8 ms·

In fractional reserve systems you create money when you borrow from the bank. So governments will often deliberately (if not openly) stimulate real estate pric

by tsotha 11y ago

In fractional reserve systems you create money when you borrow from the bank. So governments will often deliberately (if not openly) stimulate real estate prices in an effort to inflate the money supply and stimulate the economy. A great many people believe the 2008 US real estate crash can ultimately be traced to the government's inflationary reaction to the bursting of the dotcom bubble in 2000.

skylan_q 11y ago
In fractional reserve systems you create money when you borrow from the bank This isn't true. Banks can only loan out money deposited with them.
- baddox 11y ago
  I suspect tsotha is thinking of deposit multiplication, which is often considered to be "money creation" because demand deposits are considered part of some definitions of "money supply" (particularly M1 in the United States).
- deleted 11y ago
  [deleted]
- RhodesianHunter 11y ago
  It's entirely true, it's even in the name. In a "Fractional Reserve" System banks only have to maintain a fraction of what they lend out in reserve. When you borrow money from a bank you are literally creating new money. But don't believe me, Wikipedia is your friend.
  - philwelch 11y ago
    You're thinking fractional reserve means, for a 1/4 fraction, I put $1000 in my savings account and the bank can lend you $4000. That's not true. In reality, I put $1000 in my bank account. But the bank only needs $250 cash in reserve backing that account, and can lend out the other $750. Of the bank's $1000 in assets, 1/4 must be hard cash and the rest can be debts payable to the bank. The bank charges interest to borrowers, and pays interest to depositors, and makes its profit off the margin.
    - RobertoG 11y ago
      It seems this is not how it really works. http://www.economonitor.com/lrwray/2013/08/15/banks-dont-lend-reserves-who-knew-mmt-thats-who/ http://www.economonitor.com/lrwray/2013/08/15/banks-dont-len... This is one of these things that made me think what else of what I believe is not true.
      - XorNot 11y ago
        The link you posted seems to fundamentally fail to contradict the OP. The link states "banks do not lend out their reserves" - which is true. They lend from their deposits, which is exactly what the OP was saying. If that's not it, then someone needs to explain it more clearly.
        RobertoG 11y ago
        Banks don't lean from deposits even in the "official" narrative. A bank that needs to lend money that doesn’t have it's going to use the interbank system in order to get "reserves" from others banks. The idea is that the causality is inverted. Banks lend and then search for reserves. If you see it this way, you realize that there is not constrains in how much money they can lend (except how expensive is to find reserves). Try this (maybe more clear than the other): http://bilbo.economicoutlook.net/blog/?p=14620 http://bilbo.economicoutlook.net/blog/?p=14620
- tsotha 11y ago
  >Banks can only loan out money deposited with them. This is emphatically incorrect, and the slightest bit of research would have been enough for you to realize it, too. When you take out a home loan at the bank the bank doesn't lend you anyone's money. Your promise to repay is assigned a monetary value on one side of the leger, and they cut you a check from the other side. This video is a bit melodramitic, but it's pretty accurate: https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&sqi=2&ved=0CCQQtwIwAWoVChMItfT93_joxgIVRRY-Ch0RpA82&url=http%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3DjqvKjsIxT_8&ei=nIKsVbW2OsWs-AGRyL6wAw&usg=AFQjCNGETcFMDD8EIkbyE3bcU2GNNfpErw&bvm=bv.98197061,d.cWw https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&c...
  - philwelch 11y ago
    It doesn't do wonders for your credibility when you're both wrong and arrogant about it: https://news.ycombinator.com/item?id=9914210 https://news.ycombinator.com/item?id=9914210
    - tsotha 11y ago
      I'm not wrong. You are. Please. Do a little research. You have no idea how the system works, and I'm not sure where the certainty is coming from. This is right from the wiki page you refuse to read: "Because bank deposits are usually considered money in their own right, and because banks hold reserves that are less than their deposit liabilities, fractional-reserve banking permits the money supply to grow beyond the amount of the underlying reserves of base money originally created by the central bank."
      - philwelch 11y ago
        That doesn't even remotely contradict my post. The money multiplier effect you're alluding to means that if I have $1000 in the bank, the bank can lend $750 of it out to you, so between the two of us we have $1750 of liquid assets despite the $1000 of hard cash backing it. If you spend your $750 on a house, and the guy selling the house puts the $750 in his bank account, the bank lends out $562.50 which means that from my $1000 hard cash, there is now $2312.50 of liquid assets floating around. It does not mean that the bank can fiat $4000 into existence the second I deposit that $1000. If that were the case, there wouldn't be such a thing as a bank run, because the bank would still have my $1000. Bank runs are widely acknowledged to be the biggest risk of fractional reserve banking. From the very Wikipedia article you're citing: "Fractional-reserve banking is the practice whereby a bank accepts deposits, and holds reserves that are a fraction of the amount of its deposit liabilities" "The relending model begins when an initial $100 deposit of central bank money is made into Bank A. Bank A takes 20 percent of it, or $20, and sets it aside as reserves, and then can theoretically loan out the remaining 80 percent, or $80. If the bank does in fact issue loan proceeds in the form of $80 in central bank money, the money supply actually totals $180, not $100, because the bank has loaned out $80 of the central bank money, kept $20 of central bank money in reserve (not part of the money supply), and substituted a newly created $100 IOU claim for the depositor that acts equivalently to and can be implicitly redeemed for central bank money (the depositor can transfer it to another account, write a check on it, demand his cash back, etc.)". (The editors of Wikipedia are evidently fond of their run-on sentences.)

