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Banking mythes with the neo liberal economy

This topic contains 32 replies, has 7 voices, and was last updated by Profile photo of jens jens 3 days, 7 hours ago.

Discussions Politics Today Banking mythes with the neo liberal economy

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  • #1704245
    Profile photo of halcyonhalcyon
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    halcyon

    Check out Wikipedia. Sounds like the Reserve Bank loans money to the commercial banks.

    The official cash rate (OCR) is the term used in Australia and New Zealand for the bank rate and is the rate of interest which the homogeneous central bank charges on overnight loans to commercial banks. This allows the Reserve Bank of Australia and the Reserve Bank of New Zealand to adjust the interest rates that apply in each country’s economy. The OCR cannot be changed by transactions between financial institutions as this does not change the supply of money, only its location. Only transfers between the central bank and an institution can affect the OCR.
    As banks settle all inter-bank transfers overnight, the central bank can regulate the rate paid for cash by the sale or buy back of bonds and other government issued securities (these are known as domestic market operations). As the sale or purchase of bonds affects the supply of money, then the interest rate will change to reflect its availability. This system indirectly influences the term structure of interest rates in the whole economy. Changes to the official cash rate generally affect the rates on housing and other loans within a matter of days or weeks. Under the Australian system the Reserve Bank of Australia issues its dealing intentions at the start of each day, and banks and other financial institutions will act prior to the actual rate being achieved.
    The rate is set by the central banks regularly, usually every month in Australia and every six weeks in New Zealand and forms one of the main tools to manage monetary policy.

    Already disturbed, approach with caution.

    #1704273
    Profile photo of paulinempaulinem
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    paulinem

    Yes that is correct Halcyon the reserve bank does have this control  over the trading banks in  interest charged and  percentage of deposit etc for property. BUT the reserve bank under neo liberal is not controlled by the Government of the day ( maybe indirectly ) it was under legislation made independent.  In the words it is not controlled by the owners of the reserve bank the community or taxpayers, its whom ever gets to be a director  on to the reserve bank board.

    Under Keynesian economy the Government of the day did control and dictate to the reserve bank. The government ( whom ever was in charge ) represented the People and was answerable for its management every three years by democracy. In reality this meant the Government controlled the ec0nomy not the Australain  banks

    NZ did  have a problem with this in that we had a FPP  ( First past the Post )election system, which saw the same party totally in control for many years. DESPITE the fact that the majority of the electorate voting against them.  This was the reason we had a campaign back in the 70s/80s to change the voting to MMP and introduce referendums etc

    #1704284
    Profile photo of halcyonhalcyon
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    halcyon

    Actually the Government of the day has a certain control over the Reserve Bank. They set the parameters of performance for the Bank Governor. Currently the parameters are for inflation to be between 1 – 3%  per annum. The Governor is on a performance bonus therefore failure to keep inflation between those parameters will affect the Governor’s pay. If the failure is great enough the Governor will be sacked. Therefore there is adequate incentive for the Governor to manage the economy in a manner that will meet the KPI’s.

    The current Government is preparing to increase the KPIs . Rather than solely focusing on inflation the Government will include other indicators such as poverty and social wellbeing.  By so doing they are adding additional controls over the Reserve Bank, and therefore the economy.

    Therefore there still remains a line of control over the economy to the voters in NZ. Every three years we can vote for parties that will introduce economic policies that we approve of. If enough people  do not approve of the current Government’s economic policies then they can vote for a change of Government.

    Already disturbed, approach with caution.

    #1704329
    Profile photo of jensjens
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    jens

    And I don’t think the Australian  banks control the NZ economy, they only help us  out with the credit for which we –  our  banks, government and people  –

    apparently have not  got  enough    capital (banking) reserves   to meet our  demand for  credit within  the accepted  safe ratio of fractional  reserves based “out of  nothing” credit creation.

    Should we not be allowed to  borrow  from Australian banks, some of  which were  formerly NZ owned,  but   sold(?),  or  merged(?)  with Australian  capital  because  they they  just  could not meet our  people’s  demand for  credit  ?

     

    #1710731
    Profile photo of paulinempaulinem
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    paulinem

    Brian Gaynor: The power of banks to create money

    The Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was relatively easy on the banks.
    This has been reflected in their strong share price performances since the report was released on Monday.  Yes, Commissioner Kenneth Hayne said that the banks were naughty, sometimes very naughty, and they would have to be good corporate citizens in the future.But they will continue to dominate the Australian and New Zealand economies as Hayne didn’t recommend any changes to their structures or basic operating models.
    This domination has been facilitated by the banking sector’s ability to create money and earn huge profits from this activity.    “Broad money” is a measure of the total amount of money held by households and companies. It comprises notes and coins held by the public, call deposits used for daily transactions and savings, and term deposits with a maturity of one day or more (see table)There is a widely held belief that the Reserve Bank creates money, partially because Sir Edmund Hillary, Kate Sheppard, Queen Elizabeth II and Sir Apirana Ngata are on our $5, $10, $20 and $50 notes.
    These notes and coins are issued by the Reserve Bank but they represent only 2 per cent of total money. The remaining 98 per cent is effectively created by the banking sector.    This broad money is a medium of exchange that can be converted into its full nominal value. It doesn’t include land, houses, shares or other non-financial assets.

