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I don't have econonic background but I understood why banks are allowed to print the money and give it to businesses. If amount of money is fixed, then this pro

I don't have econonic background but I understood why banks are allowed to print the money and give it to businesses. If amount of money is fixed, then this problem will go away on its own. Human nature is not relible and if allowed humans will overspend and subsequent default. As Taleb puts it, executives at these companies don't have "skin in the game". Increasing shareholder value short-term is lucrative especially when their own compensations are tied to short-term stock value gain. Another part is lack of progress in executive education. While engineering as a discipline have constantly improved by introspection. No such thing have happenned in business management area. It's all about maintaining the status quo and appearing in controls even when they are nowhere near it.

jussij 8y ago
Banks don't print money. Federal Banks print the money, which basically means it's the government printing the money. > If amount of money is fixed, then this problem will go away on its own. There was a time when this in was in fact the case. It was known as The Gold Standard and it basically required governments to back up their currency with an equivalent amount of gold. The Gold Standard ended when it was abandoned by the USA. Basically the USA did start to print money and they didn't have the gold to backup that printing press.
- acornax 8y ago
  Banks don't literally print money but they do create it when they issue loans.
  - kiriakasis 8y ago
    they do not create money, they are lending you someone else savings or money created by the federal reserve.
    - orbifold 8y ago
      That is incorrect, they only are required to own a fraction of the loans they give in assets. When a bank lends someone money, they create that money https://en.m.wikipedia.org/wiki/Money_creation https://en.m.wikipedia.org/wiki/Money_creation.
      - jussij 8y ago
        The Central bank in your link is the Federal Bank. Basically when retail banks need money they get it from the Central Bank through the Open Market Operation. What happens is the retail banks offering up theirs bonds (which are assets), and the Central bank effectively buys (or sell) these bonds using a swap or repurchase agreement. The retail banks then use that money to offer up loans to the public. So the Central bank has the ability to print money by being prepared to buy up these bonds (using money that is effectively printed), but retail banks don't have that ability. Retail banks and companies can do something similar by offering up their own bonds and selling them to investors, however should that organisation go broke the bonds take on junk status which basically means any investor that paid good money for them has lost the money. For these transaction the money being used is real money.
    - zrail 8y ago
      That isn’t how fractional reserve lending works. An example will probably help. You walk into Friendly Neighborhood Bank and ask for a loan, and since they’re friendly they make the loan. Now, what does that mean? From your perspective you now have a liability (the loan) and an asset (money in a bank account). From the bank’s perspective, they now have an asset (the loan), a liability (your bank account), and an income stream (the interest payments). The bank didn’t have to move any money around from the Fed or other people’s savings accounts to make this happen. They just entered the debits and credits into their system and boom the money appears in your account, just as good as any other money. They literally created it out of thin air.
      - jussij 8y ago
        For every debit there has to be a matching credit so nothing comes out of thin air. If you go to your Friendly Neighbourhood Bank for a loan they are giving you their money, so you can then give that money on to someone else. Now the bank is not so friendly that it gives you their money, instead they offer to lend you their money, on the proviso you pay it back in full and with interest. For example lets say you want to buy a new car, so you go to the bank to get the loan. The bank transfers the money to pay for the new car to the car dealership and you end up with a new car and a whole lot of debt.
