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Pragmatic Capitalism

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banks creating money, loan losses

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In terms of money supply, when a loan gets repaid, money evaporates. Does a loan loss also cause money to disappear, from the bank’s money set aside for losses? Is that the right accounting for a loan loss?

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Posted by laskerfan12
Posted on 01/02/2017 8:14 AM
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When a firm writes down a loan they are writing down both the loan asset and liability. While this does not destroy the deposit or the deposit liability that was created by this loan it does destroy some person’s credit as well as the firm’s value. So while there isn’t a direct destruction of money that occurs here like a loan repayment there is a destruction of money in the sense that shareholders lose money and the borrower loses their credibility.

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Cullen Roche Posted by Cullen Roche
Answered on 01/02/2017 2:49 PM
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    as you phrase the question “In terms of the money supply”, The potential money supply is reduced, – as , where a capital and profit margin exists and is therefore reduced , the potential for issuing liabilities to shareholders is reduced.

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    Posted by Dinero
    Answered on 01/03/2017 3:54 PM
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      Guys, he wasn’t asking about written off loans, but repaid loans and what happens to the reserves backing it.

      Regardless, a written off “deposit liability” gets auctioned off to skanky third-party debt collectors for pennies on the dollar. Isn’t that then a loss of money? What happened to the matching “deposit”? The full value of the “deposit liability” will never be recovered and if anyone is stupid enough to deal in any way with third party debt collectors, they’ll have to pay taxes on the full amount that was discounted/forgiven/reduced by either the original creditor those skanky third party debt collectors.

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      Posted by MachineGhost
      Answered on 01/04/2017 2:22 PM
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        Oh my bad, I misread the question. Dinero, aren’t you contradicting Roche?

        I’m gonna argue there is no reduction in the ability to issue future liabilities. Banks write off bad loans on their taxes and then sell it off to skanky third party debt collectors that I mentioned. They don’t carry any liability on their books. This isn’t the same as securitization but its close.

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        Posted by MachineGhost
        Answered on 01/04/2017 2:26 PM
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          Also, there’s now a new clearingfirm operating that is specifically designed for banks to borrow and lend short and medium term loans to each other. It sounds rather circular so I’m not sure what the ultimate point of it is, but it sounds like an opportunity for smart banks to game dumb banks.

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          Posted by MachineGhost
          Answered on 01/04/2017 2:29 PM
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            I’m not contradicting Cullen Roche,

            Its a balance sheet study.

            If the bank has less payments coming into the balance sheet it has to reduce the payments coming out of it.

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            Posted by Dinero
            Answered on 01/04/2017 3:06 PM
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              3.06 continued.

              and as bank liabilities are called the money supply that reduces the money supply.

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              Posted by Dinero
              Answered on 01/04/2017 3:12 PM
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