Mortgages and the true cost to our banks?

[ajlennon]

This might also help you. There's a page here on the money supply, and specifically M0 and M4 measures:

 

Tutor2u - measuring the money supply

 

From the page:

 

Narrow Money (M0) M0 is simply the total stock of notes and coins in circulation plus the commercial bankers' operational deposits held with the Bank of England.

...

A second measure of the money supply includes M0 plus sterling deposits held by UK residents at banks and building societies. Broad Money (or M4) comprises both the deposits lodged into accounts by people wanting to save, together with deposits created by commercial banks and building societies through their lending activities.

(my emphasis)

 

There's a graph here showing how M4 has grown in UK, US and elsewhere over the years:

 

Money supply - Wikipedia, the free encyclopedia

[ajlennon]

I'd like to go back to post #22 to try to clarify things further.

 

Let's take out all notions of borrowing from the commercial

markets or elsewhere for now and just concentrate on FRB.

 

The source of the funds is important to me to work out costs,

but I agree that it is more important now to nail down the

FRB process, and borrowing the money is a red herring here.

 

I've taken the 'Wonderful Life' example, upon which I think

we're agreed, and tabulated/graphed it on Excel.

 

http://www.dynamicdevices.co.uk/downloads/Fractional Reserve Lending (System).png

 

This just shows the process by which a percentage of a

deposit in bank A is lent out, and passes through banks

B, C, D ... etc. increasing the money supply as it goes.

 

(No surprises here - I _think_ we agree on this ?)

 

I've tabled 50 iterations but the limiting case is 1/R where

R is the ratio. As the ratio I have used is 20% the

multiplier m = 5 and so my initial £100 increases to £500

in the economy.

 

 

Next, and here's where I have been having some trouble,

I've been trying to relate that iterative loaning of 80%

of the deposit to the commentary I'm reading that a bank

can loan £500 for a deposit of, say £100, which is

counter-intuitive.

 

I think I understand the basis for this viewpoint now.

 

Banks are continually taking deposits and making loans.

In the first example we iterate through a number of banks

but we might equally well look at the whole banking sector

within the economy and average out those deposits and loans.

 

If we make an assumption that all (or most) of the

commercial money loaned from bank A will eventually

be deposited with another bank, rather than hidden under

the bed, and this other bank is also making loans on the

same basis as bank A, then on average we can perform our

analysis as if these loans and deposits refer to a single bank.

 

Here's that analysis

 

http://www.dynamicdevices.co.uk/downloads/Fractional Reserve Lending (Bank).png

 

So given the assumptions are reasonable then it follows that

for a deposit of £100 a bank can loan £400 at reserve ratio R=20%, or £900 at reserve ratio=10%.

 

 

Edited February 16, 2009 by ajlennon
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