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This feels like a bizarre article that seems to be 'fixing' a confusion no one actually has. Also, if the premise of your article is that the 'dictionary is wro

This feels like a bizarre article that seems to be 'fixing' a confusion no one actually has. Also, if the premise of your article is that the 'dictionary is wrong because I feel otherwise and that's why everyone is confused', then you should consider the parsimonious explanation that no one is actually confused, that the dictionary is right, and that it is you has invented a confusion.

jljljl 6y ago
People do have this confusion all the time though: they think the bank lends out the money they put in, when really what’s happening is money creation as described in the article.
- derefr 6y ago
  The money is lent out, though, in the specific sense that a bank run during a crash of the economy can† result in the bank not having the cash-on-hand to give back to its depositors. † Or, at least, this was true in the US until 2007, after which savings banks were legally limited in their ability to leverage their deposits.
  - jljljl 6y ago
    This is a problem of not having enough reserves, and not quite of lending deposits. Banks encourage people to put their money in the bank in exchange for deposits so that they have these reserves. It’s like the article says: banks give out deposits in exchange for Government Cash, or for Valuable Long Term Promises. A run can kill a bank if they read the market wrong and can’t generate enough government cash to redeem the deposits.
- kinkrtyavimoodh 6y ago
  But the two are independent ideas. You don't need lending or money creation for a bank to work, though even there the analogy is sound. The bank does lend money out and if a lot of people try to withdraw it at the same time, you get bank runs and collapses. That being said, in principle, it is possible to have a bank that literally takes the cash you give it and puts it in a giant vault, and when you come to ask for withdraw it, retrieves it and hands it back over. It is literally the idea that the author seems to be railing against. You come with your money (water) and deposit (pour) it into the bank's vault (glass). What exactly is the confusion?
  - deleted 6y ago
    [deleted]
  - TheOtherHobbes 6y ago
    The confusion is that this isn't how banks work. But most people believe that this is how banks work. More than that, most people have no idea how lending really works. They believe the bank is literally lending their savings out. So if no one saves, there's no lending. Even some economists believe a more complex version of this. https://larspsyll.wordpress.com/2014/09/21/the-loanable-funds-fallacy/ https://larspsyll.wordpress.com/2014/09/21/the-loanable-fund...
    - cm2187 6y ago
      Well at a micro level, it is still what happens, the bank doesn't make money appear by magic. The multiplier effect just happens because the original amount of cash has been deposited, then lent, then deposited again. So you have the same amount of cash in the system but two deposits, one backed by a loan, the other by cash, and the deposits are treated as "like cash" whereas they are mere IOUs backed by a financial asset.
      - jljljl 6y ago
        A reserve (or government cash deposit) is not technically required for a bank to issue a loan. Its _risky_, since it could lead to a situation where someone tries to cash out and you have nothing to give them, which would destroy your business and reputation as a banker. But if you could make perfect loan decisions and no one comes to redeem their deposit, you wouldn’t need to have any reserves at all. Most regulators require a minimum amount of reserves to prevent instability or bank runs (and to control money supply) That’s the difference, you’re not lending out the original amount of cash, you’re using it as a reserve in case someone asks for their money.
  - jljljl 6y ago
    The confusion is that modern commercial banks don’t work like a giant vault. So applying the analogy you described to, say, Wells Fargo, would mislead you about how Wells Fargo works. You could have a bank that does what you say, but it wouldn’t be able to survive as a commercial institution.
- WalterBright 6y ago
