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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 mo

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.
    - Akronymus 4y ago
      And you paying them back destroys that money.

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.
  - Akronymus 4y ago
    And you paying them back destroys that money.