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That's no different than what I said, except you're conflating the ledger money created by banks with their reserves at the Central Bank. Only Central Bank res

That's no different than what I said, except you're conflating the ledger money created by banks with their reserves at the Central Bank. Only Central Bank reserves and cash are considered "money" in this system. And I'm saying the "money" is leveraged 9:1 in our toy example, whereas you seem to be saying assets must always be greater than liabilities - which obviously I agree with. Since if they weren't, the bank would be insolvent.

kgwgk 5y ago
You said "if a bank has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the bank can make $10 million in loans" What I say is that it can only make more that $900k in loans _if_ the deposits held at the bank grow above $1m. Which doesn’t normally happen when lending because the most likely outcome is that the borrower takes the money out of the bank. The reserves of the bank go down in that case, don’t you agree? They are just $100k after the $900k loan is made (and transferred away). $100k are the minimal reserves required when a bank has $1m in deposits. Again, an individual bank is not the same as the banking system as a whole. And I don’t quite get your remark about reserves. What I called “reserves” could be entirely held at the central bank (or in the vaults!) if the bank wanted to. Do you have an issue with those balance sheets?
- louloulou 5y ago
  I shouldn't have quoted $1M in deposits, because I meant $1M in reserves. Since deposits can only become reserves if they are the liabilities of other banks that get settled by transferring reserves to your bank's reserve account. My only point was individual banks, can lend up to whatever the reserve requirement is. If it was 10%, $1M in reserves at the central bank means the bank can could make $10M worth of loans. Do we disagree on this point? It seems like we're arguing about what is actually money.
  - kgwgk 5y ago
    > My only point was individual banks, can lend up to whatever the reserve requirement is. If it was 10%, $1M in reserves at the central bank means the bank can could make $10M worth of loans. Do we disagree on this point? I agree that bank can lend up to whatever the reserve requirement is. But the next sentence is extremely misleading at best. For that bank with $1m in deposits and $1m in reserves before any lending that 10% requirement means that it can not let its reserves go below 100k (10% times $1m in deposits) so it can only lend up to $900k out. I can agree if you say "the bank can make $9m worth of loans provided that the recipients of the loans never get them of the bank [and it ends with $10m in deposits]". That is reasonable (even approximatively true) for the banking system as a whole but is a ridiculous implicit assumption for an individual bank. I would also agree if you said "a bank with $10m in deposits needs to have at least $1m in reserves".
    - ubercow13 5y ago
      >the bank can make $9m worth of loans provided that the recipients of the loans never get them of the bank The bank can make $9m worth of loans (actually the bank can make any amount of loans, maybe even more), and some proportion of that may be transferred to other banks as reserves, and some other reserves will be transferred onto the banks balance sheet from unrelated transactions the bank makes. Then at the end of the day if the bank needs more reserves, it borrows them. The likely amount the bank needs to borrow based on the loans it makes and the cost of that reserve borrowing determines how many loans it will make. If it wouldn’t be profitable to make more, it’ll stop. At no point does the bank only make 900k of loans so that it is fully covered in case all its loans are transferred out. The whole thesis of the paper is that that way of thinking is backwards.
      - kgwgk 5y ago
        Then you could just as well say that it can make $9m in loans, $99m in loans or $999m in loans as long as enough reserves are transferred onto the banks balance sheet from unrelated transactions the bank makes (including borrowing if required). The amount of reserves can (and will) go up and down for an individual bank as it operates depending on their strategy. 10x the initial reserves has no particular meaning for an individual bank, only for the whole system (and the whole thesis of the paper is that even then the 10x number doesn't really matter).

kgwgk 5y ago

You said "if a bank has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the bank can make $10 million in loans" What I say is that it can only make more that $900k in loans _if_ the deposits held at the bank grow above $1m. Which doesn’t normally happen when lending because the most likely outcome is that the borrower takes the money out of the bank. The reserves of the bank go down in that case, don’t you agree? They are just $100k after the $900k loan is made (and transferred away). $100k are the minimal reserves required when a bank has $1m in deposits. Again, an individual bank is not the same as the banking system as a whole. And I don’t quite get your remark about reserves. What I called “reserves” could be entirely held at the central bank (or in the vaults!) if the bank wanted to. Do you have an issue with those balance sheets?

louloulou 5y ago
I shouldn't have quoted $1M in deposits, because I meant $1M in reserves. Since deposits can only become reserves if they are the liabilities of other banks that get settled by transferring reserves to your bank's reserve account. My only point was individual banks, can lend up to whatever the reserve requirement is. If it was 10%, $1M in reserves at the central bank means the bank can could make $10M worth of loans. Do we disagree on this point? It seems like we're arguing about what is actually money.
- kgwgk 5y ago
  > My only point was individual banks, can lend up to whatever the reserve requirement is. If it was 10%, $1M in reserves at the central bank means the bank can could make $10M worth of loans. Do we disagree on this point? I agree that bank can lend up to whatever the reserve requirement is. But the next sentence is extremely misleading at best. For that bank with $1m in deposits and $1m in reserves before any lending that 10% requirement means that it can not let its reserves go below 100k (10% times $1m in deposits) so it can only lend up to $900k out. I can agree if you say "the bank can make $9m worth of loans provided that the recipients of the loans never get them of the bank [and it ends with $10m in deposits]". That is reasonable (even approximatively true) for the banking system as a whole but is a ridiculous implicit assumption for an individual bank. I would also agree if you said "a bank with $10m in deposits needs to have at least $1m in reserves".
  - ubercow13 5y ago
    >the bank can make $9m worth of loans provided that the recipients of the loans never get them of the bank The bank can make $9m worth of loans (actually the bank can make any amount of loans, maybe even more), and some proportion of that may be transferred to other banks as reserves, and some other reserves will be transferred onto the banks balance sheet from unrelated transactions the bank makes. Then at the end of the day if the bank needs more reserves, it borrows them. The likely amount the bank needs to borrow based on the loans it makes and the cost of that reserve borrowing determines how many loans it will make. If it wouldn’t be profitable to make more, it’ll stop. At no point does the bank only make 900k of loans so that it is fully covered in case all its loans are transferred out. The whole thesis of the paper is that that way of thinking is backwards.
    - kgwgk 5y ago
      Then you could just as well say that it can make $9m in loans, $99m in loans or $999m in loans as long as enough reserves are transferred onto the banks balance sheet from unrelated transactions the bank makes (including borrowing if required). The amount of reserves can (and will) go up and down for an individual bank as it operates depending on their strategy. 10x the initial reserves has no particular meaning for an individual bank, only for the whole system (and the whole thesis of the paper is that even then the 10x number doesn't really matter).