  Interestingly, money creation is done by making loans. But nobody mentions the converse: money destruction is done by paying off the loans! Fractional reserve banking is an amazing invention.
  - wodenokoto 6y ago
    What? Isn’t the money supply irreversibly expanded when a loan is created? How does paying of the loan decrease the amount of money there exists? When I loan 1000 the bank basically just writes a check for 1000 that is not attached to any money what so ever. When I’ve payed off my debt, the bank will have received 1100 and my understanding is not that they will simply delete the original 1000 and keep the change.
    - User23 6y ago
      Paying off a loan contracts the bank’s balance sheet and the liability side thereof is what most private persons use as money.
    - WalterBright 6y ago
      They do just delete the original 1000. Otherwise they wouldn't be able to loan it out again, due to the reserve requirement.
  - User23 6y ago
    I like to use the analogy of malloc() and free() to communicate the concept to programmers. Commercial banks malloc() and free() deposits and the Treasury/Fed tag team malloc() and free() reserves.
    - User23 6y ago
      To elaborate, it's interesting to observe that a non-zero interest rate effectively creates a resource leak. Since the deposits created are equal to the loan's face value and don't include interest payments, in aggregate there are not enough deposits available for every borrower to pay off their loans with interest. In other words, interest makes a non-zero bankruptcy rate a mathematical certainty.
- lottin 6y ago
  That's not a confusion but rather an incomplete (but, for most purposes, good enough) understanding of how banks work.
glenstein 6y ago
Exactly, this is the perfect response to contrarian articles that insist on using vocabulary in strange ways. People love feeling smart by reinterpreting normal questions like they are trick questions. There's a market for contrarianism that purports to overturn myths and conventional wisdom, and so people end up reinterpreting reasonable things as 'myths', and 'correcting' them with fun journeys into contrarianism. I hope we can get to a point where we can recognize these articles as a familiar trope.
derriz 6y ago
Indeed - it's mumbo jumbo. A deposit in a bank is an asset for the holder of the deposit but a liability for the bank. From this simple fact, the author ties themselves in linguistic knots of their own confusion.
- Godel_unicode 6y ago
  It's not mumbo jumbo though, it's the minutiae of banking and it's important. The hypothetical you have posited above doesn't actually reflect how it works. The actual money in the bank is an asset and is owned by the bank. The deposits (claims against that money by it's clients) are the liability. This is the difference, which is important to understanding how banks work, that is misses up thread. You are not lending your money to the bank to hold. They are selling you a future claim on some amount of money from them, possibly (hopefully?) plus some interest against that claim. You will note that the FDIC, when talking about deposit insurance, uses the terms principal and interest. That's because the thing they are insuring is the loan contract between you and the bank. You'll want the "How Bank Deposits Work" section of the below investopedia link. https://www.investopedia.com/terms/b/bank-deposits.asp https://www.investopedia.com/terms/b/bank-deposits.asp https://www.fdic.gov/deposit/deposits/faq.html https://www.fdic.gov/deposit/deposits/faq.html It's similar to the confusion people create with the shorthand "I bought a song from iTunes". No, you bought a license to use that song in a specific set of ways.
  - derriz 6y ago
    Are you really claiming that a deposit account is NOT an asset for its owner or that a bank's deposit book is NOT considered a liability? That's what "doesn't actually reflect how it works" is suggesting to me? Yet to contest these two simple facts makes no sense since they are trivial to verify? Do you own any deposit accounts? Do you consider the money in them to be counted among your assets? And if you look at Bank of America's balance sheet (https://finance.yahoo.com/quote/BAC/balance-sheet/ https://finance.yahoo.com/quote/BAC/balance-sheet/), and drill into the liabilities list, you'll find the value of all their deposit accounts.
    - 6y ago

