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Of course banks are lending deposits. They're throwing in some investor money too but vast majority of loans they write is using deposits. You can try to make s

Of course banks are lending deposits. They're throwing in some investor money too but vast majority of loans they write is using deposits. You can try to make some sort of "number on screen go up" argument, btu the underlying value comes from somewhere. When someone takes a loan and withdraws dollars they're usually getting money that was deposited by a customer.

wonnage 4y ago
That's a misunderstanding - when a bank originates a loan: - the bank records an asset (the loan) and a liability (the deposit in the borrower's account) - the borrower records an asset (the loan money now deposited at the bank) and a liability (the loan) https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-... At this point the money literally came out of thin air, there's more total currency in the system then there was before. It might seem like an irrelevant nuance but it's pretty important to understanding how the money supply works
- HDThoreaun 4y ago
  except people withdraw money and the bank needs to give those people actual cash. That's deposits. Of course they could take overnight loans or whatnot but deposits are cheaper.
  - nosianu 4y ago
    The vast majority of money is not withdrawn. It's all transfers. And that is a major point and difference. Also, if it was all withdrawn it's a bank run, which has not been a problem in the US for quite a while. Overall it cancels out for the large banks, of course people transfer money they just borrowed from the bank away, but that bank also has customers that are recipients of money. That, and other mechanisms between banks and banks and central bank(s) to balance such things within all the banks in the overall economy. Money withdrawn from one bank goes to another one, and everybody is not just sender but also recipient from someone else.
    - HDThoreaun 4y ago
      I am responding to a post that said > Bank lending always creates new money. They don’t (and can’t) “lend deposits”. It's just not true. The banks do transfer literal cash from deposits out of the system through loans. The cash in banks didn't come from thin air.
      - dools 4y ago
        Well, even reserve balances are created out of thin air… it’s all just accounting
      - nosianu 4y ago
        > The cash in banks Why do you keep insisting on the "cash"? The by far least important kind of money? First of all everything is just virtual, electronic. Only a tiny fraction - and only temporary! It's not stocked at home, but used to buy something and that means deposited again in another bank - is "cash". And yes, the bank deposits are "out of thin air" -- 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... Yes banks need some reserves, but this is waayyyy more complicated than them using the deposits. Which, for the most part, are not cash. That's only that tiny fraction of paper money use din circulation, which also is a lot less than it used to be with all the card-money. https://www.bankofengland.co.uk/explainers/what-is-money https://www.bankofengland.co.uk/explainers/what-is-money In the UK, as an example: > 96% is electronic > 4% is cash USD is different because that currency is used for far more than just regular circulation, and world-wide. But even then estimates are ca. 8% cash maximum, for the world, which includes a lot less sophisticated economies. A bit more for the USD for obvious reasons, but most of that is not circulating in the US economy. In any case, even in the US, with all its cards and card payments, money is mostly electronic and not cash and is transferred from bank to bank and hardly leaves the banking system. ABOUT THAT TERM "OUT OF THIN AIR" I've seen articles arguing money is not create out of thin air, e.g. https://cepr.org/voxeu/columns/banks-do-not-create-money-out-thin-air https://cepr.org/voxeu/columns/banks-do-not-create-money-out... > commercial banks create private money by transforming an illiquid asset (the borrower’s future ability to repay) into a liquid one (bank deposits); they would quickly be insolvent otherwise Uhm.. yes, exactly. They can't do it at will, they need a borrower to sign. I mean, now we start arguing definitions, always a bad sign, especially when both sides actually are in perfect agreement and it's about the words used. This article to me is just weird, arguing it's not out of thin air, while everything being described says just that, only that their understanding of "out of thin air" is subjectively different than that of many other people. But there is no difference in knowledge and opinion about the underlying mechanism, only disagreement about some fuzzy term that some like to use and some apparently hate for whatever reason. For arguments about definitions I would like to point to "Disputing Definitions" (6 min read) https://www.lesswrong.com/posts/7X2j8HAkWdmMoS8PE/disputing-definitions https://www.lesswrong.com/posts/7X2j8HAkWdmMoS8PE/disputing-...
  - fps 4y ago
    Banks don't hold substantial cash. They send whatever cash they collect to the local federal reserve to be recycled and get fresh cash to hand out to people every morning from the same federal reserve. I don't think I've gotten a "used" bill from a bank in over a decade.
- beowulfey 4y ago
  But is it real? It’s more like an IOU, right? They don’t reduce the amount of money in the depositor’s account, but if the loan defaults would they be able to return the money to the depositor? My guess is no, not really (assuming no other outside cash sources). So even though the amount of currency looks like it has increased, it hasn’t really… unless I’m misunderstanding still. But my impression is this is pretty much what happened yesterday with SVB.