        zrail 8y ago
        > they are giving you their money They create that money by crediting your checking account (their liability) and debiting your loan account (their asset).
        jussij 8y ago
        But you missing one step where they credit your loan account by debiting their loan book account. Also your loan account is not a bank asset, it is a bank liability. It is money the bank might not get back.
      - kybernetikos 8y ago
        > That isn’t how fractional reserve lending works. I'm not sure which part of the GP you're disagreeing with. Fractional reserve is exactly that banks lend out a fraction of the deposits that they take in (the rest is kept in reserve). The only reason it looks like money is created is because people (and economists) think of 'money in their account' as real money, when in fact it's just a IOU from the bank to you (possibly guaranteed by the government). If you think of money-in-your-account as actually a debt the bank owes you, then it becomes quite clear that banks don't create money any more than lending money to a friend creates money. And there is a sense in which it does - lending money to a friend results in your friend having money and you having an asset (an IOU from your friend) that you expect to be able to use at some point in the future, so there is a sense in which the sum total of wealth has increased by the value of the IOU.
    - imtringued 8y ago
      When a bank lends you money the money lands in your bank account which means the bank can lend it out again. Even if you spend it, the money is going to land in someone else's bank account again. If we assume that 100% of the money is in the banking system without any potential for a bank run then in theory the bank could lend out an infinite amount of money.
      - jussij 8y ago
        This is not how the banking system works. Banks, just like all institutions have to account for their money, hence the reason they employ accountants. Those accountants all use the same accounting rules, rules that were in fact invented many centuries earlier by the monk, Luca Pacioli. Those rules form the basis of double entry book keeping, which boils done to a very simple rule that for every credit there must be an equal debit. What you are describing does not follow that rule because you are saying one credit can result in many other many other credits. What you describe reads more like a pyramid scheme than a banking system.
- danieka 8y ago
  Banks don’t print physical money, that’s correct. But they do create new money when they lend money and I believe that’s what parent was referring to.
- zby 8y ago
  https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking - yes banks print money (figuratively). They make loans and the money people receive on their accounts is money just created out of thin air.
- jhayward 8y ago
  > Banks don't print money. Federal Banks print the money, which basically means it's the government printing the money. You are confusing two things about money creation: which entity decides to create the money, and which one carries the book-keeping entry that creates it. In the US system, it is member banks that decide to create a loan. The money that is loaned is some combination of their own deposits, and money lent them by the Federal Reserve. The details of how much money they need to keep on deposit, how much is "their own", and how much the Fed provides are governed by FR rules. So, it is indeed banks that make the individual decision to create money by giving a loan. The FR is merely the book-keeper for that decision and the rule-maker for how the system at large works. Oh, and last, it is the US Treasury that actually prints currency. But we're all talking about the more abstract concept "money".
dm3 8y ago
Here's the best layman explanation by Bank of England of what is actually meant by "money" in the current economy[0]. Think it can be helpful for the discourse. [0]: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-in-the-modern-economy-an-introduction.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
drieddust 8y ago
Well I must have hit some nerves. Getting up and down voted constantly.

