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> Banks don't make their money or derive their power through the 'creation of money'. A bank just opened and has $0 in the vault You give the bank $1000 The ba
by wan23 7y ago
> Banks don't make their money or derive their power through the 'creation of money'.
A bank just opened and has $0 in the vault
You give the bank $1000
The bank lends me $800
Your current bank balance = $1000
My current bank balance = $800
Total money in the bank = $1800
You might say that the money wasn't created because they can't afford to pay out $1800, but if for some reason at this point they need to pay back the $1000 they can ask another bank for a loan, and point to the $800 they're owed as collateral. On top of that, both the $1000 and the $800 would be insured against the failure of the bank by the federal government. This is a simplified example of course, but when the banking system is working normally it's hard to say that they don't make their profits on the creation of money.
- magnamerc 7y agoThere are now decentralized systems that have monetary policy baked in, where the system can't become under-collateralized, see MakerDAO.
- minderasure 7y agoTechnically it can become undercollateralized, but there is a recollateralization mechanism through dilution of the MKR token.
- godson_drafty 7y agoNot sure that's correct though. For banks, deposits are liabilities, while assets are loans and cash-on-hand, which they are required to hold fractionally against the total amount of their deposits. In this example, the bank is holding $200, has assets of $800, and liabilities of $1000. Adding it up, you have ($200 + $800) - $1000 == $0.
- projektfu 7y agoIn reality the bank can take your $1,000 and write loans for $9,000 or more. It’ll have net assets of whatever capital was paid in plus loans minus deposits.
- pfortuny 7y agoThis is why double accounting (?) was created. Too keep track of All the directions money flows. Your example is right, but only half-right (there are at the same time two debts to account for).