  - elcomet 4y ago
    Money is not "real" so you can consider this IOU is actually money. And if everyone agrees then it is.
  - alangibson 4y ago
    Your misunderstanding is around what money really is: it's just an accounting unit. It's literally a number in a database somewhere. It's very hard for people to accept this because of how most people basically trade 1/3 of their lives to get some. It just doesn't "feel right" Currency is just a physical representation of that unit.
    - beowulfey 4y ago
      Am I wrong though that if the loan were to default and the depositor tried to withdraw all 1000, the bank wouldn’t be able to return it? Perhaps because of the insurance from central banks this problem is avoided.
      - alangibson 4y ago
        That's wrong. The loan amount was never anything but a number that someone at the bank punched into a database. It doesn't have anything directly to do with someone else withdrawing their own money. If the bank is giving cash to the withdrawer, that would come out of their capital reserve I guess. If they didn't have that, they FDIC insurance would kick in.
        4y ago
fauigerzigerk 4y ago
So let's assume a bank has collected deposits worth £1000 from all of its customers. Now the bank makes a loan of £100 to one of its customers and puts the money into the customer's current account at the bank. According to your theory, what is the total amount of deposits at this bank after making the loan? If, as you say, banks were lending deposits, then the total amount of deposits cannot possibly have changed and that new loan of £100 would have to come out of some other customer's bank account. I would be pissed if my bank account balance suddenly dropped and the bank told me, sorry we have lent your money to someone else. So this is clearly not what's happening.
- HDThoreaun 4y ago
  They give your money to that guy. And he puts it in his account at the bank and they give it back to you. The money is still real though. Without the deposits they could not make any loans to begin with. If someone comes to take out a loan for $1000 and withdraw the money what would happen? They'd go get the money everyone left there and give it to the new customer. Now they bank has no money because they just lent all the deposits. $1100 in deposits and $1100 in loans
  - dools 4y ago
    “ Without the deposits they could not make any loans to begin with.” Incorrect, banks create deposits when they issue loans and only require reserve balances sufficient to satisfy net flows of funds between institutions. They can also borrow those reserves. So deposits are required to increase profitability, and of course a minimum level of profitability is required to be solvent, but banks in now way “lend out deposits”.
    - NovemberWhiskey 4y ago
      If you actually believe this describes the process then follow me on this thought experiment. TWB (unrelated to SVB) realizes that it’s in trouble - customers are taking a lot of their deposits out, and confidence in the institution is low. So, instead of trying to liquidate some of their assets or raise capital (which is what would be conventional) they decide to lend their bank president a trillion dollars of interest free loan with a recall feature, on the contingency that he deposit it in a non-interest bearing account with a 300 year notice requirement. In your understanding of the mechanics of banking; this is fine. The bank magics $1tn of deposits out of thin air, records an equivalent asset, and can then just pay all of their customers from these new deposits they have. Or not? And if not, why not?
jacquesm 4y ago
In your worldview, where does the money a bank needs to operate from? In your worldview, can you explain how it is possible for a bank to have far more loans on their books than they have deposits (see: fractional reserve banking)?
- nordsieck 4y ago
  > In your worldview, where does the money a bank needs to operate from? The answer in the US is simple: the Fed. A bank can make an infinite amount of loans. They are not constrained by anything. The only "limitation" they have is the future default rate of the people who accept loans from them. The way a loan works is: they make a loan to someone and then "just in time", they borrow the money from the Fed to cover that loan. Now, many banks take customer deposits. I think there are 2 reasons they do that: 1. Deposits may be less expensive than borrowing from the Fed. 2. Account holders are warm leads for future loans. But in principle, a bank doesn't have to take any deposits.
  - NovemberWhiskey 4y ago
    >The way a loan works is: they make a loan to someone and then "just in time", they borrow the money from the Fed to cover that loan. Ehhh, how does that work exactly? They go up to the discount window and borrow from the Fed every time they issue a loan?
    - nordsieck 4y ago
      > how does that work exactly? I don't know. I don't work at a bank. But loans aren't typically available immediately - they take time to clear. It doesn't seem unreasonable to me that they'd bundle the day's loans (or maybe a few hours at a very large bank) to limit the number of transactions they'd have to make.
    - alangibson 4y ago
      The money that gets borrowed from the Fed is used to settle balances between banks. When a bank originates a loan, they just add a number to an account. The money doesn't come from anywhere. This works mainly because most money transfers are electronic. tl;dr yes, banks create money out of thin air. It's been this way for decades.

