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One of the main take aways I had, was the fact that banks can lend more than they have on deposit. Then that money can be deposited with another bank, and again

by axod 18y ago

One of the main take aways I had, was the fact that banks can lend more than they have on deposit. Then that money can be deposited with another bank, and again multiplied indefinitely. So for example, I deposit $10 at bank A Bank A can now lend 10x ($100) to you You deposit that at Bank B, who can again lend 10x ($1000) Can you explain what value has been created there? To me, it seems like the bank has been given a license to create money indefinitely, which seems like a very bad idea. For me, that is the scam. Why can't we exist only allowing banks to lend out what they actually have instead of creating money out of thin air?

cx01 18y ago
Banks don't create money indefinitely. If you deposit a $10 banknote at a bank, then the whole money supply can only increase by $100 (when the reserve is 10%). Your example is wrong, because you mixed up deposits(which exists only on the balance sheet of the individual banks) and reserve (which is basically the paper money + balances of all banks at the central bank). But of course you're right, that banks still lend out more than they have, which I agree is scam.
- cchooper 18y ago
  If I have only $100 and I lend out $60, then I have loaned more money than I have, because I now only have $40 dollars. Banks are not doing anything different to this. They are just loaning the cash deposited with them. Although the original $10 loan will eventually lead to $100 being created, it has also lead to $100 dollars worth of loans to banks. There's no scam here, it's just the way that debt works. It's no different to people loaning money to each other.
  - cx01 18y ago
    Banks loan out money on checking accounts, but the basic idea of a checking account is to have access to the money anytime. So if I put $100 in my checking account, and the bank lends out $90 of it, the bank has liabilities of $190, backed by only $100 in cash. In other words, the bank has created $90 out of thin air.
    - cchooper 18y ago
      This is still no different to normal lending. If I loan you $100, then you have created a $100 bond "out of thin air." It's true that we use "bank bonds" (checking accounts) as money, and it's true that we do this because they can be redeemed on demand, but that's our decision, not the bank's. We could use bonds issued by you instead if we wanted to. The bank is still not lending more money than has been deposited with it, or doing anything else nefarious. It's just making loans.
      - cx01 18y ago
        The bank IS lending more money than it has been deposited with. If banks were sane, they wouldn't lend out any money out of checking accounts. They would only lend out money on savings accounts, where I would agree to give up my right on immediate redemption in exchange for payment of interest.
        deleted 18y ago
        [deleted]
        cchooper 18y ago
        Not it's not. The bank only ever loans a fraction of the money deposited with (or borrowed by) it. The rest goes in the reserve. The total amount of cash loaned is always strictly less than the cash borrowed. Bank's just can't create base money from nothing. They can create checking accounts, but these are neither loaned nor borrowed. They are financial instruments representing a loan that has been made.
        axod 18y ago
        Did you watch the video at all? * You deposit $10 at a bank * The bank is allowed, to lend a *multiple* of that $10. So it can now lend say $60 out. Even though it hasn't got $60 to lend. It's created the extra $50 from thin air. This is not how normal lending works. It's like if you lend me your bike, and I have magical powers that allow me to then summon 4 more bikes out of thin air, so that I can lend out 5 bikes.
- axod 18y ago
  OK, thanks for clarifying. Still, the main point stands.
cchooper 18y ago
What's you're saying is actually not true. Unfortunately, it seems that almost everyone on the internet gets this wrong. The correct calculation goes as follows: If you deposit $10 then, assuming a 10% reserve rate, the bank will keep $1 and loan $9. In return, you get a $10 bank balance, so the money supply has increased by 10$. However, the money that was created cannot be loaned again. You can't loan your bank balance to someone else, and neither can the bank. However, the remaining $9 cash can be re-deposited by someone else. Again, the bank keeps 10% and lends the remaining $8.10, creating a $9 account in the process. Then the $8.10 can be re-deposited and so on. The total amount of money that can be created is therefore given by the equation m = d/r where d is the initial deposit, r is the reserve requirement percentage and m is the amount of money created. So for my example, the maximum money created is $100. http://en.wikipedia.org/wiki/Fractional-reserve_banking#Money_multiplier http://en.wikipedia.org/wiki/Fractional-reserve_banking#Mone... What confuses everyone is that in normal circumstances, banks don't give cash-in-hand loans. Instead, they open an account for the borrower, who has the option of withdrawing that cash, but will probably leave it there. In effect, the $9 has been immediately deposited back at the bank, where it can be reloaned. This doesn't really change anything though. It just means that the same bank is reloaning the money rather than a different bank. The total money loaned to the bank is effectively $19 (the original $10 plus the borrower who has loaned their borrowed money back again). If the borrower transfers the money to another account, then a different bank will hold the money, but it makes no overall difference to the system.
- axod 18y ago
  OK, thanks for clarifying. I don't see it making a big change to the main point though - banks being allowed to lend more money than they have on deposit.

