What Banks Are For. | 11 comments (11 topical, editorial, 0 hidden)

All correct, & that's why I made credit (none / 0)

& that's why I made credit one of the fundamental functions.

Nevertheless, that function could not exist without the capital (8%). Ancillary comes from anchor, no? The capital allows to resist to unexpected withdrawals, without borrowing in despair from the central bank.

Historically banks lent from what they had in capital. No more capital, no more lending. Applied to central banks, that was the idea of the gold standard.

It is obsolete, but as you point out, "long term funding of productive assets" is imploding because credit was given in a self feeding loop to the financial system, a bit like when an amp feeds a microphone, that makes the loudspeaker scream even louder, etc...

What has been missing is the notion of PRODUCTIVITY, indeed. Instead short term profits to "credit institutions"(whatever that means, $12 billion of TARP gift through AIG in the case of Goldman) have been confused with long term profits to society.

So society stopped being profitable, basically... Ethics is the way out.
PA

Patrice Ayme Patriceayme.com Patriceayme.wordpress.com http://tyranosopher.blogspot.com/

by Patrice Ayme on Wed May 6th, 2009 at 07:13:38 PM EST
[ Parent ]

Re: that's why I made credit (none / 1)

Ancillary comes from anchor, no?

No, it comes from ancilla which is Latin for handmaiden.

ancillary
1667, "subservient, subordinate," from L. ancillaris "relating to maidservants," dim. of ancilla "handmaid," fem. dim. of anculus "servant," lit. "he who bustles about," from root of ambi- "about" + PIE *kwol-o-, from base *kwel- "move round, turn about, be much about" (see cycle).

You know, some 19th century philosophers also made a career out of squeezing deep meening out of etymologies and (especially German ones) word composition.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Carrie (migeru at eurotrib dot com) on Thu May 7th, 2009 at 01:56:36 AM EST
[ Parent ]

Touche'! I generally check etymologies, but (none / 0)

not this time. Thanks.

Anyway, the initial point was whether deposits were still important or not. As a gentleman above pointed out, banks are in charge of CREATING credit nowadays, that means creating money outright. Most of the money coming out of banks is made that way, so some will view credit as the most important function of banks.

But that function cannot happen without banks having SOME capital. (The capital standards were developed by the international organization called the Bank for International Settlements, based in Basel, and famous, long ago for being kind to Nazis). Indeed if some loans fail, capital is needed.

PA

Patrice Ayme Patriceayme.com Patriceayme.wordpress.com http://tyranosopher.blogspot.com/

by Patrice Ayme on Thu May 7th, 2009 at 12:04:50 PM EST
[ Parent ]

Capital != financial assets (none / 0)

The requirement that banks have some level of "hard money" is a regulatory one. It is not a "law" of economics. There is a number of other possible ways to regulate money creation (e.g. by having the central bank clear all interbank transactions and limiting the amount of credit it will clear in any given time frame).

Further, there is a distinction to be made between short-term credit secured by intrinsically valuable stuff (which essentially means the payment clearing system), short term credit that is either unsecured or secured with stuff that has no obvious intrinsic value (e.g. brokers' loans secured by stocks) and long-term credit (whether secured or unsecured).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 7th, 2009 at 03:23:41 PM EST
[ Parent ]

Banks need to face unexpected losses (none / 0)

while engaging themselves, and not a central bank each time (or they would become a subsidiary of the central bank). Hence the capital requirements.

The distinction between law and regulation is interesting in political philosophy. Regulation is mid way between law and interpretation.

Patrice Ayme Patriceayme.com Patriceayme.wordpress.com http://tyranosopher.blogspot.com/

by Patrice Ayme on Thu May 7th, 2009 at 07:08:06 PM EST
[ Parent ]

What Banks Are For. | 11 comments (11 topical, 0 editorial, 0 hidden)

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