jljljl 6y ago

People do have this confusion all the time though: they think the bank lends out the money they put in, when really what’s happening is money creation as described in the article.

derefr 6y ago
The money is lent out, though, in the specific sense that a bank run during a crash of the economy can† result in the bank not having the cash-on-hand to give back to its depositors. † Or, at least, this was true in the US until 2007, after which savings banks were legally limited in their ability to leverage their deposits.
- jljljl 6y ago
  This is a problem of not having enough reserves, and not quite of lending deposits. Banks encourage people to put their money in the bank in exchange for deposits so that they have these reserves. It’s like the article says: banks give out deposits in exchange for Government Cash, or for Valuable Long Term Promises. A run can kill a bank if they read the market wrong and can’t generate enough government cash to redeem the deposits.
kinkrtyavimoodh 6y ago
But the two are independent ideas. You don't need lending or money creation for a bank to work, though even there the analogy is sound. The bank does lend money out and if a lot of people try to withdraw it at the same time, you get bank runs and collapses. That being said, in principle, it is possible to have a bank that literally takes the cash you give it and puts it in a giant vault, and when you come to ask for withdraw it, retrieves it and hands it back over. It is literally the idea that the author seems to be railing against. You come with your money (water) and deposit (pour) it into the bank's vault (glass). What exactly is the confusion?
- deleted 6y ago
  [deleted]
- TheOtherHobbes 6y ago
  The confusion is that this isn't how banks work. But most people believe that this is how banks work. More than that, most people have no idea how lending really works. They believe the bank is literally lending their savings out. So if no one saves, there's no lending. Even some economists believe a more complex version of this. https://larspsyll.wordpress.com/2014/09/21/the-loanable-funds-fallacy/ https://larspsyll.wordpress.com/2014/09/21/the-loanable-fund...
  - cm2187 6y ago
    Well at a micro level, it is still what happens, the bank doesn't make money appear by magic. The multiplier effect just happens because the original amount of cash has been deposited, then lent, then deposited again. So you have the same amount of cash in the system but two deposits, one backed by a loan, the other by cash, and the deposits are treated as "like cash" whereas they are mere IOUs backed by a financial asset.
    - jljljl 6y ago
      A reserve (or government cash deposit) is not technically required for a bank to issue a loan. Its _risky_, since it could lead to a situation where someone tries to cash out and you have nothing to give them, which would destroy your business and reputation as a banker. But if you could make perfect loan decisions and no one comes to redeem their deposit, you wouldn’t need to have any reserves at all. Most regulators require a minimum amount of reserves to prevent instability or bank runs (and to control money supply) That’s the difference, you’re not lending out the original amount of cash, you’re using it as a reserve in case someone asks for their money.
- jljljl 6y ago
  The confusion is that modern commercial banks don’t work like a giant vault. So applying the analogy you described to, say, Wells Fargo, would mislead you about how Wells Fargo works. You could have a bank that does what you say, but it wouldn’t be able to survive as a commercial institution.
WalterBright 6y ago
Interestingly, money creation is done by making loans. But nobody mentions the converse: money destruction is done by paying off the loans! Fractional reserve banking is an amazing invention.
- wodenokoto 6y ago
  What? Isn’t the money supply irreversibly expanded when a loan is created? How does paying of the loan decrease the amount of money there exists? When I loan 1000 the bank basically just writes a check for 1000 that is not attached to any money what so ever. When I’ve payed off my debt, the bank will have received 1100 and my understanding is not that they will simply delete the original 1000 and keep the change.
  - User23 6y ago
    Paying off a loan contracts the bank’s balance sheet and the liability side thereof is what most private persons use as money.
  - WalterBright 6y ago
    They do just delete the original 1000. Otherwise they wouldn't be able to loan it out again, due to the reserve requirement.
- User23 6y ago
  I like to use the analogy of malloc() and free() to communicate the concept to programmers. Commercial banks malloc() and free() deposits and the Treasury/Fed tag team malloc() and free() reserves.
  - User23 6y ago
    To elaborate, it's interesting to observe that a non-zero interest rate effectively creates a resource leak. Since the deposits created are equal to the loan's face value and don't include interest payments, in aggregate there are not enough deposits available for every borrower to pay off their loans with interest. In other words, interest makes a non-zero bankruptcy rate a mathematical certainty.
lottin 6y ago
That's not a confusion but rather an incomplete (but, for most purposes, good enough) understanding of how banks work.

glenstein 6y ago

Exactly, this is the perfect response to contrarian articles that insist on using vocabulary in strange ways. People love feeling smart by reinterpreting normal questions like they are trick questions. There's a market for contrarianism that purports to overturn myths and conventional wisdom, and so people end up reinterpreting reasonable things as 'myths', and 'correcting' them with fun journeys into contrarianism. I hope we can get to a point where we can recognize these articles as a familiar trope.

derriz 6y ago

Indeed - it's mumbo jumbo. A deposit in a bank is an asset for the holder of the deposit but a liability for the bank. From this simple fact, the author ties themselves in linguistic knots of their own confusion.

Godel_unicode 6y ago
It's not mumbo jumbo though, it's the minutiae of banking and it's important. The hypothetical you have posited above doesn't actually reflect how it works. The actual money in the bank is an asset and is owned by the bank. The deposits (claims against that money by it's clients) are the liability. This is the difference, which is important to understanding how banks work, that is misses up thread. You are not lending your money to the bank to hold. They are selling you a future claim on some amount of money from them, possibly (hopefully?) plus some interest against that claim. You will note that the FDIC, when talking about deposit insurance, uses the terms principal and interest. That's because the thing they are insuring is the loan contract between you and the bank. You'll want the "How Bank Deposits Work" section of the below investopedia link. https://www.investopedia.com/terms/b/bank-deposits.asp https://www.investopedia.com/terms/b/bank-deposits.asp https://www.fdic.gov/deposit/deposits/faq.html https://www.fdic.gov/deposit/deposits/faq.html It's similar to the confusion people create with the shorthand "I bought a song from iTunes". No, you bought a license to use that song in a specific set of ways.
- derriz 6y ago
  Are you really claiming that a deposit account is NOT an asset for its owner or that a bank's deposit book is NOT considered a liability? That's what "doesn't actually reflect how it works" is suggesting to me? Yet to contest these two simple facts makes no sense since they are trivial to verify? Do you own any deposit accounts? Do you consider the money in them to be counted among your assets? And if you look at Bank of America's balance sheet (https://finance.yahoo.com/quote/BAC/balance-sheet/ https://finance.yahoo.com/quote/BAC/balance-sheet/), and drill into the liabilities list, you'll find the value of all their deposit accounts.
  - 6y ago