June 13, 2019 Thursday
Bedtime Story
Credit Entry as Assets
There are extremely amusing (for want of
better word) ways that banks make entries in their balance sheets whilst
creating such credit that we saw last night.
You would think that when a bank gives out
loan which is same as issuing a credit it would add it to its liability.
And indeed it does so.
But the entry made is in negative in its
balance sheet and to counteract that in the double-entry bookkeeping system it
makes an equivalent positive figure in its assets column.
You can see what this amounts to… right?
By creating money out of thin air and
giving it out as a loan it has created an asset for itself on the assumption
(this is the key word) that the loan will be repaid with interest and that the
loan was made out to a credit-worthy entity or individual.
The debtor in his double-entry book keeping
system adds the equivalent amount to his positive cash balance side along with
the same amount marked as a negative liability that he has to return to the
bank.
It is quite fascinating that the bank need
not even have in its possession the amount of money that it is lending out as
credit (often in electronic form) for they are blessed with that magic wand
called banking license.
Banking licenses grant the banks the power
to create credits (need I repeat the phrase ‘out of thin air’?) as long as its
overall assets are greater than its total liabilities; but then who is there to
supervise or audit these details.
This whole rigging and juggling of credit
and loans though seems scornful and unscrupulous has overall proven to be very
successful in the course of our recent civilization.
As the British historian Niall Ferguson who
specializes in viewing historical events through the perspective of finance,
economics and money puts it in his book ‘The Ascent of Money’:
“Banks have evolved since the days of
Medici (Italian Banking Family of the 15th Century) precisely in
order (as the third Lord Rothschild succinctly put it), to ‘facilitate the
movement of money from point A, where it is, to point B, where it is needed.’
Credit and debit, in short, are among the
essential building blocks of economic development, as vital to creating the
wealth of nations as mining, manufacturing or mobile telephony.”
In the same book he also wrote a passage
strongly defending banks not only as the wealth creator but also as a wealth
distributor from people like me who are savers to entrepreneurs like my brother
who are constantly bubbling with ideas seeking ways to expand their businesses
and yes, profits:
“Poverty is not the result of rapacious
financiers exploiting the poor.
It has much more to do with the lack of
financial institutions, with the absence of banks, not their presence.”
To be continued…
Stay tuned to the voice of an
average story storytelling chimpanzee or login at http://panarrans.blogspot.com
Good night Mon Ami and my fellow cousin ape.
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Another great educator and a teacher that I am aware of is
Professor Subhashish Chattopadhyay in Bangalore, India.
While I narrate stories, Professor Subhashish an electronic
engineer and a former professor at BARC, does and teaches real mathematics and
physics.
He started the participation of Indian students at the
International Physics Olympiad.
Do visit him here:
All his books can be downloaded for free through this link:
For edutainment and English education of your children, I
recommend this large collection of Halloween Songs for Kids:
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