5 ms·

Can you describe how a bank uses money that it has to originate loans? EDIT: note that this paragraph (and the one preceding it) directly contradicts what you

by dools 4y ago

Can you describe how a bank uses money that it has to originate loans? EDIT: note that this paragraph (and the one preceding it) directly contradicts what you are saying: This description of money creation contrasts with the notion that banks can only lend out pre-existing money, outlined in the previous section. Bank deposits are simply a record of how much the bank itself owes its customers. So they are a liability of the bank, not an asset that could be lent out. A related misconception is that banks can lend out their reserves. Reserves can only be lent between banks, since consumers do not have access to reserves accounts at the Bank of England.

imtringued 4y ago
One thing that should raise an obvious flag is that if the bank lends your bank account balance, why isn't it telling you that you cannot withdraw or spend it? After all, that money is supposed to be in your or someone else's bank account! It can't be in both simultaneously. The only conclusion is that your bank account isn't actually your money but a bank's promise to pay you money and those promises are obviously created by the bank. The only confusion is over whether highly regulated promises that people use in their day to day activity as money substitute can be considered money or not. The classic "bank takes your deposit and lends it out" only applies to certificates of deposit, after all, you have no access to that money. You can't transfer or withdraw it until the agreed date.
baobabKoodaa 4y ago
> Can you describe how a bank uses money that it has to originate loans? Yes. If I take a loan out of a bank in physical banknotes, then the bank physically loses the amount of banknotes that I physically receive. Physical banknotes are not duplicated. If I take out 100 euros in physical banknotes, then the bank loses the corresponding 100 euros in physical banknotes. The bank does not magically create physical banknotes out of thin air. If I take a loan out of a bank in the form of electronic transfer to another bank, then usually one of 2 things happen: 1. The receiving bank requires the sending bank to settle all transfers that occurred throughout a timespan such as 1 day, by transferring reserves held at the central bank. For example, if the net outflow from bank A to bank B is +2M, then bank B would require bank A to transfer 2M of reserves to settle the transfers. Note that also in this case bank A loses the amount of money that it lent to me. Money wasn't duplicated. It was transferred out of the bank. or 2. The receiving bank B has looked through the books of sending bank A, they have a prior relationship, and bank B provides an unsecured loan to bank A. Note that if bank A actually had 0 money anywhere, then bank B wouldn't want to provide bank A an unsecured loan. In this case bank A does not lose physical banknotes, and does not lose reserves held at the central bank, but they still have to record the unsecured loan. In an accounting sense, they didn't magically gain "free money" by providing a loan to their customer. > This description of money creation contrasts with the notion that banks can only lend out pre-existing money, outlined in the previous section. Bank deposits are simply a record of how much the bank itself owes its customers. So they are a liability of the bank, not an asset that could be lent out I believe this is referring to the creation of the accounting entry. It's true in the most pedantic sense, which is incredibly misleading and unhelpful. Yes, when you type a number into a computer, you can type any number. If I were to open a business where I operate like a bank, taking deposits from people and loaning money to people, and I were to keep a ledger of how much money each person has at their "accounts" with me, I could type