How do Banks make their money

1 The previous section looks at how banks actually operate in the real world. The following section looks at some of the common misconceptions surrounding banks, including the favourite of economics textbook writers everywhere, the money multiplier model.

2 PERCEPTION OF BANKING NUMBER 1: THE ‘[SHORTCUT]SAFE[/SHORTCUT] DEPOSIT BOX’

Most of us had a piggy bank when we were kids. The idea is really simple: keep putting small amounts of money into your piggy bank, and when a rainy day comes along, the money will still be sat there waiting for you. For a lot of people, this idea of keeping your money safe sticks with them into adult life. A poll done by ICM on behalf the Cobden Centre found that a third of the UK public still believe that this is how banks work.

However, your bank account isn’t a safe deposit box. The bank doesn’t take your money, carry it down to the vault and put it in a box with your name written on the front. And it doesn’t store it in any digital equivalent of a safe deposit box either. What actually happens is that when you put money into a bank, that money becomes the property of the bank. Because it becomes their property, the bank can use it for effectively anything it likes.

But what are those numbers that appear in your account? Is that not money? In a legal sense, no. Those numbers in your account are just a record that the bank needs to repay you at some point in the future.  In accounting terms, this is known as a liability of the bank. So the balance of your bank account doesn’t actually represent the money that the bank is holding on your behalf. It just shows that they have a legal obligation – or liability – to repay you the money at some point in the future.

3 PERCEPTION OF BANKING NUMBER 2: THE [SHORTCUT]MIDDLE[/SHORTCUT]-MAN.

The other two thirds of the UK public have a slightly better understanding of how banks really work.

They believe that banks take money from savers and lend it to borrowers – i.e. banks borrow money from people who want to save it, such as pensioners and wealthy individuals, and they then use that money to lend it to people who need to borrow, such as young families that want to buy houses or small businesses that want to invest and grow. The banks make their money by charging the borrowers slightly more in interest than they pay to the savers. The difference between the interest rates – known as the spread – makes up their profit.

In this model, banks just provide a service by getting money from people who don’t need it at the time, to people who do. The Cobden Centre poll mentioned earlier asked people if they were worried about this process: around 61% of people said they didn’t mind so long as they get some interest and the bank isn’t too reckless.Uu

The implications of this theory are that if there’s no-one who wants to save, then no-one will be able to borrow. That means it’s good for the country if we save, because it will provide more money for businesses to grow, which will lead to more jobs and a healthier economy. This is the way that a lot of economists think as well. In fact, a lot of economics courses at universities still teach that the amount of investment in the economy depends on how much we have in savings. But this is completely wrong, as we’ll see shortly.

4 PERCEPTION OF BANKING NUMBER 3: THE MONEY [SHORTCUT]MULTIPLIER[/SHORTCUT]

Most economics and finance students have a slightly better understanding of banking. They get taught about something called the ‘money multiplier’. The money multiplier story says that banks actually create much of the money in the economy.

Here’s how the story goes: A man walks into a bank and deposits his salary of £1000 in cash. Now the bank knows that, on average, the customer won’t need the whole of his £1000 returned all at once. He’s probably going to spend a little bit of his salary each day over the course of the month. So the bank assumes that much of the money deposited is ‘idle’ or spare and won’t be needed on any particular day.

It keeps back a small ‘reserve’ of say 10% of the money deposited with it (in this case £100), and lends out the other £900 to somebody who needs a loan. So the borrower takes this £900 and spends it at a local car dealer. The car dealer doesn’t want to keep that much cash in its office, so it takes the money back to another bank.

Now the bank again realises that it can use the bulk of the money to make another loan. It keeps back 10% – £90 – and lend out the other £810 to make another loan. Whoever borrows the £810 spends it, and it comes back to one of the banks again. Whichever bank receives it then keeps back 10% i.e. £81, and makes a new loan of £729.

This process of re-lending continues, with the same money being lent over and over again, but with 10% of the money being put in the reserve every time. Note that every one of the customers who paid money into the bank still thinks that their money is there, in the bank. The numbers on their bank statement confirm that the money is still there. Even though there is still only £1000 in cash flowing around, the sum total of everyone’s bank account balances has been increasing, and so has the total amount of debt.

