This seems to be much a do about nothing. Suppose you borrow money from a bank. The bank could: A. Use mortgages/IOUs instead of cash so the next borrower who

This seems to be much a do about nothing. Suppose you borrow money from a bank. The bank could: A. Use mortgages/IOUs instead of cash so the next borrower who wants to borrow is given IOU's (from various people) instead of cash. Assuming the person selling the house agrees, the buyer trades these IOU's to the seller for the house. "I'll give you 2 IOU's that I got from my bank (1 from Bob and 1 from Sally) totaling $200K for your house." OR B. The bank uses some mechanism to convert those IOU's to cash and assumes the risk that Bob and Sally might not pay their debts. The bank agrees to guarantee/take responsibility for the IOU's it received i.e covers the risk that the IOU will go bad and gives the next borrower cash instead. The banks is being compensated for assuming that risk by charging interest. Am I missing something?