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"reserve deposits are a fraction of lending, not vice-versa" It amazes me how many people get that backwards. If a bank could loan more money than had on depo

"reserve deposits are a fraction of lending, not vice-versa" It amazes me how many people get that backwards. If a bank could loan more money than had on deposit, they could could simply loan themselves or other banks enough to pay off depositors. That is literally a license to print money. And the government prefers to keep that power for themselves. That's what the Federal Reserve is. For every deposit of $10, they might earn 2% on the $9 they are allowed to lend out. They have to live on that 18 cents. If they were able to loan out $90 or $100 (depending on what theory you hear), they'd make 10 times as much. Within a decade, they wouldn't need their deposits. But banks do fail, so clearly that is not the case. I think people are confusing modern banks with ancient banks that took in gold deposits and issued paper notes based on those deposits, sometimes issuing more notes than the gold they had on deposit. That is a completely different situation. And was not sustainable when it did occur. The banking system is a huge creator of bubbles, but it does not work the way many imagine. I asked one believer in the multiplier theory to show me the statute that says it works that way. He found the law that contradicted his belief and insisted it proved it.

ThomPete 11y ago
When banks lend someone money via FRB they aren't moving money from one account to another to make them available on the loaners account. They are literally making the money appear without it afecting any other account in the system. Banks can loan more out than they have in the bank but it's relative to how much they have in the bank they can loan out. It's the central banks who "vouch" for this mechanism and is why banks are said to be able to "print" money out of no-where I guess.
- stretchwithme 11y ago
  May I ask why you think that is the case?
  - ThomPete 11y ago
    "Because bank deposits are usually considered money in their own right, and because banks hold reserves that are less than their deposit liabilities, fractional-reserve banking permits the money supply to grow beyond the amount of the underlying reserves of base money originally created by the central bank.[1][3] In most countries, the central bank (or other monetary authority) regulates bank credit creation, imposing reserve requirements and capital adequacy ratios. This can limit the amount of money creation that occurs in the commercial banking system, and helps to ensure that banks are solvent and have enough funds to meet demand for withdrawals.[3]" https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking The point about Fractional reserve banking is to allow banks to create debt which is another way to create money. (Debt is money) This is actually what a lot of people are missing. It's not money thats being created per se but debt (credit) which is the same thing but just in put in a different context.
  - stretchwithme 11y ago
    "banks hold reserves that are less than their deposit liabilities" If you hold one dollar of a ten dollar deposit and loan out nine, reserves ARE less than their liabilities. They still owe $10 plus interest to the depositor. They only have $1, on average. That's less than their liabilities. It doesn't say what you think it does. "the central bank (or other monetary authority) regulates bank credit creation, imposing reserve requirements and capital adequacy ratios" The reserve requirement is a RESTRICTION on how much the bank can lend. Not a multiplier the bank can apply to deposits to print money. If the Fed RAISED the reserve requirement, banks could not lend as much. If it completely removed the reserve requirement, banks could lend more. That's my reading of your quote.
    - ThomPete 11y ago
      Thats not what Fractional Reserve Banking is. It's not "Money from the bank" but allowed debt creation backed by the central banks beyond This is the important part of the quote which you left out. "fractional-reserve banking permits the money supply to grow beyond the amount of the underlying reserves of base money" Nothing in that talks about limiting it within their deposits. If that was the case then we wouldn't have had any issues at all since all banks did with the sub-prime crisis was creating debt without any actual "real money" being used as base for the loans. If they raised the reserve requirement they could not lend out as much but still more than they have because again it's not actually money but debt. It's just that they now have much harder restrictions on the ratio. Not a single dollar is moved from somewhere else in the bank to the lendee. It's literally just debt created. Thats at least how I have understood it and maybe we are saying the same thing just focusing on different parts. The point really is that banks do not actually move money they have to your account but instead create debt on your account without anything else is affected. Not sure how else to think of it.
      - stretchwithme 11y ago
        Here's what the Fed says: "The amount of reserves that a depository institution must hold against specified deposit liabilities." http://www.federalreserve.gov/newsevents/reform_glossary.htm http://www.federalreserve.gov/newsevents/reform_glossary.htm And here's a table showing the exact percentages of DEPOSIT liabilities: https://www.federalreserve.gov/monetarypolicy/reservereq.htm#table1 https://www.federalreserve.gov/monetarypolicy/reservereq.htm... It doesn't get more definitive than that. And if it were a multiplier, how much can a bank lend out if they have less than $15 million in deposits? Infinity?

