While this specific arrangement is prompted by Alice first approaching the lender, I would say that the actions of creating the new debts and transferring the house are simultaneous. There isn't a point in time when Alice owes the bank £355,000 but the bank doesn't owe Bob anything yet (and Alice doesn't own the house).
The sequence is:
1. Alice offers Bob £200K for the house, subject to obtaining finance (and checking Bob actually owns the house, and it's it's structurally sound, etc.).
2. Bob accepts in principle.
3. Alice asks the bank for a mortgage, with payment to be made to Bob.
4. The bank agrees.
5. Contracts are signed, and exchanged, so everyone has a copy. At this point the 4 actions represented by the arrows occur simultaneously.
The reason that people usually get a solicitor to do this conveyancing, I believe, is that it requires a lot of care to structure this multi-party transaction so that it *is* simultaneous.
I agree about the simultaneity of actions at a settlement meeting, but my suggestion relates to the physical order of the "4 actions" listed in the posted article.
The order of facts you’ve now detailed in the above comment agrees with my suggestion by also contradicting the chronology of the "4 actions" listed in the posted article.
Your list in the article has the bank transferring Alice’s £200,000 Credit to Bob’s account [point 1] BEFORE Alice has even signed the mortgage promising to pay the bank the original £200,000 + interest [points 3 & 4]. My point is that the bank needs Alice’s promise(s) BEFORE it can raise the £200,000 Credit to pay Bob. Banks can’t create, and certainly won’t transfer, anything BEFORE Alice’s mortgage has been signed.
I didn't intend the list to be thought of as chronological at all. They are just 4 things which happen, and they happen simultaneously. The whole set of events is a single transaction: at any point in time, either none of them has occurred, or all of them have.
The actions (i.e. changes to assets & liabilities) all occur at an agreed time *after* the contracts have all been signed.
I agree the bank *won't* create a deposit for Bob before Alice becomes indebted to it, but equally Alice won't become indebted to the bank before Bob transfers his house to her, and Bob won't do that before the bank creates the deposit. All must occur simultaneously.
In principle any of these actions *can* occur in isolation, but it would be taking a big leap of faith in the other parties. (A bank *can* create deposits without receiving anything in exchange - it just reduces its equity. When I opened my first bank account as a new student, the bank credited me £25, in the hope they'd retain my business in future).
I see what you did, but I'm still inclined to emphasize the chronology as an essential element. The preparatory steps leading to 'simultaneity' are nevertheless real.
For £25? They purchased your good-will and future business connection with them - a "loss leader". For £200,000? I doubt it.
Neither Bob nor Alice is an idiot. His final action (house-title transfer) can't precede her crucial prior decisions: (a) to 'offer' to buy and then (b) approach her bank. Alice must do (a) - which Bob may (or may not) accept. When Bob accepts (a), THEN and ONLY THEN does Alice take the first accounting "leap" (b). If she doesn't, her offer lapses ... so no-one else jumps. She is a primary *cause*, and the cause must precede its subsequent effect(s).
Your changes to RNW point this out, but most may miss it. The bank never loaned the 200K, it was simply credited to the buyers account to balance the debit (the mortgage debt) based upon the value of the house.
Yes, the lender is simply writing an IOU. It didn't transfer an existing £200K of cash. But if Bob insists, it *does* have to obtain £200K of cash and transfer it to Bob.
I do want to emphasise that "simply" writing an IOU is a genuine transfer of wealth. For example, if Alice defaults on the mortgage, and also burns the house down so the bank can't repossess and sell it, the bank still owes its £200K debt to Bob. That's a £200K loss to the bank. (Maybe a bit less, because it could repossess the land and sell that).
“Simply” writing an IOU is neither the cause of a transfer of someone’s wealth to the writer, nor the transfer of wealth in itself. Someone’s *acceptance* of the IOU is what causes that wealth transfer.
Despite obvious differences, writing an IOU for £10 has features in common with printing a £10 Bank of England note: neither “creates wealth” or causes a “transfer of wealth”; yet both can be used as a “£10 exchange medium” and enable subsequent transfers of £10 worth of ‘wealth’, one as circulating credit (after it’s deposited at a bank), the other as circulating cash.
But this similarity is NOT equivalence, and when Bob tries to withdraw “cash” from an account he’s deposited Alice’s “credit” into, a problem arises from the differences. The problem arises because identical account balances of “£10.00 Cr” are created in bank accounts by depositing EITHER a £10 BoE note or a £10 IOU, and those balances are literally indistinguishable. Banks create a problem for themselves when they refuse to maintain the distinction between “money” and “credit” in this situation because “credit” is merely a convenient substitute for “money” (which the bank does NOT create), not the equivalent of it.
You can see why Bob’s withdrawing BoE cash from such an IOU-generated credit balance causes problems, but at first glance, simply not allowing cash withdrawals from such accounts would eliminate that problem completely.
When we deposit an IOU with them, banks should state clearly that they are simply “providing a credit facility”. If this distinction was rigidly enforced, there will be no reason to foreclose on Alice. There would also be fewer defaults. In fact, there will be no justification for interest charges either, because no bank asset is transferred from the bank to Alice in the first place; her deposit of an IOU simply initiated a “liability swap”.
I agree that simply writing "IOU £10" on a piece of paper doesn't transfer wealth: it's only handing it to someone which does that. (I make that very point in the post on debts). But when I say "write an IOU", I generally mean "and hand it to someone" to be inferred, because simply writing an IOU is of no economic consequence whatsoever. It's only when one party has the asset side and the other has the liability side that something interesting has happened.
I'm not sure what you mean when you say Bob has "deposited Alice's credit". What situation are you imagining? A bank won't normally credit Bob's account in exchange for him handing over an IOU written by Alice.
