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How could they make loans multiple times the deposits they have unless they too are borrowing money from somewhere?
by eli 9y ago
How could they make loans multiple times the deposits they have unless they too are borrowing money from somewhere?
- carapace 9y agoThey just do. > Because banks hold reserves in amounts that are less than the amounts of their deposit liabilities, and because the deposit liabilities are considered money in their own right, fractional-reserve banking permits the money supply to grow beyond the amount of the underlying base money originally created by the central bank. https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking It is literally just paperwork. Fractional-reserve banking is the greatest scam ever, or a pillar of our economic system, depending on whom you ask.
- perl4ever 9y agoThis doesn't happen - if banks had the power to multiply money by 10, we would have hyperinflation.
- carapace 9y agoI'm not sure what to tell you. I'm just quoting the wikipedia article. In any event... > hyperinflation is often associated with some stress to the government budget, such as wars or their aftermath, sociopolitical upheavals, a collapse in export prices, or other crises that make it difficult for the government to collect tax revenue. ~ https://en.wikipedia.org/wiki/Hyperinflation https://en.wikipedia.org/wiki/Hyperinflation Banks generally give loans to people who they believe are very likely to repay them. Typically this means that you get a loan if you have a good plan for repaying it and a history of doing so. (Leading to the old complaint, "The only people who can get loans don't need them.") These are two different kinds of "money creation". IANAEconomist
- perl4ever 9y agoI don't think Wikipedia is wrong; I think you and many other people don't follow what it is saying, which is why you are susceptible to the claim banking is a scam. Reserves are not the amount of assets the bank has on its balance sheet - if they had less assets than their liabilities (aka deposits), they would be insolvent. Capital ratios and reserve ratios are different concepts - just as solvency and liquidity are different.
- carapace 9y agoI didn't claim banking is a scam, I said that people have different ideas about it. You'll get different answers depending on whom you ask. As for me, I don't know enough about finance to judge one way or another. I am open to the idea that fractional-reserve banking is a scam, because of my experience of human nature, especially when money is involved. Certainly the history described in the wikipedia article makes it sound like a clever trick the old goldsmiths came up with, and no one the wiser until time and custom had rendered it respectable. > the goldsmiths observed that people would not usually redeem all their notes at the same time, and they saw the opportunity to invest their coin reserves in interest-bearing loans and bills. The trick works fine until it doesn't. > If creditors (note holders of gold originally deposited) lost faith in the ability of a bank to pay their notes, however, many would try to redeem their notes at the same time. If, in response, a bank could not raise enough funds by calling in loans or selling bills, the bank would either go into insolvency or default on its notes. This activity is different from mining, or farming, or manufacturing, or shipping, or goldsmithing. It's a kind of consensus hallucination (or a hoodwink) that worked and kept working. Now we could argue all day whether the bankers né goldsmiths deserve to make money this way, but I'm not interested. If it really bothered me, I would start a bank. ;-) I'm not financially sophisticated. To me, if there's more cash than gold, something's fishy. :-) ------- edit: (Apparently I have nothing better to do this morning.) Let me see if I can clarify my position: Long ago my friends got into playing Magic the Gathering. They tried to get me to play and I said I would but I was going to make my own cards. (Make photocopies of the real cards and laminate them and play with those.) To me it seemed totally obvious and reasonable. After all, in D&D no one tries to make you only use the official dungeon modules, eh? But my friends wouldn't hear of it. I got kind of mad at them and told them, "You know there are no real wizards at Wizards of the Coast, right?" But they were baka as the Japanese say. Fools. For what it's worth, this is my attitude to banking: Neat trick, I can't believe people go for it, but whatever. As long as anyone can open a bank and get in on the "scam" I can't really condem it. Consenting adults and all that.
- eli 9y agoI think one of us is confused. Your link says they can loan out money that people have on deposit even though they technically owe it to depositors. They only need to reserve a fraction of what people have deposited (so better hope they don't all withdraw at once). It doesn't say they can loan out MORE than had been deposited.
- deleted 9y ago[deleted]