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It's not exactly out of "thin air", since we are trying to be nuanced here. If you take out a mortgage to buy a house the bank does loan you the money out of th

It's not exactly out of "thin air", since we are trying to be nuanced here. If you take out a mortgage to buy a house the bank does loan you the money out of their own funds. It's just that the seller who receives your funds will put the money back into the banks (not necessarily the same bank, but the money market is there for the banks to settle among themselves). So in effect the sellers make the loans to buyers, intermediated through the financial system.

JumpCrisscross 4y ago
> the bank does loan you the money out of their own funds Nope. This is the toy model of money and banking taught in high school. When a bank makes a loan, it creates money. The fact that there are stabilising deposits is a fortunate convenience. This is why leveraged finance is inherently unstable. The BoE had a good paper about this.
- chii 4y ago
  > When a bank makes a loan, it creates money. The bank must reach some level of capital requirement to make this loan. In other words, if the bank does not have enough reserves, they cannot make this loan. The bank can use customer deposits as part of their reserves. They can also borrow from another bank (presumably, paying them interest). Lastly, i think central banks also have a reserve borrowing method (but not sure about this).
  - deleted 4y ago
    [deleted]
  - JumpCrisscross 4y ago
    > bank must reach some level of capital requirement to make this loan No, they don’t. We force them to through fiat. But credit isn’t created from money—credit is money. Left to their own devices, financial systems create as much credit as the market will bear, then the market shifts, money vanishes and voila, a panic.
    - chii 4y ago
      and after said panic, you end up with "some level of capital requirement to make this loan". "we force them through fiat", is just the same as "we force everybody to not murder and steal".
- deleted 4y ago
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- fspeech 4y ago
  What do you mean "toy model"? It is how it works operationally. Banks have to settle up by end of each business day or they are out of the business. The fact money is created with loans in a fractional reserve system does not negate operational constraints.
  - cturner 4y ago
    The toy model is the idea that a bank gets deposit from one customer and loans it to another. This is not how it works. If you go to a bank for a loan, they do a risk assessment of you, and then make some marks on a ledger. As a result of this, new money appears in your account. But - what stops banks from creating infinite money? There is a byzantine system of rules laid out by the Basel Accords and national regulators within that. That system limits the activities a bank can conduct, lays out rules for the way it must go about business it can conduct, and sets capital requirements. There is nothing close to a full reserve and the system is not defined in those terms. Rather, there are ratios. If you have so many AAA rated treasuries posted with your central bank, then you can grow your balance sheet by X. But for B rated investments, you can only grow your balance sheet by Y. When a commercial bank issues a loan, it literally creates money.
    - fspeech 4y ago
      Actually the "toy model" is exactly how it works. When you take a loan from the bank and deposit their check your bank must pay whoever the amount on their check. There is not some mysterious ledger they just mark. The fact that a bank takes an illiquid asset - your promise to pay them back - and turns it into a liquid claim on themselves is not creating money out of "thin air". Your promise to pay the bank is not "thin air" as you will quickly find out if you break your promise.
      - bambataa 4y ago
        By your logic, my promise to pay them back is what creates the cash? As someone upthread said, the BoE wrote a report on this: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m... I assume they would know.
- phire 4y ago
  It's important to understand that banks also destroy money when loans are repaid. Everyone always brings up the fact that banks create money out of thin air when issuing loans. Nobody ever mentions that the inverse happens again at the other side. I'm not sure how much it's because everyone just parrots the factoid that "banks create money" without understanding it, or they are deliberately trying to mislead people into distrusting the banking system.
  - nl 4y ago
    The destruction of the money is a lot less important because the time-value of the loan is so much higher.

JumpCrisscross 4y ago

> the bank does loan you the money out of their own funds Nope. This is the toy model of money and banking taught in high school. When a bank makes a loan, it creates money. The fact that there are stabilising deposits is a fortunate convenience. This is why leveraged finance is inherently unstable. The BoE had a good paper about this.

chii 4y ago
> When a bank makes a loan, it creates money. The bank must reach some level of capital requirement to make this loan. In other words, if the bank does not have enough reserves, they cannot make this loan. The bank can use customer deposits as part of their reserves. They can also borrow from another bank (presumably, paying them interest). Lastly, i think central banks also have a reserve borrowing method (but not sure about this).
- deleted 4y ago
  [deleted]
- JumpCrisscross 4y ago
  > bank must reach some level of capital requirement to make this loan No, they don’t. We force them to through fiat. But credit isn’t created from money—credit is money. Left to their own devices, financial systems create as much credit as the market will bear, then the market shifts, money vanishes and voila, a panic.
  - chii 4y ago
    and after said panic, you end up with "some level of capital requirement to make this loan". "we force them through fiat", is just the same as "we force everybody to not murder and steal".
deleted 4y ago
[deleted]
fspeech 4y ago
What do you mean "toy model"? It is how it works operationally. Banks have to settle up by end of each business day or they are out of the business. The fact money is created with loans in a fractional reserve system does not negate operational constraints.
- cturner 4y ago
  The toy model is the idea that a bank gets deposit from one customer and loans it to another. This is not how it works. If you go to a bank for a loan, they do a risk assessment of you, and then make some marks on a ledger. As a result of this, new money appears in your account. But - what stops banks from creating infinite money? There is a byzantine system of rules laid out by the Basel Accords and national regulators within that. That system limits the activities a bank can conduct, lays out rules for the way it must go about business it can conduct, and sets capital requirements. There is nothing close to a full reserve and the system is not defined in those terms. Rather, there are ratios. If you have so many AAA rated treasuries posted with your central bank, then you can grow your balance sheet by X. But for B rated investments, you can only grow your balance sheet by Y. When a commercial bank issues a loan, it literally creates money.
  - fspeech 4y ago
    Actually the "toy model" is exactly how it works. When you take a loan from the bank and deposit their check your bank must pay whoever the amount on their check. There is not some mysterious ledger they just mark. The fact that a bank takes an illiquid asset - your promise to pay them back - and turns it into a liquid claim on themselves is not creating money out of "thin air". Your promise to pay the bank is not "thin air" as you will quickly find out if you break your promise.
    - bambataa 4y ago
      By your logic, my promise to pay them back is what creates the cash? As someone upthread said, the BoE wrote a report on this: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m... I assume they would know.
phire 4y ago
It's important to understand that banks also destroy money when loans are repaid. Everyone always brings up the fact that banks create money out of thin air when issuing loans. Nobody ever mentions that the inverse happens again at the other side. I'm not sure how much it's because everyone just parrots the factoid that "banks create money" without understanding it, or they are deliberately trying to mislead people into distrusting the banking system.
- nl 4y ago
  The destruction of the money is a lot less important because the time-value of the loan is so much higher.