5 ms·

This is not correct. Banks don't use your deposits and loan money to someone else. However, I still think you should not support evil banks for many other reaso

by mo_42 3y ago

This is not correct. Banks don't use your deposits and loan money to someone else. However, I still think you should not support evil banks for many other reasons. When banks create a loan, they create new money. They put the loan on the asset side of their balance sheet and create the same amount of liabilities due to the receive of that loan.

reaperman 3y ago
> When banks create a loan, they create new money. They put the loan on the asset side of their balance sheet and create the same amount of liabilities due to the receive of that loan. What's the difference between a bank and me where they can "create new money"? I'm assuming I cannot do this, because when someone asks me to loan them money I actually have to give them cash to fulfill their request, and if I don't have that cash I cannot "create new money" to give them. I've assumed banks actually have to have cash to give out -- either from being well-capitalized initially and growing that through making good loans over time, and/or by using the cash of depositors.
- luca3v 3y ago
  The analogy would be that if your friend Bob asks you for a $1k loan, you could tell him "done, I am loaning you $1k and for now I am keeping it safe for you; just tell me when you need it". Now you have all the money you had before, and you friend "has" an extra $1k, so you have "created" money. If Bob then tells you hey, I need the $1k to give it to John, you say no worries, and you go to John and says hey, here is $1k from Bob, and for now I am keeping it safe for you; just tell me when you need it. And so on. If at some point John actually wants the $1k in cash then you actually give him the money, you cannot create it. Maybe at some point you have just $1k of real cash with you, other people owe you $9k, and yet other people have $10k of "created" money that you are keeping for them. If all of the latter want their money in cash, you are going to be in trouble. Same with a bank, if a lot of depositors want their money back, the bank has to give it out of its reserves, it cannot "create" it to give it to them, hence the phenomenon of "runs on the bank" (because at any given time, the sum of all depositor balances in a bank is a lot more than the actual reserves) and why we need a federal insurance program to protect depositors.
- lxgr 3y ago
  In a very broad sense, you can also "create new money": If you are widely known for never letting any of your checks bounce, these checks might become regarded as a kind of money, and people might defer cashing them out of convenience or due to other factors, in a similar way that e.g. Amazon or Starbucks gift cards seem a bit like money as well. But in the more narrow sense, banks indeed have something quite useful that you, as a non-bank, don't: They have access to the Fed's deposit window, where they can borrow reserves by posting discounted securities as collateral. Often, that's treasuries, but it can also be commercial or even home loans. Borrowing from the Fed in that way is in fact one of the mechanisms that create new reserves.
spigottoday 3y ago
Then where do our deposits go? If not loans to these companies are they investing in them by buying stock or something? The sum of deposits the bank holds are not available for withdrawl all at once. So where is it?
- mo_42 3y ago
  I think it helps to think how the balance sheet changes. If you deposit money, the bank has higher liabilities, they owe you that money, and higher assets as they actually have the money. So they might buy all sorts of assets with that money. However, it's not that they need that money to make a loan. That was my main point. > The sum of deposits the bank holds are not available for withdrawl all at once. So where is it? This only depends on the central bank being able to produce enough cash for all the people. Technically, the commercial bank will ask the central bank to swap their assets for some cash to hand it to the customers. So practically, they might not be able to give cash to everyone, just because the central banks cannot product it that quickly. But other than that there's no problem that many people can withdraw money. If customers come bank with the cash, the commercial bank will take it, give it back to the central bank, and receive their previous assets back.

by mo_42 3y ago

reaperman 3y ago

> When banks create a loan, they create new money. They put the loan on the asset side of their balance sheet and create the same amount of liabilities due to the receive of that loan. What's the difference between a bank and me where they can "create new money"? I'm assuming I cannot do this, because when someone asks me to loan them money I actually have to give them cash to fulfill their request, and if I don't have that cash I cannot "create new money" to give them. I've assumed banks actually have to have cash to give out -- either from being well-capitalized initially and growing that through making good loans over time, and/or by using the cash of depositors.

luca3v 3y ago
The analogy would be that if your friend Bob asks you for a $1k loan, you could tell him "done, I am loaning you $1k and for now I am keeping it safe for you; just tell me when you need it". Now you have all the money you had before, and you friend "has" an extra $1k, so you have "created" money. If Bob then tells you hey, I need the $1k to give it to John, you say no worries, and you go to John and says hey, here is $1k from Bob, and for now I am keeping it safe for you; just tell me when you need it. And so on. If at some point John actually wants the $1k in cash then you actually give him the money, you cannot create it. Maybe at some point you have just $1k of real cash with you, other people owe you $9k, and yet other people have $10k of "created" money that you are keeping for them. If all of the latter want their money in cash, you are going to be in trouble. Same with a bank, if a lot of depositors want their money back, the bank has to give it out of its reserves, it cannot "create" it to give it to them, hence the phenomenon of "runs on the bank" (because at any given time, the sum of all depositor balances in a bank is a lot more than the actual reserves) and why we need a federal insurance program to protect depositors.
lxgr 3y ago
In a very broad sense, you can also "create new money": If you are widely known for never letting any of your checks bounce, these checks might become regarded as a kind of money, and people might defer cashing them out of convenience or due to other factors, in a similar way that e.g. Amazon or Starbucks gift cards seem a bit like money as well. But in the more narrow sense, banks indeed have something quite useful that you, as a non-bank, don't: They have access to the Fed's deposit window, where they can borrow reserves by posting discounted securities as collateral. Often, that's treasuries, but it can also be commercial or even home loans. Borrowing from the Fed in that way is in fact one of the mechanisms that create new reserves.

spigottoday 3y ago

Then where do our deposits go? If not loans to these companies are they investing in them by buying stock or something? The sum of deposits the bank holds are not available for withdrawl all at once. So where is it?

mo_42 3y ago
I think it helps to think how the balance sheet changes. If you deposit money, the bank has higher liabilities, they owe you that money, and higher assets as they actually have the money. So they might buy all sorts of assets with that money. However, it's not that they need that money to make a loan. That was my main point. > The sum of deposits the bank holds are not available for withdrawl all at once. So where is it? This only depends on the central bank being able to produce enough cash for all the people. Technically, the commercial bank will ask the central bank to swap their assets for some cash to hand it to the customers. So practically, they might not be able to give cash to everyone, just because the central banks cannot product it that quickly. But other than that there's no problem that many people can withdraw money. If customers come bank with the cash, the commercial bank will take it, give it back to the central bank, and receive their previous assets back.