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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=841

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
      For anyone reading this, downandout is correct. nhaehnle has a deeply flawed understanding of how the principles underlyingmodern banking, and is confusing different funding sources. Do not accept what he says at face value.
      - nhaehnle 12y ago
        And yet both of you lack an actual argument or any piece of evidence to show that I'm wrong. So, the first point is this: Even if I take a charitable interpretation of what downandout writes, they still contradict themselves. First, they wrote: > A $100 deposit generates slightly less than $1K in loans In the latest comment, they wrote: > 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 $72 of that money, and that goes into bank D. > > None of these banks has lent out more than 90% of their deposits, yet the money has multiplied. I suppose this shows that they are aware that deposits are roughly equal to loans. But then why write that 100$ of deposits generates roughly 1000$ of loans? The two statements are clearly contradictory. [0] The second point is this: Perhaps this is a confusion about where deposits actually come from? Today, most deposits are usually made electronically, but even if you actually go ahead and deposit physical money at your bank, that physical money at the bank has previously been withdrawn from a bank account somewhere. But even if 100$ of physical money were to appear by magic in your wallet and you then went ahead and deposited those at your bank, this would not cause an increase of loans by 1000$. There is just no process in modern banking where anybody at the bank says "Oh look, our deposits have increased, let's go loan to somebody". That just doesn't happen - go talk to actual bankers! The truth is that the level of loans in the economy is primarily determined by (a) how many people/companies apply for loans and (b) how creditworthy they are. [1] The amount of loans given out by banks might additionally be limited by capital regulations. However, at no point anywhere does the amount of deposits determine how many loans a bank makes. If anything, it's the other way round, because the level of loans determines the level of money which determines the level of deposits. I know that your story is the one that a lot of laypeople (and even economists!) perpetuate. Unfortunately, it's just not true. [0] I honestly fail to see how one could fail to see this. My only explanation is that you people were told this story from when you were children, that you accepted it unquestioningly and it was never pointed out to you. Edit: Perhaps, to spell it out and make the contradiction more obvious: You assume 100$ entering exogenously as new deposits. You now apply the statement "100$ of deposits generate 900$ in loans". Fine. Those loans become deposits, so now you actually have 1000$ of deposits additionally to the starting point, 900$ of which you have not yet applied the statement "100$ of deposits generate 900$ in loans" to. You now apply this statement 10 times, meaning that 9000$ in loans are generated. Ad infinitum. It just doesn't make any sense even disregarding how the banking system really works. [1] Note that this is a good thing, because it means that the economy is free to grow quickly!
- deleted 12y ago
  [deleted]

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
    For anyone reading this, downandout is correct. nhaehnle has a deeply flawed understanding of how the principles underlyingmodern banking, and is confusing different funding sources. Do not accept what he says at face value.
    - nhaehnle 12y ago
      And yet both of you lack an actual argument or any piece of evidence to show that I'm wrong. So, the first point is this: Even if I take a charitable interpretation of what downandout writes, they still contradict themselves. First, they wrote: > A $100 deposit generates slightly less than $1K in loans In the latest comment, they wrote: > 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 $72 of that money, and that goes into bank D. > > None of these banks has lent out more than 90% of their deposits, yet the money has multiplied. I suppose this shows that they are aware that deposits are roughly equal to loans. But then why write that 100$ of deposits generates roughly 1000$ of loans? The two statements are clearly contradictory. [0] The second point is this: Perhaps this is a confusion about where deposits actually come from? Today, most deposits are usually made electronically, but even if you actually go ahead and deposit physical money at your bank, that physical money at the bank has previously been withdrawn from a bank account somewhere. But even if 100$ of physical money were to appear by magic in your wallet and you then went ahead and deposited those at your bank, this would not cause an increase of loans by 1000$. There is just no process in modern banking where anybody at the bank says "Oh look, our deposits have increased, let's go loan to somebody". That just doesn't happen - go talk to actual bankers! The truth is that the level of loans in the economy is primarily determined by (a) how many people/companies apply for loans and (b) how creditworthy they are. [1] The amount of loans given out by banks might additionally be limited by capital regulations. However, at no point anywhere does the amount of deposits determine how many loans a bank makes. If anything, it's the other way round, because the level of loans determines the level of money which determines the level of deposits. I know that your story is the one that a lot of laypeople (and even economists!) perpetuate. Unfortunately, it's just not true. [0] I honestly fail to see how one could fail to see this. My only explanation is that you people were told this story from when you were children, that you accepted it unquestioningly and it was never pointed out to you. Edit: Perhaps, to spell it out and make the contradiction more obvious: You assume 100$ entering exogenously as new deposits. You now apply the statement "100$ of deposits generate 900$ in loans". Fine. Those loans become deposits, so now you actually have 1000$ of deposits additionally to the starting point, 900$ of which you have not yet applied the statement "100$ of deposits generate 900$ in loans" to. You now apply this statement 10 times, meaning that 9000$ in loans are generated. Ad infinitum. It just doesn't make any sense even disregarding how the banking system really works. [1] Note that this is a good thing, because it means that the economy is free to grow quickly!
deleted 12y ago
[deleted]