“The Govt guarantee did not make overseas funds any cheaper then they had been in the past, it helped the banks raise their continuing need for more rollover funds, at lower rates then the crazy rates being quoted without it. Banks paid a fee, I gather that the Govt earned a billion$ from those, without paying out anything. The Govt charged AA rated banks less then BB rated banks, so small banks would have suffered from the higher cost of the guarantee.”

As eloquent in terms of economic speak as that explanation is Yabby, I would still be interested in how you could not interpret such significant competitive advantage effectively as a cost ‘discount,’ as identified by the reputable market leaders and analysts I quoted.

Further, if it was a ‘discount,’ why may it not be observed as ’double dipping’ as quoted by Bank of Queensland Chief, David Liddy, in the report I refer to, and why was it not passed on to its considerable number of residential home lenders at that time?

If you retain a vested interest in Westpac Yabby, it is your ethical obligation to declare it in this debate.

Yabby won't debate the real issues of bank fractional reserve rorting and their exorbitant profits because he like other interest groups hold their shares.

The present system is destroying real productivity by over inflating assets and destroying the purchasing power of workers.Investment money
ends up in institutions that have little or no productivity.

The present Keynesian system is stuffed and pumping more money into it,will not revive it's dead carcass.

Banks do increase the money supply. The mechanism that the text books teach and commentators like Yabby and Pericles believe is that banks lend a fraction of their deposits. This in turn creates a new smaller deposit and then the banks lend a fraction of that new smaller deposit. This is an interesting explanation of how things work but in real life it does not work that way.

Banks make a loan then they look for money to cover the loan. The end result in terms of the number of loans created is exactly the same as having a deposit and then lending but the implications are profound.

What matters for economic growth is the willingness of the banks to make loans not the supply or cost of money from the Reserve Bank. In other words the Reserve Bank has a marginal influence on the money supply.

Banks make more profits the more loans they give so they are always trying to sell more of their products. This inevitably leads to asset bubbles that sooner or later burst.

Evidence for the creation of loans before deposits was published by two neoclassical economists Kydland and Prescott in 1990. http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=225

This further expanded and explained by Steve Keen.
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

Ngarmada, the Govt gave nothing away for free, but
basically undertook a commercial insurance transaction. They charged a higher
premium to those whose risk of default was higher. Given that
banks were paying higher interest on overseas funds then they
were charging you for a housing loan, what did you want them to
pass on? Most of that overseas money goes to business lending,
where its higher interest can be justified by extra interest charged
to business.

Yes, I run my own super fund and have shares in Westpac and NAB.
So I've taken the trouble to learn a bit about the truth regards
banking and not the hysteria which people like Arjay and others
spread.

Which leads to the question of what can be called excessive profit?

Westpac for instance, have loans outstanding of well over 400 billion $.

Their net profit is a bit less then 1% of that. In other words,
if they charged their clients 1% less interest or paid an extra
1% for their money, they would effectively be losing money.

I really don't think that 1% is excessive.

There is also a dependency issue here.

In the same way that we depend on the Banks to keep our Super funds healthy, the government relies on them to deliver tax dollars to support the Federal Budget.

$10bn would be a big hole to fill.

The question is, of course, whether that ten billion would be better off in our pockets than theirs.

While I have no difficulty in answering that specific question, it leads to a whole other discussion on why are we taxed the way we are.

Changing that system, and in doing so releasing the government from its dependency, is not just a matter of bashing the Banks.

Yabby - OK, I take your point. Although new money is being created, as each deposit is made it appears to be "old" money, or rather there is nothing to distinguish whether it is new or old. Given that, a bank pays interest in return for the deposit, and therefore charges higher interest on loans made from that deposit. So there's an intrinsic cost in the money-creation process. I think that's what you're saying. Correct? I'll consider the implications, but it may be moot given the comments below.

Regarding super, "workers" may in principle "own" Australian industry through super funds, but they have no control. They don't even have the minimal control direct share-holders have in theory. And you gloss over the fact that many people have little or no super. In a stabilised system, direct ownership would be less risky, and would then permit more control by workers. (You could even have employees owning the enterprise they work for - it already exists, but on a tiny scale.) By eliminating financial cowboys, more wealth would flow to workers and the present obscene extremes of wealth (and power) would be reduced. Please note - this would not be socialism, it would be a more equitable market system.

Fickle - Steve Keen argued to me some time ago that loans precede deposits but I couldn't get why he thought it was important. I missed the article you linked to from last year, and that makes it clear.

Forkes - thanks for the complement. I see Steve Keen gives another good account of "the money multiplier" mechanism - and argues convincingly that it's not the dominant mechanism in our system. I commend the link supplied by Fickle Pickle.

All - The result of Steve's analysis is that banks (and others) at present can create credit almost without limit, and at great profit, and this produces debt bubbles and crashes. Different mechanism, similar end result.