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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
by 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 agoBanks 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 agoThis 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 agoThe 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 agoNot 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 agoDid 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.
- cchooper 18y agoNo, and if the video says that then it's wrong. Please explain to me how a bank can create base money, which is exclusively issued by the central bank. * The bank is allowed, to lend a multiple of that $10. False! The bank can lend only a fraction of that $10. However, if the borrower deposits that money back in the bank (i.e. makes a loan) then the bank can lend the money again, just like with normal borrowing.
- axod 18y agohttp://en.wikipedia.org/wiki/Fractional-reserve_banking http://en.wikipedia.org/wiki/Fractional-reserve_banking You should at least watch the video so you can see what we're discussing...
- 18y ago
- Eliezer 18y agoThey're creating new "money of zero maturity". If I have a CD I can't withdraw for one year, and that's used to create a loan due in one year, that's one thing. The problem is when money in my checking account that I can withdraw at any time, is used to make loans that can't be called in at any time. This is what creates the possibility of a run on the bank. Banks borrow short and lend long, which is profitable, but can with some justice be called fraud.
- cchooper 18y agoFraud involves deception. When was the last time you saw a bank advertise that it didn't lend out your money?