To the economists on the board:

[TheU]

Question for you guys...

Why does the Canadian government allow private banks to create money on a computer then borrow it to people and the government at compounded interest instead of using the bank of canada? Is there a feasibility issue... incentive issue... or whats up? Seems kind of silly to use a private bank that charges huge interest as opposed to the interest free bank of canada...

[red sky]

Can't answer your question but I think you mean "lend"

[Fozzie_DeBear]

I'm not sure...but the Bank of Canada isn't a retail bank...its clients are Banks and other financial institutions, not CP'ers

[peter12]

Bank of Canada is a regulating body.

[Sample00]

.
Wikipedia's information on the Bank of Canada is pretty good and might give you a better understanding of its role in the monetary system.

you might want to peruse the role's and responsibilities section first...

hope this helps.

http://en.wikipedia.org/wiki/Bank_of_Canada

[Antithesis]

I think it might have something to do with them being fat and sassy millionaires, but I'm not sure.

[yads]

Borrowing from the Bank of Canada is not interest free.

[Jedi Ninja]

Banks don't create money out of thin air. When they lend money, they either use money held in deposit accounts, issue bonds, borrow from other banks, etc.. The idea that banks create money is a misunderstanding of what the money multiplier is.

See here: http://en.wikipedia.org/wiki/Money_creation

[longsuffering]

Originally Posted by TheU

Question for you guys...

Why does the Canadian government allow private banks to create money on a computer then borrow it to people and the government at compounded interest instead of using the bank of canada? Is there a feasibility issue... incentive issue... or whats up? Seems kind of silly to use a private bank that charges huge interest as opposed to the interest free bank of canada...

Based on your user name, I assumed you went to a university. Again, I am reminded of the risks of ass-u-ming.

[Shazam]

Originally Posted by longsuffering

Based on your user name, I assumed you went to a university. Again, I am reminded of the risks of ass-u-ming.

He's actually TheUrinator.

[McG]

huge interest rates? where?

seriously, the bank of canada was never intended to be a retail bank. it acts as Canada's central bank; similar to many central banks around the world.

the website http://www.bankofcanada.ca/en/index.html for the b of c gives lots better information than you can get on a thread.

[WilsonFourTwo]

This is pretty old write-up, but it's still holds true. There's a bit of an anti-bank tone, but much of the information is sound and reasonable.

http://www.basicincome.com/basic_banks.htm

The fractional reserve system can be a wonderfully beneficial one, however, as we (Canadians) have essentially handed over money creation to for-profit institutions, we're seeing more bad than good. When the (primarily US) banks were falling apart, we kept hearing about them being over leveraged......this is the system that allowed it occur, and is at the heart of many financial problems.

[Shazam]

That writeup is moronic.

[The Yen Man]

Banks do not create money on the computer screen. You know that money in your savings account? Well, the bank is using that money to lend to other people. They also borrow money at lower interest rates and then lend it to you at a higher interest rates. How can they do that you ask? Because they have a lot of assets to leverage.

[blankall]

Originally Posted by The Yen Man

Banks do not create money on the computer screen. You know that money in your savings account? Well, the bank is using that money to lend to other people. They also borrow money at lower interest rates and then lend it to you at a higher interest rates. How can they do that you ask? Because they have a lot of assets to leverage.

I haven't looked at this stuff in a while, but my understanding was that chartered banks could create money as long as they met the necessary reserve ratio.

So if the reserve ration was 5:1. They could create 5 dollars for every 1 dollar they had invested.

[Jedi Ninja]

Originally Posted by blankall

I haven't looked at this stuff in a while, but my understanding was that chartered banks could create money as long as they met the necessary reserve ratio.

So if the reserve ration was 5:1. They could create 5 dollars for every 1 dollar they had invested.

When people say this, this is what they mean:

Bob walks into the bank and deposits $1000 cash in his account.

Jim wants a hooker bad but doesn't have any cash, he comes into the bank and borrows $1000. They give him a bank draft and he goes straight to the massage parlour for the full treatment. He signs the bank draft over to the hooker.

Later that day, the hooker comes back to the bank and deposits the $1000 bank draft in the account. The bank now has another $1000 which it will lend out to a church group later in the afternoon.

So, at the bank, we now have two people who each have $1000 in their savings accounts, so you could say that the supply of money in the economy has grown. But the money isn't created out of nothing. The $1000 that they lent to Jim came from Bob, and the $1000 for the church group is owed to the hooker. The bank isn't $1000 richer.

Moreover, both the hooker and Bob will want interest on their savings account. The bank has to pay them interest. When they lend the money out, they have to lend out at a rate that is higher than what they are paying on savings plus a margin of profit plus a risk premium to cover the cost of defaults on loans plus the costs of operating the bank.

[Pastiche]

Pretty good characterization Jedi. TheU maybe you could clarify your question?

Banks do not 'create' money. Only the central bank is authorized to create money and the central bank is governed by strict regulations (inflation targets) on much money it can create. The central bank with a monopoly over the money supply then lends that money out to retail banks. Retail banks can do what they wish with that money.

Banks create money in the sense that they are not obliged to keep capital reserves in line with their liabilities (deposits). Banks typically keep about 10% of their total liabilities in cash. What this allows is a cascading effect that Jedi describes in that if a bank lends out $1000 to one person they can continue to re-lend that money as it comes back into the bank from other people's deposits.

This is actually a very good thing. It creates liquidity in the economy which allows for the potential of more exchanges.

Is your problem with the idea of interest from loans? Unless there's a cost to borrow money then no one will lend it. You need interest to have finance. And you need finance to have economic growth.