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Yes, 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

Yes, 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 ago
It'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 ago
Yes, except fractional reserve banking hasn’t been the basis of banking since at least the mid 1930s.
- fennecfoxen 7y ago
  Voted down as Fundamentally Incorrect. You must have misread something somewhere.
  - qubex 7y ago
    No, I haven’t misread... even the Bank of England subscribes to the endogenous theory of money nowadays: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/-/media/boe/files/quarterly-... Furthermore, Islamic banking has never relied upon fractional reserve banking. So... no, not “factually incorrect”.
    - fennecfoxen 7y ago
      Okay, so you have located and subscribe to a heterodox economic theory. That's fine, and your theory may be legit. The theory that the New Deal substantially extended the Great Depression is ever-so-mildly heterodox, and I happen to believe it. I can sympathize. However, you are tendentiously representing heterodox economic theory as if it is mainstream; this is somewhat less than ideal, and impedes communication. And you go further, declaring that we abandoned fractional reserve finance in the 1930s. I am confident that even non-crank economists who subscribe to this theory will admit that the things that the original poster describes literally occur, to some reasonable level of approximation, and that the layout of money in a bank within US or European banking systems can therefore be meaningfully called "fractional reserve", even if endogenous-money theory is correct insofar as the underlying reserve multipliers are not a primary cause of changes in the total money supply (thus limiting the power of the central bank). Given that we are much less interested in the total money supply and central bank policy, and much more interested in the basic mechanics of banking and where money is and is owed, the topic you raise is incredibly irrelevant at best, and a sign of gross overreach. Finally, the US and European banking systems cannot be said to run on the principles of Islamic finance and your mention of Islamic banking here is 100% totally irrelevant. It is possible to advocate for this theory in discussions such as these. It may even improve understanding! This has not happened. Your posts do not promote understanding of economics or of banking, and you are not effectively advocating for this theory. I regretfully reiterate my conclusion that you are confused, and will note it is a further possibility that you are a crank.
nine_zeros 7y ago
The ECB can have a standing repo for banks for perpetual liquidity borrowing. Honestly, liquidity should not be a problem. The problem is effectively containing inflation.

fennecfoxen 7y ago

It'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 ago

Yes, except fractional reserve banking hasn’t been the basis of banking since at least the mid 1930s.

fennecfoxen 7y ago
Voted down as Fundamentally Incorrect. You must have misread something somewhere.
- qubex 7y ago
  No, I haven’t misread... even the Bank of England subscribes to the endogenous theory of money nowadays: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/-/media/boe/files/quarterly-... Furthermore, Islamic banking has never relied upon fractional reserve banking. So... no, not “factually incorrect”.
  - fennecfoxen 7y ago
    Okay, so you have located and subscribe to a heterodox economic theory. That's fine, and your theory may be legit. The theory that the New Deal substantially extended the Great Depression is ever-so-mildly heterodox, and I happen to believe it. I can sympathize. However, you are tendentiously representing heterodox economic theory as if it is mainstream; this is somewhat less than ideal, and impedes communication. And you go further, declaring that we abandoned fractional reserve finance in the 1930s. I am confident that even non-crank economists who subscribe to this theory will admit that the things that the original poster describes literally occur, to some reasonable level of approximation, and that the layout of money in a bank within US or European banking systems can therefore be meaningfully called "fractional reserve", even if endogenous-money theory is correct insofar as the underlying reserve multipliers are not a primary cause of changes in the total money supply (thus limiting the power of the central bank). Given that we are much less interested in the total money supply and central bank policy, and much more interested in the basic mechanics of banking and where money is and is owed, the topic you raise is incredibly irrelevant at best, and a sign of gross overreach. Finally, the US and European banking systems cannot be said to run on the principles of Islamic finance and your mention of Islamic banking here is 100% totally irrelevant. It is possible to advocate for this theory in discussions such as these. It may even improve understanding! This has not happened. Your posts do not promote understanding of economics or of banking, and you are not effectively advocating for this theory. I regretfully reiterate my conclusion that you are confused, and will note it is a further possibility that you are a crank.

nine_zeros 7y ago

The ECB can have a standing repo for banks for perpetual liquidity borrowing. Honestly, liquidity should not be a problem. The problem is effectively containing inflation.