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> In a non-MBS banking system, there is roughly the same amount of deposit money flowing around as there are loans. Because when you take out a mortgage it get

• jblwps 7y ago
  Maybe not literally, but don't regulations stipulate how many liquid assets a lender must have on hand? Even if the ratio isn't 1:1, it's bounded, unlike an unbounded MBS market. IANA finance expert, but I suppose you could bound the MBS market with some kind of maximum-degrees-removed-from-real-assets metric, and regulate based off of that. But that, to me, would seem unwise since that metric would likely be fairly abstract and therefore dis-preferred as a basis of regulation.
• neffy 7y ago
  The double entry book keeping operation when a bank issues a new loan, is [debit loan, credit deposit account] creating deposit money. When a loan is securitzed (sold) by the bank, the DBE operations are: [credit loan, debit deposit account of purchaser] and the purchaser now owns loan. At this point strictly money has been removed from the banking system, but in practice the bank then recreates that money with a new loan (as above) because they are now within their regulatory lending requirements, and can issue a new loan. They can continue this indefinitely until the market for securitized loans dries up, which is effectively what happened in 2008.