4 ms·

Kind of, sort of, but not really. The $90 that was lent, at some point, winds up back in a bank, where that loan is now a new deposit. Then 90% of the $90 can

Kind of, sort of, but not really. The $90 that was lent, at some point, winds up back in a bank, where that loan is now a new deposit. Then 90% of the $90 can once again be lent out. Now that original $100 deposit = $171 in loans. And on it goes, until that $100 deposit is roughly $1000 floating around in the economy. This is called the "money multiplier". Here's a chart that shows the expansion potential of money at various reserve requiements: http://en.wikipedia.org/wiki/Fractional_reserve_banking#mediaviewer/File:Fractional-reserve_banking_with_varying_reserve_requirements.gif http://en.wikipedia.org/wiki/Fractional_reserve_banking#medi... This also shows how banks make so much money, and why there are both laws and services designed to encourage people to keep their money in banks. A $100 deposit generates slightly less than $1K in loans. At only 5% interest, the banks will realize $50 in interest per year on the ~$1K in loans enabled by that single $100 deposit.

jackgavigan 12y ago
And can't the person who borrowed $100 using a p2p loans marketplace also loan it out again?
- arjunnarayan 12y ago
  You are correct, and downandout is wrong. The same fixed point calculation that he/she makes with fractional reserve banking is true of the p2p loans marketplace as well. Your original calculation (reserve requirement of 10% -> $100 of deposits becomes $90 of loans) is correct. Edit: Downandout isn't wrong, it's the GP userbmf that is, since he/she said that market lenders aren't banks and "cannot use fractional reserve banking", which is a ill-defined statement. I erroneously assumed that the two users were the same. My apologies.
  - downandout 12y ago
    > downandout is wrong. Did I say that it didn't apply to p2p loans? It, of course, applies to any money that can be a new deposit. And how exactly am I wrong? The concept of the money multiplier is pretty well documented. There's even a chart that I linked to.
    - userbmf 12y ago
      I don't think it does apply to p2p loans. When I save $100 with a bank I retain my demand deposit - that $100 is still "there" for me. That is the multiplier effect (though that model has other flaws). When I borrow $100 from p2p lending then loan it out to you through p2p lending I no longer have that $100 until you repay it to me, at which point you no longer have it. So we are simply passing $100 around without any multiplier effect. edit - can't reply to you as the reply limit bottomed out - your response doesn't have enough info. You didn't address the demand deposit vs timed loan difference.
      - jackgavigan 12y ago
        I owe you the $100 in the same way that the bank owes you the $100 you deposited. The only difference is that the bank is regulated and (FDIC) insured.
      - downandout 12y ago
        It applies to P2P loans in the macro sense. The proceeds from the p2p loan will be deposited in a bank somewhere, and then X% of that deposit can be lent out by the bank, and the cycle continues.
nhaehnle 12y ago
This is not how banking works. I give a shot at a better explanation here: https://news.ycombinator.com/item?id=8413408 https://news.ycombinator.com/item?id=8413408 > A $100 deposit generates slightly less than $1K in loans If that were true, the amount of money in circulation would be infinite, because loans also end up as deposits. Edit: More to the point, look at actual numbers in bank balance sheets. The amount of loans tends to be roughly equal to the amount of deposits (the precise ratio varies with bank business models).
- downandout 12y ago
  >This is not how banking works This is precisely how banking works, at least in countries that have fractional reserve requirements. >If that were true, the amount of money in circulation would be infinite, because loans also end up as deposits. Nope. It would only be infinite if the reserve requirement were 0%. Look at the chart I linked to. This goes on all day, every day at banks around the world. New money is created through credit, subject to the limitations imposed by each country's reserve requirements.
  - nhaehnle 12y ago
    What do you have to say about the empirical evidence that the total amount of deposits and the total amount of loans in the system is of the same order of magnitude? This clearly contradicts the typical money multiplier story of "X amount of deposits creates X/reserve requirement amount of loans" you have posted. Furthermore, check out countries without reserve requirements. Do they have an infinite amount of money in circulation? Yes, banks create new money through credit. However, this is not limited by reserve requirements (if the empirical evidence still doesn't convince you, please read up on how the central bank will always lend the required central bank money to banks when they need it, i.e. the lender of last resort function of central banks). You have to look at capital requirements and general borrower demand and quality to understand what's going on.
    - downandout 12y ago
      Its very simple. Bank A receives a $100 deposit and lends $90. That $90 goes into bank B. Bank B lends $81 of that money. That goes into bank C. Bank C lends $72 of that money, and that goes into bank D. None of these banks has lent out more than 90% of their deposits, yet the money has multiplied. Of course, most banks will never be able to get to 90% because demand for loans from qualified borrowers isn't high enough. But this is how the system works.

