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> So if you're wealthy and that dollar goes to pay off the loan - where does it go? It gets wiped off the books and a dollar leaves the economy. > The person

by dpark 10y ago

> So if you're wealthy and that dollar goes to pay off the loan - where does it go? It gets wiped off the books and a dollar leaves the economy. > The person you're giving it to will either spend it on consumption Did you take a loan out from a person? No. You took a loan out from a bank. They don't spend deposits on consumption. They cover their expenses and profits with the interest you pay. > or loan it to someone else until (ultimately) it is spent. The amount of lending a bank makes is almost unrelated to the amount of deposits they hold. Reserve regulations impact this somewhat, but the reality is that banks make profitable loans whenever feasible. If they don't meet reserve regulations at the end of the day, they borrow at exceedingly low interest rates to cover the gap. A bank can make a billion in loans at 5%, borrow at 3% to meet regulations nightly, and still come out ahead. (Specific numbers made up. Overnight rates are actually closer to 0.25%. So a loan at 5% with no reserves is actually crazy profitable.) > And if you deposit the dollar into the bank then the bank have to loan it to someone (they need to make money too!) who will then spend it on consumption. The fed pays 0.5% on reserves that banks hold. As of a few minute ago, Chase's interest rate sheet showed <0.5% for all checking, all money market, and most savings accounts. So in reality, Chase can hold your deposit and pay you interest and still make money. If your savings has a "good" interest rate of, say, 1%, a single loan of $100K at 4% could still cover the cost of $800K in deposits. Banks absolutely do not have to loan out every dollar deposited to make money. http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm http://www.federalreserve.gov/monetarypolicy/reqresbalances.... https://chaseonline.chase.com/resources/RateSheetForCons70219132016.pdf https://chaseonline.chase.com/resources/RateSheetForCons7021... > It won't reduce the amount of money in circulation. When a bank loans you money, they are creating money. When you pay it back, you are destroying money. The view that your deposit is "loaned" to someone else is very inaccurate and misleading in a modern banking economy. http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf http://www.bankofengland.co.uk/publications/Documents/quarte...

