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Yep, this fractional reserve scheme they're running sounds shady. Almost like what banks are doing when they create book money out of nothing. Which is of cour

Yep, this fractional reserve scheme they're running sounds shady. Almost like what banks are doing when they create book money out of nothing. Which is of course perfectly legal if you're rich enough to set up a private bank but the difference is they're doing it on a public ledger where everyone can see exactly how much emission there is, while bank books aren't public. Doing it in the open clearly goes too far, they're giving away the bank secrets.

stephen_g 4y ago
That’s actually a bit of a misunderstanding of how banks work. “Fractional reserve” isn’t really actually a thing in the real world (just a textbook model). The confusion stems from a rule in the US, where banks were required to have a particular type of asset (central bank reserves) in an amount equaling at least 10% of deposits. People misunderstood this to mean that banks only have 10% of deposits backed with any asset, which is completely wrong! Banks have to have assets backing 100% of deposits, or else they’re insolvent! The reserve requirement was a liquidity thing, and I don’t think it’s actually a requirement at all any more. Most other countries don’t have a reserve requirement either. Now, it is basically correct that banks create money (when they lend, because the created loan (debt to the customer) is an asset to the bank, and at the same time they create a liability (to the bank) that is the deposit (the money loaned)), as you can read about here [1] from the Bank of England. But that’s not a secret, it’s just not commonly known. What Tether is doing, of course, is different, because they seem to create money out of nothing without having the assets to cover them, and/or without the licensing to create assets (loans), which of course carries with it obligations like capital adequacy requirements to be able to cover expected losses with capital (not deposits, a real bank isn’t actually allowed to use customer deposits for lending, but they are used as part of the liquidity that the bank needs). 1. https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
- whimsicalism 4y ago
  > Banks have to have assets backing 100% of deposits, or else they’re insolvent! Yeah, by asset you mean "loan to other person", and that person will often deposit their loaned money in the same bank, where it will be loaned out again.
- trompetenaccoun 4y ago
  Banks do not have 100% of "assets", otherwise bank runs wouldn't be so catastrophic when enough people try to withdraw their funds in actual currency. Because it's not there. Your misunderstanding is that you're focusing on your average savings account, these types of accounts are inconsequential in the grand scheme of things, in fact many banks don't even want these customers since they can't make much money that way if at all. Now as for credit it is not fully backed and they do create money out of nothing, any econ 101 course teaches you that. That is actually how most new money is created, though bank credits. The "money" is book money which is not legal tender, which means yes, they literally just make an entry into their books (today digital), same as Tether minting money out of thin air. The most fatal aspect is that many people do not understand the complicated legal situation when giving money to banks. They imagine it like their money is sitting in a virtual safe just for them and the bank can't touch it. In reality once it enters the banks books you have lost custody of the actual asset (government money), which is why insurance is needed in case the bank goes under. In the EU for example all savings are insured up to 100k€. >What Tether is doing, of course, is different, because they seem to create money out of nothing without having the assets to cover them This is what banks do, you simply do not understand. >"Sight deposits are an example of book money: sight deposits are created when a bank settles transactions with a customer, ie it grants a credit, say, or purchases an asset and credits the corresponding amount to the customer's bank account in return. This means that banks can create book money just by making an accounting entry: according to the Bundesbank's economists, ""this refutes a popular misconception that banks act simply as intermediaries at the time of lending – ie that banks can only grant credit using funds placed with them previously as deposits by other customers"". By the same token, excess central bank reserves are not a necessary precondition for a bank to grant credit (and thus create money)." https://www.bundesbank.de/en/tasks/topics/how-money-is-created-667392 https://www.bundesbank.de/en/tasks/topics/how-money-is-creat...
deleted 4y ago
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stephen_g 4y ago

That’s actually a bit of a misunderstanding of how banks work. “Fractional reserve” isn’t really actually a thing in the real world (just a textbook model). The confusion stems from a rule in the US, where banks were required to have a particular type of asset (central bank reserves) in an amount equaling at least 10% of deposits. People misunderstood this to mean that banks only have 10% of deposits backed with any asset, which is completely wrong! Banks have to have assets backing 100% of deposits, or else they’re insolvent! The reserve requirement was a liquidity thing, and I don’t think it’s actually a requirement at all any more. Most other countries don’t have a reserve requirement either. Now, it is basically correct that banks create money (when they lend, because the created loan (debt to the customer) is an asset to the bank, and at the same time they create a liability (to the bank) that is the deposit (the money loaned)), as you can read about here [1] from the Bank of England. But that’s not a secret, it’s just not commonly known. What Tether is doing, of course, is different, because they seem to create money out of nothing without having the assets to cover them, and/or without the licensing to create assets (loans), which of course carries with it obligations like capital adequacy requirements to be able to cover expected losses with capital (not deposits, a real bank isn’t actually allowed to use customer deposits for lending, but they are used as part of the liquidity that the bank needs). 1. https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

whimsicalism 4y ago
> Banks have to have assets backing 100% of deposits, or else they’re insolvent! Yeah, by asset you mean "loan to other person", and that person will often deposit their loaned money in the same bank, where it will be loaned out again.
trompetenaccoun 4y ago
Banks do not have 100% of "assets", otherwise bank runs wouldn't be so catastrophic when enough people try to withdraw their funds in actual currency. Because it's not there. Your misunderstanding is that you're focusing on your average savings account, these types of accounts are inconsequential in the grand scheme of things, in fact many banks don't even want these customers since they can't make much money that way if at all. Now as for credit it is not fully backed and they do create money out of nothing, any econ 101 course teaches you that. That is actually how most new money is created, though bank credits. The "money" is book money which is not legal tender, which means yes, they literally just make an entry into their books (today digital), same as Tether minting money out of thin air. The most fatal aspect is that many people do not understand the complicated legal situation when giving money to banks. They imagine it like their money is sitting in a virtual safe just for them and the bank can't touch it. In reality once it enters the banks books you have lost custody of the actual asset (government money), which is why insurance is needed in case the bank goes under. In the EU for example all savings are insured up to 100k€. >What Tether is doing, of course, is different, because they seem to create money out of nothing without having the assets to cover them This is what banks do, you simply do not understand. >"Sight deposits are an example of book money: sight deposits are created when a bank settles transactions with a customer, ie it grants a credit, say, or purchases an asset and credits the corresponding amount to the customer's bank account in return. This means that banks can create book money just by making an accounting entry: according to the Bundesbank's economists, ""this refutes a popular misconception that banks act simply as intermediaries at the time of lending – ie that banks can only grant credit using funds placed with them previously as deposits by other customers"". By the same token, excess central bank reserves are not a necessary precondition for a bank to grant credit (and thus create money)." https://www.bundesbank.de/en/tasks/topics/how-money-is-created-667392 https://www.bundesbank.de/en/tasks/topics/how-money-is-creat...

deleted 4y ago

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