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> As the money from an individual loan gets repaid, the loan disappears from the banks' balance sheet, and the bank earns only from the interest. It disappears
by nickelcitymario 8y ago
> As the money from an individual loan gets repaid, the loan disappears from the banks' balance sheet, and the bank earns only from the interest.
It disappears? How does that work?
When the bank credits my account with, say, a $500,000 mortgage, they consider that an asset. Because now I owe them $500k+interest, even though they didn't actually take that $500k out of any account. They created it when they loaned it to me.
You're saying the bank "destroys" the money as it gets paid back, and only keeps the interest?
I apologize if I'm misconstruing your explanation.
- notahacker 8y agoYes. A mortgage ceases to be an asset when it is repaid, on account of not actually existing any more, with the bank only keeping the interest as profit (and similarly, loans the bank might have to take out to cover its reserve shortfall in the event of lending beyond its current deposits cease to become liabilities when the bank repays them). The result, for better and for worse, is that the quantity of money in an economy is linked to the supply of and demand for credit.
- nickelcitymario 8y agoWow, I have truly been schooled today. Thank you, notahacker :-)