     

    • This reply was modified 1 week ago by Profile photo of paulinem paulinem.
    #1710779
    Profile photo of paulinempaulinem
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    paulinem

    Sorry about above had great difficulty posting it as it kept on jamming up into a jumbled mess, tried several times edited but nothing I did or cut seem to work .

    Will try again below after cutting lots of info  out ….it was published in the Hearald

    Brian Gaynor: The power of banks to create money

    The Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was relatively easy on the banks.
    This has been reflected in their strong share price performances since the report was released on Monday.  Yes, Commissioner Kenneth Hayne said that the banks were naughty, sometimes very naughty, and they would have to be good corporate citizens in the future.But they will continue to dominate the Australian and New Zealand economies as Hayne didn’t recommend any changes to their structures or basic operating models.
    This domination has been facilitated by the banking sector’s ability to create money and earn huge profits from this activity.    “Broad money” is a measure of the total amount of money held by households and companies. It comprises notes and coins held by the public, call deposits used for daily transactions and savings, and term deposits with a maturity of one day or more (see table)There is a widely held belief that the Reserve Bank creates money, partially because Sir Edmund Hillary, Kate Sheppard, Queen Elizabeth II and Sir Apirana Ngata are on our $5, $10, $20 and $50 notes.
    These notes and coins are issued by the Reserve Bank but they represent only 2 per cent of total money. The remaining 98 per cent is effectively created by the banking sector.    This broad money is a medium of exchange that can be converted into its full nominal value. It doesn’t include land, houses, shares or other non-financial assets.

    #1710785
    Profile photo of paulinempaulinem
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    paulinem

    More on the reality of banking today under our Liberal economy from an article in NZ Herald

    At the end of 2018 New Zealand had total broad money of $311.4 billion, with notes and coins representing only $6.1b of this.

    As with most other modern economies, notes and coins created by central banks comprise only a small proportion of the total.

    Banks create money by lending to individuals who immediately place these borrowings on deposit.

    For example, an individual invests $500,000 in a bank term deposit and the bank then lends $450,000 of this to another party who deposits the proceeds in their account.

    The depositor still has $500,000 but the borrower now has $450,000. Thus, a $500,000 deposit has been converted into $950,000 of broad money.

    The borrower may subsequently use the $450,000 to buy a house but the seller of the home is likely to deposit these proceeds back into the banking system. The banks can then lend most of this new deposit to create even more money.

    Central banks have been reluctant to highlight the banking sector’s money creation activities but this silence was broken in 2014 by two studies from the Bank of England, the UK central bank.

    These papers are: Money in the modern economy: an introduction and Money creation in the modern economy.

    The latter paper noted: “Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money”.

    A major feature of most modern economies has been the massive expansion in broad money through the banks.

    Broad money as a percentage of New Zealand’s GDP has surged from 52.6 per cent at the end of 1988, to 69.0 per cent 10 years later, 84.3 per cent in December 2008 and 107.0 per cent of GDP at the end of 2018.

    The latest OECD figures show that New Zealand’s broad money has increased by 28 per cent since 2015 while total OECD broad money has risen by 21.4 per cent over the same period.

    These figures illustrate why banks play a massive role in the New Zealand and other modern economies.

    A key issue is what eventually happens to the newly-created money. Does it find its way into productive or non-productive areas?

    This is an important issue as broad money is rising much more rapidly than general prices, as measured by consumer price indices.

    The problem with New Zealand and Australia is that the majority of new bank credit eventually finds its way into the existing housing and apartment markets. This is a non-productive use of the new money and is a major contributor to the surge in house prices.

    Reserve Bank of New Zealand figures show that residential mortgages have soared from $158.7b in December 2008 to $261.4b at the end of 2018. The latter figure consists of $185.8b of owner-occupier loans, $70.2b of loans to property investors and $5.4b of business loans secured by residential property.

    This $261.4b of residential mortgages represents 59.3 per cent of total bank domestic lending, a high figure by international standards.

    New Zealand-based banks have a much greater exposure to residential property than in most other countries, particularly Germany.

    Germans don’t like debt and have fewer credit cards than any other major country. Thus, the 2000-plus German banks mainly lend to the business sector and this has been a significant contributor to Germany’s industrial success.

    By contrast, New Zealanders are comfortable with debt and borrow heavily to purchase existing houses. It means residential property borrowers crowd out the business sector as far as bank loans are concerned.