wonnage 4y ago

That's a misunderstanding - when a bank originates a loan: - the bank records an asset (the loan) and a liability (the deposit in the borrower's account) - the borrower records an asset (the loan money now deposited at the bank) and a liability (the loan) https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-... At this point the money literally came out of thin air, there's more total currency in the system then there was before. It might seem like an irrelevant nuance but it's pretty important to understanding how the money supply works

HDThoreaun 4y ago
except people withdraw money and the bank needs to give those people actual cash. That's deposits. Of course they could take overnight loans or whatnot but deposits are cheaper.
- nosianu 4y ago
  The vast majority of money is not withdrawn. It's all transfers. And that is a major point and difference. Also, if it was all withdrawn it's a bank run, which has not been a problem in the US for quite a while. Overall it cancels out for the large banks, of course people transfer money they just borrowed from the bank away, but that bank also has customers that are recipients of money. That, and other mechanisms between banks and banks and central bank(s) to balance such things within all the banks in the overall economy. Money withdrawn from one bank goes to another one, and everybody is not just sender but also recipient from someone else.
  - HDThoreaun 4y ago
    I am responding to a post that said > Bank lending always creates new money. They don’t (and can’t) “lend deposits”. It's just not true. The banks do transfer literal cash from deposits out of the system through loans. The cash in banks didn't come from thin air.
    - dools 4y ago
      Well, even reserve balances are created out of thin air… it’s all just accounting
    - nosianu 4y ago
      > The cash in banks Why do you keep insisting on the "cash"? The by far least important kind of money? First of all everything is just virtual, electronic. Only a tiny fraction - and only temporary! It's not stocked at home, but used to buy something and that means deposited again in another bank - is "cash". And yes, the bank deposits are "out of thin air" -- 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... Yes banks need some reserves, but this is waayyyy more complicated than them using the deposits. Which, for the most part, are not cash. That's only that tiny fraction of paper money use din circulation, which also is a lot less than it used to be with all the card-money. https://www.bankofengland.co.uk/explainers/what-is-money https://www.bankofengland.co.uk/explainers/what-is-money In the UK, as an example: > 96% is electronic > 4% is cash USD is different because that currency is used for far more than just regular circulation, and world-wide. But even then estimates are ca. 8% cash maximum, for the world, which includes a lot less sophisticated economies. A bit more for the USD for obvious reasons, but most of that is not circulating in the US economy. In any case, even in the US, with all its cards and card payments, money is mostly electronic and not cash and is transferred from bank to bank and hardly leaves the banking system. ABOUT THAT TERM "OUT OF THIN AIR" I've seen articles arguing money is not create out of thin air, e.g. https://cepr.org/voxeu/columns/banks-do-not-create-money-out-thin-air https://cepr.org/voxeu/columns/banks-do-not-create-money-out... > commercial banks create private money by transforming an illiquid asset (the borrower’s future ability to repay) into a liquid one (bank deposits); they would quickly be insolvent otherwise Uhm.. yes, exactly. They can't do it at will, they need a borrower to sign. I mean, now we start arguing definitions, always a bad sign, especially when both sides actually are in perfect agreement and it's about the words used. This article to me is just weird, arguing it's not out of thin air, while everything being described says just that, only that their understanding of "out of thin air" is subjectively different than that of many other people. But there is no difference in knowledge and opinion about the underlying mechanism, only disagreement about some fuzzy term that some like to use and some apparently hate for whatever reason. For arguments about definitions I would like to point to "Disputing Definitions" (6 min read) https://www.lesswrong.com/posts/7X2j8HAkWdmMoS8PE/disputing-definitions https://www.lesswrong.com/posts/7X2j8HAkWdmMoS8PE/disputing-...
- fps 4y ago
  Banks don't hold substantial cash. They send whatever cash they collect to the local federal reserve to be recycled and get fresh cash to hand out to people every morning from the same federal reserve. I don't think I've gotten a "used" bill from a bank in over a decade.
beowulfey 4y ago
But is it real? It’s more like an IOU, right? They don’t reduce the amount of money in the depositor’s account, but if the loan defaults would they be able to return the money to the depositor? My guess is no, not really (assuming no other outside cash sources). So even though the amount of currency looks like it has increased, it hasn’t really… unless I’m misunderstanding still. But my impression is this is pretty much what happened yesterday with SVB.
- elcomet 4y ago
  Money is not "real" so you can consider this IOU is actually money. And if everyone agrees then it is.
- alangibson 4y ago
  Your misunderstanding is around what money really is: it's just an accounting unit. It's literally a number in a database somewhere. It's very hard for people to accept this because of how most people basically trade 1/3 of their lives to get some. It just doesn't "feel right" Currency is just a physical representation of that unit.
  - beowulfey 4y ago
    Am I wrong though that if the loan were to default and the depositor tried to withdraw all 1000, the bank wouldn’t be able to return it? Perhaps because of the insurance from central banks this problem is avoided.
    - alangibson 4y ago
      That's wrong. The loan amount was never anything but a number that someone at the bank punched into a database. It doesn't have anything directly to do with someone else withdrawing their own money. If the bank is giving cash to the withdrawer, that would come out of their capital reserve I guess. If they didn't have that, they FDIC insurance would kick in.
      - 4y ago

