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I just wonder how this works upstream. Don't the banks also owe that money to somebody? After all, value isn't just money, it's money plus time.
by 101404 7y ago
I just wonder how this works upstream. Don't the banks also owe that money to somebody? After all, value isn't just money, it's money plus time.
- Phenix88be 7y agoI think banks "create" (out of "no where" I mean) the money they loan. So they don't owe anyone.
- xxs 7y agoof course this is not true, the credits are sold and resold, etc.
- 6510 7y agoIt involves a lot more parties but the level of control over the game mechanics is almost the same as a video game. It is actually a very constructive way of looking at it. All rules of the game can be suspended when it hurts gameplay.
- ptah 7y agonot sure why you are being downvoted as if fractional reserve banking is not the status quo
- gruez 7y agoThat's not relevant in the context of this discussion because at the end of the day, someone is not getting those interest payments. Sure, you can argue the money is still there (in the form of debt), but that doesn't help whatever entity that requires the cash now.
- ianleeclark 7y agoWhy do you believe some entity needs the cash now?
- robjan 7y agoOther entities may not forgive the banks for failing to make repayments on their loans. There are also instruments such as bonds and fixed income which may be backed by mortgages.
- deleted 7y ago[deleted]
- ptah 7y agothe money is not from other entities. it is literally made up based on a fraction of the reserves the bank holds. https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking
- jonplackett 7y agoAnyone who wants to understand this insanity, I recommend MONEY AS DEBT https://www.youtube.com/watch?v=2nBPN-MKefA https://www.youtube.com/watch?v=2nBPN-MKefA The first time I saw it I thought it was a luny conspiracy theory, but NO. It's all true.
- aguyfromnb 7y ago>It's all true. This is not a surprise to anyone who understands how a modern monetary system works. I guess this is why Bitcoin and its "there's a set amount of currency and we know exactly what it is" is so popular with people of a certain mindset; they expect that's how money works.
- jonplackett 7y agoThat's my point though - most people have no idea how the modern monetary system works. Most people have no idea banks have the power to create money. They think they're lending other people's money.
- Scarblac 7y agoNot quite. They get money from somewhere, that they loan out. But because much of the money they got from somewhere can be requested at will (people can still remove money from their accounts), it is still liquid and still counts as money. So money is "created" this way. That is how they create money. They don't literally just create whatever they need, only central banks can do that.
- nicky0 7y agoActually the banks do just create the money. They put an entry on the balance sheet "they owe us this much" and call it an asset.
- afiori 7y agoThat is creating liquidity, what they are doing is essentially selling debt. It is different from just creating money.
- glofish 7y agoYou are pre-selling your own work and productivity. That value that backs up that money will be created by you.
- Kiro 7y agohttps://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking
- aguyfromnb 7y agoIf one actually reads this article (and other links on Wikipedia) one would realize that "fractional reserve banking" is irrelevant in the modern economy. In the EU and US, requirements are too low, and have too many exception to matter, while other advanced nations don't have reserve requirements at all.
- CGamesPlay 7y agoYes, the banks owe the money to their account holders. As long as the account holders don't all simultaneously try to withdraw the money, they will never notice the bank doesn't actually have it. If everyone did try to get their money at the same time, it would be called a "bank run". https://en.wikipedia.org/wiki/Bank_run https://en.wikipedia.org/wiki/Bank_run
- fennecfoxen 7y agoIt's not quite so clear. The banks do owe deposited money to depositors, but they can also sell the mortgages themselves as bonds, and other entities buy the bonds. In that case, the homeowners owe money to bondholders (including other banks in Italy and around Europe, private and public pension funds, university endowments, and others.) Even when the bank holds the mortgages directly, the bank does not owe the mortgage income to deposit account holders. The bank may owe interest to those accountholders... but today, that is likely at or near 0% rates. If payments on the loan are suspended for N months, the people who lose out are the bank's shareholders. In either case, this loss could be modeled as putting this month's interest payments at the end of the loan life, up to 30 years later, and discounting the amount received by the time value of money over that interval... or, alternatively, by moving all the interest payments back by N months over the lifetime of the loan and performing the discount that way; I think it works out to the same loss either way. (To be clear, this is a real loss, in the same way that if I took $500,000 from your savings and retirement accounts, and bought myself a home, and lived in it rent-free for 5 years, and give you back the same $500,000, you have suffered a loss, and I have enjoyed a gain.) It's notable that European bank shareholders haven't been doing well recently — for a variety of reasons. There may fundamentally be too many of them, with too many inefficient processes, being propped up by governments instead of failing in an orderly fashion and being consolidated. But that's a different policy discussion.
- qubex 7y agoYes, except fractional reserve banking hasn’t been the basis of banking since at least the mid 1930s.
- 7y ago
- beefield 7y agoThe article was a bit light in details, but here is my educated guess depending of the details: 1. (most likely) The interest is still paid, but the outstanding notional payments are deferred. This causes no actual losses to banks, but may cause liquidity issues. VCentral bank can sort those easily. 2. (A bit less likely) Even interest rates are deferred, but they are capitalized to the loan so that your loan amount increases if you do not pay the interest. As above, no losses to the bank, but maybe liquidity issues. 3. (Least likely) Banks actually waive the payments. In this scenario it is primarily the shareholders that take the loss, but I would strongly expect that in this scenario government covers the losses of the bank.