by tsotha 11y ago

skylan_q 11y ago

In fractional reserve systems you create money when you borrow from the bank This isn't true. Banks can only loan out money deposited with them.

baddox 11y ago
I suspect tsotha is thinking of deposit multiplication, which is often considered to be "money creation" because demand deposits are considered part of some definitions of "money supply" (particularly M1 in the United States).
deleted 11y ago
[deleted]
RhodesianHunter 11y ago
It's entirely true, it's even in the name. In a "Fractional Reserve" System banks only have to maintain a fraction of what they lend out in reserve. When you borrow money from a bank you are literally creating new money. But don't believe me, Wikipedia is your friend.
- philwelch 11y ago
  You're thinking fractional reserve means, for a 1/4 fraction, I put $1000 in my savings account and the bank can lend you $4000. That's not true. In reality, I put $1000 in my bank account. But the bank only needs $250 cash in reserve backing that account, and can lend out the other $750. Of the bank's $1000 in assets, 1/4 must be hard cash and the rest can be debts payable to the bank. The bank charges interest to borrowers, and pays interest to depositors, and makes its profit off the margin.
  - RobertoG 11y ago
    It seems this is not how it really works. http://www.economonitor.com/lrwray/2013/08/15/banks-dont-lend-reserves-who-knew-mmt-thats-who/ http://www.economonitor.com/lrwray/2013/08/15/banks-dont-len... This is one of these things that made me think what else of what I believe is not true.
    - XorNot 11y ago
      The link you posted seems to fundamentally fail to contradict the OP. The link states "banks do not lend out their reserves" - which is true. They lend from their deposits, which is exactly what the OP was saying. If that's not it, then someone needs to explain it more clearly.
      - RobertoG 11y ago
        Banks don't lean from deposits even in the "official" narrative. A bank that needs to lend money that doesn’t have it's going to use the interbank system in order to get "reserves" from others banks. The idea is that the causality is inverted. Banks lend and then search for reserves. If you see it this way, you realize that there is not constrains in how much money they can lend (except how expensive is to find reserves). Try this (maybe more clear than the other): http://bilbo.economicoutlook.net/blog/?p=14620 http://bilbo.economicoutlook.net/blog/?p=14620
tsotha 11y ago
>Banks can only loan out money deposited with them. This is emphatically incorrect, and the slightest bit of research would have been enough for you to realize it, too. When you take out a home loan at the bank the bank doesn't lend you anyone's money. Your promise to repay is assigned a monetary value on one side of the leger, and they cut you a check from the other side. This video is a bit melodramitic, but it's pretty accurate: https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&sqi=2&ved=0CCQQtwIwAWoVChMItfT93_joxgIVRRY-Ch0RpA82&url=http%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3DjqvKjsIxT_8&ei=nIKsVbW2OsWs-AGRyL6wAw&usg=AFQjCNGETcFMDD8EIkbyE3bcU2GNNfpErw&bvm=bv.98197061,d.cWw https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&c...
- philwelch 11y ago
  It doesn't do wonders for your credibility when you're both wrong and arrogant about it: https://news.ycombinator.com/item?id=9914210 https://news.ycombinator.com/item?id=9914210
  - tsotha 11y ago
    I'm not wrong. You are. Please. Do a little research. You have no idea how the system works, and I'm not sure where the certainty is coming from. This is right from the wiki page you refuse to read: "Because bank deposits are usually considered money in their own right, and because banks hold reserves that are less than their deposit liabilities, fractional-reserve banking permits the money supply to grow beyond the amount of the underlying reserves of base money originally created by the central bank."
    - philwelch 11y ago
      That doesn't even remotely contradict my post. The money multiplier effect you're alluding to means that if I have $1000 in the bank, the bank can lend $750 of it out to you, so between the two of us we have $1750 of liquid assets despite the $1000 of hard cash backing it. If you spend your $750 on a house, and the guy selling the house puts the $750 in his bank account, the bank lends out $562.50 which means that from my $1000 hard cash, there is now $2312.50 of liquid assets floating around. It does not mean that the bank can fiat $4000 into existence the second I deposit that $1000. If that were the case, there wouldn't be such a thing as a bank run, because the bank would still have my $1000. Bank runs are widely acknowledged to be the biggest risk of fractional reserve banking. From the very Wikipedia article you're citing: "Fractional-reserve banking is the practice whereby a bank accepts deposits, and holds reserves that are a fraction of the amount of its deposit liabilities" "The relending model begins when an initial $100 deposit of central bank money is made into Bank A. Bank A takes 20 percent of it, or $20, and sets it aside as reserves, and then can theoretically loan out the remaining 80 percent, or $80. If the bank does in fact issue loan proceeds in the form of $80 in central bank money, the money supply actually totals $180, not $100, because the bank has loaned out $80 of the central bank money, kept $20 of central bank money in reserve (not part of the money supply), and substituted a newly created $100 IOU claim for the depositor that acts equivalently to and can be implicitly redeemed for central bank money (the depositor can transfer it to another account, write a check on it, demand his cash back, etc.)". (The editors of Wikipedia are evidently fond of their run-on sentences.)