But your reply to ‘Bitfarmer111’ (see, above) contradicts the point you say you made “in the post on debts”. I was simply responding to the contradictory emphasis you placed on this point in your reply to ‘Bitfarmer111’, viz., “I do want to emphasise [sic] that "simply" writing an IOU is a genuine transfer of wealth”.
Consistency and precision can only help your readers.
What I meant by “deposited Alice's credit” was: Bob accepted a ‘good’ cheque from Alice for £10 and deposited it at his bank.
I could assume you understand how clearance of cheques works, but, to be clear: when Alice draws a cheque payable to Bob for £10 and gives it to him, Bob will usually deposit it at his bank, which (tentatively) debits £10 to its asset account, (tentatively) credits £10 to his account, and presents Alice’s cheque to Alice’s bank for “clearance”. Only after Alice’s bank “clears” the cheque for payment is her account debited £10, and Bob’s bank confirms both the £10 debit to its asset account and the £10 credit to Bob’s account. His bank now owes Bob the £10 that Alice’s bank used to owe her; Alice has transferred £10-worth of “her credit-balance” to Bob.
It’s complicated, but it works. When her “IOBob” has been accepted by Bob’s bank, her “£10Cr” asset is transferred to Bob. I know! Strictly speaking, a cheque is an “instruction to the bank”, not an “IOU”, but I trust you will get my point.
P.S. I notice you haven’t changed the order of the 4 points in this article to reflect the chronology of WHEN the bank draws Alice’s £200,000 cheque, for payment to Bob, and still have the bank paying Bob £200,000 as #1, implying it takes place two steps ahead of Alice’s depositing her £200,000 “IOU” with the bank at #3. Whether you intended it or not, the physical order of those items does suggest a chronological order, even if it is only by implication.
It's arguable whether transfer of house ownership [#2] should be either the last item, or simultaneous with Bob’s receipt of £200,000Cr, but #3 should definitely be moved to #1, as it is NECESSARILY the first FINANCIAL step, in time, after the contract has been signed by Bob and Alice (usually including a “subject to finance” clause).
So, the physical order [reality?] is:
1. Sign contract (“subject to finance”); THEN
2. First TRANSFER occurs: Alice DEPOSITS her IOU, i.e., agrees to “borrow” £200,000;
3. IF (and only IF) the Bank ACCEPTS, by creating matching £200,000 debit and £200,000 credit for Alice; THEN
4. The REAL transfer can occur: swap Alice’s £200,000 cheque for Bob’s house; THEN
5. Bob banks Alice’s £200,000 cheque AND Alice registers Title Transfer at Registry; so
6. Alice’s bank can “clear” Alice’s cheque and Bob finally gets his £200,000Cr.
With respect to the 4 actions involved in Alice buying a house from Bob with a mortgage from the bank, I'd said immediately before the picture that they were a transaction, which by definition that means that they are simultaneous. To emphasise that the 4 actions aren't chronological, I've edited the text now to say "There are 4 *simultaneous* actions".
I'm afraid I can't agree with your 6 point list, which presents the scenario as the bank making a loan to Alice which she happens to spend on Bob's house by writing a cheque to him. That wouldn't allow the house to be the security for the loan from the outset, which is what banks require. And Bob would be foolish to hand over the house in exchange for Alice's personal cheque when there's a chance that it won't be honoured because she doesn't have enough funds in her account to pay him. The whole thing has to be a simultaneous 3-party transaction, with Bob receiving cleared funds before handing the keys over. (Even though Bob still has the keys for some time after the funds have cleared, the ownership of the house changes at the instant the funds clear).
Several red herrings you raise about Alice’s personal cheque disappear if it’s replaced with a bank cheque, but in either case your assertion that “[t]he whole thing has to be a simultaneous 3-party transaction” is still incorrect. The “whole thing” has (at least) three distinguishable steps, two of which - (i) a sale & purchase contract and (ii) Alice’s credit-agreement with her bank - must precede the final settlement as step (iii).
In Alice’s case, since her funds [£200k Cr] won’t even exist until she performs step (ii) at her bank, the final step (iii) can’t occur UNLESS she takes step (ii). Step (iii) certainly can’t occur BEFORE step (ii). And since step (iii) usually takes place in a solicitor’s office while step (ii) occurs in her bank, they can’t occur simultaneously unless they both occur at her bank, and that hasn’t occurred in any house purchase or sale I’ve been involved in.
Finally, Alice is unlikely to take step (ii) without a prior sale and purchase agreement (subject to finance) being signed by Bob in step (i). So, the physical sequence of events usually begins with step (i): conditional “sale and purchase” agreement; followed by step (ii): Alice signing the bank’s credit agreement, which can then (and only then) be followed by; step (iii): the physical exchange of Alice’s £200k Cr (the funds) for Bob’s title at the settlement meeting.
I agree step (iii) is invariably done with a bank cheque, usually in a solicitor’s office, but that bank cheque will be drawn against Alice’s £200k Cr balance AFTER it has been posted to her account following step (ii). Since no funds will be created by the bank without Alice’s signature in step (ii), her signature in step (ii) is undoubtedly the efficient cause of their creation, even though the bank’s accounting processes are the obvious material and formal causes of their creation.
The physical reality and logic are inescapable as two separate contracts are involved, between different parties, usually executed in different locations, and usually at different times. And since two people can’t sign a contract simultaneously (each must sign sequentially) only the bilateral exchange of Alice’s funds for Bob’s title in step (iii) necessarily need to (and can) occur simultaneously.
I essentially agree with your description of the cheque clearing process. (I actually used to work for a firm which sold cheque-processing systems to banks). Perhaps the only slight disagreement is in the final paragraph:
"When her “IOBob” has been accepted by Bob’s bank, her “£10Cr” asset is transferred to Bob."
I'd say that Alice's £10 asset is written off (transferring £10 of Alice's RNW to her bank); Alice's bank transfers £10 of its RNW to Bob's bank one way or another; and Bob's bank writes a new £10 IOU to (i.e. creates a new £10 deposit for) Bob (transferring £10 of its RNW to Bob).