any number I want in that ledger. Let's say I type in "9999999999999 dollars". Sure, why not. If your argument is that one can type in any number they want on a computer, then that's true, but it's not a useful argument to make. Do you think that a bank which has NO MONEY is able to (in a practical sense) create infinite money out of thin air? Sure it can type "9999999999999 dollars" on a computer, but that wouldn't be "real money" in any practical sense, because you wouldn't be able to exchange it for goods and services. Follow-up question: if you genuinely believe this to be possible, then why isn't anybody doing that? Surely there are many people working at banks who would like to collude with their friends and family to create infinite money. If you believe that to be possible, why has it literally never happened?
- qnt 4y ago
  > Furthermore, it's not clear to me how you believe that the BoE article contradicts what I'm saying. I'm under the impression that you (along with most other people) are simply misunderstanding what you are reading here. The contradiction seems fundamental. You're suggesting existing deposits facilitate the creation of loans. The entire BoE article is a repeated attempt at showing how loans create deposits. > Do you think that a bank which has NO MONEY is able to (in a practical sense) create infinite money out of thin air? Sure it can type "9999999999999 dollars" on a computer, but that wouldn't be "real money" in any practical sense, because you wouldn't be able to exchange it for goods and services. That's ... exactly how it works. If the bank believes you are good for 9999999999999 dollars over the term of the loan, they put +x in your demand deposit account, and -x in your loan account (and from bank's view those are respectively the bank's own liabilities and assets). You can then go and send that money (demand deposit) somewhere else to buy a house or whatever (goods and services). Bank A and bank B both have banking licences, which means they mutually trust using each other's customer demand deposit accounts as 'money'. You mentioned you wouldn't be able to exchange that for goods and services - but that's exactly what happens. You then need to find those dollars and pay back the loan eventually from a job or whatever, or else you go bankrupt. If you would like to turn that demand deposit into hard cash to keep under the mattress, your commercial bank will send your demand deposit to the commercial bank's account with the central bank, and the central bank will truck over some cash in return. I know you get this since you write it as IOUs in the article. What I'm trying to get across is that nothing has to precede the creation of the IOU, whereas I think you say an initial deposit of government-issued central bank money (cash) is required. > Follow-up question: if you genuinely believe this to be possible, then why isn't anybody doing that? Surely there are many people working at banks who would like to collude with their friends and family to create infinite money. If you believe that to be possible, why has it literally never happened? Try it :) I think odds are you end up in jail. And if a bank (or crypto exchange!) is in the business of writing crap to counterparties who can't pay them back, the bank probably goes out of business once everyone realizes the bank assets (loans) are garbage. Trying to get a loan without intention of paying it back is bank fraud. It happens and occasionally for very large sums; https://www.afr.com/companies/financial-services/papas-mazcon-received-16-5m-in-fraudulent-funds-westpac-alleges-20210811-p58hqd https://www.afr.com/companies/financial-services/papas-mazco... Further, regulators like to see banks hold capital against their assets to make sure they can fill the gap when some loans inevitably go bad. That capital could be retained earnings, shareholder capital, etc etc. It just doesn't have to come from an initial deposit.

