period of inflation after the first world war the Reichsbank was overwhelmed with thousands of suggestions, plans and schemes for stabilizing the currency. . . . For some reason or other the arithmetical nature of finance seems to inspire the mathematically-minded, and their efforts always tend in the one direction, towards the creation of an automatically functioning solution operating according to fixed mathematical rules. But the currency problem is not a problem which can be solved according to fixed rules. If it were, then perhaps a capable professor of mathematics would be the best financier after all. Monetary policy is not an exact science but an art. As such it is a sphere which will always remain mysterious to the man who is not capable of mastering that art, while appearing simplicity itself to the man who is. The art of monetary policy consists in keeping the relationship between the value of money and the value of the other commodities as steady as possible. Part of this art consists in constantly observing and correctly judging not only the movements of money but also the production and consumption of other commodities. Therefore it is essential that the financier should have a wide knowledge of national and international economic affairs. This is all the more necessary because economic conditions, costs of production, etc., are constantly being changed by technical inventions ad new organizational measures.

The fact that I, of all people, who have always been regarded as a representative of the individualistic economic conception, should have been called in to assist a Social-Democratic Government, was entirely due to the broadmindedness and enlightenment of Fritz Ebert, who was at that time Reich’s President. When I reminded him before my appointment that I was not a Socialist, he replied with a smile: "That’s quite beside the point. The question is: do you think you can solve the problem?" He was right: that was all that mattered. I replied in the affirmative, and I am happy to say that under Ebert’s ægis the Social Democratic Government of the day gave me a completely free hand to carry through my stabilization policy. In later years, unfortunately, it seriously interfered with my plans.

German social Democracy had enjoyed its heyday in the nineties . . . The much-praised talent of the Germans for organization, which was naturally shared by the Social Democratic Party, has one great disadvantage, a tendency towards excessive bureaucracy . . . The original drive and vigour of German Social Democracy was weakened by this flaw. . All those currency projects which embody new ideas and suggestions for establishing automatically functioning principles are fruitless. All that is required after that is vigour and determination in carrying out the recovery plan. It is not a question of the percentage of gold or bills behind the notes in circulation, or of note control, or the discount rate, but simply and solely a matter of the temperature and the pulse of economic life. In monetary policy, just as in medical therapy, correct diagnosis is the secret of successful treatment.

But everything depends on initiative, on the ability to seize an opportunity, on vigorous action

In the inflation of 1923 there were three main measures which were decisive to the stabilization of the mark.

[1] abolition of private paper currency ;

[2] the diminution of the volume of legal means of payment ; and

[3] the credit bar.

As the volume of bank-notes officially issued by the Reichsbank proved unable to keep pace with the rapid rate of currency depreciation, and a shortage of notes developed everywhere, both municipal administrations and large-scale industrial undertakings began to print their own paper money, which nominally had the same value as the notes officially issued by the Reichsbank. Naturally, this unofficial paper money depreciated at the same rate as the official notes printed by the Reichsbank, and the printing of such paper money thus proved a very profitable business, since when it was issued its value was considerably higher than when it was later redeemed. This unofficial paper money was, of course, not legal tender, but if economic life was not to break down altogether then the banks, including the Reichsbank itself, had to accept it in just the same way as they accepted the official notes. Some firms ruthlessly exploited the situation by paying in the biggest possible sums of the money they had themselves printed to one branch of the Reichsbank whilst drawing out an equivalent sum at a neighbouring branch in official bank-notes, which were, of course, the only legal tender and could therefore be used abroad, or, at least, could be used abroad more readily than the unofficially printed paper money. . .

[[[1]]]My first measure as Reich’s Currency Controller was to issue instructions that no more of this emergency currency was to be accepted by the Reichsbank. This undermined the entire basis of the private issue of currency.[[[deceitful-unfathomable CDSs, toxic mortgages,etc?]]] Notes which the Reichsbank refused to accept were valueless. This first measure was quite sufficient to make me very unpopular both with the municipalities and with the large-scale industrial undertakings. For the latter the fact that the blow was delivered by a man whom they regarded as one of themselves, the Director of a big bank, added insult to injury. I was practically mobbed. They threatened me ; they pleaded with me ; they painted the probable consequences in the most violent colours. But I remained adamant. I was determined at all costs to put an end to the misery of the great masses of Germany’s working people and to guarantee them a stable wage once more.