I wouldn't like to say that Alice's asset is transferred to Bob, because it's a *new* debt (one owed by Bob's bank), not an existing one (owed by Alice's bank).
There’s no disagreement here. You are indeed correct and I’m the one who (unconsciously) invited you to draw your (correct) inferences.
It’s a bit like two witnesses to a “crime”, where each describes it from a different perspective: where one says, “Bob fell to the ground because Alice shot him”, the other prefers to say, “Bob fell to the ground because Alice pulled the trigger on a gun which was aimed directly at Bob’s chest; the impact of that bullet caused Bob to fall to the ground."
> "But your reply to ‘Bitfarmer111’ (see, above) contradicts the point you say you made “in the post on debts”. I was simply responding to the contradictory emphasis you placed on this point in your reply to ‘Bitfarmer111’, viz., “I do want to emphasise [sic] that "simply" writing an IOU is a genuine transfer of wealth”. "
When I said "simply writing an IOU" originally, the point was to distinguish it from handing over money which the bank has obtained from somewhere else. It's emphasising [British spelling!] that banks can create money.
I still think that, since writing an IOU but not actually giving it to anyone is a pointless action, it's implied that "writing an IOU" implies actually giving it to the new creditor. Just like if a shopper asks a shopkeeper how they can pay, and the shopkeeper says "you can write a cheque", this implies handing the written cheque to the shopkeeper rather than leaving it in the chequebook.
We rely on common-sense inference all the time. For example, when talking about writing an IOU or cheque, we don't feel the need to specify that the ink needs to be visible. So I don't think it's any less precise to rely on common-sense inference, although I'm happy to acknowledge it's a matter of judgement.
I usually try to minimize the risk of being misinterpreted by not assuming readers will draw 'correct' inferences; danger lurks in the “shadows of ambiguity”, ready to pounce when least expected.
[REPOSTING of 26 June comment not received, in reply to: “By asking "on which account will it be drawn?", it seems to me you're assuming it's drawn *on an account*. While that's the way cheques normally work (where the drawer is not the drawee), it's not true when an entity is both drawer and drawee, as in a banker's cheque.”]
*****
It’s not your conclusion that is incorrect; it your analysis, which is incomplete. True, the bank does indeed draw funds of its own, and “is both drawer and drawee” on the bank cheque, but as “drawer A” it will definitely not draw £200,000 from “drawee A”, before Alice first withdraws her £200,000 from her account & deposits it into an asset account [X] of “drawer A”.
The temporal sequence exists and is not only important; it’s logically and physically necessary … and the bank’s rules will enforce it. Alice must pay the bank before the bank draws its cheque on its own asset account [X]. It can only withdraw (credit) £200,000 out of its [X] account for Alice’s benefit after <someone> has made a £200,000 deposit (debit) into [X]. That <someone> can only be (i) Alice or (ii) someone else acting with her authority (e.g., with her Power of Attorney) or as a benefactor.
As a non-expert, I rely on forensic engineering techniques, which help to reveal causal connections, and in this case, I’ve identified the source of the funds that ultimately “honour” the banker's cheque. Sources I’ve checked† as well as commonsense, say the purchaser provides them all.
Whether funds "move" by wire transfer (we've both done that), cash, personal or banker's cheque, the purchaser [Alice], or (more precisely) Alice’s promise-to-pay £200,000, is the ultimate "source".
[†WIKIPEDIA: “… when an individual *requests* a banker's draft the amount of the draft (plus any applicable fees and charges) is *immediately removed* from their account.” INVESTOPEDIA: “A cashier’s check is drawn against the bank’s account rather than yours, which makes the bank responsible for paying the check. *You provide funds* to the bank to cover the check *from your account*.”]
"Alice must pay the bank before the bank draws its cheque on its own asset account [X]."
This seems to be the core of our disagreement. I don't see why the bank would need an asset account containing a £200,000 deposit in order to write a £200,000 cheque. And even if it did, it could just make an interest-free loan to itself to do it (create a matching pair of asset and liability accounts, X and Y, debit X £200,000 and credit Y £200,000), and then write the cheque without Alice needing to be involved at all.
I believe it's far simpler:
- Alice writes a promissory note to the bank. (Bank debits Alice's loan account)
- The bank creates a deposit for Bob. (Bank credits Bob's deposit account).
I don't see why anything else is logically or physically necessary - can you explain what the problem is, or cite an authoritative source which says this can't be done?
The implication of what you write seems to be that a new bank, capitalised with £1m cash, and with no customers yet, couldn't write a £100 banker's cheque to Frank in exchange for Frank cleaning the bank's windows. That doesn't seem right to me.
It may be possible (e..g., in a “thought experiment”) for the bank to “make an interest-free loan to itself to do it (create a matching pair of asset and liability accounts, X and Y, debit X £200,000 and credit Y £200,000), and then write the cheque without Alice needing to be involved at all”, and, yes, your two-step process is certainly “far simpler” and avoids a banker’s cheque.
But if Alice isn’t involved at all, the bank would be purchasing the house, wouldn’t it?
You (rightly) introduced the banker’s cheque (or wire-transfer) into this discussion on the basis that carrying £200,000 cash or drawing a personal cheque for a £200,000 purchase are both so unlikely.
You also know that, when you request a £200,000 banker’s cheque (or wire transfer), the first thing the bank says is: “Show me YOUR £200,000!!!” Similarly, Frank won’t ask the bank for a £100 banker's cheque *before* he cleans their windows. It’s the same thing: Frank has to “deposit” his “£100 worth of cleaning effort” *before* he’ll get the “£100 bank cheque”, even if the bank does have £1m cash sitting in its vault.