    This is a major drawback for New Zealand companies wanting to borrow money to grow their businesses.

    The ability of the banks to create money, and earn massive profits from this activity, has enabled them to diversify into insurance, funds management, superannuation and other financial services. This includes KiwiSaver in New Zealand.

    It is relatively easy for the banks to cross-sell KiwiSaver to customers with a home loan, and the four major banks, plus Kiwibank, have a combined KiwiSaver market share of 66.7 per cent. This has been achieved even though their investment performances have been relatively modest.

    The Australian Royal Commission’s report was about misconduct, rather than the money creation and lending activities of the banks. Nevertheless, there was an expectation that some of their core and non-core activities would be reined in.

    This was not to be, as the Australian Financial Review highlighted on its front page: “It seems bizarre. But the big four banks are winners because their core business, earning 200 basis point margin on taking deposits and lending to households and businesses, remain intact. The oligopoly is alive and well”.

    The big question is, why have we allowed our banks to become so big and powerful?
    This column pointed out in November that the four largest New Zealand banks — ANZ, ASB, Bank of New Zealand and Westpac — reported combined statutory profits after tax of $5128 million for the 2017/18 year compared with a combined $1693m for the 10 largest NZX-listed companies.

    These four banks also dominate their sector with a combined market share of 82.7 per cent. In addition, the banks receive positive ticks from regulators as illustrated by the Commerce Commission’s decision to allow the two large overseas-owned banks, ANZ Banking Group and The National Bank of New Zealand, to merge in 2003.

    The commission wrote at the time: “In the supply of personal loans, the merger is unlikely to result in a substantial lessening in competition because there are several other competitors in the market, including non-bank financial institutions. Further, barriers to entry into the supply of personal loans are not significant and the combined entity would be constrained by potential competition”.

    This so called “competitive environment” has allow the NZ banking sector to raise its total after-tax earnings from $2667m at the time of the 2003 merger to $5830m in the latest year.

    Meanwhile, the commission recently turned down the proposed Fairfax/NZME and Vodafone/Sky TV mergers even though the merged entities would face huge competition from existing and new competitors, with the latter group having relatively low barriers of entry.

    The Royal Commission clearly shows that the four major Australian banks, and their NZ subsidiaries, lead charmed lives. The Commission’s report will be quickly forgotten and the major Australasian banks will be back in full harness again creating money and delivering massive profits for their shareholders.

    – Brian Gaynor is a director of Milford Asset Management which owns shares in ASX-listed ANZ, CBA, NAB and Westpac on behalf of clients.

    #1711065
    Profile photo of jensjens
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    jens

    Yes paulinem – fractional reserves  based bank credit “out of nothing”  is like  extra  currency in circulation  as long as  that  credit  has not been  repaid, and because  all the  time the credit issuing bank  has to be prepared  to  hand out  cash on the  credit granted, their  capacity to issue  credit is limited.

    Govt. policies financed by  Keynesian credit creation  is potentially more  dangerous, because a govt.  does not go bankrupt  as a bank with  only a  certain amount of  reserve  capital,  and can print debt  free money for  itself, and if that  exceeds  certain  limits, it becomes more  serious inflation than  what the  limited  bank  credits “out of nothing” can  create.

    We are  fortunate that so far,  the  majority of  us seems  to  understand the limitations  of  sound  credit  creation,  and has voted accordingly.

    • This reply was modified 4 days, 21 hours ago by Profile photo of jens jens.
    • This reply was modified 4 days, 21 hours ago by Profile photo of jens jens.
    • This reply was modified 4 days, 21 hours ago by Profile photo of jens jens. Reason: Because it does not come out properly
    #1711075
    Profile photo of paulinempaulinem
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    paulinem

    Social Credit – Napier February 9 at 1:59 PM ·

    We’ve said, since the 1920’s, that banks create money – they don’t lend money people deposit with them. We’ve been called cranks, and “the funny money’ party.
    Now another one of NZ’s leading economic commentators, Brian Gaynor, says the same thing. We were right all along. We’ll reign the banks in. Time for Social Credit to be in government.

    https://www.nzherald.co.nz/business/news/article.cfm…

    #1711108
    Profile photo of halcyonhalcyon
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    halcyon

    Social Credit have been in government paulinem. I voted for Vernon Cracknell the year he got elected as MP for Hobson.

    I think Social Credit mislead when they say that banks do not lend out the money depositors place with the bank. Banks also have to hold reserve,s which the Reserve Bank has recently required them to increase due to the potential correction of the housing market.

    And it is the shareholders of the banks  that have to fund any shortfall if the bank goes belly up. Shareholder funds are not secured funds. So they risk losing all their money infested in shares.

    Under SC’s model, it would be the tax payer who would have to underwrite any losses. And this means international investors could take assets to recoup any losses. Do you think the risk is worthwhile?

     

     

    Already disturbed, approach with caution.

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