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There is allot of financial illiteracy regarding the banking system. For example, heard an NPR reporter this morning talking about a bank not having money to lo

There is allot of financial illiteracy regarding the banking system. For example, heard an NPR reporter this morning talking about a bank not having money to loan because of depositors fleeing. These are vestiges of the Gold standard. There is no loanable funds market. That is, the funding for loans does not come from deposits. It comes from thin air. Banks create loans which then become deposits. So called "Bank Money" . In order to create loans and stay in the lending business, banks are required to have certain levels of capital. * The Fed has control of quantity of money . No. The Fed controls the direction of interest rates via interest rate policy or simply put the Fed determines the price of money.

dancingvoid 4y ago
I’ll add that the reserve requirement is currently zero. https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
- zhte415 4y ago
  It might be worth adding that regulatory capital requirements are not zero: https://www.federalreserve.gov/publications/large-bank-capital-requirements-20210805.htm https://www.federalreserve.gov/publications/large-bank-capit...
vishnugupta 4y ago
+1. To add, the vast amount of money that's circulating is created by banks. As I keep harping, refer to this article by BoE for details. 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...
anononaut 4y ago
I'll add that approximately 97% of US dollars are created in this way. https://positivemoney.org/how-money-%20works/how-banks-%20create-money/ https://positivemoney.org/how-money-%20works/how-banks-%20cr...
O__________O 4y ago
Stating obvious, this is only true until debts exceed a leverage US government has to inject currency it magically creates or utilize other financial tools it has available. At the point they are unable to do so, that’s no longer the case, system reaches a critical point for which recovery will take real assets at fair market value on the global market. Ironically, US’s down fall may be its own failure to believe itself.
- bubbleRefuge 4y ago
  If Banks make bad loans and those loans( or investments) are marked to market bringing the bank out of compliance with Capital requirements, then it gets shutdown.
  - jessaustin 4y ago
    That's the theory, but does anyone still believe it? In USA now, and for at least the last 15 years, those wealthy enough to hire lobbyists always get bailed out. This week was an opportunity to improve that situation, merely by allowing FDIC to operate in its normal lawful fashion. Small deposits protected entirely, large deposits receive their share of liquidated assets, shareholder equity disappears. Easy and lawful. Saule Omarova, had she been confirmed, would have pushed for this. (If better OCC regulation under her leadership hadn't avoided this situation entirely.) Suddenly it's obvious why she was not confirmed...
2143 4y ago
I just don't get this about the system in the US. If you keep creating money out of thin air — which as per my admittedly naive understanding is equivalent to just printing money without giving back anything in return — wouldn't it ultimately lead to a collapse or a hyper inflation? Like it did in Venezuela a few years ago (???). Why is the US seemingly immune to this kind of thing?
- HWR_14 4y ago
  In US the fed determines how much money is printed. The EU, UK, Japan, Switzerland, and China have similar central banks. Most countries do, but those are some major players (I left some out). Basically, if you print the right amount of money, it works. So they get smart Econ experts to guess how much money to print. And as long as they get close enough it doesn't cause hyperinflation.
  - CraigJPerry 4y ago
    This isn’t an accurate description of the mechanics of money printing in the US, the UK or the EU.
    - HWR_14 4y ago
      Interpreting "printing money" to replace the more technical "controlling the size of the monetary base[1]" seems reasonable. How is that incorrect? Unless you're talking about literal printing press operations, "the fed tries to tweak the money supply to control inflation as one of its dual mandates" seems like an absolute correct, if simple, explanation of why we don't have hyperinflation. (I know tone is hard to convey. I am serious about learning if I have a misunderstanding) [1] https://www.stlouisfed.org/on-the-economy/2018/july/federal-reserve-control-supply-money https://www.stlouisfed.org/on-the-economy/2018/july/federal-...
      - CraigJPerry 4y ago
