6 ms·

"In Germany, if you take a loan to open up a business, you can pretty much ruin your whole life" So instead you ruin other people's lives?

hgomersall 2y ago
The bank? The ones whose job is literally to turn risk into premium on loans?
- jurgenaut23 2y ago
  Yes, exactly. It's amazing how people don't see that the _whole_ point of banks is to aggregate defaulting risks across a very large number of loans to power the economy.
  - eru 2y ago
    Banks have more than one point and function. Eg they also provide 'checking' accounts. There's no conceptual reason why that function needs to be bundled with the 'aggregating default risk' function; but it happens to be so in many countries. To illustrate, on the one hand, think of an institution that takes deposits and lets you transfer money to pay your rent etc, but doesn't make any 'real' investments: all they do is park the deposits in government loans. On the other hand, think of exchange traded funds that invest in a wide array of bonds (or even equities). They diversify defaulting risk across the economy, without taking deposits, like your typical bank does.
    - hgomersall 2y ago
      The ability to provide loans from nothing is the special feature of a bank, which is why they are so heavily regulated. The deposits are just the opposite half of the loan creation. No bank invest deposits - they're a liability to the bank.
      - eru 2y ago
        Banks don't create loans from nothing. (And if banks could create loans from 'nothing', so could any other company that can issues bonds.) There have been episodes in history with very lightly regulated banks, and they were very stable banking systems by and large. See the 'free banking episodes' in eg Canada, Scotland, Australia and China. There was no 'creating loans from nothing' that needed to be regulated away.
        neilwilson 2y ago
        They do. DR Loan, CR Deposit. Job done. No need to issue bonds or do anything. It's just splitting the zero in accounting. Any operation can do that. Generally there is legislation that then brings these 'deposit holders' under specific requirements.
        eru 2y ago
        > DR Loan, CR Deposit. > Job done. You can do that, sure. And if that was all there was to banking, it would be a fantastic business to be in. Alas, the whole point of taking out a loan is to spend the money on something, eg to invest it. And once the bank's customer withdraws the deposit half of that newly created pair of anti-particles, the situation isn't nearly as symmetrical and neat anymore: the bank better have some money in the vault to be able to satisfy that withdrawal request. (Slightly less antiquated: the customer will likely spend their borrowed money electronically, but then just means that you need to have the funds available to settle with the bank who runs the account on the receiving end of that transaction.) > Generally there is legislation that then brings these 'deposit holders' under specific requirements. Even without legislation or specific requirements, you can't just keep creating these loan/deposit pairs out of thin air. At least not, if your customers are supposed to be able to spend their borrowed funds.
        neilwilson 2y ago
        "And once the bank's customer withdraws the deposit" Withdrawing is always just transferring to another bank - even if that bank is the central bank. Banks settle with each other by the target bank taking over the deposit in the source bank. That is how correspondent banking has worked for at least four hundred years. Everything else is a collateral optimisation. There is never any "money" in a vault. There might be some receipts for money, but that's about it.
southernplaces7 2y ago
I'm sure the executives at Chase or JP Morgan struggle to wipe the tears of loss from their eyes with 100 dollar bills once you default on a loan their underlings made to you. The very purpose of even smaller banks is to spread risk across multiple loans and investments in such a way that a client's bankruptcy doesn't ruin them at all. Given the interest rates they charge on certain financial services, they seem to have no problem not going under themselves in most cases.
red_admiral 2y ago
Investors like Y Combinator can pool risk, so even if most of their startups fail they're still net ahead.

hgomersall 2y ago

The bank? The ones whose job is literally to turn risk into premium on loans?

jurgenaut23 2y ago
Yes, exactly. It's amazing how people don't see that the _whole_ point of banks is to aggregate defaulting risks across a very large number of loans to power the economy.
- eru 2y ago
  Banks have more than one point and function. Eg they also provide 'checking' accounts. There's no conceptual reason why that function needs to be bundled with the 'aggregating default risk' function; but it happens to be so in many countries. To illustrate, on the one hand, think of an institution that takes deposits and lets you transfer money to pay your rent etc, but doesn't make any 'real' investments: all they do is park the deposits in government loans. On the other hand, think of exchange traded funds that invest in a wide array of bonds (or even equities). They diversify defaulting risk across the economy, without taking deposits, like your typical bank does.
  - hgomersall 2y ago
    The ability to provide loans from nothing is the special feature of a bank, which is why they are so heavily regulated. The deposits are just the opposite half of the loan creation. No bank invest deposits - they're a liability to the bank.
    - eru 2y ago
      Banks don't create loans from nothing. (And if banks could create loans from 'nothing', so could any other company that can issues bonds.) There have been episodes in history with very lightly regulated banks, and they were very stable banking systems by and large. See the 'free banking episodes' in eg Canada, Scotland, Australia and China. There was no 'creating loans from nothing' that needed to be regulated away.
      - neilwilson 2y ago
        They do. DR Loan, CR Deposit. Job done. No need to issue bonds or do anything. It's just splitting the zero in accounting. Any operation can do that. Generally there is legislation that then brings these 'deposit holders' under specific requirements.
        eru 2y ago
        > DR Loan, CR Deposit. > Job done. You can do that, sure. And if that was all there was to banking, it would be a fantastic business to be in. Alas, the whole point of taking out a loan is to spend the money on something, eg to invest it. And once the bank's customer withdraws the deposit half of that newly created pair of anti-particles, the situation isn't nearly as symmetrical and neat anymore: the bank better have some money in the vault to be able to satisfy that withdrawal request. (Slightly less antiquated: the customer will likely spend their borrowed money electronically, but then just means that you need to have the funds available to settle with the bank who runs the account on the receiving end of that transaction.) > Generally there is legislation that then brings these 'deposit holders' under specific requirements. Even without legislation or specific requirements, you can't just keep creating these loan/deposit pairs out of thin air. At least not, if your customers are supposed to be able to spend their borrowed funds.
        neilwilson 2y ago
        "And once the bank's customer withdraws the deposit" Withdrawing is always just transferring to another bank - even if that bank is the central bank. Banks settle with each other by the target bank taking over the deposit in the source bank. That is how correspondent banking has worked for at least four hundred years. Everything else is a collateral optimisation. There is never any "money" in a vault. There might be some receipts for money, but that's about it.

southernplaces7 2y ago

I'm sure the executives at Chase or JP Morgan struggle to wipe the tears of loss from their eyes with 100 dollar bills once you default on a loan their underlings made to you. The very purpose of even smaller banks is to spread risk across multiple loans and investments in such a way that a client's bankruptcy doesn't ruin them at all. Given the interest rates they charge on certain financial services, they seem to have no problem not going under themselves in most cases.

red_admiral 2y ago

Investors like Y Combinator can pool risk, so even if most of their startups fail they're still net ahead.