And, Yes! At last, you see it: Alice does have to “deposit” her £200,000 promissory note *before* the bank will credit either her or Bob’s account. Without her deposit it can’t [sorry, won’t] credit either account. Hypothetically, it could do it, but that is as likely as elephants flying.
That is to say, the time sequence I keep describing may not be necessary in a “thought experiment”, but it is at any bank on planet Earth.
Aren’t Wiki- and Investo-pedia authoritative enough?
It really feels like we have such different conceptual models that it's hard to communicate. But I think if I try to reply to all the areas I disagree with you, without establishing an effective communication, we're not going to get anywhere.
Can you show me where Investopedia (or even Wikipedia) says that a bank can't simultaneously debit Alice's mortgage loan account and credit Bob's current account? If you think they must happen sequentially, what accounting entries would you expect to see for the two stages? (I.e. what credit would correspond to the debit of receiving Alice's promissory note, and what debit would correspond to crediting Bob's current account?)
Since I agree with your opening statement, before I try to meet your request, I’ll try to short circuit this saga by refocusing your attention on its origin:
[My PREMISE 1] Since nobody can do anything with “£200,000 that don’t exist”, [my REQUEST] will you explain briefly why you maintain the following 4-step sequence, [my DEDUCTION] which seems to imply Bob and Alice bank at the same bank and [my PREMISE 2] describes acts which don’t - I’d even say can’t - occur in the listed order.
[Your CLAIM] *with my added comments* is:
“There are 4 simultaneous actions:
1. The bank adds £200,000 *which do not yet exist* to Bob’s account. (This is a new debt from the bank to Bob) *but these funds are yet to be created, as Alice’s asset, by her PN deposit, and will (can only?) be transferred to Bob’s a/c subsequently*
2. Bob transfers the house to Alice *before Alice has even created the £200,000 to pay for it*.
3. Alice promises to pay the bank the original £200,000 over 25 years *thereby creating the £200,000 needed for your STEP 1*.
4. Alice also promises to pay the bank £155,000 interest over 25 years (a 5% rate) *which happens simultaneously with STEP 3, as [my ASSUMPTION] Alice only signed one “loan agreement” covering both Principal & Interest payments*.
First, a couple of general points. I'm not saying the actions occur in that sequence (one step after the other). I'm saying they are 4 actions which occur *simultaneously*. I've just numbered them to make them easier to refer to. And yes, I'm assuming here that Bob banks at the same bank as Alice. Let's start with the simpler problem. (We can deal with Bob banking elsewhere as an independent problem - one which is actually pretty simple).
To the main issue, I assume you agree that the bank can create a £200,000 "deposit" for Alice (her asset, the bank's liability) by crediting her account, in exchange for her writing a promissory note to the bank (her liability, the bank's asset). And that she can then instruct the bank to transfer her £200,000 asset to Bob, with the end result being that Alice owes the bank £200,000 (+ interest) and the bank owes Bob £200,000.
But it seems you don't believe that they can skip straight to the final state by Alice instructing the bank to create a £200,000 "deposit" asset for *Bob* in exchange for her writing the promissory note. Is that right?
The bank doesn't need to *transfer* £200,000 to Bob's account. It *creates* £200,000 in Bob's account simply by crediting it.
[ASSERTING] simultaneity does allow you to put points in any order but, [IF] simultaneity is impossible, that freedom disappears and a necessary order exists. It’s your [ASSERTION]: “4 actions ... occur simultaneously” which is the issue.
For 9 months my [CONTENTION] has been “they don't and can’t”. On 28 Sep last year I outlined the necessary sequence: [3 & 4] do occur first and simultaneously, and must precede [1], which might coincide with [2] or not.
My [PROOF]: What doesn’t exist can’t move or be moved; a fund of £200,000 must be created by Alice [3 + 4] before £200,000 can be assigned to Bob [1].
I agree with para 2 but for one [OBJECTION]: Alice’s Cr [+] isn’t a “deposit”.
My [REASONS]: Alice's new asset is created by her promise, but the deposited promise is represented by the Dr [+] (not the Cr [+]) and Alice (not the bank) was the depositor, thus the “creator” of both. In this context, “deposit” is misleading; it’s “credit” or “ a credit balance”. [CONSEQUENCE]: Double quotes simply disguise a psychological booby-trap, which distracts the unwary from an important accounting reality: Alice is the ONLY “depositor” here.
I rephrase “Is [it] right [that] you don’t believe …” as questions of [FACT] rather than [BELIEF], thus: [Q1]: “Can they <skip> straight to the final state?” and [Q2]: “Can Alice <instruct> the bank to create a £200,000 "deposit" asset for *Bob* in <exchange> for her writing the promissory note?”
My short [A1] & [A2]: Hypothetically? In a movie, maybe they can but, in reality? It’s No! They can’t, and No! She can’t.
My [REASONS] for [A2]: Alice’s recognized <instruction> device is “a cheque” drawn on a Cr [+] in her a/c, payable to Bob. I may be wrong, but I [BELIEVE] the word <exchange> implies you [BELIEVE] that the bank is a middleman “facilitating” an <exchange> between Alice and Bob. It’s not; it will follow its established [PROCEDURES].
My [REASONS] for [A1]: Will the bank agree to such a <skip>? I doubt it. I [PREDICT] it will need Alice’s cheque as authority to access her a/c, and her a/c must be Cr [+] before the bank can post a Dr [-] to it.
Finally, IF <“The bank doesn't need to *transfer* £200,000 to Bob's account. It *creates* £200,000 in Bob's account simply by crediting it”> IS <TRUE> THEN <the bank is not using double-entry accounting>. To balance that Cr [+] in Bob’s a/c, there has to be a Dr [?] entry <somewhere>. Where will that be, and will the “?” be “+” or “-”?
May I suggest you put your "4 actions" in the chronological order in which they must necessarily occur?
3 & 4 should become 1 & 2, respectively; so 1 & 2 become 3 & 4, respectively.
