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:
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).
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.