3 ms·

Every modern bank loan is "printing money" because there is no amount of corresponding money that the bank is actually loaning out. The bank must survive stress

Every modern bank loan is "printing money" because there is no amount of corresponding money that the bank is actually loaning out. The bank must survive stress tests, but not have actual deposits on hand for the amount loaned out. However, even if the bank needed to have deposits or collateral on hand, to stop the "printing money" aspect of new loans, this same thing could happen because homes are collateral on mortgage. Really I think it mostly driven by the supply demand mismatch, and in particular a belief that local governments will not allow the supply to meet demand. There's a great recent Fed paper that shows the absolute huge correlation between prices and the supply/demand mismatch. It further shows that demand volatility has been higher than supply volatility so recent effects are explained by that demand volatility. The only way to solve this is to out build demand and shock prices down. IMHO.

arminiusreturns 4y ago
This is called the fractional reserve rate and is a vital part of controlling monetary policy in a fiat system. The reserve rate was taken to 0 during covid...
Retric 4y ago
Banks do need cash on hand to hand out loans, they don't need cash on hand for deposits. However, they can sell old loans to get money for new loans. Really there is nothing magic about loans. Handing a bank 1,000$ and thinking you still have that money rather the the bank owing you 1,000$ is how money is created.
- ljlolel 4y ago
  Actually during 2020 they removed reserve requirement to 0%. Yes really
  - KallDrexx 4y ago
    Which isn't that crazy when bank reserves are at record highs, and was at relative highs when the rule was put into place. https://fred.stlouisfed.org/series/TOTRESNS https://fred.stlouisfed.org/series/TOTRESNS Banks did not want to lend out money and lowering the reserve percentage is one of the few tools they have to try to encourage banks making loans. It just so happens that it didn't do cause an uptick in loans
  - Retric 4y ago
    Reserve requirements are only a question of deposits, but they limit everything from paying expenses to dividends from the exact same pool of money used to issues loans. Which is critical to understand because banks don't just offer loans they also use money for everything else normal business do. On the other hand, if they didn't need cash on hand to offer loans any random small bank could loan a 1 trillion dollars to someone. They can't because they don't actually have that money. Consider a bank with 3 billion dollars total and 2 billion in deposits. They only need to care about reserve requirements on 2 billion and can use the other 1 billion for anything because it's their money. In effect cash on hand are assets and deposits are debt. Reserve requirements are just a question of how much leverage they can legally have.

arminiusreturns 4y ago

This is called the fractional reserve rate and is a vital part of controlling monetary policy in a fiat system. The reserve rate was taken to 0 during covid...

Retric 4y ago

Banks do need cash on hand to hand out loans, they don't need cash on hand for deposits. However, they can sell old loans to get money for new loans. Really there is nothing magic about loans. Handing a bank 1,000$ and thinking you still have that money rather the the bank owing you 1,000$ is how money is created.

ljlolel 4y ago
Actually during 2020 they removed reserve requirement to 0%. Yes really
- KallDrexx 4y ago
  Which isn't that crazy when bank reserves are at record highs, and was at relative highs when the rule was put into place. https://fred.stlouisfed.org/series/TOTRESNS https://fred.stlouisfed.org/series/TOTRESNS Banks did not want to lend out money and lowering the reserve percentage is one of the few tools they have to try to encourage banks making loans. It just so happens that it didn't do cause an uptick in loans
- Retric 4y ago
  Reserve requirements are only a question of deposits, but they limit everything from paying expenses to dividends from the exact same pool of money used to issues loans. Which is critical to understand because banks don't just offer loans they also use money for everything else normal business do. On the other hand, if they didn't need cash on hand to offer loans any random small bank could loan a 1 trillion dollars to someone. They can't because they don't actually have that money. Consider a bank with 3 billion dollars total and 2 billion in deposits. They only need to care about reserve requirements on 2 billion and can use the other 1 billion for anything because it's their money. In effect cash on hand are assets and deposits are debt. Reserve requirements are just a question of how much leverage they can legally have.