It all starts with Alice's "promises" to the bank. Without them, nothing happens.
While this specific arrangement is prompted by Alice first approaching the lender, I would say that the actions of creating the new debts and transferring the house are simultaneous. There isn't a point in time when Alice owes the bank £355,000 but the bank doesn't owe Bob anything yet (and Alice doesn't own the house).
The sequence is:
1. Alice offers Bob £200K for the house, subject to obtaining finance (and checking Bob actually owns the house, and it's it's structurally sound, etc.).
2. Bob accepts in principle.
3. Alice asks the bank for a mortgage, with payment to be made to Bob.
4. The bank agrees.
5. Contracts are signed, and exchanged, so everyone has a copy. At this point the 4 actions represented by the arrows occur simultaneously.
The reason that people usually get a solicitor to do this conveyancing, I believe, is that it requires a lot of care to structure this multi-party transaction so that it *is* simultaneous.
I agree about the simultaneity of actions at a settlement meeting, but my suggestion relates to the physical order of the "4 actions" listed in the posted article.
The order of facts you’ve now detailed in the above comment agrees with my suggestion by also contradicting the chronology of the "4 actions" listed in the posted article.
Your list in the article has the bank transferring Alice’s £200,000 Credit to Bob’s account [point 1] BEFORE Alice has even signed the mortgage promising to pay the bank the original £200,000 + interest [points 3 & 4]. My point is that the bank needs Alice’s promise(s) BEFORE it can raise the £200,000 Credit to pay Bob. Banks can’t create, and certainly won’t transfer, anything BEFORE Alice’s mortgage has been signed.
I didn't intend the list to be thought of as chronological at all. They are just 4 things which happen, and they happen simultaneously. The whole set of events is a single transaction: at any point in time, either none of them has occurred, or all of them have.
The actions (i.e. changes to assets & liabilities) all occur at an agreed time *after* the contracts have all been signed.
I agree the bank *won't* create a deposit for Bob before Alice becomes indebted to it, but equally Alice won't become indebted to the bank before Bob transfers his house to her, and Bob won't do that before the bank creates the deposit. All must occur simultaneously.
In principle any of these actions *can* occur in isolation, but it would be taking a big leap of faith in the other parties. (A bank *can* create deposits without receiving anything in exchange - it just reduces its equity. When I opened my first bank account as a new student, the bank credited me £25, in the hope they'd retain my business in future).
I see what you did, but I'm still inclined to emphasize the chronology as an essential element. The preparatory steps leading to 'simultaneity' are nevertheless real.
For £25? They purchased your good-will and future business connection with them - a "loss leader". For £200,000? I doubt it.
Neither Bob nor Alice is an idiot. His final action (house-title transfer) can't precede her crucial prior decisions: (a) to 'offer' to buy and then (b) approach her bank. Alice must do (a) - which Bob may (or may not) accept. When Bob accepts (a), THEN and ONLY THEN does Alice take the first accounting "leap" (b). If she doesn't, her offer lapses ... so no-one else jumps. She is a primary *cause*, and the cause must precede its subsequent effect(s).
Your changes to RNW point this out, but most may miss it. The bank never loaned the 200K, it was simply credited to the buyers account to balance the debit (the mortgage debt) based upon the value of the house.
Yes, the lender is simply writing an IOU. It didn't transfer an existing £200K of cash. But if Bob insists, it *does* have to obtain £200K of cash and transfer it to Bob.
I do want to emphasise that "simply" writing an IOU is a genuine transfer of wealth. For example, if Alice defaults on the mortgage, and also burns the house down so the bank can't repossess and sell it, the bank still owes its £200K debt to Bob. That's a £200K loss to the bank. (Maybe a bit less, because it could repossess the land and sell that).
“Simply” writing an IOU is neither the cause of a transfer of someone’s wealth to the writer, nor the transfer of wealth in itself. Someone’s *acceptance* of the IOU is what causes that wealth transfer.
Despite obvious differences, writing an IOU for £10 has features in common with printing a £10 Bank of England note: neither “creates wealth” or causes a “transfer of wealth”; yet both can be used as a “£10 exchange medium” and enable subsequent transfers of £10 worth of ‘wealth’, one as circulating credit (after it’s deposited at a bank), the other as circulating cash.
But this similarity is NOT equivalence, and when Bob tries to withdraw “cash” from an account he’s deposited Alice’s “credit” into, a problem arises from the differences. The problem arises because identical account balances of “£10.00 Cr” are created in bank accounts by depositing EITHER a £10 BoE note or a £10 IOU, and those balances are literally indistinguishable. Banks create a problem for themselves when they refuse to maintain the distinction between “money” and “credit” in this situation because “credit” is merely a convenient substitute for “money” (which the bank does NOT create), not the equivalent of it.
You can see why Bob’s withdrawing BoE cash from such an IOU-generated credit balance causes problems, but at first glance, simply not allowing cash withdrawals from such accounts would eliminate that problem completely.
When we deposit an IOU with them, banks should state clearly that they are simply “providing a credit facility”. If this distinction was rigidly enforced, there will be no reason to foreclose on Alice. There would also be fewer defaults. In fact, there will be no justification for interest charges either, because no bank asset is transferred from the bank to Alice in the first place; her deposit of an IOU simply initiated a “liability swap”.
I agree that simply writing "IOU £10" on a piece of paper doesn't transfer wealth: it's only handing it to someone which does that. (I make that very point in the post on debts). But when I say "write an IOU", I generally mean "and hand it to someone" to be inferred, because simply writing an IOU is of no economic consequence whatsoever. It's only when one party has the asset side and the other has the liability side that something interesting has happened.
I'm not sure what you mean when you say Bob has "deposited Alice's credit". What situation are you imagining? A bank won't normally credit Bob's account in exchange for him handing over an IOU written by Alice.
