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Why do governments borrow from the banks ?

Yoga Face

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It seems to me banks create money when they lend as they lend far more monies then they have as deposits

Even though they create money this does cause inflation as the future monies of the borrowers cannot be spent by the borrowers as they are forced to pay back what they borrowed

However, the government can borrow made up monies from itself then pay itself back through taxes thereby halting the inflation caused by printing money

By borrowing from itself the government would pay no interest to the banks
 

JohnLarue

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Jan 19, 2005
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It seems to me banks create money when they lend as they lend far more monies then they have as deposits

Even though they create money this does cause inflation as the future monies of the borrowers cannot be spent by the borrowers as they are forced to pay back what they borrowed

However, the government can borrow made up monies from itself then pay itself back through taxes thereby halting the inflation caused by printing money

By borrowing from itself the government would pay no interest to the banks
The govt does not borrow from the banks like you or I
They auction off govt backed debt. The banks are the primary dealers & sell the debt to their investor clients.

Why does the govt borrow?
They run deficits (more out than in) sometimes because of revenue shortfalls or cost overruns (more often), sometime intentionally to stimulate growth.
They defer the difference until years when they run a surplus or just let the next generation worry about it (Greece).
The latter approach is very dangerous, very irresponsible and generally socialist
 

danmand

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Nov 28, 2003
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It seems to me banks create money when they lend as they lend far more monies then they have as deposits

Even though they create money this does cause inflation as the future monies of the borrowers cannot be spent by the borrowers as they are forced to pay back what they borrowed

However, the government can borrow made up monies from itself then pay itself back through taxes thereby halting the inflation caused by printing money

By borrowing from itself the government would pay no interest to the banks
The fed loans money to the banks at 0.1% interest. The banks then buys T bills that pays 2.6% interest. Then the banks pay their executives large bonuses.Somehow that is good for the economy.
 

39ajaxmale

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Part of the Bank of Canada's mandate is to regulate interest rates.

Interest rates are essentially based on supply and demand of borrowing. I'm not talking about consumer lending, but rather institutionalized lending. The premise is simple. If an institution has a need for 'overnight' borrowing, they need a short term loan to meet debt obligations, they will 'shop' for the best possible interest rate with other institutional traders. If there is too much currency available to be borrowed rates will be lower, since everyone who has a surplus wants to loan their money out for the profit they realize, even on a single day basis. As a large institution if I can loan you money for 1 day, let's say you need $500m then the interest in 1 day becomes a little more significant, and there's incentive to make that loan.

If the rates fall below or raises above what the Bank of Canada calls 'The operating band' essentially .25-.50 basis points lower or higher than BoC prime rate. If interest rates are too HIGH, if money is in short supply, and the institutional investors are asking for too much interest on their loans, the BoC will issue what's known as an SPRA (Special Purchase and Resale Agreement) to the borrowers so pressure the interest rates down. They will offer the SPRA at the HIGH level of the operating band, so slightly higher than prime.

If interest rates are too LOW, money is in high supply, and institutional investors are shopping prices down below the lowest level of the operating band, below what lenders are wanting to earn for their loans.. the BoC will issue an SRA (Sale and Repurchase Agreement) and BORROW money at the lowest level of the operating band forcing institutions that need to borrow to offer at least that interest rate to obtain the money they need.

To give you a rough idea, worldwide it is estimated overnight institutional lending accounts for over $100billion in financial transactions, daily.

In short, Governments borrow and lend money to set and control current interest rates.
 

djk

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the hobby needs more capitalism
Part of the Bank of Canada's mandate is to regulate interest rates.

Interest rates are essentially based on supply and demand of borrowing. I'm not talking about consumer lending, but rather institutionalized lending. The premise is simple. If an institution has a need for 'overnight' borrowing, they need a short term loan to meet debt obligations, they will 'shop' for the best possible interest rate with other institutional traders. If there is too much currency available to be borrowed rates will be lower, since everyone who has a surplus wants to loan their money out for the profit they realize, even on a single day basis. As a large institution if I can loan you money for 1 day, let's say you need $500m then the interest in 1 day becomes a little more significant, and there's incentive to make that loan.

If the rates fall below or raises above what the Bank of Canada calls 'The operating band' essentially .25-.50 basis points lower or higher than BoC prime rate. If interest rates are too HIGH, if money is in short supply, and the institutional investors are asking for too much interest on their loans, the BoC will issue what's known as an SPRA (Special Purchase and Resale Agreement) to the borrowers so pressure the interest rates down. They will offer the SPRA at the HIGH level of the operating band, so slightly higher than prime.

If interest rates are too LOW, money is in high supply, and institutional investors are shopping prices down below the lowest level of the operating band, below what lenders are wanting to earn for their loans.. the BoC will issue an SRA (Sale and Repurchase Agreement) and BORROW money at the lowest level of the operating band forcing institutions that need to borrow to offer at least that interest rate to obtain the money they need.

To give you a rough idea, worldwide it is estimated overnight institutional lending accounts for over $100billion in financial transactions, daily.