fauigerzigerk 4y ago

So let's assume a bank has collected deposits worth £1000 from all of its customers. Now the bank makes a loan of £100 to one of its customers and puts the money into the customer's current account at the bank. According to your theory, what is the total amount of deposits at this bank after making the loan? If, as you say, banks were lending deposits, then the total amount of deposits cannot possibly have changed and that new loan of £100 would have to come out of some other customer's bank account. I would be pissed if my bank account balance suddenly dropped and the bank told me, sorry we have lent your money to someone else. So this is clearly not what's happening.

HDThoreaun 4y ago
They give your money to that guy. And he puts it in his account at the bank and they give it back to you. The money is still real though. Without the deposits they could not make any loans to begin with. If someone comes to take out a loan for $1000 and withdraw the money what would happen? They'd go get the money everyone left there and give it to the new customer. Now they bank has no money because they just lent all the deposits. $1100 in deposits and $1100 in loans
- dools 4y ago
  “ Without the deposits they could not make any loans to begin with.” Incorrect, banks create deposits when they issue loans and only require reserve balances sufficient to satisfy net flows of funds between institutions. They can also borrow those reserves. So deposits are required to increase profitability, and of course a minimum level of profitability is required to be solvent, but banks in now way “lend out deposits”.
  - NovemberWhiskey 4y ago
    If you actually believe this describes the process then follow me on this thought experiment. TWB (unrelated to SVB) realizes that it’s in trouble - customers are taking a lot of their deposits out, and confidence in the institution is low. So, instead of trying to liquidate some of their assets or raise capital (which is what would be conventional) they decide to lend their bank president a trillion dollars of interest free loan with a recall feature, on the contingency that he deposit it in a non-interest bearing account with a 300 year notice requirement. In your understanding of the mechanics of banking; this is fine. The bank magics $1tn of deposits out of thin air, records an equivalent asset, and can then just pay all of their customers from these new deposits they have. Or not? And if not, why not?

jacquesm 4y ago

In your worldview, where does the money a bank needs to operate from? In your worldview, can you explain how it is possible for a bank to have far more loans on their books than they have deposits (see: fractional reserve banking)?

nordsieck 4y ago
> In your worldview, where does the money a bank needs to operate from? The answer in the US is simple: the Fed. A bank can make an infinite amount of loans. They are not constrained by anything. The only "limitation" they have is the future default rate of the people who accept loans from them. The way a loan works is: they make a loan to someone and then "just in time", they borrow the money from the Fed to cover that loan. Now, many banks take customer deposits. I think there are 2 reasons they do that: 1. Deposits may be less expensive than borrowing from the Fed. 2. Account holders are warm leads for future loans. But in principle, a bank doesn't have to take any deposits.
- NovemberWhiskey 4y ago
  >The way a loan works is: they make a loan to someone and then "just in time", they borrow the money from the Fed to cover that loan. Ehhh, how does that work exactly? They go up to the discount window and borrow from the Fed every time they issue a loan?
  - nordsieck 4y ago
    > how does that work exactly? I don't know. I don't work at a bank. But loans aren't typically available immediately - they take time to clear. It doesn't seem unreasonable to me that they'd bundle the day's loans (or maybe a few hours at a very large bank) to limit the number of transactions they'd have to make.
  - alangibson 4y ago
    The money that gets borrowed from the Fed is used to settle balances between banks. When a bank originates a loan, they just add a number to an account. The money doesn't come from anywhere. This works mainly because most money transfers are electronic. tl;dr yes, banks create money out of thin air. It's been this way for decades.