Title: RE: [PEN-L:27096] where does "money" come from?
I wrote: > neither GE Capital nor Fannie Mae can "create money" (i.e., credit) the way that banks can, since they don't take deposits<
Steve Diamond writes: > I don't think this is the way that money works. I think that Fannie Mae creates "money" (or, if you prefer, paper claims to wealth) by creating a market for mortgages (i.e. flooding the market with cheap mortgage rates and then deals) THEN repackaging them as Asset-Backed securities and then selling those into the capital markets (thus offloading them from their balance sheet) and taking the cash from institutional investors from the ABS sale to finance a new round of mortgages. Meanwhile the recipient of the home loan gives the money to the seller of the house so that they in turn deposit the money into a MMF or CMA or bank account for the inevitable multiplier effect<
This description fits my understanding of the issue. My argument was only that the "Austrians" were contradicting themselves if they were thinking that GE capital or Fannie Mae were somehow worse than banks by their standards. I wasn't saying that these institutions couldn't have the _indirect_ effect (via banks) of "creating money."
>... This may be a matter of semantics about "broad" v. "narrow" money but I think deposits are created after money is created not the reverse.<
The _way_ in which banks "create money" is by creating deposits (so the two are the same thing). They can't create currency, the other kind of money (only the Fed and the Treasury can do that). All they can do is creating bookkeeping obligations, i.e., bank deposits, which count as part of money no matter how you measure it (unless you think that money = currency).
>The key question I think is who is the mover of the process and I think it is not the depositor but the creator of the original relationship that allegedly has value in it (whether in real estate or manufacturing) i.e. a capitalist (whether financial or production). In this case it is Fannie Mae or GE Capital (in the latter case, e.g., 40% of GE profits come from financing, similar numbers for GMAC/GM).<
These days, the "mover" in the banking industry is the banks themselves. The textbook story of banks receiving deposits and then lending them doesn't work except in a limited way. "New" or "entrepreneurial" banking involves seeking out borrowers and _then_ drumming up funds to lend to them, sometimes by attracting deposits, but more often by selling commercial paper. When they do the latter, they're acting more like GE capital.
Gene Coyle write:>Doesn't GE Capital raise a lot of cash in the commercial paper market? This is very short term borrowing. The Fed can impact the availability of funds from this source and potentially could squeeze GE severely. It wouldn't be "run" but GE nevertheless might have to stop lending, stop renewing loans, etc. This exposure is what caused a bond analyst to attack GE a few months ago. <
you're right. But my point was only that GE Capital was different than banks.
JD
