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What percentage of people do you think realise how modern banking works? In my experience when I talk to people, universally the answer is "they take money from

What percentage of people do you think realise how modern banking works? In my experience when I talk to people, universally the answer is "they take money from Alice and lend it to Bob, the difference in rates is how they make money". I wonder if a survey about this has ever been done, but I suspect only a very small percentage of people really realise that banks, private banks, simply create the money they loan you themselves, as they wish. Reminds me of that quote: "if the average man realised how our banks work, there would be revolution in the streets tomorrow".

plonk 4y ago
I don’t see the problem here. Creating money isn’t free for private banks, they can’t do it as much as they want. They start rejecting more loans when funding gets tighter. What is the concrete problem that this system creates in your opinion?
- andrepd 4y ago
  Several problems. First, it has been amply demonstrated that (1) the rules aren't as tight as should be and (2) the "punishment" for failure is not strong enough, or should I say, it is non-existent. This means that banks can and will make too risky investments, collect the profits when they succeed, and get bailed out – with no personal or corporate responsibility of any kind – when they fail. Second, this creates a class privilege: while banks can create money at will (and profit from it) as long as they stay within the confines of the regulations, ordinary families and individuals have no such power. There is no mechanism whereby ordinary people and families can do something equivalent to free leveraging through money creation, given similar capital/reserve minimums rules as banks have. Unlike a bank, a person with 10k$ cash on hand cannot credit themselves 100k$ (or 200k$ or 500k$) of money and use it as they please, to spend or to invest. In fact they have to go through the very same middlemen who do *have that kind of power, and which do use that mechanism to credit themselves the money that they will lend you for interest*. This doesn't strike me as fair.
  - plonk 4y ago
    > First, it has been amply demonstrated that (1) the rules aren't as tight as should be and (2) the "punishment" for failure is not strong enough, or should I say, it is non-existent. This means that banks can and will make too risky investments, collect the profits when they succeed, and get bailed out – with no personal or corporate responsibility of any kind – when they fail. The problem in 2008 was subprime loans that should never have been allowed, it wasn’t that banks could create enough money. Inflation after Covid was caused by central banks, not private ones, and it was done on purpose to avoid a recession. I don’t think these things are inevitable consequences of private banks creating money. > Second, this creates a class privilege: while banks can create money at will (and profit from it) as long as they stay within the confines of the regulations, ordinary families and individuals have no such power. Banks are given that privilege in exchange for being regulated to hell. They get a kind of monopoly over these profits in exchange for doing things like being forced to bank everyone, including unprofitable customers. Without this incentive, who would do the banks’ job?
Consultant32452 4y ago
There's another layer to the onion. You mentioned the small number that understands the fractional reserve system. What percentage of those know that in 2020 the reserve ratio was set to 0, so banks don't even have to legally have any reserves to poof money into existence.
- bondarchuk 4y ago
  I have heard this, and I believe it, but if taken at face value, it would mean that some bank could, right now, simply poof 100 trillion trillion trillion dollars into existence, and then start giving it to random people. If the people who control the money-poof-button at some bank were to do this, would there be any way to stop them? Or would they somehow not be able to in the first place?
  - kasey_junk 4y ago
    The reason the fed lowered the reserve amount to zero is because it was no longer a real barrier to lending. Since 2008 US banks had amassed something like 4 trillion in liquid capital and were lending at the same or reduced rates. There was also a currency shock due to the pandemic. The search term is “ample reserves regime”. The fed still has other requirements for use of their facilities and every bank that lends money is covered by a wide swath of regulators that have their own asset to liability and loan makeup requirements.
  - lottin 4y ago
    Sooner or later part of these 100 trillion trillion dollars will be withdrawn from the originating bank and deposited with other banks. The originating bank will have to send reserves to these other banks, and if it can't because it doesn't have enough reserves, the bank will fail. But the reason most countries no longer have reserve ratios is because these ratios have been replaced with capital requirements, which likewise constrain bank lending activity. Apparently some people didn't get the memo though, and think banks are now unregulated and can do whatever they want. In reality the banking sector is one of the most regulated industries, and for a good reason.
dcl 4y ago
I've worked at a bank. A significant proportion of the the workforce had no idea how it works. I'd say <10% of the senior executives have the slightest clue. But it's not 'as they wish' as you say, depending on where they operate, they are typically constrained by capital and liquidity ratios set by their regulator.
- User23 4y ago
  Isn’t bank capitalization largely bank stocks, which are valued largely on the number and performance of originated or otherwise held loans? I feel like I have a pretty solid grasp on the operational mechanics of money creation, but I don’t for capitalization. The whole thing seems a little dippy though. For example isn’t the Fed “capitalized” by its largest borrower, the Treasury? All that being said I doubt loan officers check their capitalization ratio before originating a profitable loan to a creditworthy borrower. I imagine another department checks the ratios from time to time and sells or resells loans for cash or stocks to increase the capitalization ratio as needed. I’d love to hear from someone who actually handles this.
  - lottin 4y ago
    OP was talking about financial capital. Financial capital is the difference between assets and liabilities. If the company was liquidated right now, what would remain is the financial capital, so in a manner of speaking it's the net worth of a corporation. Regulators require banks to keep a certain amount of financial capital in accordance with the risks that they take and various other parameters in order to make sure that they are able to absorb big losses without going bankrupt.
    - User23 4y ago
      Yeah, I'm aware of the basic investopedia definition. What I don't understand is what are those assets exactly? What kind of assets can be counted as capital? Vault cash? Reserves held at the Fed? And is a performing loan capital? It's an asset that can be sold to other banks. If that's the case, then can't a bank increase its capital by originating good loans? If that's so, then capital requirements don't particularly appear to operationally constraint loan origination and deposit creation.
NikolaNovak 4y ago
>>private banks, simply create the money they loan you themselves, as they wish. I for one did not realize that. I thought that was what the single nation's central bank does. If strictly true, how does anything work, I. E. Why would they not just create money ad infinitum? I imagine there are crucial, critical details to that "simply".
- DarkmSparks 4y ago
  they have to buy banknotes from the central bank and there is a "reserve ratio" which determines the ratio of how many "banknotes" they own and what they can create. More or less. What people tend to forget is banks are just "middlemen" - they are a mechanism to facilitate trade and not much else.
  - hpkuarg 4y ago
    Only tangentially related, but let's not fall into the fallacy of the middleman -- middlemen are only bad if they are legally or otherwise monopolistically required to be there. In other situations, they add value in the connecting of producers and consumers.
    - taneq 4y ago
      You mean like banks are? I don’t think I can call up the national reserve bank and get a loan to buy a house.
      - lottin 4y ago
        Central banks are not in the business of banking.
    - andrepd 4y ago
      What value or service are they providing, and which "producers" and "consumers" are they connecting? In fact, they do have a monopoly wrt. their customers: they can credit themselves assets by creating a matching liability – inside the confines of regulatory limits – while ordinary people and businesses can't, and thus they have to pay the bank a fee to do that for them and give them the money.
vinay_ys 4y ago
Something like 95% of money in circulation is money borrowed from future. Only a small fraction money in circulation is already earned money.
jimcavel888 4y ago
thematrixturtle 4y ago
Hong Kong makes this more obvious by letting banks issue paper currency: HSBC, Standard Chartered and Bank of China all issue their own banknotes, with radically different designs to boot. Northern Ireland and Scotland do this too, but there it's kind of obfuscated by both being interchangeable with the British pound, while the HKD stands alone.
- HPsquared 4y ago
  That's the history as well, individual banks used to issue paper notes which were redeemable for something "real" (gold in the vault). This evolved to the system we have today where they did away with the gold.

