Thanks for the comment! Yes, I've come across both in my research, and met Richard Werner in real life.
I have more to say about Werner. I like the way he uses balance sheets in his analysis of banking - it means he's saying something precise. But I have some significant differences with his interpretation, as I'll be writing about soon. He implies that banks are getting something for nothing when they create money, but money created by banks is debt owed *by* banks (which *decreases* their RNW) to the account (or note) holder. That's what makes it valuable to non-banks. Banks don't become wealthy by writing IOUs to people.
Don't the banks become wealthy by collecting interest on the IOUs they create?
My impression is that what they're getting for free is an income steam with no opportunity cost. When I loan someone money, I have to first earn the money (production), then not spend the money (deferred consumption), so there's an opportunity cost to making the loan, which I'm compensated for by the interest income.
If I could just create credit out of nothing, without producing anything and without deferring any consumption (no opportunity cost), my interest income would be getting something for free, no?
Yes, the interest they collect on loans does increase their raw net worth. It's a simple bank's only real source of income. But it's not cost-free. What they're doing is underwriting the borrower's IOU. If Alice borrows $10,000 from the bank, uses it to buy a car from Bob, and then she defaults (and crashes the car so it's beyond repair), the bank still owes $10,000 to Bob, but it won't get paid by Alice. You can think of the interest as being like an insurance premium.
In an attempt to save my dad's savings, I moved it out of the markets, and it’s sitting in a few banks as cash. I’m even more scared now. Just knowing that the banks take your money and put it anywhere else is terrifying.
I'm afraid I can't offer any advice on what to do. All financial products are promises (i.e. debts), and I'm not in a position to tell you whose promises can be trusted. All I can help you with is understanding how things work.
As you know, banks don't just store cash in a vault for you. Cash is the debt asset (green) half of a debt owed by the central bank to the current holder of the banknote. When you deposit it at a high street bank, you're transferring the debt asset to the bank (so the central bank now owes the debt to the bank), in exchange for the bank creating a *new* debt owed to you, the account holder: the bank is promising to transfer cash back to you when you ask for it. In the meantime, the bank can do what it wants to with the cash.
I believe most nations have deposit "insurance" schemes (e.g. FSCS in UK and FDIC in US), so that should be some reassurance to you. If the bank fails, and can't pay you the cash it owes you, the government takes it from somebody else in order to pay you. (It's less reassuring if you're that somebody else). In the UK, the limit is £85,000 per "bank, building society or credit union" (but be careful because several "banks" are just different brands of the same actual bank, so if you have £85,000 in HSBC and £85,000 in First Direct, only half of the total is protected).
This reminds me of Richard Werner’s work, and Catherine Austin Fitts’. (She was an assistant secretary for HUD during the Bush Sr presidency)
Thanks for the comment! Yes, I've come across both in my research, and met Richard Werner in real life.
I have more to say about Werner. I like the way he uses balance sheets in his analysis of banking - it means he's saying something precise. But I have some significant differences with his interpretation, as I'll be writing about soon. He implies that banks are getting something for nothing when they create money, but money created by banks is debt owed *by* banks (which *decreases* their RNW) to the account (or note) holder. That's what makes it valuable to non-banks. Banks don't become wealthy by writing IOUs to people.
Don't the banks become wealthy by collecting interest on the IOUs they create?
My impression is that what they're getting for free is an income steam with no opportunity cost. When I loan someone money, I have to first earn the money (production), then not spend the money (deferred consumption), so there's an opportunity cost to making the loan, which I'm compensated for by the interest income.
If I could just create credit out of nothing, without producing anything and without deferring any consumption (no opportunity cost), my interest income would be getting something for free, no?
Hi - thanks for the question!
Yes, the interest they collect on loans does increase their raw net worth. It's a simple bank's only real source of income. But it's not cost-free. What they're doing is underwriting the borrower's IOU. If Alice borrows $10,000 from the bank, uses it to buy a car from Bob, and then she defaults (and crashes the car so it's beyond repair), the bank still owes $10,000 to Bob, but it won't get paid by Alice. You can think of the interest as being like an insurance premium.
Do you find that convincing?
You might find these articles useful:
https://www.economics21st.com/p/money-and-banking-1
https://www.economics21st.com/p/money-and-banking-2
The second one explicitly addresses interest payments, but it's probably best to read the first one first!
In an attempt to save my dad's savings, I moved it out of the markets, and it’s sitting in a few banks as cash. I’m even more scared now. Just knowing that the banks take your money and put it anywhere else is terrifying.
I'm afraid I can't offer any advice on what to do. All financial products are promises (i.e. debts), and I'm not in a position to tell you whose promises can be trusted. All I can help you with is understanding how things work.
As you know, banks don't just store cash in a vault for you. Cash is the debt asset (green) half of a debt owed by the central bank to the current holder of the banknote. When you deposit it at a high street bank, you're transferring the debt asset to the bank (so the central bank now owes the debt to the bank), in exchange for the bank creating a *new* debt owed to you, the account holder: the bank is promising to transfer cash back to you when you ask for it. In the meantime, the bank can do what it wants to with the cash.
I believe most nations have deposit "insurance" schemes (e.g. FSCS in UK and FDIC in US), so that should be some reassurance to you. If the bank fails, and can't pay you the cash it owes you, the government takes it from somebody else in order to pay you. (It's less reassuring if you're that somebody else). In the UK, the limit is £85,000 per "bank, building society or credit union" (but be careful because several "banks" are just different brands of the same actual bank, so if you have £85,000 in HSBC and £85,000 in First Direct, only half of the total is protected).
I hope that helps a bit.
Thanks so much!