        >> Interpreting "printing money" to replace the more technical "controlling the size of the monetary base[1]" These are different things. Printed money is cash (or currency) and it represents a small amount of the total money in use, just under 3% in the UK. I don't have the figure to hand for the US but it's comparable, less than an order of magnitude difference. Printing money isn't a significant driver of the size of the monetary base, currency is (more or less) printed to replace the notes & coins that are guessed to have been lost or damaged. Talk about printing money, especially as a means to expand the monetary base, is usually misguided. The monetary base consists of currency in circulation + reserve balances. Reserve balances in the US, since March 2020 (Fed reserve requirements changed to 0%), refers only to the balance recorded in the account at the central bank for a given commerical bank (or other approved user of reserves). Reserves are money but they're a special kind of money that can't be spent in the economy. They're only usable by the central bank and institutions who are licenced to hold reserves at the central bank (predominantly commercial banks). They're not phyiscal (reserves used to include actual cash in the vault back when there were reserve requirements). Reserves, like most money today, just exist as rows in a DB on a computer. There's an unlimited supply of reserves available to commercial banks (via the discount window), they are created on demand as needed from nothing by the central bank and charged at the discount rate in unlimited supply. A commercial bank today cannot run out of reserves. >> the fed tries to tweak the money supply The fed doesn't control much of the money supply, most of our money is created as commercial banks issue new loans. There's a common misunderstanding that commercial banks operate as intermediaries lending deposits, but they don't.
zhte415 4y ago
> There is allot of financial illiteracy regarding the banking system. And nor does the balance sheet become inexplicably unbalanced. It issues bills, a liability, which will cancel out as an asset unless it sells them, or takes a value from it's balance sheet capital, or gets interbank funding (which still balances, because that's another bank's asset). You're not wrong a bank can fund it's lending, indeed there's that often cited BoE paper all about it, but that funding doesn't come from thin air.
- bubbleRefuge 4y ago
  The accounting is like this. Bank A is in compliance for the current period of time under examination (capital requirments and reserve requirements). Bank A makes a loan L1 to person B. This is a contract. Bank A has an asset in L1 on its balance sheet(this improves its capital ratio) and person B has L1 on her balance sheet as a liability. Person B makes a deposit of L1 amount into Bank B. Bank B has a liability of L1. Person B has an asset of L1 which is her deposit which she owns. Finally, Bank A makes a reserve payment to Bank B of L1. These reserves come out of the reserve account that each bank has at the Fed. The reserves maybe borrowed in the Federal Funds market on demand so long as the bank is in compliance.
Acumen321 4y ago
This is a very popular but false 'take the gist of it as true' misunderstanding. Yes, banks do "create" money. No, it is not out of thin air. It absolutely does come from deposits. An example of how banks "create" money, is person A has $100. A deposits it. The bank lends that $100 to B. Now B has $100, but A also still thinks they have $100, even though they just have a number on a piece of paper. They system goes from acting as if $100 exists, to acting as if $200 exists, but really there is only $100, and an IOU for $100. That is what bank money "creation" is. It is not from thin air. People get confused because "money", as in fiat currency, is also a Government IOU. But the above principle is true for gold, bitcoin, or any asset, and they wouldn't get mixed up the same way thinking banks create gold out of thin air. It is a starkly different thing than how the Government creates money.
- bubbleRefuge 4y ago
  There is not a dependency on deposits in order create loans. This is false. Banks can make loans to the extend of demand for loans at the banks terms. Deposits have nothing to do with it in terms of funding. The bank must be in compliance with capital requirements and reserve requirement in order to be in the federal reserve system . As Mosler says (founder of MMT) The loan guy does not call the deposit guy at the bank before making a loan.
  - Acumen321 4y ago
    The loan guy absolutely does need to make sure the bank has the cash to make the loan. You can't loan more money than you have. What happens when B goes to withdraw it from the bank to buy a car or house if it isn't there? If banks can loan more than they have by say borrowing the money at a lower rate than they lend it, that invalidates your basic premise of banks creating money. They wouldn't have created it, they would have borrowed it.
    - bubbleRefuge 4y ago
      see my other reply on the balance sheet operations above.
makomk 4y ago
Banks do create money out of thin air, but depositors fleeing does in fact limit their ability to loan money. Here's how that works: every time a bank loans money, they create an asset (the repayment they're owed) and a matching liability (the actual money sitting in someone's account). So long as this stays within the bank or outflows match with inflows, everything works. However, if money starts flowing out of the bank overall for whatever reason then the trick no longer works - and that includes if the money is being transferred out by customers other than the ones being lent to, such as their employees or suppliers. The main consequences of this are usually that one bank can't be substantially more aggressive in lending or offer substantially different interest rates than everone else, which of course affects demand to borrow money from the bank.

