4 ms·
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 doe
by 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 agoThere 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 agoThe 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 agosee my other reply on the balance sheet operations above.
- Acumen321 4y agoThere are many problems with your understanding, but the simplest total failure of your model is that if the bank did just get the money from somewhere else to lend, it is not creating it. You are not describing the bank "creating" money, which they actually do as per how I described. You are describing the bank borrowing money.
- bubbleRefuge 4y agoI disagree . And language can get tricky here. You don't need deposit amounts in order to make loans. There is a bunch of gymnastics under the hood of the transaction I described but none of it requires consumer deposits.
- Acumen321 4y agoYou start a bank, I come to take out a loan and I want it in cash since I am buying a used car this afternoon. You have no cash since you said you don't need it, are just going to create it. Where does the cash come from? If you get it somewhere else, like the FED, you clearly aren't creating it, the FED is, right? If you need to involve the FED (which you don't as per how I described) then the FED creates the money, not the banks. This invalidates your entire premise.
- bubbleRefuge 4y agoMoving the goal posts. Loans are contracts that create deposits. What you do with your deposit is a separate operation.
- bubbleRefuge 4y agoAdditionally, if you take my example above and change bank B to bank A which is completely feasible in the real world, then it is thin air.
- cm_silva 4y agoWeird, and I thought fractional reserve banking was a thing. https://en.m.wikipedia.org/wiki/Fractional-reserve_banking https://en.m.wikipedia.org/wiki/Fractional-reserve_banking
- Acumen321 4y agoIt is (was) a thing, the idea works exactly the same way. Person A deposits $100, bank lends $90 to B, $10 goes to reserve (if 10% reserve rate). System thinks there is $190 instead of $100, so money is "created". As of 2020 in the US the reserve rate is 0%: https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
- bubbleRefuge 4y agoPerson A does not need to make a deposit to fund load for Person B. If bank is in compliance they can make the loan.
- __MatrixMan__ 4y agoI went in search of the capital requirements, just to get a feel for what limits do exist--since they're no longer directly connected to deposits. I found them: https://www.ecfr.gov/current/title-12/chapter-I/part-3/subpart-B/section-3.10 https://www.ecfr.gov/current/title-12/chapter-I/part-3/subpa... But then my eyes glazed over and I remembered that I am not proficient in this language. Presumably the following requirements do place some limits on how much money they can have created? > A common equity tier 1 capital ratio of 4.5 percent. > A tier 1 capital ratio of 6 percent. > A total capital ratio of 8 percent. > A leverage ratio of 4 percent.
- bubbleRefuge 4y agoEvery time a good loan is made. Thats an asset for the bank.