Bank Underground

I also groan at this. You, or readers, may be interested in this article from the Bank of England's blog, which provides a somewhat more modern/real-world version of the 'money multiplier' i.e. market operations to provide liquidity/funds/interbank/creation of liabilities to fund assets (lending)/balance banks' sheets on lending, which has been the case for years now.

https://bankunderground.co.uk/2015/06/30/banks-are-not-intermediaries-of-loanable-funds-and-why-this-matters/

An excerpt:

> In the simple ILF model, bank loans represent the intermediation of real savings, or loanable funds, between non-bank savers and non-bank borrowers. Lending starts with banks collecting deposits of real resources from one agent, and ends with the lending of those resources to another agent. In the real world, however, banks never intermediate real loanable funds, an activity that, correctly understood, can only amount to barter.

> Rather, the key function of banks is the provision of financing, meaning the creation of new monetary purchasing power through loans, for a single agent that is both borrower and depositor. Specifically, whenever a bank makes a new loan to a non-bank customer X, it creates a new loan entry in the name of customer X on the asset side of its balance sheet, and it simultaneously creates a new and equal-sized deposit entry, also in the name of customer X, on the liability side of its balance sheet. The bank therefore creates its own funding, deposits, through…

This is a great site for anyone who is interested in macro economics and global credit issues.

I've followed it for the past year and here is a list of "curated" articles from the blog that I found interesting enough to bookmark and make notes on:

https://bankunderground.co.uk/2016/05/03/the-growth-of-peer-to-peer-lending-platforms-and-prospects-for-banks-disintermediation-hype-or-real-threat/

https://bankunderground.co.uk/2016/03/22/1602/

https://bankunderground.co.uk/2016/03/18/

https://bankunderground.co.uk/2015/10/30/rational-and-behavioural-drivers-of-financial-markets-the-case-of-search-for-yield/

https://bankunderground.co.uk/2015/10/20/does-oil-drive-financial-market-inflation-expectations/

https://bankunderground.co.uk/2015/10/14/is-starting-a-new-market-like-opening-a-nightclub/

https://bankunderground.co.uk/2015/11/19/regulatory-arbitrage-in-action-evidence-from-cross-border-lending-and-macroprudential-policy/

https://bankunderground.co.uk/2016/01/15/testing-the-test-how-reliable-are-risk-model-backtesting-results/

https://bankunderground.co.uk/2016/02/29/stress-tests-the-small-print-matters/

https://bankunderground.co.uk/2016/03/31/modelling-banking-sector-shocks-and-unconventional-policy-new-wine-in-old-bottles/

The bank of England has been very lucky with the people it has had lead it in the past 20 years. It had Mervyn King lead it up until recently and since then Mark Carney, they stole him from the same position in Canada:(, has lead them. …

I think this is quite similar to this analysis of the effects of the more recent supply chain issues on US inflation and the Phillips curve: https://bankunderground.co.uk/2023/07/05/did-supply-constraints-tilt-the-phillips-curve/ There's a lot of technical details on how they measured this exactly, but the rough conclusion is that supply chain constraints steepen the Philips curve and cause monetary policy to have a much greater effect on inflation than it normally would, rather than having less effect as bank economists apparently wrongly thought in the 1970s.

This probably shouldn't be a surprise - after all, if the oil or other basic things needed to increase production isn't there, there's no way for the expansion in production that would be needed to stop this from being inflationary to happen. Yet even now, there seems to be a widespread popular belief that because the cause of inflation is supply side, there's no reason for central banks to raise interest rates and they're just making things worse for no reason by doing so.

Guess you disagree with the Bank of England.

https://bankunderground.co.uk/2015/06/30/banks-are-not-intermediaries-of-loanable-funds-and-why-this-matters/

Or Werner, the guy who coined the ideas behind the (since basterdized) QE:

http://www.sciencedirect.com/science/article/pii/S1057521914001070

Banks are not intermediaries. Just where do you think all the new money is coming from?? $100K used to be worth something, it's worth sweet FA now for land. Banks issue money against land. There are two tiers of pricing as a result:

1. land - insane increase

2. everything else - mostly falling in price

Banks are the new churches, vast open receptions with hundreds of square feet to be in awe of in city centers.

I'd never heard of this - fascinating. For others who are interested, there's a decent, referenced, account from the Bank of England's blog here: https://bankunderground.co.uk/2016/01/20/the-cheque-republic-money-in-a-modern-economy-with-no-banks/

Doesn't sound like there was "no harm to the economy" though, except in the broader sense. A quote from an Irish building contractor cited in the article: "I employ only 10 people. If it hadn’t been for the bank strike I’d be hiring 30. I’d say I’ve lost up to £20,000 over it ... One of my problems is finding the money to pay the wages. I run round from Wednesday to Friday to scrape them up, and in that time I can do no other work."

It was a real bond purchase. The money just came from the Bank of England reserves, and the BoE was private at the time (although had very strong links to the Government).

Eg: The episode marked an important step on the Bank’s transformation from private institution to a central bank.. A decade after the Armistice, the altered role of the Bank prompted creation of a Parliamentary commission to examine its functions, ultimately setting it on a path to nationalisation

See https://bankunderground.co.uk/2017/08/08/your-country-needs-funds-the-extraordinary-story-of-britains-early-efforts-to-finance-the-first-world-war/