dancingvoid 4y ago

I’ll add that the reserve requirement is currently zero. https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm

zhte415 4y ago
It might be worth adding that regulatory capital requirements are not zero: https://www.federalreserve.gov/publications/large-bank-capital-requirements-20210805.htm https://www.federalreserve.gov/publications/large-bank-capit...

vishnugupta 4y ago

+1. To add, the vast amount of money that's circulating is created by banks. As I keep harping, refer to this article by BoE for details. 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...

anononaut 4y ago

I'll add that approximately 97% of US dollars are created in this way. https://positivemoney.org/how-money-%20works/how-banks-%20create-money/ https://positivemoney.org/how-money-%20works/how-banks-%20cr...

O__________O 4y ago

Stating obvious, this is only true until debts exceed a leverage US government has to inject currency it magically creates or utilize other financial tools it has available. At the point they are unable to do so, that’s no longer the case, system reaches a critical point for which recovery will take real assets at fair market value on the global market. Ironically, US’s down fall may be its own failure to believe itself.

bubbleRefuge 4y ago
If Banks make bad loans and those loans( or investments) are marked to market bringing the bank out of compliance with Capital requirements, then it gets shutdown.
- jessaustin 4y ago
  That's the theory, but does anyone still believe it? In USA now, and for at least the last 15 years, those wealthy enough to hire lobbyists always get bailed out. This week was an opportunity to improve that situation, merely by allowing FDIC to operate in its normal lawful fashion. Small deposits protected entirely, large deposits receive their share of liquidated assets, shareholder equity disappears. Easy and lawful. Saule Omarova, had she been confirmed, would have pushed for this. (If better OCC regulation under her leadership hadn't avoided this situation entirely.) Suddenly it's obvious why she was not confirmed...

2143 4y ago

I just don't get this about the system in the US. If you keep creating money out of thin air — which as per my admittedly naive understanding is equivalent to just printing money without giving back anything in return — wouldn't it ultimately lead to a collapse or a hyper inflation? Like it did in Venezuela a few years ago (???). Why is the US seemingly immune to this kind of thing?

HWR_14 4y ago
In US the fed determines how much money is printed. The EU, UK, Japan, Switzerland, and China have similar central banks. Most countries do, but those are some major players (I left some out). Basically, if you print the right amount of money, it works. So they get smart Econ experts to guess how much money to print. And as long as they get close enough it doesn't cause hyperinflation.
- CraigJPerry 4y ago
  This isn’t an accurate description of the mechanics of money printing in the US, the UK or the EU.
  - HWR_14 4y ago
    Interpreting "printing money" to replace the more technical "controlling the size of the monetary base[1]" seems reasonable. How is that incorrect? Unless you're talking about literal printing press operations, "the fed tries to tweak the money supply to control inflation as one of its dual mandates" seems like an absolute correct, if simple, explanation of why we don't have hyperinflation. (I know tone is hard to convey. I am serious about learning if I have a misunderstanding) [1] https://www.stlouisfed.org/on-the-economy/2018/july/federal-reserve-control-supply-money https://www.stlouisfed.org/on-the-economy/2018/july/federal-...
    - CraigJPerry 4y ago
      >> Interpreting "printing money" to replace the more technical "controlling the size of the monetary base[1]" These are different things. Printed money is cash (or currency) and it represents a small amount of the total money in use, just under 3% in the UK. I don't have the figure to hand for the US but it's comparable, less than an order of magnitude difference. Printing money isn't a significant driver of the size of the monetary base, currency is (more or less) printed to replace the notes & coins that are guessed to have been lost or damaged. Talk about printing money, especially as a means to expand the monetary base, is usually misguided. The monetary base consists of currency in circulation + reserve balances. Reserve balances in the US, since March 2020 (Fed reserve requirements changed to 0%), refers only to the balance recorded in the account at the central bank for a given commerical bank (or other approved user of reserves). Reserves are money but they're a special kind of money that can't be spent in the economy. They're only usable by the central bank and institutions who are licenced to hold reserves at the central bank (predominantly commercial banks). They're not phyiscal (reserves used to include actual cash in the vault back when there were reserve requirements). Reserves, like most money today, just exist as rows in a DB on a computer. There's an unlimited supply of reserves available to commercial banks (via the discount window), they are created on demand as needed from nothing by the central bank and charged at the discount rate in unlimited supply. A commercial bank today cannot run out of reserves. >> the fed tries to tweak the money supply The fed doesn't control much of the money supply, most of our money is created as commercial banks issue new loans. There's a common misunderstanding that commercial banks operate as intermediaries lending deposits, but they don't.