[[[2]]]My second measure was directed against speculation in foreign exchange.[[[carry-trade ops?]]] On November 20th, 1923, the Reichsbank had let the exchange rate of the United States dollar climb to 4.2 billion marks with the firm intention of maintaining it at that level. However, private speculators continued to buy dollars at an even higher rate. The groups who indulged in this speculation did not believe that I would succeed in keeping the exchange rate at its official level, and so they merrily went on buying foreign exchange on a rising market, paying up to 12 billion dollars [marks ?] ‘per Termin’, which meant that at the end of the month the dollars had to be paid for with legal tender, that is to say, with Reichsbank notes. When settlement day came round at the end of the month the dollar purchasers needed marks from the Reichsbank to meet their commitments, but the Reichsbank refused to give them Reichsbank notes and handed out Rentenbank notes instead. This Rentenbank had been established as an auxiliary institution to assist in the stabilization of the mark, and the notes it issued did not have the character of official bank-notes. In short, they were not normal legal tender But naturally, the foreign groups who had sold the dollars demanded payment in money which was legal tender, and the German dollar purchasers were now unable to comply. Nothing remained for them but to sell their stores of foreign currency to the Reichsbank which now secured dollars which had been bought speculatively for as much as 12 billion marks at the official rate of 4.2 billion marks[[[4.2 million-million]]]. Speculators lost many millions on this unprofitable transaction. Naturally, my unpopularity was greatly increased, but the well-being of the great mass of the German people meant more to me than the troubles of individual speculators. The dollar rate of exchange, officially fixed by the Reichsbank at 4.2 billion marks, had to be maintained at all costs. I was not prepared to allow private speculation to drive it up again. It was, in fact, held. .

[[[3]]]The third of the decisive measures adopted to put an end to inflation came into operation at the beginning of April, 1924. Big business interests had once again used the excessive credits they had asked for and obtained to start hoarding foreign exchange. In order to make them realize once and for all that they must subordinate their operations to the monetary policy of the Reichsbank, I suddenly barred all further credit against bills. In normal times these bills were the usual means of obtaining credit from the Reichsbank. It was unprecedented that the Reichsbank should refuse to discount good commercial bills. When its credit was called on to an excessive degree, that is to say, when too many bills were presented, the Reichsbank would merely raise the discount rate, and continue to raise it, until the deduction was more than the bill holders cared to pay and they preferred to do without the credit. However, in times of currency depreciation such as we had just experienced, this discount screw necessarily failed to operate effectively. It did not matter in the least whether the presenter of a bill had to pay 10 or 15 per cent discount when within a few weeks, or even within a few days, money itself would depreciate by 50 per cent and even more. This was the reason why I did not have recourse to the usual method of raising the discount rate, but adopted instead the harsh but only really effective means of blocking all credit. The measure was immediately successful. To the extent that business interests needed money they had to surrender their hoarded sums of foreign exchange to the Reichsbank, and within the space of two months equilibrium had been restored so successfully that throughout my whole subsequent period of office the mark remained stable. . . .

All in all, this struggle with the speculators over the rate of exchange lasted eight months. It was waged with vigour and determination, and private interests were ruthlessly ignored in the interests of the community as a whole. My victory did not make me popular . . . Even the experts did not always grasp my methods, which contradicted every classical theory, and the great mass of the people naturally failed to understand the significance of what was taking place. . . It was in this period that the press first dubbed me a ‘Financial Wizard’, because in money matters in particular the simple and the natural is the most difficult to grasp.

They were the

( Abrechung mit Hitler, Hjalmar Schacht
Rowohltverlag, Hamburg 1948. )
Translated by Edward Fitzgerald
London : Weidenfel & Nicolson, 1949, pages 8 - 15.


Burnbright's picture

Yep, when you go down and sign a loan, that in fact is a promisary note. So your signature creates the money for the loan. It is also why the federal reserve notes are called notes. They are just promisary notes from the FED.

Mark Beck's picture

Really this is a manifestation of modern fiat banking, in that, the "reserve" requirement is not met from the commercial bank side, the central bank always accomodates the needed credit, or credit expansion. Essentially, the banker can loan in violation of the "reserve", and the central bank will try and service the bank to correct the imbalance. But, it is really just a matter of common practice with fiat USD. Because, it is not practical to try and meet a reserve requirement in real time. Especially for a large bank with the ability for huge loans.

But, to be fair, you should also mention what happens with electronic credit when the loan is repaid. You will find a contraction in credit, with the added need to address interest. That being said, the commercial bank seemingly perverse creation of credit is not the concern. The central bank is the problem, and in the US the lack of sound money policy. The FED should be the primary focus because it is here that the money supply never seems to contract, or tighten. The evidence shows that whenever the FED takes action, the currency suffers. In my opinion this is the real crime, in terms of violating the Constitution. Also, we should notice that when the FED makes mistakes it puts the currency and the country at risk. This kind of power should only lay with the Congress and not the FED.

