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This is because banks lend against their deposit value (in many multiples). So if you give them $1, the bank can now lend $5 (without actually having it) and t

by Zhenya 7y ago

This is because banks lend against their deposit value (in many multiples). So if you give them $1, the bank can now lend $5 (without actually having it) and then make many times that $5 in interest. So sure, they will pay you a little, so they can make a lot. At least that's how it works today.

mikeash 7y ago
You’re the second reply who seems to think that I have no idea how banks actually work or why they can often pay interest. Did you just skip my second paragraph, or what’s the deal?
- Zhenya 7y ago
  I read your second paragraph. There is almost a zero-cost to storing the money and as the account size grows the cost to transact on this account per dollar of storage also approaches zero. Meanwhile the lending power of the bank multiples by large whole numbers. They aren't storing your bills or gold coins.
  - mikeash 7y ago
    Yes, costs are low, but so is the potential revenue from loans right now. I never said anything about storing bills or coins.
    - JumpCrisscross 7y ago
      > so is the potential revenue from loans right now Broader interest rates are low, too. The revenue potential for banks is limited. Particularly European ones. European banks have failed to compete for investment opportunities. Negative rates push that onus back onto savers.
  - floatingatoll 7y ago
    “Zero-cost excluding the cost of insurance” is more precise here. Bitcoin is zero-cost^ to store for any dollar amount. So are gold bars. Insuring them against theft and loss is not zero-cost. A shovel for burying gold in your yard is cheap (high capex, low opex), but if a sinkhole opens up and eats your gold, you’re probably out of luck. A hard drive for your Bitcoin is cheap (high capes, low opex), but if a lightning bolt burns your house down and you aren’t paying for offsite backups, you might be out of luck. What degree of loss do you wish to insure against (accident, damage, theft, loss) — and what percentage of your money are you willing to spend on that? ^ “I bury coins on my land” seems zero-cost, but it just means that you’re paying property tax to insure against treasure hunters uncovering your hoard with a metal detector. External costs need to be accounted for.
JumpCrisscross 7y ago
> So if you give them $1, the bank can now lend $5 (without actually having it) and then make many times that $5 in interest Sigh This is not how it works. (It’s a common misconception, however.) Loans create deposits, not the other way. Most money is created by banks, not the central bank or mint [1]. From a consumer perspective, imagining a bank as taking your $1 and lending it out five times is okay. But systemically speaking, it’s a misleading model. The truth is the bank created $5 in loans, and through that $5 in deposits. About $4 of those deposits were then spent and ended up in other banks or bank accounts as deposits. The loan always comes first. The BoE has a good primers on this [2]. [1] https://www.bankofengland.co.uk/knowledgebank/how-is-money-created https://www.bankofengland.co.uk/knowledgebank/how-is-money-c... [2] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
- numakerg 7y ago
  So the bank levies a micro tax on all holders of the currency with the expectation that their investment in the receiver of the loan will yield a better return?
  - JumpCrisscross 7y ago
    > the bank levies a micro tax on all holders of the currency with the expectation that their investment in the receiver of the loan will yield a better return? No. Banks compete for deposits and compete to lend. The spread between those rates must pay the bank’s costs, cover its risks and turn a profit. When central banks reduce the return on safe assets banks hold, their income from lending to the government goes down. The banks thus seek to replace that income with other lending. Unfortunately, everyone in the system is doing the same thing. This competition forces lending rates down. Savers are competing for investments next to the banks. There are lots of them crowding into bank deposits; this lets those banks lower the rate they pay. (Nobody forces savers to deposit Euros only in German banks.) This is a system of feedback loops. Nobody is charging a tax, though banks may charge a fee for a service it costs them to provide. Depositors are free to take their business elsewhere. And entrepreneurs who think they can do better are free to launch competing financial services.

by Zhenya 7y ago

mikeash 7y ago

You’re the second reply who seems to think that I have no idea how banks actually work or why they can often pay interest. Did you just skip my second paragraph, or what’s the deal?

Zhenya 7y ago
I read your second paragraph. There is almost a zero-cost to storing the money and as the account size grows the cost to transact on this account per dollar of storage also approaches zero. Meanwhile the lending power of the bank multiples by large whole numbers. They aren't storing your bills or gold coins.
- mikeash 7y ago
  Yes, costs are low, but so is the potential revenue from loans right now. I never said anything about storing bills or coins.
  - JumpCrisscross 7y ago
    > so is the potential revenue from loans right now Broader interest rates are low, too. The revenue potential for banks is limited. Particularly European ones. European banks have failed to compete for investment opportunities. Negative rates push that onus back onto savers.
- floatingatoll 7y ago
  “Zero-cost excluding the cost of insurance” is more precise here. Bitcoin is zero-cost^ to store for any dollar amount. So are gold bars. Insuring them against theft and loss is not zero-cost. A shovel for burying gold in your yard is cheap (high capex, low opex), but if a sinkhole opens up and eats your gold, you’re probably out of luck. A hard drive for your Bitcoin is cheap (high capes, low opex), but if a lightning bolt burns your house down and you aren’t paying for offsite backups, you might be out of luck. What degree of loss do you wish to insure against (accident, damage, theft, loss) — and what percentage of your money are you willing to spend on that? ^ “I bury coins on my land” seems zero-cost, but it just means that you’re paying property tax to insure against treasure hunters uncovering your hoard with a metal detector. External costs need to be accounted for.

JumpCrisscross 7y ago

> So if you give them $1, the bank can now lend $5 (without actually having it) and then make many times that $5 in interest Sigh This is not how it works. (It’s a common misconception, however.) Loans create deposits, not the other way. Most money is created by banks, not the central bank or mint [1]. From a consumer perspective, imagining a bank as taking your $1 and lending it out five times is okay. But systemically speaking, it’s a misleading model. The truth is the bank created $5 in loans, and through that $5 in deposits. About $4 of those deposits were then spent and ended up in other banks or bank accounts as deposits. The loan always comes first. The BoE has a good primers on this [2]. [1] https://www.bankofengland.co.uk/knowledgebank/how-is-money-created https://www.bankofengland.co.uk/knowledgebank/how-is-money-c... [2] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

numakerg 7y ago
So the bank levies a micro tax on all holders of the currency with the expectation that their investment in the receiver of the loan will yield a better return?
- JumpCrisscross 7y ago
  > the bank levies a micro tax on all holders of the currency with the expectation that their investment in the receiver of the loan will yield a better return? No. Banks compete for deposits and compete to lend. The spread between those rates must pay the bank’s costs, cover its risks and turn a profit. When central banks reduce the return on safe assets banks hold, their income from lending to the government goes down. The banks thus seek to replace that income with other lending. Unfortunately, everyone in the system is doing the same thing. This competition forces lending rates down. Savers are competing for investments next to the banks. There are lots of them crowding into bank deposits; this lets those banks lower the rate they pay. (Nobody forces savers to deposit Euros only in German banks.) This is a system of feedback loops. Nobody is charging a tax, though banks may charge a fee for a service it costs them to provide. Depositors are free to take their business elsewhere. And entrepreneurs who think they can do better are free to launch competing financial services.