But your reply to ‘Bitfarmer111’ (see, above) contradicts the point you say you made “in the post on debts”. I was simply responding to the contradictory emphasis you placed on this point in your reply to ‘Bitfarmer111’, viz., “I do want to emphasise [sic] that "simply" writing an IOU is a genuine transfer of wealth”.
Consistency and precision can only help your readers.
What I meant by “deposited Alice's credit” was: Bob accepted a ‘good’ cheque from Alice for £10 and deposited it at his bank.
I could assume you understand how clearance of cheques works, but, to be clear: when Alice draws a cheque payable to Bob for £10 and gives it to him, Bob will usually deposit it at his bank, which (tentatively) debits £10 to its asset account, (tentatively) credits £10 to his account, and presents Alice’s cheque to Alice’s bank for “clearance”. Only after Alice’s bank “clears” the cheque for payment is her account debited £10, and Bob’s bank confirms both the £10 debit to its asset account and the £10 credit to Bob’s account. His bank now owes Bob the £10 that Alice’s bank used to owe her; Alice has transferred £10-worth of “her credit-balance” to Bob.
It’s complicated, but it works. When her “IOBob” has been accepted by Bob’s bank, her “£10Cr” asset is transferred to Bob. I know! Strictly speaking, a cheque is an “instruction to the bank”, not an “IOU”, but I trust you will get my point.
P.S. I notice you haven’t changed the order of the 4 points in this article to reflect the chronology of WHEN the bank draws Alice’s £200,000 cheque, for payment to Bob, and still have the bank paying Bob £200,000 as #1, implying it takes place two steps ahead of Alice’s depositing her £200,000 “IOU” with the bank at #3. Whether you intended it or not, the physical order of those items does suggest a chronological order, even if it is only by implication.
It's arguable whether transfer of house ownership [#2] should be either the last item, or simultaneous with Bob’s receipt of £200,000Cr, but #3 should definitely be moved to #1, as it is NECESSARILY the first FINANCIAL step, in time, after the contract has been signed by Bob and Alice (usually including a “subject to finance” clause).
So, the physical order [reality?] is:
1. Sign contract (“subject to finance”); THEN
2. First TRANSFER occurs: Alice DEPOSITS her IOU, i.e., agrees to “borrow” £200,000;
3. IF (and only IF) the Bank ACCEPTS, by creating matching £200,000 debit and £200,000 credit for Alice; THEN
4. The REAL transfer can occur: swap Alice’s £200,000 cheque for Bob’s house; THEN
5. Bob banks Alice’s £200,000 cheque AND Alice registers Title Transfer at Registry; so
6. Alice’s bank can “clear” Alice’s cheque and Bob finally gets his £200,000Cr.
Consistency AND precision?
With respect to the 4 actions involved in Alice buying a house from Bob with a mortgage from the bank, I'd said immediately before the picture that they were a transaction, which by definition that means that they are simultaneous. To emphasise that the 4 actions aren't chronological, I've edited the text now to say "There are 4 *simultaneous* actions".
I'm afraid I can't agree with your 6 point list, which presents the scenario as the bank making a loan to Alice which she happens to spend on Bob's house by writing a cheque to him. That wouldn't allow the house to be the security for the loan from the outset, which is what banks require. And Bob would be foolish to hand over the house in exchange for Alice's personal cheque when there's a chance that it won't be honoured because she doesn't have enough funds in her account to pay him. The whole thing has to be a simultaneous 3-party transaction, with Bob receiving cleared funds before handing the keys over. (Even though Bob still has the keys for some time after the funds have cleared, the ownership of the house changes at the instant the funds clear).
Several red herrings you raise about Alice’s personal cheque disappear if it’s replaced with a bank cheque, but in either case your assertion that “[t]he whole thing has to be a simultaneous 3-party transaction” is still incorrect. The “whole thing” has (at least) three distinguishable steps, two of which - (i) a sale & purchase contract and (ii) Alice’s credit-agreement with her bank - must precede the final settlement as step (iii).
In Alice’s case, since her funds [£200k Cr] won’t even exist until she performs step (ii) at her bank, the final step (iii) can’t occur UNLESS she takes step (ii). Step (iii) certainly can’t occur BEFORE step (ii). And since step (iii) usually takes place in a solicitor’s office while step (ii) occurs in her bank, they can’t occur simultaneously unless they both occur at her bank, and that hasn’t occurred in any house purchase or sale I’ve been involved in.
Finally, Alice is unlikely to take step (ii) without a prior sale and purchase agreement (subject to finance) being signed by Bob in step (i). So, the physical sequence of events usually begins with step (i): conditional “sale and purchase” agreement; followed by step (ii): Alice signing the bank’s credit agreement, which can then (and only then) be followed by; step (iii): the physical exchange of Alice’s £200k Cr (the funds) for Bob’s title at the settlement meeting.
I agree step (iii) is invariably done with a bank cheque, usually in a solicitor’s office, but that bank cheque will be drawn against Alice’s £200k Cr balance AFTER it has been posted to her account following step (ii). Since no funds will be created by the bank without Alice’s signature in step (ii), her signature in step (ii) is undoubtedly the efficient cause of their creation, even though the bank’s accounting processes are the obvious material and formal causes of their creation.
The physical reality and logic are inescapable as two separate contracts are involved, between different parties, usually executed in different locations, and usually at different times. And since two people can’t sign a contract simultaneously (each must sign sequentially) only the bilateral exchange of Alice’s funds for Bob’s title in step (iii) necessarily need to (and can) occur simultaneously.
I essentially agree with your description of the cheque clearing process. (I actually used to work for a firm which sold cheque-processing systems to banks). Perhaps the only slight disagreement is in the final paragraph:
"When her “IOBob” has been accepted by Bob’s bank, her “£10Cr” asset is transferred to Bob."