plonk 4y ago

I don’t see the problem here. Creating money isn’t free for private banks, they can’t do it as much as they want. They start rejecting more loans when funding gets tighter. What is the concrete problem that this system creates in your opinion?

andrepd 4y ago
Several problems. First, it has been amply demonstrated that (1) the rules aren't as tight as should be and (2) the "punishment" for failure is not strong enough, or should I say, it is non-existent. This means that banks can and will make too risky investments, collect the profits when they succeed, and get bailed out – with no personal or corporate responsibility of any kind – when they fail. Second, this creates a class privilege: while banks can create money at will (and profit from it) as long as they stay within the confines of the regulations, ordinary families and individuals have no such power. There is no mechanism whereby ordinary people and families can do something equivalent to free leveraging through money creation, given similar capital/reserve minimums rules as banks have. Unlike a bank, a person with 10k$ cash on hand cannot credit themselves 100k$ (or 200k$ or 500k$) of money and use it as they please, to spend or to invest. In fact they have to go through the very same middlemen who do *have that kind of power, and which do use that mechanism to credit themselves the money that they will lend you for interest*. This doesn't strike me as fair.
- plonk 4y ago
  > First, it has been amply demonstrated that (1) the rules aren't as tight as should be and (2) the "punishment" for failure is not strong enough, or should I say, it is non-existent. This means that banks can and will make too risky investments, collect the profits when they succeed, and get bailed out – with no personal or corporate responsibility of any kind – when they fail. The problem in 2008 was subprime loans that should never have been allowed, it wasn’t that banks could create enough money. Inflation after Covid was caused by central banks, not private ones, and it was done on purpose to avoid a recession. I don’t think these things are inevitable consequences of private banks creating money. > Second, this creates a class privilege: while banks can create money at will (and profit from it) as long as they stay within the confines of the regulations, ordinary families and individuals have no such power. Banks are given that privilege in exchange for being regulated to hell. They get a kind of monopoly over these profits in exchange for doing things like being forced to bank everyone, including unprofitable customers. Without this incentive, who would do the banks’ job?