by dools 4y ago

imtringued 4y ago

One thing that should raise an obvious flag is that if the bank lends your bank account balance, why isn't it telling you that you cannot withdraw or spend it? After all, that money is supposed to be in your or someone else's bank account! It can't be in both simultaneously. The only conclusion is that your bank account isn't actually your money but a bank's promise to pay you money and those promises are obviously created by the bank. The only confusion is over whether highly regulated promises that people use in their day to day activity as money substitute can be considered money or not. The classic "bank takes your deposit and lends it out" only applies to certificates of deposit, after all, you have no access to that money. You can't transfer or withdraw it until the agreed date.

baobabKoodaa 4y ago

> Can you describe how a bank uses money that it has to originate loans? Yes. If I take a loan out of a bank in physical banknotes, then the bank physically loses the amount of banknotes that I physically receive. Physical banknotes are not duplicated. If I take out 100 euros in physical banknotes, then the bank loses the corresponding 100 euros in physical banknotes. The bank does not magically create physical banknotes out of thin air. If I take a loan out of a bank in the form of electronic transfer to another bank, then usually one of 2 things happen: 1. The receiving bank requires the sending bank to settle all transfers that occurred throughout a timespan such as 1 day, by transferring reserves held at the central bank. For example, if the net outflow from bank A to bank B is +2M, then bank B would require bank A to transfer 2M of reserves to settle the transfers. Note that also in this case bank A loses the amount of money that it lent to me. Money wasn't duplicated. It was transferred out of the bank. or 2. The receiving bank B has looked through the books of sending bank A, they have a prior relationship, and bank B provides an unsecured loan to bank A. Note that if bank A actually had 0 money anywhere, then bank B wouldn't want to provide bank A an unsecured loan. In this case bank A does not lose physical banknotes, and does not lose reserves held at the central bank, but they still have to record the unsecured loan. In an accounting sense, they didn't magically gain "free money" by providing a loan to their customer. > This description of money creation contrasts with the notion that banks can only lend out pre-existing money, outlined in the previous section. Bank deposits are simply a record of how much the bank itself owes its customers. So they are a liability of the bank, not an asset that could be lent out I believe this is referring to the creation of the accounting entry. It's true in the most pedantic sense, which is incredibly misleading and unhelpful. Yes, when you type a number into a computer, you can type any number. If I were to open a business where I operate like a bank, taking deposits from people and loaning money to people, and I were to keep a ledger of how much money each person has at their "accounts" with me, I could type any number I want in that ledger. Let's say I type in "9999999999999 dollars". Sure, why not. If your argument is that one can type in any number they want on a computer, then that's true, but it's not a useful argument to make. Do you think that a bank which has NO MONEY is able to (in a practical sense) create infinite money out of thin air? Sure it can type "9999999999999 dollars" on a computer, but that wouldn't be "real money" in any practical sense, because you wouldn't be able to exchange it for goods and services. Follow-up question: if you genuinely believe this to be possible, then why isn't anybody doing that? Surely there are many people working at banks who would like to collude with their friends and family to create infinite money. If you believe that to be possible, why has it literally never happened?

qnt 4y ago
> Furthermore, it's not clear to me how you believe that the BoE article contradicts what I'm saying. I'm under the impression that you (along with most other people) are simply misunderstanding what you are reading here. The contradiction seems fundamental. You're suggesting existing deposits facilitate the creation of loans. The entire BoE article is a repeated attempt at showing how loans create deposits. > Do you think that a bank which has NO MONEY is able to (in a practical sense) create infinite money out of thin air? Sure it can type "9999999999999 dollars" on a computer, but that wouldn't be "real money" in any practical sense, because you wouldn't be able to exchange it for goods and services. That's ... exactly how it works. If the bank believes you are good for 9999999999999 dollars over the term of the loan, they put +x in your demand deposit account, and -x in your loan account (and from bank's view those are respectively the bank's own liabilities and assets). You can then go and send that money (demand deposit) somewhere else to buy a house or whatever (goods and services). Bank A and bank B both have banking licences, which means they mutually trust using each other's customer demand deposit accounts as 'money'. You mentioned you wouldn't be able to exchange that for goods and services - but that's exactly what happens. You then need to find those dollars and pay back the loan eventually from a job or whatever, or else you go bankrupt. If you would like to turn that demand deposit into hard cash to keep under the mattress, your commercial bank will send your demand deposit to the commercial bank's account with the central bank, and the central bank will truck over some cash in return. I know you get this since you write it as IOUs in the article. What I'm trying to get across is that nothing has to precede the creation of the IOU, whereas I think you say an initial deposit of government-issued central bank money (cash) is required. > Follow-up question: if you genuinely believe this to be possible, then why isn't anybody doing that? Surely there are many people working at banks who would like to collude with their friends and family to create infinite money. If you believe that to be possible, why has it literally never happened? Try it :) I think odds are you end up in jail. And if a bank (or crypto exchange!) is in the business of writing crap to counterparties who can't pay them back, the bank probably goes out of business once everyone realizes the bank assets (loans) are garbage. Trying to get a loan without intention of paying it back is bank fraud. It happens and occasionally for very large sums; https://www.afr.com/companies/financial-services/papas-mazcon-received-16-5m-in-fraudulent-funds-westpac-alleges-20210811-p58hqd https://www.afr.com/companies/financial-services/papas-mazco... Further, regulators like to see banks hold capital against their assets to make sure they can fill the gap when some loans inevitably go bad. That capital could be retained earnings, shareholder capital, etc etc. It just doesn't have to come from an initial deposit.