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Those $900 of extra assets are balanced by $900 of extra liabilities. 0 net money is created.

• hinkley 9y ago
  sigh maybe this just isn't the venue or even the right group to try to discuss this stuff (myself included). We like to pretend like everybody else has an 'easy' job but economics is hard stuff. I think you're mostly right, except for a couple of problems that I know of. One, when the system goes sideways those liabilities tend not to be paid off. Bankruptcies and such. And we assume that banks are managing these risks but that doesn't always turn out to be the case - which is how the reserve rate got instituted in the first place. The government says, we don't care how much you think you've got it sorted out, we insist that you be at least this tiny bit pessimistic. My original post was sort of pointing out that if you hear "Oh we have an 8% reserve so that means only 92% of assets are being used", the money moves around so many times that the effective rate is much lower and the risk is shared. But it still does put an upper bound on how much they can be leveraged. How much money is moving around (modulo fraud and 'monetary easing'). It's not the only one, and it might not even be the most important 'resistance' built into the financial policies, but it is part of it. The second is that we for some reason measure the health of our economy by how much money is changing hands. We don't discount liabilities changing hands at all in that, which is a bit worrying, because in the early 2000's when they weren't lending money to anybody, everything tightened up, and when they're throwing money at anybody it looks like growth but feels like danger.