WalterBright 10y ago
> The fed pays 0.5% on reserves that banks hold. The Fed does require a certain reserve percentage that the bank cannot loan out. It's only fair that they pay some interest on that. However, making 0.5% is losing money because of inflation. Furthermore, no bank is going to loan you money for 0.5% - they're going to charge you a lot more. > Banks absolutely do not have to loan out every dollar deposited to make money. No legal requirement, sure. But they have every reason to loan out as much as possible. It's why they advertise loans, credit cards, etc. Banks have plenty of expenses, too, which means if they don't make loans, they go bankrupt.
- dpark 10y ago
  Fairness is an irrelevant point of discussion here. The Fed doesn't pay reserve interest because it's fair. They pay the interest that they expect will drive desired market behavior. If fairness were the goal, they'd pay zero interest for the excess reserves that they don't require. Inflation is also irrelevant. What matters is the spread between what they pay a depositor in interest and what the Fed will pay for holding the deposit in reserve. So long as that spread is positive, they make money just for holding your money. Can they do better by lending and increasing the spread? Sure. Do they have to in order to make money? Not really. This is also really odd stuff to choose to nitpick out of the discussion of how money of created in the modern economy.
  - WalterBright 10y ago
    Any organization relying on a 0.5% return on investment is going to go bankrupt due to inflation, taxes, and expenses. Hoarding money is not a viable business plan.
    - dpark 10y ago
      I'm not sure what the disconnect is here. It's not Chase's money sitting in reserve drawing 0.5% interest. It's your money. Chase makes money for free by just holding your money. There are certainly expenses associated with running a bank. Those expenses don't significantly increase for Chase if you deposit an extra $100K in your savings account, but Chase will make an extra $4K just for holding it. I'm not sure if you're under the impression that I'm claiming that holding reserves is the primary way banks make money. I'm not. The discussion about reserves is to answer the claim that a dollar deposited with Chase will automatically result in a 90 cent loan to someone else. It will not.
nstj 10y ago
>> So if you're wealthy and that dollar goes to pay off the loan - where does it go? >It gets wiped off the books and a dollar leaves the economy. The case in point was for a 'wealthy person' (not my term, I don't like it but let's roll with it) who holds the debt of a student borrower. The hypothesis of an above poster was that money repaid on loan service (from the borrower student to the rentier) would not result in increased consumption in the economy and that if the money remained with the debtor that they would be more likely to stoke consumption in the economy. My point was that if someone gives you money you can either spend or invest it (let's forget physical currency for now - in our current monetary system there's not that much central bank money [physical/reserves] in the economy as a percentage of gross domestic product, save for the US with USD1.46 trillion, owing to persistent current account deficits and the Triffin dilemma and other factors - but I digress). But let's take your argument as an example. If I hold $100k of a student's debt, and that debt is 'extinguished' then it doesn't change the money stock in the economy. If a debt between 2 individuals is "wiped off the books" then a dollar doesn't "leave the economy". >> The person you're giving it to will either spend it on consumption >Did you take a loan out from a person? No. You took a loan out from a bank. They don't spend deposits on consumption. They cover their expenses and profits with the interest you pay. I'm not sure I really follow what's going on in this segment of your response. Banks take deposits. They fund assets (often loans) with those deposits. Those funds are then used at some point for consumption. >> or loan it to someone else until (ultimately) it is spent. >The amount of lending a bank makes is almost unrelated to the amount of deposits they hold. Reserve regulations impact this somewhat, but the reality is that banks make profitable loans whenever feasible. If they don't meet reserve regulations at the end of the day, they borrow at exceedingly low interest rates to cover the gap. A bank can make a billion in loans at 5%, borrow at 3% to meet regulations nightly, and still come out ahead. (Specific numbers made up. Overnight rates are actually closer to 0.25%. So a loan at 5% with no reserves is actually crazy profitable.) Well, as much as I'd like to be able to change double entry accounting (and the laws of physics) this is not the case. The amount of lending a bank does is inextricably related to the amount of deposits they hold. If you 'deposit funds' with a bank, then there is a corresponding liability on their balance sheet (an entry on the right side). Other liabilities of banks include debt (both short and long term) and equity capital. Guess what? If you deposit money with a bank (or loan it money by purchasing its debt, or invest by providing equity capital) then whatever funds you provided the bank must be recognised on the bank's balance sheet. This new money you gave them goes on the left side (their assets). Now if you're a bank you can hold physical currency in your vaults (doesn't earn much interest, and there's a potential silverfish problem) or you can loan it out. You could loan it to the Fed[0] for 0.5% or you'd probably want to loan it out to someone else at a potentially higher rate (think mortgages, equities if you want to roll the dice, structured credit if you're feeling like it's 2007, you get the point). >> And if you deposit the dollar into the bank then the bank have to loan it to someone (they need to make money too!) who will then spend it on consumption. >The fed pays 0.5% on reserves that banks hold. As of a few minute ago, Chase's interest rate sheet showed <0.5% for all checking, all money market, and most savings accounts. So in reality, Chase can hold your deposit and pay you interest and still make money. Sounds like a money machine. Does Chase obtain all of their debt capital from depositors? Or is it possible that they pay more than 0.5% on some of their funding? > If your savings has a "good" interest rate of, say, 1%, a single loan of $100K at 4% could still cover the cost of $800K in deposits. Banks absolutely do not have to loan out every dollar deposited to make money. http://www.federalreserve.gov/monetarypolicy/reqresbalances... http://www.federalreserve.gov/monetarypolicy/reqresbalances..... https://chaseonline.chase.com/resources/RateSheetForCons7021.. https://chaseonline.chase.com/resources/RateSheetForCons7021.... $100,000 * 0.04 = $4,000 (loans -> income) $800,000 * 0.01 = $8,000 (deposits -> expenses) -$4,000 (total profit) Losing $4,000 every year on a $100,000 loan book doesn't seem like the best move for a bank. Furthermore, I ask this one question - if they don't "loan out" every dollar deposited, then what do they do with the monies? Hoard them in a vault? >> It won't reduce the amount of money in circulation. >When a bank loans you money, they are creating money. When you pay it back, you are destroying money. The view that your deposit is "loaned" to someone else is very inaccurate and misleading in a modern banking economy. As illustrated above, a deposit with a bank is a liability entry in their balance sheet with a corresponding asset to match. The asset would either be physical currency if that is what you deposited (how old fashioned) or the debt of another banking institution (which I'm guessing would be netted out at the end of each day - or intraday if that is your central bank's kind of thing - and balanced, or exchanged for central bank money). By definition the money is "loaned" to someone. Now we could really get into the nitty gritty of credit creation and "high powered central bank money" vs "private bank money" but there's probably not the need to get that into detail. Anyways - I'm probably wrong with all of this though. It would be awesome if you could show the balance sheet entries which would correspond to the transactions which you're describing as then we could really just resolve any confusion using quantitative measures rather than long winded discussions :) [0]: https://fred.stlouisfed.org/series/WRESBAL https://fred.stlouisfed.org/series/WRESBAL
losvedir 10y ago
> If they don't meet reserve regulations at the end of the day, they borrow at exceedingly low interest rates to cover the gap. Borrow from whom? I've heard this idea before that the loans issued by a bank are essentially independent of the deposits, and it makes sense to me from a logistical perspective - is some BofA loan officer going to load up BofA's financials to make sure they have the money to issue the loan? No, they'll just do it, and it's someone else's job at the end of the day to "make it work". But who are the banks borrowing from? If it's from other banks, doesn't it mean that in the aggregate loans and deposits are tied together?
- dpark 10y ago
  They borrow from other banks or from the Fed. Borrowing from the Fed is generally more expensive, though. In general, yes, the aggregated loans and deposits are largely tied together. There some fuzziness even here, though, as the Fed can inject money or move loans onto their books in a number of ways.

