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> A commercial bank has a considerable amount of both assets and liabilities. In order to remain solvent, the asset side must exceed the liability side, and the

> A commercial bank has a considerable amount of both assets and liabilities. In order to remain solvent, the asset side must exceed the liability side, and they have various regulations placed on them to try to keep them as solvent as possible. The 'attempt to remain solvent' assumes that an insolvent bank isn't instantly marked as 'a fraudulent store of assets', in the same way that a parking garage that 'takes joyrides in its customers cars' can't really be called a 'properly functioning parking garage', even if most of the customers don't generally get inconvenienced by the joyriding. Banks that lend out _deposits_, for loans to others, who then deposit those loans as deposits, are _lying_ to their customers about the availability of the money, and in 'old times' was regarded as uninteresting, simple fraud, and the responsible parties were stripped of their banking certifications and publically shamed for the crime of stealing their customers assets. The fed is not to be taken seriously, though it can hurt you if you run afoul of it, and everyone who is affected by the dollar is kinda running afoul of it right now. :(

chrisbolt 4y ago
> Banks that lend out _deposits_, for loans to others, who then deposit those loans as deposits, are _lying_ to their customers about the availability of the money Isn’t this just fractional-reserve banking?
- throw0101a 4y ago
  >> Banks that lend out _deposits_, for loans to others, who then deposit those loans as deposits, are _lying_ to their customers about the availability of the money > Isn’t this just fractional-reserve banking? Yes, and it is no longer a thing, and it has not been for a while. Tobin call this the "Old View" in 1963: * https://elischolar.library.yale.edu/cowles-discussion-paper-series/388/ https://elischolar.library.yale.edu/cowles-discussion-paper-... For how things actually work in recent decades see: * 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...
JumpCrisscross 4y ago
> Banks that lend out _deposits_, for loans to others Banks don’t lend deposits. They create deposits through loans. Understanding that is far more fundamental than anything about the Fed.
- OscarCunningham 4y ago
  I think the way that people naively think banks work and the way that you think banks work are actually completely equivalent. The differences are only in what you call 'money' and how you do the accounting.
  - JumpCrisscross 4y ago
    > differences are only in what you call 'money' and how you do the accounting They are for first approximations. Someone leading a life with the deposits-lent-out-as-loans model will generally navigate the financial system fine, just like someone ignorant of general relativity or, frankly, time zones, can live happily. But the simple model breaks down when you consider how banks interact with each other, and what happens in crises. It totally disintegrates when you get to the central bank.
    - shadowgovt 4y ago
      Of all things, the thing that helped me understand this best was Terry Pratchett's novel Making Money. Without giving away the ending too hard: in the post-gold era, the value of a nation-state's currency has very little to do with numbers or tangibles and everything to do with the perceived power of the nation-state (although, of course, numbers and tangibles feed into that perception). The US is a huge outlier and it's hard to predict how things like "The central bank running a deficit" end up impacting the psyche of the financial decision-makers of the world.
  - throw0101a 4y ago
    No, they are no equivalent. Banks do not need deposits to create loans: * 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... * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625 * https://rationalreminder.ca/podcast/132 https://rationalreminder.ca/podcast/132 In may countries even reserves (requirements) are not needed: * https://en.wikipedia.org/wiki/Reserve_requirement#Countries_and_districts_without_reserve_requirements https://en.wikipedia.org/wiki/Reserve_requirement#Countries_...
lovich 4y ago
I think a critical point might be how the federal reserve is not a commercial bank

chrisbolt 4y ago

> Banks that lend out _deposits_, for loans to others, who then deposit those loans as deposits, are _lying_ to their customers about the availability of the money Isn’t this just fractional-reserve banking?

throw0101a 4y ago
>> Banks that lend out _deposits_, for loans to others, who then deposit those loans as deposits, are _lying_ to their customers about the availability of the money > Isn’t this just fractional-reserve banking? Yes, and it is no longer a thing, and it has not been for a while. Tobin call this the "Old View" in 1963: * https://elischolar.library.yale.edu/cowles-discussion-paper-series/388/ https://elischolar.library.yale.edu/cowles-discussion-paper-... For how things actually work in recent decades see: * 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...

JumpCrisscross 4y ago

> Banks that lend out _deposits_, for loans to others Banks don’t lend deposits. They create deposits through loans. Understanding that is far more fundamental than anything about the Fed.

OscarCunningham 4y ago
I think the way that people naively think banks work and the way that you think banks work are actually completely equivalent. The differences are only in what you call 'money' and how you do the accounting.
- JumpCrisscross 4y ago
  > differences are only in what you call 'money' and how you do the accounting They are for first approximations. Someone leading a life with the deposits-lent-out-as-loans model will generally navigate the financial system fine, just like someone ignorant of general relativity or, frankly, time zones, can live happily. But the simple model breaks down when you consider how banks interact with each other, and what happens in crises. It totally disintegrates when you get to the central bank.
  - shadowgovt 4y ago
    Of all things, the thing that helped me understand this best was Terry Pratchett's novel Making Money. Without giving away the ending too hard: in the post-gold era, the value of a nation-state's currency has very little to do with numbers or tangibles and everything to do with the perceived power of the nation-state (although, of course, numbers and tangibles feed into that perception). The US is a huge outlier and it's hard to predict how things like "The central bank running a deficit" end up impacting the psyche of the financial decision-makers of the world.
- throw0101a 4y ago
  No, they are no equivalent. Banks do not need deposits to create loans: * 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... * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625 * https://rationalreminder.ca/podcast/132 https://rationalreminder.ca/podcast/132 In may countries even reserves (requirements) are not needed: * https://en.wikipedia.org/wiki/Reserve_requirement#Countries_and_districts_without_reserve_requirements https://en.wikipedia.org/wiki/Reserve_requirement#Countries_...

lovich 4y ago

I think a critical point might be how the federal reserve is not a commercial bank