I have said this many times before on ZH. That what is needed is centralized control over fiscal and monetary policy. These need to be addressed together with sound money in mind in order to correct corruption of our money system. The separation of fiscal and monetary policy, in terms of a nations money, is an absolute failure. The worse of both worlds. An afront to Democracy, and even today, puts the nation in peril.

Mark Beck

merehuman's picture

I  like the way you said that! I can hear heat behind the words. Cheers to ya!

anony's picture

With all the sound and noisesome complexity of a symphony orchestra, the variety and crescendo, who is the one person who does not make a sound and yet without him the men and women with the instruments, remain mute?

El Maestro, The conductor

THE DORK OF CORK's picture

The Cartel controls everything - the only thing that will take these Bastards down is their own decadence and corruption.

The global energy system is in deep trouble because they got even more greedy after the 60s - they did not reinvest any of their wealth in capital - now a declining surplus year after year has exposed these cretins as they have to engage in emergency and overt transfusions into their decaying bodies to remain at the top of the food chain. 

Frank Owen's picture

Congrats on the Max Keiser question for David McWilliams... too bad he didn't read the whole thing! :)

THE DORK OF CORK's picture

Yes well the Irish times have hinted that the ECB is the real executive power in Ireland with the civil servants in Dublin Castle doing their bidding. But they are not looking too deeply down this rabbit hole

Sorry having problems with this site - just google "Is the ECB the real puppet master behind the NAMA plan" and the article under the Irish times may be the right one

wake the roach's picture

Yeah but when the SHTF, its nothing that cannot be fixed with the right ratio of Murpheys, Jameson and some good old Irish know how haha...

My family, the O'Byrnes have had plenty of practice expelling foreign pests...

Maybe I'll gather my clan and we''ll fly over and lend a fist;-)

wake the roach's picture

Yep... Is that a good thing or a bad thing haha?

hedgeless_horseman's picture

Our ancestors likely fought for, and against, each other at some point.  

I drink these:

2 1/2 oz Jameson

3/4 oz Cointreau

2 dashes Grenadine

1 egg white

Shake with ice and strain into a Waterford deep champagne saucer (Kildare pattern for me)


THE DORK OF CORK's picture

No a obscure tavern in the backstreets of Cork - cannot name names.....

Imagine me as a desert camel arriving at a oasis - certain of a long dry journey ahead.

hedgeless_horseman's picture

Not your pub, but the Roach's family.  Might you, Dork, be a current or former Intel drone?


THE DORK OF CORK's picture

Drones live a short happy uncomplicated life - my life is a long unhappy complicated existence

hedgeless_horseman's picture

The happiness and complexity of a man's life are are both within his own control.  Health, wealth, and love maybe not so much. 

Count your blessings, defeat your demons, treasure your friends, and enjoy your beer.  Cheers.

THE DORK OF CORK's picture

Hey I was drinking in a little pub yesterday and the barman of many years was given his notice to leave  - he was expected to finish the next day and yet provide unpaid "tuition" to the new barman.

He decided in his wisdom to provide a free bar to the few lucky clientele that were present  - I guess I was a accessory to robbery but somehow I found some moral justification in his actions

THE DORK OF CORK's picture

Revenge is a dish best served with a cold Heineken

Frank Owen's picture

I can't find it but imagine it's based on this:

This paragraph from Mr. McWilliams was a damn good hammer hit:

The problem for us in Ireland is that the people who are drafting our laws locking us to the banks do not understand this, because they are not capitalists; they are legalistic functionaries, civil servants and bankers trying to hold on to their jobs. In short, they are consummate insiders with their interests vested in the old status quo who can’t see that the old status quo is the problem.


THE DORK OF CORK's picture


The Irish Times - Monday, September 21, 2009

Is ECB the real puppetmaster of our Nama salvation plan


BUSINESS OPINION: The conspiracy theorists are wondering if the bank signed a €54 billion pact with Ireland, writes JOHN McMANUS 

THE EXTENT to which the European Central Bank (ECB) has been propping up Ireland is becoming clearer by the day.

As reported in this newspaper over the weekend, the ECB has indirectly financed over one-quarter of the Irish exchequer deficit since last November by refinancing Irish banks’ bond purchases.

