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A simple explanation of how money moves around the banking system (2013)
- dang 4y agoRelated: A simple explanation of how money moves around the banking system (2013) - https://news.ycombinator.com/item?id=9351277 https://news.ycombinator.com/item?id=9351277 - April 2015 (17 comments)
- _n_b_ 4y agoIf this genre appeals to you, the Bits About Money newsletter (https://bam.kalzumeus.com/archive/ https://bam.kalzumeus.com/archive/) has a lot more content along these general "how finance really works" themes. The article about mortgages, in particular, is great.
- tmnvix 4y agoEdit: Apologies for being slightly off topic here - this was meant more as a response to a comment elsewhere on money creation. I've been keenly interested in the subject of banks, debt, and money creation ever since I picked up a book on the subject of debt around 2006. I really appreciated having a (very faulty but nonetheless useful) mental model to apply when trying to make sense of subsequent events. I sometimes like to think that I saw the GFC coming, but was probably just primed to see how precarious our debt based financial system had become. With my local (NZ) housing market once again appearing to be on the brink of big changes (many are suggesting a crash), my interest has been piqued again. Looking about at what is out there that can help me make sense of what's going on I rediscovered a nice little interview (from our friends at RT no doubt) that I'd recommend to anyone trying to create their own mental model to help them understand the fascinating, frustrating, and confusing reality of banking. https://www.youtube.com/watch?v=EC0G7pY4wRE https://www.youtube.com/watch?v=EC0G7pY4wRE One of the interviewees is Richard Werner - the man who introduced the concept of quantitative easing during the Japanese Financial crisis in the 90s.
- contingencies 4y agohttps://en.wikipedia.org/wiki/Debt:_The_First_5000_Years https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years perhaps? Happy https://en.wikipedia.org/wiki/Anzac_Day https://en.wikipedia.org/wiki/Anzac_Day ... miss the biscuits!
- unmole 4y agoIt couldn't have been Graeber's screed because OP read it before 2008 and it gave him a mental model of how the financial system unravelled.
- contingencies 4y agoBoth excellent points.
- tmnvix 4y agoNo, I haven't read Graeber's book. This was The Grip of Death: A Study of Modern Money, Debt Slavery, and Destructive Economics by Michael Rowbotham. From memory, the title is derived from the literal meaning of the term 'mortgage'. It wasn't a book that I sought out. I just happened to be traveling at the time and was asked to return it to it's owner, so read it on the plane. I can't remember enough of the specific substance of the book to make a definitive recommendation but I can say that I remember it being very engrossing and will always appreciate that it broadened my interest in economics at the time (coincidentally I had just finished my studies in economics that year).
- utunga 4y agoI have no idea who you are but the fact you're interested in debt and in NZ makes me wonder if you'd be interested in a project we're working on https://cashless.social https://cashless.social
- tmnvix 4y agoThanks, I'll take a look!
- lifeformed 4y agoWhy does CHAPS cost £25 per transaction? Isn't it just the equivalent of some API calls?
- marcodiego 4y agoThe simplest explanation: - You invest in the bank - The bank loans your money to someone else at high interest rate - The bank gets paid, keeps most of the profit and uses a small part of it for your investment.
- User23 4y agoSimple, but completely wrong. The bank never loans your money. When it wants to originate a loan it creates new deposits from nothing.
- NovemberWhiskey 4y agoThat is not how fractional reserve banking works, people - or, to me at least, it gives a wrong impression. Say we are in a fractional reserve banking system, where the required reserve is 10%. I deposit $1M at the bank. My bank can now lend $900K to you. You can now deposit $900K back at your bank. Your bank can now lend $810K to someone else, and so on and so on. The geometric sum of this is "1/reserve_ratio"; so if there's a 10% reserve ratio, then the initial $1M deposit can lead to $10M of loans outstanding. No single bank is loaning out more than is being deposited with it.
- mgraczyk 4y agoThis used to be true, but hasn't mattered for a long time. The reserve requirement is zero for most (all?) US banks. https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
- NovemberWhiskey 4y agoIt doesn't matter because no banks have been anywhere near the reserve requirements that were previously in effect. The change to the "ample reserves" regime is just a tacit admission that lending is not functionally limited by reserve ratios in the U.S. at the moment.