I'd say that Alice's £10 asset is written off (transferring £10 of Alice's RNW to her bank); Alice's bank transfers £10 of its RNW to Bob's bank one way or another; and Bob's bank writes a new £10 IOU to (i.e. creates a new £10 deposit for) Bob (transferring £10 of its RNW to Bob).
I wouldn't like to say that Alice's asset is transferred to Bob, because it's a *new* debt (one owed by Bob's bank), not an existing one (owed by Alice's bank).
There’s no disagreement here. You are indeed correct and I’m the one who (unconsciously) invited you to draw your (correct) inferences.
It’s a bit like two witnesses to a “crime”, where each describes it from a different perspective: where one says, “Bob fell to the ground because Alice shot him”, the other prefers to say, “Bob fell to the ground because Alice pulled the trigger on a gun which was aimed directly at Bob’s chest; the impact of that bullet caused Bob to fall to the ground."
> "But your reply to ‘Bitfarmer111’ (see, above) contradicts the point you say you made “in the post on debts”. I was simply responding to the contradictory emphasis you placed on this point in your reply to ‘Bitfarmer111’, viz., “I do want to emphasise [sic] that "simply" writing an IOU is a genuine transfer of wealth”. "
When I said "simply writing an IOU" originally, the point was to distinguish it from handing over money which the bank has obtained from somewhere else. It's emphasising [British spelling!] that banks can create money.
I still think that, since writing an IOU but not actually giving it to anyone is a pointless action, it's implied that "writing an IOU" implies actually giving it to the new creditor. Just like if a shopper asks a shopkeeper how they can pay, and the shopkeeper says "you can write a cheque", this implies handing the written cheque to the shopkeeper rather than leaving it in the chequebook.
We rely on common-sense inference all the time. For example, when talking about writing an IOU or cheque, we don't feel the need to specify that the ink needs to be visible. So I don't think it's any less precise to rely on common-sense inference, although I'm happy to acknowledge it's a matter of judgement.
Good points.
I usually try to minimize the risk of being misinterpreted by not assuming readers will draw 'correct' inferences; danger lurks in the “shadows of ambiguity”, ready to pounce when least expected.
[REPOSTING of 26 June comment not received, in reply to: “By asking "on which account will it be drawn?", it seems to me you're assuming it's drawn *on an account*. While that's the way cheques normally work (where the drawer is not the drawee), it's not true when an entity is both drawer and drawee, as in a banker's cheque.”]
*****
It’s not your conclusion that is incorrect; it your analysis, which is incomplete. True, the bank does indeed draw funds of its own, and “is both drawer and drawee” on the bank cheque, but as “drawer A” it will definitely not draw £200,000 from “drawee A”, before Alice first withdraws her £200,000 from her account & deposits it into an asset account [X] of “drawer A”.
The temporal sequence exists and is not only important; it’s logically and physically necessary … and the bank’s rules will enforce it. Alice must pay the bank before the bank draws its cheque on its own asset account [X]. It can only withdraw (credit) £200,000 out of its [X] account for Alice’s benefit after <someone> has made a £200,000 deposit (debit) into [X]. That <someone> can only be (i) Alice or (ii) someone else acting with her authority (e.g., with her Power of Attorney) or as a benefactor.
As a non-expert, I rely on forensic engineering techniques, which help to reveal causal connections, and in this case, I’ve identified the source of the funds that ultimately “honour” the banker's cheque. Sources I’ve checked† as well as commonsense, say the purchaser provides them all.
Whether funds "move" by wire transfer (we've both done that), cash, personal or banker's cheque, the purchaser [Alice], or (more precisely) Alice’s promise-to-pay £200,000, is the ultimate "source".
[†WIKIPEDIA: “… when an individual *requests* a banker's draft the amount of the draft (plus any applicable fees and charges) is *immediately removed* from their account.” INVESTOPEDIA: “A cashier’s check is drawn against the bank’s account rather than yours, which makes the bank responsible for paying the check. *You provide funds* to the bank to cover the check *from your account*.”]
"Alice must pay the bank before the bank draws its cheque on its own asset account [X]."
This seems to be the core of our disagreement. I don't see why the bank would need an asset account containing a £200,000 deposit in order to write a £200,000 cheque. And even if it did, it could just make an interest-free loan to itself to do it (create a matching pair of asset and liability accounts, X and Y, debit X £200,000 and credit Y £200,000), and then write the cheque without Alice needing to be involved at all.
I believe it's far simpler:
- Alice writes a promissory note to the bank. (Bank debits Alice's loan account)
- The bank creates a deposit for Bob. (Bank credits Bob's deposit account).
I don't see why anything else is logically or physically necessary - can you explain what the problem is, or cite an authoritative source which says this can't be done?
The implication of what you write seems to be that a new bank, capitalised with £1m cash, and with no customers yet, couldn't write a £100 banker's cheque to Frank in exchange for Frank cleaning the bank's windows. That doesn't seem right to me.
It may be possible (e..g., in a “thought experiment”) for the bank to “make an interest-free loan to itself to do it (create a matching pair of asset and liability accounts, X and Y, debit X £200,000 and credit Y £200,000), and then write the cheque without Alice needing to be involved at all”, and, yes, your two-step process is certainly “far simpler” and avoids a banker’s cheque.
But if Alice isn’t involved at all, the bank would be purchasing the house, wouldn’t it?
You (rightly) introduced the banker’s cheque (or wire-transfer) into this discussion on the basis that carrying £200,000 cash or drawing a personal cheque for a £200,000 purchase are both so unlikely.
You also know that, when you request a £200,000 banker’s cheque (or wire transfer), the first thing the bank says is: “Show me YOUR £200,000!!!” Similarly, Frank won’t ask the bank for a £100 banker's cheque *before* he cleans their windows. It’s the same thing: Frank has to “deposit” his “£100 worth of cleaning effort” *before* he’ll get the “£100 bank cheque”, even if the bank does have £1m cash sitting in its vault.
