8 ms·

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 th

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.
        eru 2y ago
        > Withdrawing is always just transferring to another bank - even if that bank is the central bank. No. You can withdraw cash. But you are right, that the common case is a transfer. > Banks settle with each other by the target bank taking over the deposit in the source bank. That's one way they can settle. But at the end of the day (or whatever the relevant period is), they send each other the net difference in the underlying base money. These days, that's deposits at the central bank. > That is how correspondent banking has worked for at least four hundred years. Correspondent banking being important is mostly an American thing (and perhaps a 18th and 19th century English, but not Scottish, thing, too.) > There is never any "money" in a vault. There might be some receipts for money, but that's about it. These days, the 'vault' is (mostly) an account at the central bank.
    - zarzavat 2y ago
      If a company issues a bond and I buy it then I have to give my own existing money in exchange. If a company takes out a loan from the bank, the bank isn’t putting up existing money, it just creates a new asset and starts accounting for it. Hence new money is created from nothing. What stops the bank from creating too many loans is that the bank would become insolvent and all the workers have to carry their stuff out in cardboard boxes (except the execs they probably have someone to do that for them).
      - eru 2y ago
        > If a company issues a bond and I buy it then I have to give my own existing money in exchange. > If a company takes out a loan from the bank, the bank isn’t putting up existing money, it just creates a new asset and starts accounting for it. Hence new money is created from nothing. Sorry, your analogy doesn't work out, because the roles are reversed. Look at the situation where a company sells me a bond, to be paid back in ten years. But instead of me handing money over to them, I give them an IOU (or credit line) that they can draw down any time they wish to. We can create this pair of bond and IOU out of nothing, just like the bank can create deposit-loan pairs out of nothing. However, just like with the bank, people don't borrow money to let it just sit there. They want to invest. So they spend their deposit, and draw down their IOU. And once your customer does that, you better have some money in your 'safe' that you can hand to them. In the classic case, that money comes from outside deposits. > What stops the bank from creating too many loans is that the bank would become insolvent and all the workers have to carry their stuff out in cardboard boxes (except the execs they probably have someone to do that for them). How would they go insolvent in your model?
  - kd5bjo 2y ago
    A bank can just magic up an account with $1M in your name, sure, but when you show up to withdraw the money they have to source that currency from somewhere— Their loans won’t be held in very high regard if you can’t then use the loaned money to, for example, pay for all of the various labor and materials you need to build your new house. That somewhere is the bank’s depositors.
    - somewhereoutth 2y ago
      Except that they don't have to source that currency from somewhere - it really is literally magicked up out of thin air! When you come to spend it, that amount is transferred to another bank, that they can then offset against their own magic money. The only relationship with deposits (which are actually liabilities) and assets is that enforced by regulators. This is how money creation works in the modern economy - so the money supply can grow as economic activity increases, all guided by central banks / governments with levers such as interest rates, open market activities (QE), and regulations. Again - banks really do create money from nothing, all day, every day.
      - floating-io 2y ago
        Citation needed. I do not believe this for even a single moment. The only institution that can "create" money from thin air is the government. And even that is a polite fiction when you realize that "printing more money" also inherently devalues the money already in the system.
        deleted 2y ago
        [deleted]
        hgomersall 2y ago
        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...
        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.
        eru 2y ago
        > Withdrawing is always just transferring to another bank - even if that bank is the central bank. No. You can withdraw cash. But you are right, that the common case is a transfer. > Banks settle with each other by the target bank taking over the deposit in the source bank. That's one way they can settle. But at the end of the day (or whatever the relevant period is), they send each other the net difference in the underlying base money. These days, that's deposits at the central bank. > That is how correspondent banking has worked for at least four hundred years. Correspondent banking being important is mostly an American thing (and perhaps a 18th and 19th century English, but not Scottish, thing, too.) > There is never any "money" in a vault. There might be some receipts for money, but that's about it. These days, the 'vault' is (mostly) an account at the central bank.
  - zarzavat 2y ago
    If a company issues a bond and I buy it then I have to give my own existing money in exchange. If a company takes out a loan from the bank, the bank isn’t putting up existing money, it just creates a new asset and starts accounting for it. Hence new money is created from nothing. What stops the bank from creating too many loans is that the bank would become insolvent and all the workers have to carry their stuff out in cardboard boxes (except the execs they probably have someone to do that for them).
    - eru 2y ago
      > If a company issues a bond and I buy it then I have to give my own existing money in exchange. > If a company takes out a loan from the bank, the bank isn’t putting up existing money, it just creates a new asset and starts accounting for it. Hence new money is created from nothing. Sorry, your analogy doesn't work out, because the roles are reversed. Look at the situation where a company sells me a bond, to be paid back in ten years. But instead of me handing money over to them, I give them an IOU (or credit line) that they can draw down any time they wish to. We can create this pair of bond and IOU out of nothing, just like the bank can create deposit-loan pairs out of nothing. However, just like with the bank, people don't borrow money to let it just sit there. They want to invest. So they spend their deposit, and draw down their IOU. And once your customer does that, you better have some money in your 'safe' that you can hand to them. In the classic case, that money comes from outside deposits. > What stops the bank from creating too many loans is that the bank would become insolvent and all the workers have to carry their stuff out in cardboard boxes (except the execs they probably have someone to do that for them). How would they go insolvent in your model?
- kd5bjo 2y ago
  A bank can just magic up an account with $1M in your name, sure, but when you show up to withdraw the money they have to source that currency from somewhere— Their loans won’t be held in very high regard if you can’t then use the loaned money to, for example, pay for all of the various labor and materials you need to build your new house. That somewhere is the bank’s depositors.
  - somewhereoutth 2y ago
    Except that they don't have to source that currency from somewhere - it really is literally magicked up out of thin air! When you come to spend it, that amount is transferred to another bank, that they can then offset against their own magic money. The only relationship with deposits (which are actually liabilities) and assets is that enforced by regulators. This is how money creation works in the modern economy - so the money supply can grow as economic activity increases, all guided by central banks / governments with levers such as interest rates, open market activities (QE), and regulations. Again - banks really do create money from nothing, all day, every day.
    - floating-io 2y ago
      Citation needed. I do not believe this for even a single moment. The only institution that can "create" money from thin air is the government. And even that is a polite fiction when you realize that "printing more money" also inherently devalues the money already in the system.
      - deleted 2y ago
        [deleted]
      - hgomersall 2y ago
        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...
        2y ago