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When a bank loans 10,000 dollars, the amount is credited to a checking account. It does not have to come from somewhere else. What use would a loan be if you ke
by jazzyjackson 5y ago
When a bank loans 10,000 dollars, the amount is credited to a checking account. It does not have to come from somewhere else. What use would a loan be if you kept it in your checking?
Don't take my word for it, take it from the Bank of England's Quarterly Bulletin [0] "Banks create create additional broad money whenever they create a loan... it runs contrary to the view sometimes put forward that banks can only lend out deposits that they already have. In fact, Loans create deposits, not the other way around."
[0] https://youtu.be/CvRAqR2pAgw https://youtu.be/CvRAqR2pAgw
- fancifalmanima 5y agoMoney creation happens when the money is deposited and loaned again me -> deposit $100 in bank a -> bank a loans $95 to business -> business deposits $95 in bank b -> bank b loans $90.25 This loop repeats indefinitely until we're talking about fractions of pennies. The reserve ratio (and bank willingness to loan up to that ratio) determines the money multiplication effect. No bank is loaning more than it's actual deposits, it's just the effect of the same dollar getting deposited and loaned multiple times.
- jazzyjackson 5y agoExcept it doesn't have to be more than one bank, just different accounts at the same bank. So if a bank creates a loan, which ends up deposited in another account, their deposits have increased from $100 to $195. So the question becomes, where does the money that has increased the banks' reserves come from? It was created when it was loaned. Maybe we are saying the same thing, I can't tell.
- zz865 5y agoYes that is what I was saying. I'm trying to dispute the myth that a bank gets a deposit and lends out 10x as much that it magically creates.
- jazzyjackson 5y agoIs that what you were saying? Because I'm trying to disagree with you. You seem to say that banks are not magically creating 10x money, that it only lends out money that was previously deposited. This is not the case.
- fancifalmanima 5y agoThey're lending 95% of their deposits or whatever the reserve requirement is. It's just that every other bank is too, and when they loan money it almost always ends up back in the banking system just in another account. The money creation is an artifact of the same dollar getting deposited and loaned multiple times.
- deleted 5y ago[deleted]
- zz865 5y agoWe agree that the amount of loans roughly matches the amount of deposits. Lots of people (like beambot I believe) think there are 10x more money lent out than deposits.
- beambot 5y agoNope. GP said that storing money was expensive. I was simply alluding to the fact that (a) supply of physical dollars << assets on the balance sheet - i.e. fractional reserve, and (b) a trusted authority can 'print' money on demand so long as people have faith in its viability - i.e. central banks & federal reserve. Bank financing is counterintuitive: deposits are actually liabilities, and loans are assets... but banks also routinely borrow money (e.g. from the Fed) well in excess of their book value. For example, JP Morgan's current debt-to-equity ratio is 1.675 [1], meaning that they are also (in a sense) "mortgaged" well beyond their net assets. It's debt all the way down... [1] https://ycharts.com/companies/JPM https://ycharts.com/companies/JPM