Consultant32452 4y ago

There's another layer to the onion. You mentioned the small number that understands the fractional reserve system. What percentage of those know that in 2020 the reserve ratio was set to 0, so banks don't even have to legally have any reserves to poof money into existence.

bondarchuk 4y ago
I have heard this, and I believe it, but if taken at face value, it would mean that some bank could, right now, simply poof 100 trillion trillion trillion dollars into existence, and then start giving it to random people. If the people who control the money-poof-button at some bank were to do this, would there be any way to stop them? Or would they somehow not be able to in the first place?
- kasey_junk 4y ago
  The reason the fed lowered the reserve amount to zero is because it was no longer a real barrier to lending. Since 2008 US banks had amassed something like 4 trillion in liquid capital and were lending at the same or reduced rates. There was also a currency shock due to the pandemic. The search term is “ample reserves regime”. The fed still has other requirements for use of their facilities and every bank that lends money is covered by a wide swath of regulators that have their own asset to liability and loan makeup requirements.
- lottin 4y ago
  Sooner or later part of these 100 trillion trillion dollars will be withdrawn from the originating bank and deposited with other banks. The originating bank will have to send reserves to these other banks, and if it can't because it doesn't have enough reserves, the bank will fail. But the reason most countries no longer have reserve ratios is because these ratios have been replaced with capital requirements, which likewise constrain bank lending activity. Apparently some people didn't get the memo though, and think banks are now unregulated and can do whatever they want. In reality the banking sector is one of the most regulated industries, and for a good reason.

dcl 4y ago

I've worked at a bank. A significant proportion of the the workforce had no idea how it works. I'd say <10% of the senior executives have the slightest clue. But it's not 'as they wish' as you say, depending on where they operate, they are typically constrained by capital and liquidity ratios set by their regulator.

User23 4y ago
Isn’t bank capitalization largely bank stocks, which are valued largely on the number and performance of originated or otherwise held loans? I feel like I have a pretty solid grasp on the operational mechanics of money creation, but I don’t for capitalization. The whole thing seems a little dippy though. For example isn’t the Fed “capitalized” by its largest borrower, the Treasury? All that being said I doubt loan officers check their capitalization ratio before originating a profitable loan to a creditworthy borrower. I imagine another department checks the ratios from time to time and sells or resells loans for cash or stocks to increase the capitalization ratio as needed. I’d love to hear from someone who actually handles this.
- lottin 4y ago
  OP was talking about financial capital. Financial capital is the difference between assets and liabilities. If the company was liquidated right now, what would remain is the financial capital, so in a manner of speaking it's the net worth of a corporation. Regulators require banks to keep a certain amount of financial capital in accordance with the risks that they take and various other parameters in order to make sure that they are able to absorb big losses without going bankrupt.
  - User23 4y ago
    Yeah, I'm aware of the basic investopedia definition. What I don't understand is what are those assets exactly? What kind of assets can be counted as capital? Vault cash? Reserves held at the Fed? And is a performing loan capital? It's an asset that can be sold to other banks. If that's the case, then can't a bank increase its capital by originating good loans? If that's so, then capital requirements don't particularly appear to operationally constraint loan origination and deposit creation.

NikolaNovak 4y ago

>>private banks, simply create the money they loan you themselves, as they wish. I for one did not realize that. I thought that was what the single nation's central bank does. If strictly true, how does anything work, I. E. Why would they not just create money ad infinitum? I imagine there are crucial, critical details to that "simply".

DarkmSparks 4y ago
they have to buy banknotes from the central bank and there is a "reserve ratio" which determines the ratio of how many "banknotes" they own and what they can create. More or less. What people tend to forget is banks are just "middlemen" - they are a mechanism to facilitate trade and not much else.
- hpkuarg 4y ago
  Only tangentially related, but let's not fall into the fallacy of the middleman -- middlemen are only bad if they are legally or otherwise monopolistically required to be there. In other situations, they add value in the connecting of producers and consumers.
  - taneq 4y ago
    You mean like banks are? I don’t think I can call up the national reserve bank and get a loan to buy a house.
    - lottin 4y ago
      Central banks are not in the business of banking.
  - andrepd 4y ago
    What value or service are they providing, and which "producers" and "consumers" are they connecting? In fact, they do have a monopoly wrt. their customers: they can credit themselves assets by creating a matching liability – inside the confines of regulatory limits – while ordinary people and businesses can't, and thus they have to pay the bank a fee to do that for them and give them the money.

vinay_ys 4y ago

Something like 95% of money in circulation is money borrowed from future. Only a small fraction money in circulation is already earned money.

jimcavel888 4y ago

thematrixturtle 4y ago

Hong Kong makes this more obvious by letting banks issue paper currency: HSBC, Standard Chartered and Bank of China all issue their own banknotes, with radically different designs to boot. Northern Ireland and Scotland do this too, but there it's kind of obfuscated by both being interchangeable with the British pound, while the HKD stands alone.

HPsquared 4y ago
That's the history as well, individual banks used to issue paper notes which were redeemable for something "real" (gold in the vault). This evolved to the system we have today where they did away with the gold.