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That’s a good a question, understanding why banks want deposits was hard for me to understand in this model. My current understanding is that taking deposits is

That’s a good a question, understanding why banks want deposits was hard for me to understand in this model. My current understanding is that taking deposits is a cheap source of funding for the bank. They could borrow required reserves from elsewhere but it’s cheaper to take it from customers who accept low interest rates. For the second part, I agree that if you bring $500k cash to your bank and deposit it, then that asset is real and it basically goes into the bank vault. But that is not the typical case. Most deposits do not come from putting cash in the bank (after all, the amount of cash/central bank reserves is much smaller than the amount of bank deposits). Most of them are just an IOU from the bank and we use these IOUs as the most frequent form of money.

RC_ITR 4y ago
>My current understanding is that taking deposits is a cheap source of funding for the bank. They could borrow required reserves from elsewhere but it’s cheaper to take it from customers who accept low interest rates. Yeah, why it's confusing to you is that you're segregating "borrowing from capital markets" from "borrowing from depositors" when they are effectively the same thing (both are interest-bearing liabilities). >For the second part, I agree that if you bring $500k cash to your bank and deposit it, then that asset is real and it basically goes into the bank vault. I suggest you google 'fractional reserves,' because no, the money does not go into a bank vault (though some of it does!). > Most of them are just an IOU from the bank and we use these IOUs as the most frequent form of money. The logical fallacy here is that you're seeing how many IOUs there are (many) and how many cash dollars there are (much fewer!) and then assume that IOUs don't have to be attached to a physical dollar but they do (keep in mind, a physical dollar could just be a line item on The Treasury's balance sheet, it doesn't have to be paper) It's just that many IOUs can be attached to the same dollar through the credit multiplier.

RC_ITR 4y ago

>My current understanding is that taking deposits is a cheap source of funding for the bank. They could borrow required reserves from elsewhere but it’s cheaper to take it from customers who accept low interest rates. Yeah, why it's confusing to you is that you're segregating "borrowing from capital markets" from "borrowing from depositors" when they are effectively the same thing (both are interest-bearing liabilities). >For the second part, I agree that if you bring $500k cash to your bank and deposit it, then that asset is real and it basically goes into the bank vault. I suggest you google 'fractional reserves,' because no, the money does not go into a bank vault (though some of it does!). > Most of them are just an IOU from the bank and we use these IOUs as the most frequent form of money. The logical fallacy here is that you're seeing how many IOUs there are (many) and how many cash dollars there are (much fewer!) and then assume that IOUs don't have to be attached to a physical dollar but they do (keep in mind, a physical dollar could just be a line item on The Treasury's balance sheet, it doesn't have to be paper) It's just that many IOUs can be attached to the same dollar through the credit multiplier.