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Banks do not lend more money than they actually have at all. Banking is a simple business - you raise money by taking deposits, issuing bonds, borrowing from o
by derriz 8y ago
Banks do not lend more money than they actually have at all.
Banking is a simple business - you raise money by taking deposits, issuing bonds, borrowing from other banks, etc. then you keep a reserve (say 10%) and lend out the rest. That's why it's called "fractional reserve banking" because they must reserve a fraction of the money they have raised.
The idea that banks "create money out of nothing" is an analogy not reality - two people swapping IOUs for a million dollars haven't created 2 million dollars.
- alasdair_ 8y ago>The idea that banks "create money out of nothing" is an analogy not reality - two people swapping IOUs for a million dollars haven't created 2 million dollars. The two million dollars gets created at a different stage, either through a government bailout, quantitative easing, or other (generally) inflationary methods but it absolutely does get created "out of nothing" at some point in the cycle. (There is also the FDIC which, while technically insured by the banks, in practical terms is backed by an implicit government guarantee that the funds will be there even if all the FDIC banks fail.)
- derriz 8y agoSure, central banks can create money. I was addressing the idea that private banks “lend out more money than they have” thus “creating money out of nothing”.