Supposedly this process continues, until only a penny is being relent. By now, the sum total of all bank accounts adds up to about £10,000. So the multiplier model that is still taught in many universities implies that this repeated process of a bank taking money from a customer, putting a little bit into a reserve, and then lending out the rest can create money out of nothing, because the same money is double-counted every time is it relent.

You can imagine this model as a pyramid. The cash is the base of the pyramid, and depending on the reserve ratio the banks multiply up the total amount of money by re-lending it over and over again.  More advanced treatments include the concept of ‘central bank reserves’ as well as cash, however the basic message is the same.

5[SHORTCUT]PROBLEMS[/SHORTCUT] WITH THE MONEY MULTIPLIER MODEL

The money multiplier model of banking has several implications:

Firstly, this  model implies that banks have to wait until someone puts money into a bank before they can start making loans. This implies that banks just react passively to what customers do, and that they wait for people with savings to come along before they start lending.

Secondly, it implies that the central bank has ultimate control over the total amount of money in the economy. They can control the amount of money by changing either the reserve ratio or the amount of ‘base money’ – cash – at the bottom of the pyramid.

For example, if the Bank of England sets a legal reserve ratio and this reserve ratio is 10%, then the total money supply can grow to 10 times the amount of cash in the economy. If the Bank of England then increases the reserve ratio to 20%, then the money supply can only grow to 5 times the amount of cash in the economy. If the reserve ratio was dropped to 5%, then the money supply would grow to 20 times the amount of cash in the economy.

Alternatively, the Bank of England could change how much cash there was in the economy in the first place. If it printed another £1000 and put that into the economy, and the reserve ratio is still 10%, then the theory says that the money supply will increase by a total of £10,000, after the banks have gone through the process of repeatedly re-lending that money. This process is described as altering the amount of ‘base money’ in the economy.

Thirdly, it implies the money supply can never get out of control, unless the central bank wants it to.

Unfortunately, the money multiplier model of banking is completely wrong. Professor Charles Goodhart of the London School of Economics and an advisor to the Bank of England for over 30 years described this model (in 1984) as “such an incomplete way of describing the process of the determination of the stock of money that it amounts to mis-instruction.” Why is this?

Firstly, the underlying concept of the money multiplier is that in order to make loans banks first require people to deposit money. However, this is simply not true. In actual fact when banks lend they create deposits:

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Why do babies cry at night

How to Handle your Baby Crying at Night.

Having a baby is a life-altering event; we’re sure you’re aware that raising your little one is no piece of cake. Apart from feeding schedules, nap requirements, and vaccination schedules, one thing you will have to deal with a lot is your baby crying. It is through crying that babies communicate their needs and initially, it can be tricky to interpret what your little one is trying to tell you. But don’t worry… 

It is expected of a newborn baby to be crying all night, and frequently. But these episodes should become less frequent as the baby gets older. Here are some common reasons why babies cry at night:

1. FEELING HUNGRY

Babies have tiny stomachs and need to feed quite frequently during the first few months. Most babies will have to be fed every two to three hours. Watch out for signs of hunger, such as the baby putting his hands into his mouth, fussing, and smacking his lips. Starting the feed before your baby begins crying will help you have a peaceful nights

2. Experiencing Discomfort Due to Gas Troubles

Babies are prone to having gas troubles and may need to be burped or pass gas to feel relieved. Your baby might swallow air when breastfeeding or sucking from a bottle, and burping soon after a feed can provide him with relief. Placing your baby down on his tummy and gently massaging his back can also prove helpful.

3. HAVING A DIRTY OR WET DIAPER

Some babies can tolerate a wet or dirty diaper for a short time while others may need a change immediately. Putting on a fresh diaper will help the baby go back to sleep again quickly. However, ensure that you change the diaper quickly and don’t interact much with your baby while doing so, so he can be soothed back to sleep.

4. NEEDING REASSURANCE

Being alone in the dark can be a scary thing for your baby. He might cry out loud for attention, and to be reassured that you’re right there beside him.

5. FEELING COLD

Your baby is likely to cry if he’s feeling too cold. Swaddling him in light layers can help him keep warm and provide him comfort. However, ensure that you’re not wrapping him in heavy layers, as this poses the risk of SIDS.