by dpark 10y ago

WalterBright 10y ago

> The fed pays 0.5% on reserves that banks hold. The Fed does require a certain reserve percentage that the bank cannot loan out. It's only fair that they pay some interest on that. However, making 0.5% is losing money because of inflation. Furthermore, no bank is going to loan you money for 0.5% - they're going to charge you a lot more. > Banks absolutely do not have to loan out every dollar deposited to make money. No legal requirement, sure. But they have every reason to loan out as much as possible. It's why they advertise loans, credit cards, etc. Banks have plenty of expenses, too, which means if they don't make loans, they go bankrupt.

dpark 10y ago
Fairness is an irrelevant point of discussion here. The Fed doesn't pay reserve interest because it's fair. They pay the interest that they expect will drive desired market behavior. If fairness were the goal, they'd pay zero interest for the excess reserves that they don't require. Inflation is also irrelevant. What matters is the spread between what they pay a depositor in interest and what the Fed will pay for holding the deposit in reserve. So long as that spread is positive, they make money just for holding your money. Can they do better by lending and increasing the spread? Sure. Do they have to in order to make money? Not really. This is also really odd stuff to choose to nitpick out of the discussion of how money of created in the modern economy.
- WalterBright 10y ago
  Any organization relying on a 0.5% return on investment is going to go bankrupt due to inflation, taxes, and expenses. Hoarding money is not a viable business plan.
  - dpark 10y ago
    I'm not sure what the disconnect is here. It's not Chase's money sitting in reserve drawing 0.5% interest. It's your money. Chase makes money for free by just holding your money. There are certainly expenses associated with running a bank. Those expenses don't significantly increase for Chase if you deposit an extra $100K in your savings account, but Chase will make an extra $4K just for holding it. I'm not sure if you're under the impression that I'm claiming that holding reserves is the primary way banks make money. I'm not. The discussion about reserves is to answer the claim that a dollar deposited with Chase will automatically result in a 90 cent loan to someone else. It will not.