jackgavigan 12y ago

And can't the person who borrowed $100 using a p2p loans marketplace also loan it out again?

arjunnarayan 12y ago
You are correct, and downandout is wrong. The same fixed point calculation that he/she makes with fractional reserve banking is true of the p2p loans marketplace as well. Your original calculation (reserve requirement of 10% -> $100 of deposits becomes $90 of loans) is correct. Edit: Downandout isn't wrong, it's the GP userbmf that is, since he/she said that market lenders aren't banks and "cannot use fractional reserve banking", which is a ill-defined statement. I erroneously assumed that the two users were the same. My apologies.
- downandout 12y ago
  > downandout is wrong. Did I say that it didn't apply to p2p loans? It, of course, applies to any money that can be a new deposit. And how exactly am I wrong? The concept of the money multiplier is pretty well documented. There's even a chart that I linked to.
  - userbmf 12y ago
    I don't think it does apply to p2p loans. When I save $100 with a bank I retain my demand deposit - that $100 is still "there" for me. That is the multiplier effect (though that model has other flaws). When I borrow $100 from p2p lending then loan it out to you through p2p lending I no longer have that $100 until you repay it to me, at which point you no longer have it. So we are simply passing $100 around without any multiplier effect. edit - can't reply to you as the reply limit bottomed out - your response doesn't have enough info. You didn't address the demand deposit vs timed loan difference.
    - jackgavigan 12y ago
      I owe you the $100 in the same way that the bank owes you the $100 you deposited. The only difference is that the bank is regulated and (FDIC) insured.
    - downandout 12y ago
      It applies to P2P loans in the macro sense. The proceeds from the p2p loan will be deposited in a bank somewhere, and then X% of that deposit can be lent out by the bank, and the cycle continues.

nhaehnle 12y ago

This is not how banking works. I give a shot at a better explanation here: https://news.ycombinator.com/item?id=8413408 https://news.ycombinator.com/item?id=8413408 > A $100 deposit generates slightly less than $1K in loans If that were true, the amount of money in circulation would be infinite, because loans also end up as deposits. Edit: More to the point, look at actual numbers in bank balance sheets. The amount of loans tends to be roughly equal to the amount of deposits (the precise ratio varies with bank business models).

downandout 12y ago
>This is not how banking works This is precisely how banking works, at least in countries that have fractional reserve requirements. >If that were true, the amount of money in circulation would be infinite, because loans also end up as deposits. Nope. It would only be infinite if the reserve requirement were 0%. Look at the chart I linked to. This goes on all day, every day at banks around the world. New money is created through credit, subject to the limitations imposed by each country's reserve requirements.
- nhaehnle 12y ago
  What do you have to say about the empirical evidence that the total amount of deposits and the total amount of loans in the system is of the same order of magnitude? This clearly contradicts the typical money multiplier story of "X amount of deposits creates X/reserve requirement amount of loans" you have posted. Furthermore, check out countries without reserve requirements. Do they have an infinite amount of money in circulation? Yes, banks create new money through credit. However, this is not limited by reserve requirements (if the empirical evidence still doesn't convince you, please read up on how the central bank will always lend the required central bank money to banks when they need it, i.e. the lender of last resort function of central banks). You have to look at capital requirements and general borrower demand and quality to understand what's going on.
  - downandout 12y ago
    Its very simple. Bank A receives a $100 deposit and lends $90. That $90 goes into bank B. Bank B lends $81 of that money. That goes into bank C. Bank C lends $72 of that money, and that goes into bank D. None of these banks has lent out more than 90% of their deposits, yet the money has multiplied. Of course, most banks will never be able to get to 90% because demand for loans from qualified borrowers isn't high enough. But this is how the system works.