6. EXPERIENCING TEETHING TROUBLES

If your baby seems to be crying at night for no reason, check to see if teething could be the culprit. Teething pains can start from as early as four months and can cause babies to drool excessively and chew on everything they get their hands on. If your little one is about to or has already started teething, massaging the gums gently or offering baby teethers, especially ones that have been refrigerated, can reduce his irritation.

7. BEING TOO STIMULATED

Taking your baby to a social event or out on a shopping trip can sometimes prove to be too exciting for him. The sensory overload can prove to be too much, especially if you’re putting him to sleep immediately after the experience is over (eg: reaching home right before your baby’s bedtime or if he falls asleep on the way home), and this can result in him crying into the night. Placing the baby in a familiar setting and then easing him into his bedtime routine can help tackle this problem.

8. FEELING ILL

Feeling sick, tired, and fatigued can make even adults want to cry! If your baby is crying more than usual or sounds different, then it might be due to some illness. Check to see whether your baby has any other symptoms like a fever, cough, vomiting, or a loss of appetite, to name a few. Consult your doctor if this appears to be the reason.

How Long Does the Crying Last?

Early intervention can nip the problem in the bud and ensure you and your baby have peaceful nights. By resorting to appropriate methods of dealing with the crying, you can bring about changes in your baby’s behaviour in as little as two weeks. But this task gets more difficult as your baby grows older. Children aged one year or older are likely to fight off going to bed, even when they are sleepy and exhausted. They can cry for hours, protesting at the changes brought about in their schedule. If you do not take remedial measures when your child is an infant, the crying can last up until three or four years of age.

When Should Your Baby Be Able to Sleep Through the Night?

Babies under the age of two months are likely to awaken at least two times every night to be fed. After two months and up to four months of age, this comes down to one feed per night. After four months, formula-fed babies can sleep through the night for about seven hours straight. Breastfed babies should be able to get through seven hours without waking up for feeds by at least five months of age. This holds true for all normal babies of this age group; they should be able to fall asleep and stay that way without being held or rocked during the night.

Can You Comfort Your Baby if He Cries at Night?

There are two schools of thought on this topic. One belief is that babies will stop crying at night for no reason once they realize that no one responds. The other school of thought is that every time a baby cries, he should be held and comforted; that a baby should not be left alone for any reason. It is up to you to decide which way you want to go after weighing the pros and cons of each.

Would it Hurt Your Baby if You Leave Him Crying?

It is believed that letting a baby cry on his own can prove harmful to his physical and mental growth in the long term. But there is no evidence to support this claim. However, most of the sleep-training methods suggest that parents should stop responding instantaneously to every little cry of their child. But this also involves severing a connection between the parent and child. Some researchers opine that a sleep training method which involves letting a child cry for any period of time is likely to adversely impact the child’s physical, emotional, social, and behavioural growth due to interruptions in the natural biological cycle of the infant.

How to Calm Your Crying Baby at Night

If your baby wakes up crying at night despite all his needs being met, it is likely that he has made it a habit. Here are some ways in which you can help your child (over four months of age) calm down and sleep through the night:

Put your baby in the crib or on the bed when he’s drowsy but still awake. Be certain to place your child in the crib at this point even if his bedtime ritual has not been completed. The baby’s last waking memory has to be of the bed or crib, and not of you. This will encourage him to go back to sleep on his own when he wakes up in the middle of the night.

If your baby refuses to stop crying at bedtime, keep visiting him at intervals of five to fifteen minutes. You can keep increasing the duration between visits. However, do not let the baby get too upset; if he seems extremely fussy or afraid, hold him till he calms down. You can sit in the room for a few moments till he calms down, but try to leave before he falls asleep.

Don’t take your child out of the crib or bed once you have tucked him in for the night. Rocking your baby until he falls asleep or bringing him into your bed for a while will defeat the purpose of this exercise.

Introduce your baby to a security object such as a soft toy or a blanket if your baby is six months or older. This will be of comfort to your baby when he wakes up at night and he will soon be happy cuddling this object instead of you at night.

Some other things that you can try to ensure a regular sleep schedule for your child are:

Restricting the baby’s naps to two hours or less and limiting it to only two naps a day.

