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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" (check
by 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 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...
- cchooper 18y agoBanks cannot create base money. That link doesn't say that they do. Creating base money is forgery and is illegal.
- newt0311 18y agoNope. Look more carefully at the video (it gets most things wrong but not this). If you look in the second part, for any deposit, the bank can lend 90% of it.
- cx01 18y agoBut then how do you explain bank runs? If banks practice normal lending, then bank runs shouldn't be harmful, because the bank would always have enough money to redeem all deposits.
- cchooper 18y agoThe bank can't pay because it has loaned the money out.
- cx01 18y agoOK, but as I already said, the point of a checking account is to always have access to the money. You wouldn't call this a scam?
- cchooper 18y agoI wouldn't, because borrowers are compensated for the risk through the payment of interest (or other services, such as free transactions). A deposit at a bank is just like any other kind of investment: you get a reward because you took a risk. It's also worth pointing out that bank runs are incredibly rare events. In a correctly functioning market, a bank can always pay its depositors by securitizing its loans. In a dysfunctional market (such as now) there are usually government guarantees that help smooth the process. The big problem with banks at the moment is that they have been keeping insufficient capital to cover their losses. Insufficient reserves has not been a problem.
- cx01 18y agoNow I get your point. So basically we have different understandings of checking accounts. I'm not a lawyer, but in my opinion money in a checking account should always be redeemable. But you're kind of right that by depositing money there, people are agreeing to their money being lent out in exchange for interest.
- 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?