ThomPete 11y ago

When banks lend someone money via FRB they aren't moving money from one account to another to make them available on the loaners account. They are literally making the money appear without it afecting any other account in the system. Banks can loan more out than they have in the bank but it's relative to how much they have in the bank they can loan out. It's the central banks who "vouch" for this mechanism and is why banks are said to be able to "print" money out of no-where I guess.

stretchwithme 11y ago
May I ask why you think that is the case?
- ThomPete 11y ago
  "Because bank deposits are usually considered money in their own right, and because banks hold reserves that are less than their deposit liabilities, fractional-reserve banking permits the money supply to grow beyond the amount of the underlying reserves of base money originally created by the central bank.[1][3] In most countries, the central bank (or other monetary authority) regulates bank credit creation, imposing reserve requirements and capital adequacy ratios. This can limit the amount of money creation that occurs in the commercial banking system, and helps to ensure that banks are solvent and have enough funds to meet demand for withdrawals.[3]" https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking The point about Fractional reserve banking is to allow banks to create debt which is another way to create money. (Debt is money) This is actually what a lot of people are missing. It's not money thats being created per se but debt (credit) which is the same thing but just in put in a different context.
- stretchwithme 11y ago
  "banks hold reserves that are less than their deposit liabilities" If you hold one dollar of a ten dollar deposit and loan out nine, reserves ARE less than their liabilities. They still owe $10 plus interest to the depositor. They only have $1, on average. That's less than their liabilities. It doesn't say what you think it does. "the central bank (or other monetary authority) regulates bank credit creation, imposing reserve requirements and capital adequacy ratios" The reserve requirement is a RESTRICTION on how much the bank can lend. Not a multiplier the bank can apply to deposits to print money. If the Fed RAISED the reserve requirement, banks could not lend as much. If it completely removed the reserve requirement, banks could lend more. That's my reading of your quote.
  - ThomPete 11y ago
    Thats not what Fractional Reserve Banking is. It's not "Money from the bank" but allowed debt creation backed by the central banks beyond This is the important part of the quote which you left out. "fractional-reserve banking permits the money supply to grow beyond the amount of the underlying reserves of base money" Nothing in that talks about limiting it within their deposits. If that was the case then we wouldn't have had any issues at all since all banks did with the sub-prime crisis was creating debt without any actual "real money" being used as base for the loans. If they raised the reserve requirement they could not lend out as much but still more than they have because again it's not actually money but debt. It's just that they now have much harder restrictions on the ratio. Not a single dollar is moved from somewhere else in the bank to the lendee. It's literally just debt created. Thats at least how I have understood it and maybe we are saying the same thing just focusing on different parts. The point really is that banks do not actually move money they have to your account but instead create debt on your account without anything else is affected. Not sure how else to think of it.
    - stretchwithme 11y ago
      Here's what the Fed says: "The amount of reserves that a depository institution must hold against specified deposit liabilities." http://www.federalreserve.gov/newsevents/reform_glossary.htm http://www.federalreserve.gov/newsevents/reform_glossary.htm And here's a table showing the exact percentages of DEPOSIT liabilities: https://www.federalreserve.gov/monetarypolicy/reservereq.htm#table1 https://www.federalreserve.gov/monetarypolicy/reservereq.htm... It doesn't get more definitive than that. And if it were a multiplier, how much can a bank lend out if they have less than $15 million in deposits? Infinity?