2 ms·
A bank doesn't sit on a large pile of money, it facilitates the flow of money from lenders to borrowers. Eg. if Microsoft makes $1bn in profits and wants to inv
by Maro 17y ago
A bank doesn't sit on a large pile of money, it facilitates the flow of money from lenders to borrowers. Eg. if Microsoft makes $1bn in profits and wants to invest the money it calls up Morgan Stanley, who in turn sells them these "structured investments" --- which means Morgan Stanley passes the money on to borrowers at an interest. If all goes well, Joe Sixpack doesn't starve 'til his paycheck comes, so he "happily" pays the interest. Morgan Stanley keeps some of the interest and pockets the premium, and at the end of the year Microsoft has $1.1bn. Now, if Joe Sixpack defaults it's no big deal, because there are many Joe Sixpacks. If too many of them default, then Morgan Stanley would be in trouble and MS would loose their investment --- but what are the chances of that happening...
- jerf 17y agoFor the purposes of my post, lenders having money when the banks are unable to provide borrowers is "sitting on a pile of money". The money may not "belong" to the banks, but the effect is the same: Too much supply. Explaining the banking system in precise terms was beyond the scope of my post.