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>> 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 d
by 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 agoLikewise 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 agoThat 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.
- throw0101a 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. Define "cash". What the central bank gives to banks is not the money you and I use: what is given is not something that can be turned around and used in a business loan or a residential mortgage. What the central bank 'gives' banks is simply a credit in their reserve account for inter-bank settlements. And having more reserves makes little difference in the creation loans, as (as mentioned before) some places don't even have reserve requirements: * https://en.wikipedia.org/wiki/Reserve_requirement#Countries_and_districts_without_reserve_requirements https://en.wikipedia.org/wiki/Reserve_requirement#Countries_...