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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

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_...
- OscarCunningham 4y ago
  They can create an account for the borrower with a balance in it. But as soon as the borrower actually pays that money to someone else (with an account at a different bank) then it has to come from somewhere, i.e. deposits. Of course it could come from numerous other sources (e.g. interbank lending) but the naive view also agrees that banks deal with a variety of financial instruments.
  - CraigJPerry 4y ago
    >> then it has to come from somewhere, i.e. deposits. It’s more complicated than that. If i use a loan to pay you and we’re both using the same bank, it’s no different to marking down the number in column A and marking up column B. It’s only when we’re at different banks it changes, now my bank needs enough reserves to transfer to your bank. It can never not have enough reserves though because the central bank will always and without limit, lend it however much reserves it needs via the discount window. Long way to say the money doesn’t have to come from anywhere. >> interbank lending not in a post GFC world, that’s one of the reasons we have the reserves situation today. This all has happened before which people often forget. Eg it’s common for people to think Quantative easing is a new concept and yet its only the term is new, the idea is as old as banking systems.
    - OscarCunningham 4y ago
      Likewise in the naive view, if the central bank loans a commercial bank a bunch of cash, then the commercial bank can use that cash to make loans.
      - CraigJPerry 4y ago
        That doesn’t hold - the central bank could loan all the cash (really we mean reserves) it wants and the bank still be unable to make a loan. Because the bank cannot break its capital requirements and the central bank can do nothing to help that situation. Similarly the central bank could loan nothing and the commerical bank could loan millions.

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_...

OscarCunningham 4y ago
They can create an account for the borrower with a balance in it. But as soon as the borrower actually pays that money to someone else (with an account at a different bank) then it has to come from somewhere, i.e. deposits. Of course it could come from numerous other sources (e.g. interbank lending) but the naive view also agrees that banks deal with a variety of financial instruments.
- CraigJPerry 4y ago
  >> then it has to come from somewhere, i.e. deposits. It’s more complicated than that. If i use a loan to pay you and we’re both using the same bank, it’s no different to marking down the number in column A and marking up column B. It’s only when we’re at different banks it changes, now my bank needs enough reserves to transfer to your bank. It can never not have enough reserves though because the central bank will always and without limit, lend it however much reserves it needs via the discount window. Long way to say the money doesn’t have to come from anywhere. >> interbank lending not in a post GFC world, that’s one of the reasons we have the reserves situation today. This all has happened before which people often forget. Eg it’s common for people to think Quantative easing is a new concept and yet its only the term is new, the idea is as old as banking systems.
  - OscarCunningham 4y ago
    Likewise in the naive view, if the central bank loans a commercial bank a bunch of cash, then the commercial bank can use that cash to make loans.
    - CraigJPerry 4y ago
      That doesn’t hold - the central bank could loan all the cash (really we mean reserves) it wants and the bank still be unable to make a loan. Because the bank cannot break its capital requirements and the central bank can do nothing to help that situation. Similarly the central bank could loan nothing and the commerical bank could loan millions.