Avoiding changing wet diapers at night as much as possible; if you must, then keep the lights dim to prevent stimulating your baby.

Sleep Training for Your Baby

Sleep training refers to the method used to teach your baby to fall asleep on his own. Once this aim is achieved, your baby is more likely to sleep through the night. While some babies easily pick up this art of sleeping, others may take time. There are two ways of sleep training – the controlled crying approach and the no-tears method. The choice is up to both partners after looking at the advantages and disadvantages of each. That said, it is important to remember that for some parents, a single training method might not do the trick. There is no particular age specified at which sleep training should be started. A large number of parents choose the sleep training route because they cannot deal with sleep deprivation any longer. Experts opine that babies are fully able to drift off to sleep by themselves after three months of age.

What Is the Cry it Out/Crying Down/Ferber Method?

Devised by a physician called Dr Richard Ferber, this method recommends letting your baby cry for a short while before you offer him comfort. Dr Ferber has also penned a book on this topic and it can be ideally applied to babies six months and older. The method suggested is as follows:

Gently place your baby in his crib or cot when he is extremely drowsy but not fast asleep.

Give your baby a goodnight kiss and step out of the room.

If your baby cries soon after, wait for a few moments before going inside.

Comfort your baby in a low voice and let the light be on low or switched off. Do not pick him up or feed him.

Leave the room even if your baby is still crying.

You have to repeat these steps until your baby goes off to sleep. It is likely that this will take quite a few attempts before you fully succeed.

Be sure to extend the time between each visit, giving your child greater time to calm down and attempt to sleep.

If the baby wakes up again at night, repeat the same process.

According to Dr Ferber, babies should be able to put themselves to sleep in about a week’s time. It is believed that this technique works because a lot of older babies smartly make the most of the situation when they realize that crying will result in them being held or fed. So, this technique conveys the message that their crying game no longer has any takers. On realizing this, they are likely to stop crying without reason.

However, this method has had plenty of criticism coming its way as well. The process of letting a helpless baby cry seems almost traumatising to parents, which is why they tend to give up on the method on the second or third night, which is when the baby’s crying gets truly worse. Referred to as the extinction burst, it is at this point that there can be some improvement expected (after around 3 or 4 days), provided parents do not tend to their baby’s cries.

Gradual Distance Technique for Your Crying Baby

The gradual distancing technique isone of the methods suggested to help stop a baby from crying at night for no reason. Instead of severing your role in the baby’s get-back-to-sleep routine in one go, this method advocates doing it in a phased manner. Here is how you can go about this:

For the first couple of days, you can wait in the baby’s room till he’s asleep, before stepping out.

Then, gradually start leaving the room before he is fully asleep.

If he cries out on seeing you leave, come back and reassure him in a gentle voice without picking him up. Leave when he’s calm.

This can happen quite a few times in the first few days and you may have to keep leaving and coming back till he falls asleep.

Then, start putting him in the crib or cot at bedtime while he is awake and sit nearby till he starts drifting off.

Every day, increase the distance between you and your baby till you reach the doorway.

Go out of the doorway but remain close so you know if baby calls out or cries.

With this method, in about a few weeks, you should be able to put down your baby in the crib at bedtime and walk out while he falls asleep on his own. Also, remember the following tips to make the most of this technique:

It is best to try this only when you feel your baby can handle it. Four months is the suggested age.

Try not to take a step back when using this method as it can undo all that has been achieved.

When Should You Consult a Doctor?

In most cases, your crying baby can be calmed once his needs are met or through your comforting physical presence. But at times, excessive crying in babies at night can be indicative of a more serious cause, such as an illness. You should contact the paediatrician if your baby won’t stop crying at night and one of the following is evident:

Physical discomfort or signs of illness, such as high fever, rashes and the like

Signs of fear or stress in your baby

Remedial measures do not bring about even the slightest change in your child’s behaviour in two weeks

Each baby has his own timeline for meeting milestones of physical and emotional growth. It is no different when it comes to sleep schedules. Also, sleep routines can go off track when the baby is sick or if he is on the verge of achieving some milestone. Thus, it is important to remember that when it comes to babies – time, patience, and a lot of effort are required to get the needed results.

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