nstj 10y ago

>> So if you're wealthy and that dollar goes to pay off the loan - where does it go? >It gets wiped off the books and a dollar leaves the economy. The case in point was for a 'wealthy person' (not my term, I don't like it but let's roll with it) who holds the debt of a student borrower. The hypothesis of an above poster was that money repaid on loan service (from the borrower student to the rentier) would not result in increased consumption in the economy and that if the money remained with the debtor that they would be more likely to stoke consumption in the economy. My point was that if someone gives you money you can either spend or invest it (let's forget physical currency for now - in our current monetary system there's not that much central bank money [physical/reserves] in the economy as a percentage of gross domestic product, save for the US with USD1.46 trillion, owing to persistent current account deficits and the Triffin dilemma and other factors - but I digress). But let's take your argument as an example. If I hold $100k of a student's debt, and that debt is 'extinguished' then it doesn't change the money stock in the economy. If a debt between 2 individuals is "wiped off the books" then a dollar doesn't "leave the economy". >> The person you're giving it to will either spend it on consumption >Did you take a loan out from a person? No. You took a loan out from a bank. They don't spend deposits on consumption. They cover their expenses and profits with the interest you pay. I'm not sure I really follow what's going on in this segment of your response. Banks take deposits. They fund assets (often loans) with those deposits. Those funds are then used at some point for consumption. >> or loan it to someone else until (ultimately) it is spent. >The amount of lending a bank makes is almost unrelated to the amount of deposits they hold. Reserve regulations impact this somewhat, but the reality is that banks make profitable loans whenever feasible. If they don't meet reserve regulations at the end of the day, they borrow at exceedingly low interest rates to cover the gap. A bank can make a billion in loans at 5%, borrow at 3% to meet regulations nightly, and still come out ahead. (Specific numbers made up. Overnight rates are actually closer to 0.25%. So a loan at 5% with no reserves is actually crazy profitable.) Well, as much as I'd like to be able to change double entry accounting (and the laws of physics) this is not the case. The amount of lending a bank does is inextricably related to the amount of deposits they hold. If you 'deposit funds' with a bank, then there is a corresponding liability on their balance sheet (an entry on the right side). Other liabilities of banks include debt (both short and long term) and equity capital. Guess what? If you deposit money with a bank (or loan it money by purchasing its debt, or invest by providing equity capital) then whatever funds you provided the bank must be recognised on the bank's balance sheet. This new money you gave them goes on the left side (their assets). Now if you're a bank you can hold physical currency in your vaults (doesn't earn much interest, and there's a potential silverfish problem) or you can loan it out. You could loan it to the Fed[0] for 0.5% or you'd probably want to loan it out to someone else at a potentially higher rate (think mortgages, equities if you want to roll the dice, structured credit if you're feeling like it's 2007, you get the point). >> And if you deposit the dollar into the bank then the bank have to loan it to someone (they need to make money too!) who will then spend it on consumption. >The fed pays 0.5% on reserves that banks hold. As of a few minute ago, Chase's interest rate sheet showed <0.5% for all checking, all money market, and most savings accounts. So in reality, Chase can hold your deposit and pay you interest and still make money. Sounds like a money machine. Does Chase obtain all of their debt capital from depositors? Or is it possible that they pay more than 0.5% on some of their funding? > If your savings has a "good" interest rate of, say, 1%, a single loan of $100K at 4% could still cover the cost of $800K in deposits. Banks absolutely do not have to loan out every dollar deposited to make money. http://www.federalreserve.gov/monetarypolicy/reqresbalances... http://www.federalreserve.gov/monetarypolicy/reqresbalances..... https://chaseonline.chase.com/resources/RateSheetForCons7021.. https://chaseonline.chase.com/resources/RateSheetForCons7021.... $100,000 * 0.04 = $4,000 (loans -> income) $800,000 * 0.01 = $8,000 (deposits -> expenses) -$4,000 (total profit) Losing $4,000 every year on a $100,000 loan book doesn't seem like the best move for a bank. Furthermore, I ask this one question - if they don't "loan out" every dollar deposited, then what do they do with the monies? Hoard them in a vault? >> It won't reduce the amount of money in circulation. >When a bank loans you money, they are creating money. When you pay it back, you are destroying money. The view that your deposit is "loaned" to someone else is very inaccurate and misleading in a modern banking economy. As illustrated above, a deposit with a bank is a liability entry in their balance sheet with a corresponding asset to match. The asset would either be physical currency if that is what you deposited (how old fashioned) or the debt of another banking institution (which I'm guessing would be netted out at the end of each day - or intraday if that is your central bank's kind of thing - and balanced, or exchanged for central bank money). By definition the money is "loaned" to someone. Now we could really get into the nitty gritty of credit creation and "high powered central bank money" vs "private bank money" but there's probably not the need to get that into detail. Anyways - I'm probably wrong with all of this though. It would be awesome if you could show the balance sheet entries which would correspond to the transactions which you're describing as then we could really just resolve any confusion using quantitative measures rather than long winded discussions :) [0]: https://fred.stlouisfed.org/series/WRESBAL https://fred.stlouisfed.org/series/WRESBAL

losvedir 10y ago

> If they don't meet reserve regulations at the end of the day, they borrow at exceedingly low interest rates to cover the gap. Borrow from whom? I've heard this idea before that the loans issued by a bank are essentially independent of the deposits, and it makes sense to me from a logistical perspective - is some BofA loan officer going to load up BofA's financials to make sure they have the money to issue the loan? No, they'll just do it, and it's someone else's job at the end of the day to "make it work". But who are the banks borrowing from? If it's from other banks, doesn't it mean that in the aggregate loans and deposits are tied together?

dpark 10y ago
They borrow from other banks or from the Fed. Borrowing from the Fed is generally more expensive, though. In general, yes, the aggregated loans and deposits are largely tied together. There some fuzziness even here, though, as the Fed can inject money or move loans onto their books in a number of ways.