jussij 8y ago

Banks don't print money. Federal Banks print the money, which basically means it's the government printing the money. > If amount of money is fixed, then this problem will go away on its own. There was a time when this in was in fact the case. It was known as The Gold Standard and it basically required governments to back up their currency with an equivalent amount of gold. The Gold Standard ended when it was abandoned by the USA. Basically the USA did start to print money and they didn't have the gold to backup that printing press.

acornax 8y ago
Banks don't literally print money but they do create it when they issue loans.
- kiriakasis 8y ago
  they do not create money, they are lending you someone else savings or money created by the federal reserve.
  - orbifold 8y ago
    That is incorrect, they only are required to own a fraction of the loans they give in assets. When a bank lends someone money, they create that money https://en.m.wikipedia.org/wiki/Money_creation https://en.m.wikipedia.org/wiki/Money_creation.
    - jussij 8y ago
      The Central bank in your link is the Federal Bank. Basically when retail banks need money they get it from the Central Bank through the Open Market Operation. What happens is the retail banks offering up theirs bonds (which are assets), and the Central bank effectively buys (or sell) these bonds using a swap or repurchase agreement. The retail banks then use that money to offer up loans to the public. So the Central bank has the ability to print money by being prepared to buy up these bonds (using money that is effectively printed), but retail banks don't have that ability. Retail banks and companies can do something similar by offering up their own bonds and selling them to investors, however should that organisation go broke the bonds take on junk status which basically means any investor that paid good money for them has lost the money. For these transaction the money being used is real money.
  - zrail 8y ago
    That isn’t how fractional reserve lending works. An example will probably help. You walk into Friendly Neighborhood Bank and ask for a loan, and since they’re friendly they make the loan. Now, what does that mean? From your perspective you now have a liability (the loan) and an asset (money in a bank account). From the bank’s perspective, they now have an asset (the loan), a liability (your bank account), and an income stream (the interest payments). The bank didn’t have to move any money around from the Fed or other people’s savings accounts to make this happen. They just entered the debits and credits into their system and boom the money appears in your account, just as good as any other money. They literally created it out of thin air.
    - jussij 8y ago
      For every debit there has to be a matching credit so nothing comes out of thin air. If you go to your Friendly Neighbourhood Bank for a loan they are giving you their money, so you can then give that money on to someone else. Now the bank is not so friendly that it gives you their money, instead they offer to lend you their money, on the proviso you pay it back in full and with interest. For example lets say you want to buy a new car, so you go to the bank to get the loan. The bank transfers the money to pay for the new car to the car dealership and you end up with a new car and a whole lot of debt.
      - zrail 8y ago
        > they are giving you their money They create that money by crediting your checking account (their liability) and debiting your loan account (their asset).
        jussij 8y ago
        But you missing one step where they credit your loan account by debiting their loan book account. Also your loan account is not a bank asset, it is a bank liability. It is money the bank might not get back.
    - kybernetikos 8y ago
      > That isn’t how fractional reserve lending works. I'm not sure which part of the GP you're disagreeing with. Fractional reserve is exactly that banks lend out a fraction of the deposits that they take in (the rest is kept in reserve). The only reason it looks like money is created is because people (and economists) think of 'money in their account' as real money, when in fact it's just a IOU from the bank to you (possibly guaranteed by the government). If you think of money-in-your-account as actually a debt the bank owes you, then it becomes quite clear that banks don't create money any more than lending money to a friend creates money. And there is a sense in which it does - lending money to a friend results in your friend having money and you having an asset (an IOU from your friend) that you expect to be able to use at some point in the future, so there is a sense in which the sum total of wealth has increased by the value of the IOU.
  - imtringued 8y ago
    When a bank lends you money the money lands in your bank account which means the bank can lend it out again. Even if you spend it, the money is going to land in someone else's bank account again. If we assume that 100% of the money is in the banking system without any potential for a bank run then in theory the bank could lend out an infinite amount of money.
    - jussij 8y ago
      This is not how the banking system works. Banks, just like all institutions have to account for their money, hence the reason they employ accountants. Those accountants all use the same accounting rules, rules that were in fact invented many centuries earlier by the monk, Luca Pacioli. Those rules form the basis of double entry book keeping, which boils done to a very simple rule that for every credit there must be an equal debit. What you are describing does not follow that rule because you are saying one credit can result in many other many other credits. What you describe reads more like a pyramid scheme than a banking system.
danieka 8y ago
Banks don’t print physical money, that’s correct. But they do create new money when they lend money and I believe that’s what parent was referring to.
zby 8y ago
https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking - yes banks print money (figuratively). They make loans and the money people receive on their accounts is money just created out of thin air.
jhayward 8y ago
> Banks don't print money. Federal Banks print the money, which basically means it's the government printing the money. You are confusing two things about money creation: which entity decides to create the money, and which one carries the book-keeping entry that creates it. In the US system, it is member banks that decide to create a loan. The money that is loaned is some combination of their own deposits, and money lent them by the Federal Reserve. The details of how much money they need to keep on deposit, how much is "their own", and how much the Fed provides are governed by FR rules. So, it is indeed banks that make the individual decision to create money by giving a loan. The FR is merely the book-keeper for that decision and the rule-maker for how the system at large works. Oh, and last, it is the US Treasury that actually prints currency. But we're all talking about the more abstract concept "money".

dm3 8y ago

Here's the best layman explanation by Bank of England of what is actually meant by "money" in the current economy[0]. Think it can be helpful for the discourse. [0]: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-in-the-modern-economy-an-introduction.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

drieddust 8y ago

Well I must have hit some nerves. Getting up and down voted constantly.