Great insights!
Barry Low

Tks Barry. This paper by the Bank of England provides a very good explanation:

Basically, new money is created when commercial banks make loans. It is as simple as ‘debit’ Loan and ‘credit’ Deposit in the same name. The double entry creates the money out of thin air and keeps the bank’s books in balance. The Loan records the amount the borrower must repay, while the Deposit gives the borrower access to the money to spend. The borrower gets a right to spend he has not earned and must work/invest to create value out of which he can repay the debt. Once the debt has been repaid, he and society will be square, he will have added the same amount of value as he took out when he spent the proceeds of the loan.

The bank does not get the proceeds that are repaid. The entries in its books are simply reversed and the money goes back into the thin air fro which it came.

The bank gets the interest to pay for its cost of operations (including over the top offices and salaries and bonuses) as well as a margin to cover defaults, inflation and its profit.

Banks ought to exist to solely run the payments system and to make loans, with the focus on the loan manager knowing his client’s and client’s business to ensure that loans were made to people with the ability to repay them (albeit with a recognized risk that some would not) This is a valuable service for society. Unfortunately, over time the Big banks have deceived governments to amend the regulations in their favour creating ‘too big to fail’. This creates ‘moral hazard’ where the person making the Loan gets all the rewards (big bonus the more that gets lent) but does not bear the consequences of default.

This happens when major defaults occur and the banks run to government to be bailed out ‘because if they are not bailed out everyone will lose their deposits and the whole system will collapse.

We now need a new system that eliminates moral hazard without putting the whole financial system at risk.

I have designed such a system. It requires no change to the current system — except to remove the govt guarantees and insurance.

Under the new system no one can ever lose their deposit and the system cannot collapse no matter how many banks fail.

The new system requires new simple regulation (much less than the current system) and it is easy for any existing bank to transfer to the new system without a blip in their business. But that hat is another story :)

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