In short, Governments borrow and lend money to set and control current interest rates.
Ah, memories of part 1 of the CSC. :D
 

Yoga Face

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The govt does not borrow from the banks like you or I
They auction off govt backed debt. The banks are the primary dealers & sell the debt to their investor clients.
OK
Then no new money is created when governments borrow as money is simply exchanged thereby no inflation
 

Yoga Face

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In short, Governments borrow and lend money to set and control current interest rates.
OK
I wondered how they controlled interest rates

But they also borrow to finance governments projects such as wars in Iraq and Afghanistan
 

39ajaxmale

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OK
I wondered how they controlled interest rates

But they also borrow to finance governments projects such as wars in Iraq and Afghanistan
That borrowing is done through things like Canada Savings Bonds and other debt instruments the Government uses. Bonds can be bought by individuals, corporations, even other countries.. like we're hearing a lot about China buying Greek and Italian debt - the debt they are buying is Government Issued bonds.

Like any corportation, the Government has 2 ways to raise money, borrowing, and income. Income is taxation. So to control inflation they currently want to keep taxes low, thus less taxation. So if there is a forecast budget shortfall, they need to borrow the money, hence, bond offerings.
 

oldjones

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Yoga, it's a sausage factory. Do not look.
 

Yoga Face

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That borrowing is done through things like Canada Savings Bonds and other debt instruments the Government uses. Bonds can be bought by individuals, corporations, even other countries.. like we're hearing a lot about China buying Greek and Italian debt - the debt they are buying is Government Issued bonds.

Like any corportation, the Government has 2 ways to raise money, borrowing, and income. Income is taxation. So to control inflation they currently want to keep taxes low, thus less taxation. So if there is a forecast budget shortfall, they need to borrow the money, hence, bond offerings.
Governments can also create monies but this causes inflation which is worse than debt so they are cautious when printing money

Banks also create money when they lend as they lend more then they have but the borrower has to repay so no inflation
 

39ajaxmale

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Governments can also create monies but this causes inflation which is worse than debt so they are cautious when printing money

Banks also create money when they lend as they lend more then they have but the borrower has to repay so no inflation
Banks can't create money. Only the Bank of Canada, which is not a consumer bank in the sense that we deal with BMO, or RBC, or TD or Scotia...

As for printing of new currency, it is a slippery slope, the US has been doing it for a few years now to fund some of it's expenses, but it causes the devaluation of the currency, which causes all sorts of other economic issues.
 

Yoga Face

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Banks can't create money. Only the Bank of Canada, which is not a consumer bank in the sense that we deal with BMO, or RBC, or TD or Scotia...
Banks lend out far more monies than they have as deposits so they must be creating monies in the form of credits

I wonder why banks even bother with deposits
 

39ajaxmale

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Banks lend out far more monies than they have as deposits so they must be creating monies in the form of credits

I wonder why banks even bother with deposits
Banks are businesses. They have a number of different streams of income, not just deposits They deal with deposits, to draw you in as a loyal customer, so they can loan you money at a profitable rate.

What rate do you get on your savings accounts? Half a %? What do you get on your chequing account? Nothing. You pay fees. What do you get on your GIC's? 1-2%? What do they lend you money at? Mortgages - 3-4%, lines of credit - prime + 1%? Credit cards - 19%?

Banking is a relationship. They take your deposits because they want you as a client. Once they get you in, they find ways to make you profitable (for them).. ie they lend you money. They tell you about loyalty. They say enough to appeal to your senses that make you stay with them.. or they prey on the laziness that you won't switch banks even if you have a poor experience.

Do they loan more money than your deposits? Yes, but they don't just take deposits, they sell GIC's, they sell mutual funds, they sell mortgage backed securities at a profit. They perform financial transactions.. that cost you money. How many free transactions a month do you get, how many withdrawals at an ABM, how many teller transaction.. and do you pay a monthly service charge, and other charges like overdraft charges, etc..

Trust me, a bank cannot arbitrarily print money. Who would regulate or control that? What's to stop them from just printing billions of dollars a year and calling it profit?
 

Big Sleazy

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http://www.youtube.com/watch?v=jghiU55O5eY

The Crime of The Canadian Banking System. I hope the link works. If not copy and paste it into your browser. The World would be better off if Banks went back to being utilities rather than bigger than most Governments with thy're own Private Mercenary Armies....but I digress

BS
 

Kenny-sauga

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Banks lend out far more monies than they have as deposits so they must be creating monies in the form of credits

I wonder why banks even bother with deposits
Magic of fractional reserver banking. If you get the chance, I recommend watching a documnetary " The Money Masters".
 

nottyboi

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May 14, 2008
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The question should really be, why do banks lend to govts. And the answer is quite simple. for every $ in deposits, the banks can buy $9 in bonds. So that 3% yield becomes 30%. If they ever need cash in a hurry, they can deposit the bonds as collateral with the Bank of Canada and take short term loans at the overnight rate... so it is a WONDERFUL situation. If I could do that I would go all in immediately.
 
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