zhte415 4y ago

> There is allot of financial illiteracy regarding the banking system. And nor does the balance sheet become inexplicably unbalanced. It issues bills, a liability, which will cancel out as an asset unless it sells them, or takes a value from it's balance sheet capital, or gets interbank funding (which still balances, because that's another bank's asset). You're not wrong a bank can fund it's lending, indeed there's that often cited BoE paper all about it, but that funding doesn't come from thin air.

bubbleRefuge 4y ago
The accounting is like this. Bank A is in compliance for the current period of time under examination (capital requirments and reserve requirements). Bank A makes a loan L1 to person B. This is a contract. Bank A has an asset in L1 on its balance sheet(this improves its capital ratio) and person B has L1 on her balance sheet as a liability. Person B makes a deposit of L1 amount into Bank B. Bank B has a liability of L1. Person B has an asset of L1 which is her deposit which she owns. Finally, Bank A makes a reserve payment to Bank B of L1. These reserves come out of the reserve account that each bank has at the Fed. The reserves maybe borrowed in the Federal Funds market on demand so long as the bank is in compliance.

Acumen321 4y ago

This is a very popular but false 'take the gist of it as true' misunderstanding. Yes, banks do "create" money. No, it is not out of thin air. It absolutely does come from deposits. An example of how banks "create" money, is person A has $100. A deposits it. The bank lends that $100 to B. Now B has $100, but A also still thinks they have $100, even though they just have a number on a piece of paper. They system goes from acting as if $100 exists, to acting as if $200 exists, but really there is only $100, and an IOU for $100. That is what bank money "creation" is. It is not from thin air. People get confused because "money", as in fiat currency, is also a Government IOU. But the above principle is true for gold, bitcoin, or any asset, and they wouldn't get mixed up the same way thinking banks create gold out of thin air. It is a starkly different thing than how the Government creates money.

bubbleRefuge 4y ago
There is not a dependency on deposits in order create loans. This is false. Banks can make loans to the extend of demand for loans at the banks terms. Deposits have nothing to do with it in terms of funding. The bank must be in compliance with capital requirements and reserve requirement in order to be in the federal reserve system . As Mosler says (founder of MMT) The loan guy does not call the deposit guy at the bank before making a loan.
- Acumen321 4y ago
  The loan guy absolutely does need to make sure the bank has the cash to make the loan. You can't loan more money than you have. What happens when B goes to withdraw it from the bank to buy a car or house if it isn't there? If banks can loan more than they have by say borrowing the money at a lower rate than they lend it, that invalidates your basic premise of banks creating money. They wouldn't have created it, they would have borrowed it.
  - bubbleRefuge 4y ago
    see my other reply on the balance sheet operations above.

makomk 4y ago

Banks do create money out of thin air, but depositors fleeing does in fact limit their ability to loan money. Here's how that works: every time a bank loans money, they create an asset (the repayment they're owed) and a matching liability (the actual money sitting in someone's account). So long as this stays within the bank or outflows match with inflows, everything works. However, if money starts flowing out of the bank overall for whatever reason then the trick no longer works - and that includes if the money is being transferred out by customers other than the ones being lent to, such as their employees or suppliers. The main consequences of this are usually that one bank can't be substantially more aggressive in lending or offer substantially different interest rates than everone else, which of course affects demand to borrow money from the bank.