Since last November, the Irish banks’ holdings of Irish Government bonds have increased from about €500 million to €7.5 billion. They have been able to finance these purchases – and in the process help keep the exchequer afloat – because the ECB will accept the bonds as collateral for loans under the emergency liquidity measures introduced after global credit markets froze last September.

The net effect is that the ECB is buying Irish Government bonds, something it is not allowed to do directly under its own rules. A central bank buying its own government bonds is in effect printing money, something which is contrary to the ECB’s number one policy aim of controlling inflation.

The fact is that the ECB’s support to Ireland could be even greater than the €7 billion calculated by King Research (, as we don’t have figures for the extent to which other euro-zone banks are buying Irish bonds with the intention of refinancing them with the ECB.

It would be wrong to characterise the ECB’s support for Ireland as a bad thing, or even clandestine. The information on Irish bank holdings of Government bonds are published by the Central Bank. It’s just something that no one – for obvious reasons – is all that keen to highlight.

Equally, we have no idea of the extent to which other euro-zone countries are availing of the ECB’s “quantitative easing by stealth” programme.

But it would be safe to assume that we must be one of the biggest, particularly given that the National Asset Management Agency (Nama) is going to be financed in a similar fashion, with the ECB agreeing to take Nama bonds. From this perspective, the whole Nama exercise can be characterised as a €54 billion loan from the ECB to Ireland that will allow the State buy the banks’ bad assets.

And it’s a perspective that many Nama supporters have promoted in recent weeks on the basis that the resulting €54 billion injection of cash into the banking system will boost recovery.

It’s pretty clear the ECB has put its money where its mouth is as far as Ireland is concerned. The immediate reaction is – and should be – one of gratitude, but at the same time it is worth exploring why it did so and what conditions were attached. The answer to the first question is pretty obvious – it had no choice; and the answer or answers to the second are a conspiracy theorist’s dream.

With hindsight, it’s pretty easy to say that the ECB – and by extension the euro-zone members – were always going to come to Ireland’s aid because if Ireland fell, so did the euro.

But such presumption should be tempered by the fact that we don’t know and will not know for a time to come, just how close to collapse the global financial system came and whether we might have been let go under.

But it is possible to link the turning point in Ireland’s economic collapse with the explicit statements of support from both the ECB president, Jean-Claude Trichet, and the German foreign minister earlier this year.

And that is also the jumping-off point for conspiracy theorists.

Europe’s support also appeared to coincide with the waking from its torpor of the Government and the resultant supplementary budget and, in time, Nama.

The extent to which the ECB orchestrated all this is really just a question of how much conspiracy you can cope with. Being a journalist, I am tempted to jump in with both feet and propose something of which Robert Ludlum would be proud.

But moderation prevails. It is fair, however, to postulate that the ECB would not have extended all this credit to Ireland unless it was reassured that corrective measures were being put in place both to stabilise the exchequer finances and clean up the bank system.

Did they have to tell us what to do, or did we figure out for ourselves what we had to do in order to obtain their support? Did we have a choice either way? A bit of all of the above, one suspects.

The notion that the ECB now has its hand – even partially – on the economic tiller does put the recent comments by the Minister for Finance and the Taoiseach regarding taxation in an interesting light. Both have more than hinted that there will not be significant tax increases in December’s budget.

The corollary of that – assuming they have any ambition to try and stabilise the exchequer – is that there will have to be deep cuts in social welfare and public sector pay. And you can’t get away from the fact that if you asked the ECB what it thinks Ireland should do at this juncture, that would probably be the answer

wake the roach's picture

Yeah, good interview too ;-)


37FullHedge's picture

The more I read about banking, The more I dont understand, The $605tn swaps thing is another thing I struggle with. What I do understand is the value of currency is built on quicksand and is not money. I dont trust currency to hold its purchasing power over hard assets on the short term let alone longterm.

Nathan Muir's picture

Fractional Reserve Banking can work, but only when you have a completely transparent central bank, strict accounting standards and reasonable reserve standards, say 10 to 1.  Commodity based currencies face challanges too remember.  Given that, I would much rather see a gold standard than what we currently have.  But I believe the "best" system is what I first described.

wake the roach's picture


I'm not being anti gold here, of course a gold standard is much better than what we have but golds only real purpose was as a tool for account keeping in the days of pencil and paper, telegrams and horse drawn buggy's.

The biggest issue is not fractional reserve bankings ability to create credit money in excess of the monetary base, it is that the base money itself is created from credit. This requires exponential credit growth!!! (debt to repay debt) End of story...