And, Yes! At last, you see it: Alice does have to “deposit” her £200,000 promissory note *before* the bank will credit either her or Bob’s account. Without her deposit it can’t [sorry, won’t] credit either account. Hypothetically, it could do it, but that is as likely as elephants flying.
That is to say, the time sequence I keep describing may not be necessary in a “thought experiment”, but it is at any bank on planet Earth.
Aren’t Wiki- and Investo-pedia authoritative enough?
It really feels like we have such different conceptual models that it's hard to communicate. But I think if I try to reply to all the areas I disagree with you, without establishing an effective communication, we're not going to get anywhere.
Can you show me where Investopedia (or even Wikipedia) says that a bank can't simultaneously debit Alice's mortgage loan account and credit Bob's current account? If you think they must happen sequentially, what accounting entries would you expect to see for the two stages? (I.e. what credit would correspond to the debit of receiving Alice's promissory note, and what debit would correspond to crediting Bob's current account?)
Since I agree with your opening statement, before I try to meet your request, I’ll try to short circuit this saga by refocusing your attention on its origin:
[My PREMISE 1] Since nobody can do anything with “£200,000 that don’t exist”, [my REQUEST] will you explain briefly why you maintain the following 4-step sequence, [my DEDUCTION] which seems to imply Bob and Alice bank at the same bank and [my PREMISE 2] describes acts which don’t - I’d even say can’t - occur in the listed order.
[Your CLAIM] *with my added comments* is:
“There are 4 simultaneous actions:
1. The bank adds £200,000 *which do not yet exist* to Bob’s account. (This is a new debt from the bank to Bob) *but these funds are yet to be created, as Alice’s asset, by her PN deposit, and will (can only?) be transferred to Bob’s a/c subsequently*
2. Bob transfers the house to Alice *before Alice has even created the £200,000 to pay for it*.
3. Alice promises to pay the bank the original £200,000 over 25 years *thereby creating the £200,000 needed for your STEP 1*.
4. Alice also promises to pay the bank £155,000 interest over 25 years (a 5% rate) *which happens simultaneously with STEP 3, as [my ASSUMPTION] Alice only signed one “loan agreement” covering both Principal & Interest payments*.
…”
First, a couple of general points. I'm not saying the actions occur in that sequence (one step after the other). I'm saying they are 4 actions which occur *simultaneously*. I've just numbered them to make them easier to refer to. And yes, I'm assuming here that Bob banks at the same bank as Alice. Let's start with the simpler problem. (We can deal with Bob banking elsewhere as an independent problem - one which is actually pretty simple).
To the main issue, I assume you agree that the bank can create a £200,000 "deposit" for Alice (her asset, the bank's liability) by crediting her account, in exchange for her writing a promissory note to the bank (her liability, the bank's asset). And that she can then instruct the bank to transfer her £200,000 asset to Bob, with the end result being that Alice owes the bank £200,000 (+ interest) and the bank owes Bob £200,000.
But it seems you don't believe that they can skip straight to the final state by Alice instructing the bank to create a £200,000 "deposit" asset for *Bob* in exchange for her writing the promissory note. Is that right?
The bank doesn't need to *transfer* £200,000 to Bob's account. It *creates* £200,000 in Bob's account simply by crediting it.
[ASSERTING] simultaneity does allow you to put points in any order but, [IF] simultaneity is impossible, that freedom disappears and a necessary order exists. It’s your [ASSERTION]: “4 actions ... occur simultaneously” which is the issue.
For 9 months my [CONTENTION] has been “they don't and can’t”. On 28 Sep last year I outlined the necessary sequence: [3 & 4] do occur first and simultaneously, and must precede [1], which might coincide with [2] or not.
My [PROOF]: What doesn’t exist can’t move or be moved; a fund of £200,000 must be created by Alice [3 + 4] before £200,000 can be assigned to Bob [1].
I agree with para 2 but for one [OBJECTION]: Alice’s Cr [+] isn’t a “deposit”.
My [REASONS]: Alice's new asset is created by her promise, but the deposited promise is represented by the Dr [+] (not the Cr [+]) and Alice (not the bank) was the depositor, thus the “creator” of both. In this context, “deposit” is misleading; it’s “credit” or “ a credit balance”. [CONSEQUENCE]: Double quotes simply disguise a psychological booby-trap, which distracts the unwary from an important accounting reality: Alice is the ONLY “depositor” here.
I rephrase “Is [it] right [that] you don’t believe …” as questions of [FACT] rather than [BELIEF], thus: [Q1]: “Can they <skip> straight to the final state?” and [Q2]: “Can Alice <instruct> the bank to create a £200,000 "deposit" asset for *Bob* in <exchange> for her writing the promissory note?”
My short [A1] & [A2]: Hypothetically? In a movie, maybe they can but, in reality? It’s No! They can’t, and No! She can’t.
My [REASONS] for [A2]: Alice’s recognized <instruction> device is “a cheque” drawn on a Cr [+] in her a/c, payable to Bob. I may be wrong, but I [BELIEVE] the word <exchange> implies you [BELIEVE] that the bank is a middleman “facilitating” an <exchange> between Alice and Bob. It’s not; it will follow its established [PROCEDURES].
My [REASONS] for [A1]: Will the bank agree to such a <skip>? I doubt it. I [PREDICT] it will need Alice’s cheque as authority to access her a/c, and her a/c must be Cr [+] before the bank can post a Dr [-] to it.
Finally, IF <“The bank doesn't need to *transfer* £200,000 to Bob's account. It *creates* £200,000 in Bob's account simply by crediting it”> IS <TRUE> THEN <the bank is not using double-entry accounting>. To balance that Cr [+] in Bob’s a/c, there has to be a Dr [?] entry <somewhere>. Where will that be, and will the “?” be “+” or “-”?