Originally Posted by skeen7908
Yes there is a liability and a corresponding deposit...that's still money creation.
Not really. Depository account's aren't actually money. They're just agreements between the bank and the depositor that the depositor has a claim on the value of the deposit account in "base money" i.e. bank reserves and currency. So money in an account isn't actually money but a contractual agreement, in other words it's basically the depositor lending the bank the money at near-zero interest for the advantage of having it secured in a highly liquid asset.
When a customer writes a check on their depository account, the recipient deposits it in their depository account and the two banks clear the transaction. The clearing process requires no exchange of "base money" but rather the first bank decreases its liability to the payer while the second bank increases its liability to the payee. All that has changed is an exchange of liability, essentially of IOU.
When a bank loans money out to a customer, the process is similar but reversed (and more complicated of course). The bank deposits the loaned funds in the debtor's account; the balance sheet adjustments would be an increase in the loan asset account and a corresponding increase in the depository account liability. When the debtor writes a check to another person, the same situation as above happens.
So where did the money come from? That's the big question, right? Well, first off it isn't actually money. It's an increase in the depository account liability. In that sense, the liability did come out of "thin air" in a way, but in a rigorous sense that isn't really true because capital can't be willed into existence. The loan amount is a claim on real money, but isn't money itself.
This sounds silly because if I go to the bank and take out a $100 loan, and withdraw it as cash, it most certainly is real money in my hand. It seems like splitting hairs to define whether or not deposits are "actually" money. This however isn't true if you look at the entire economy.
If one thinks about the entire economy, it's fairly obvious that depository accounts can't be actual money ("base money"), because they are claims on the same pot of money. Bank lending expands the circulation of "base money" but does not actually "create" money. So it is leveraging the base supply but this isn't actually creating new money because, in aggregate, there is one person on each side of the loan in the economy.
As an example, let's say there's $1,000 "base money" in existence, and two banks which each have $500 cash in the vault. I open an account at JPMC and borrow $100. JPMC deposits a $100 into my account at 0% interest. Its balance sheet expands on the asset side by $100 for the loan, and $100 on the liability side for my depository account. Was money actually created? No, JPMC just owes me $100 whenever I request it. There is still only $1,000 in base money in existence. If I withdraw the $100, JPMC's cash goes down to $400, as does its corresponding depository account liability. I have $100 base money, JPMC has $400 and BOA has $500. If I use this money to pay a friend $100, he goes and deposits it in his BOA account. BOA's base money increases to $600, and its depository account for my friend increases by $100.
The situation is the same for if I just wrote a check instead of taking the cash out. I borrow $100 which is deposited into my account. JPMC's balance sheet expands by $100 because of the loan asset/deposit liability, but its base money remains the same at $500. I write a check to my friend who deposits it at BOA. BOA and JPMC clear the transaction, removing the $100 in my account and depositing it in my friend's. However no base money has been exchanged. At the end of the day the total base money is still $1,000.
Yes, at some point in this process JPMC had $1,000 in the vault and I had $100 in my account, but the $100 doesn't count towards actual money because if I withdraw those funds, it comes out of JPMC's $1,000 cash. It's a claim on a portion of JPMC's cash.
That is how the entire banking system works. The actual base money supply can't be expanded by bank lending because it is a system of claims on the same base monetary value. A depository account isn't money because it was issued by a bank. I can't take my depository account and use it to pay for my groceries without either converting it into currency or going through the bank clearing process.
Then they take the interest payable as cream...all for doing nothing other than having access to the Fed's discount window
One might argue that they deserve profits because they provide a prudential regulation of who gets access to loans, and bear the risks associated with them, but we saw in 2008 that they failed at that and had to be bailed out anyway
So, yes, banking is a completely parasitic industry that provides no added value, and instead sucks wealth out of the real economy and distorts the prices of assets.
I don't see how your last sentence follows from anything else that you've said.