by axod 18y ago

cx01 18y ago

Banks don't create money indefinitely. If you deposit a $10 banknote at a bank, then the whole money supply can only increase by $100 (when the reserve is 10%). Your example is wrong, because you mixed up deposits(which exists only on the balance sheet of the individual banks) and reserve (which is basically the paper money + balances of all banks at the central bank). But of course you're right, that banks still lend out more than they have, which I agree is scam.

cchooper 18y ago
If I have only $100 and I lend out $60, then I have loaned more money than I have, because I now only have $40 dollars. Banks are not doing anything different to this. They are just loaning the cash deposited with them. Although the original $10 loan will eventually lead to $100 being created, it has also lead to $100 dollars worth of loans to banks. There's no scam here, it's just the way that debt works. It's no different to people loaning money to each other.
- cx01 18y ago
  Banks loan out money on checking accounts, but the basic idea of a checking account is to have access to the money anytime. So if I put $100 in my checking account, and the bank lends out $90 of it, the bank has liabilities of $190, backed by only $100 in cash. In other words, the bank has created $90 out of thin air.
  - cchooper 18y ago
    This is still no different to normal lending. If I loan you $100, then you have created a $100 bond "out of thin air." It's true that we use "bank bonds" (checking accounts) as money, and it's true that we do this because they can be redeemed on demand, but that's our decision, not the bank's. We could use bonds issued by you instead if we wanted to. The bank is still not lending more money than has been deposited with it, or doing anything else nefarious. It's just making loans.
    - cx01 18y ago
      The bank IS lending more money than it has been deposited with. If banks were sane, they wouldn't lend out any money out of checking accounts. They would only lend out money on savings accounts, where I would agree to give up my right on immediate redemption in exchange for payment of interest.
      - deleted 18y ago
        [deleted]
      - cchooper 18y ago
        Not it's not. The bank only ever loans a fraction of the money deposited with (or borrowed by) it. The rest goes in the reserve. The total amount of cash loaned is always strictly less than the cash borrowed. Bank's just can't create base money from nothing. They can create checking accounts, but these are neither loaned nor borrowed. They are financial instruments representing a loan that has been made.
        axod 18y ago
        Did you watch the video at all? * You deposit $10 at a bank * The bank is allowed, to lend a *multiple* of that $10. So it can now lend say $60 out. Even though it hasn't got $60 to lend. It's created the extra $50 from thin air. This is not how normal lending works. It's like if you lend me your bike, and I have magical powers that allow me to then summon 4 more bikes out of thin air, so that I can lend out 5 bikes.
axod 18y ago
OK, thanks for clarifying. Still, the main point stands.

cchooper 18y ago

What's you're saying is actually not true. Unfortunately, it seems that almost everyone on the internet gets this wrong. The correct calculation goes as follows: If you deposit $10 then, assuming a 10% reserve rate, the bank will keep $1 and loan $9. In return, you get a $10 bank balance, so the money supply has increased by 10$. However, the money that was created cannot be loaned again. You can't loan your bank balance to someone else, and neither can the bank. However, the remaining $9 cash can be re-deposited by someone else. Again, the bank keeps 10% and lends the remaining $8.10, creating a $9 account in the process. Then the $8.10 can be re-deposited and so on. The total amount of money that can be created is therefore given by the equation m = d/r where d is the initial deposit, r is the reserve requirement percentage and m is the amount of money created. So for my example, the maximum money created is $100. http://en.wikipedia.org/wiki/Fractional-reserve_banking#Money_multiplier http://en.wikipedia.org/wiki/Fractional-reserve_banking#Mone... What confuses everyone is that in normal circumstances, banks don't give cash-in-hand loans. Instead, they open an account for the borrower, who has the option of withdrawing that cash, but will probably leave it there. In effect, the $9 has been immediately deposited back at the bank, where it can be reloaned. This doesn't really change anything though. It just means that the same bank is reloaning the money rather than a different bank. The total money loaned to the bank is effectively $19 (the original $10 plus the borrower who has loaned their borrowed money back again). If the borrower transfers the money to another account, then a different bank will hold the money, but it makes no overall difference to the system.

axod 18y ago
OK, thanks for clarifying. I don't see it making a big change to the main point though - banks being allowed to lend more money than they have on deposit.