When credit money is created it dilutes the purchasing power from the monetary base (inflation). This is theft from real economic growth and savers. This credit money only makes up for the lost purchasing power of the monetary base when invested into capital that can produce wealth.

Enter real estate...

There is a reason that realestate bubbles are so destructive to the purchasing power of the monetary base and thus to economic growth, land...

Land is natural capital, i.e. it requires no monetary input to produce (besides from clearing of vegitation, levelling etc)

When we allow credit money (money that only represents base money) to be used to drive up the price of land it becomes a wealth transferring vacuum that steals real capital wealth from an economy that goes directly into the banks.

This is the most overlooked method of wealth transference from a real wealth producing economy into the hands of bankers and is something they have tried to keep quiet for hundreds of years.

When this shithouse goes up in flames the people must enforce the three most fundamental golden rules of sustainable economic growth.

1. The monetary base must be created free of debt and by an authority that is accountable to the people.

2. Land must only be purchased by savings which will end what is by far the greatest destroyer of real wealth and allow realestate prices to never steal purchasing power from the monetary base.

ADDED: for example, when credit is used only to fund the purchase or construction of a building that sits upon land, this creates wealth that balances itself out in the system. Building materials are purchased, plumbers, sparkies and chippies produce an income etc. etc. etc. Using credit to purchase land is dead money, nuff said. Purchasing land with savings is capital already produced by the economy, no negative consequences.

And this may be hard to contemplate but if you would like an explanation just ask.

3. We must never allow interest rates to be lowered when economic growth begins to decline.

This allows devastating asset buubles to be refueled by the financial economy with its access to cheap credit money and only pushes the bubble down the road.

When economic growth declines and interest rates are held steady in an economy that has enforced the above two rules, economic downturns become short and swift, they clear all the toxins before they can become to large and it FORCES BANKS TO EXTEND CREDIT ONLY TO WEALTH CREATING CAPITAL and also forces responcibility onto consumers aswell.

Once the toxins have been purged from the economy, interest rates can then be lowered (slightly, if any) to help kickstart growth. Interest rates must never fall below what is a sustainable level of economic growth, say 2 - 3% unless for a short boost after deleveraging and defaults have occured.



wake the roach's picture

Haha yeah, you busted me, gonna have create a new cover...

Na, Its just easier to pretend as most ZH readers are yanks anyway... 

But at the end of the day, we're all americans now ;-)

Frank Owen's picture

If you told me what beer you drink I could probably narrow your location down. Sparkies lol 

we're all americans now 

Fairly true unfortunately (given that most Americans realize how far they are from what they used to be proud of). I watch the train wreck from Canada but know the problems are worldwide. America is kind of like a big brother for us... when we were kids he was always there to make sure we were safe, and took care of the bullies, and made sure bread was on the table. Lately he seems to be hooked on heroine with his good buddy the pusher always at his side making sure he doesn't listen to the rest of the family. He's also stopped helping with the groceries and just comes by to clear the beer from the fridge before going out brawling. Rehab is going to be a real bitch if he lives through it or doesn't overdose.

No offense to any "Yanks" out there. I seriously hope you pull through, and it is great to read comments of so many intelligent Americans here who are aware of what is going on and trying to make a difference.

AccreditedEYE's picture

I would love to put this post on a billboard in every major American city. f-ing fantastic.

wake the roach's picture

I only drink the best cold beer, and the best cold beer is vic, victorian bitter... haha, it gives me massive migraines but sure is yum yum...

America is kind of like a big brother for us...


Amen, for all her faults, the world would never have become what it is today.

God save the queen would probably be the only national anthem the world would ever need.

Even things are going to shit, we will come through it in the end and we will take the best of what we have gained with us, a large portion of that would be owed to good ol uncle sam...


Frank Owen's picture

Hah, I drank a lot of that and Cooper's green label when down at the Southern part of Australia but liked the Tasmanian beer James Boags premium lager the best. That 4x gold stuff is shit!

God save the queen... sex pistols version ? lol

wake the roach's picture

That 4x gold stuff is shit!


Yep, and its brewed by Victorians (mexicans) and exported to illiterate Queenslanders (banana benders) and thus XXXX...

ewmayer's picture

Regarding the translation of "Giralgeldschöpfung": Giralgeld means "credit money" [i.e. 'money' which exists in form of a loan] and "Schöpfung" means "creation" (think Haydn's famous symphony), ergo

Giralgeldschöpfung = credit money creation.

It's still a "Ungeheures Schneeballsystem" (monstrous Ponzi scheme), though. :)

Schöne Grüsse,

Ferris Büller