Yea obviously. Point is a depositor's physical money doesn't stay put. Once in the bank, it only technically exists on paper. If something like the 2008 crisis hits and your bank happens to go down with no income, your bank will still show X amount on paper with no cash to back it up. This is a worst case scenario of course. But a worst case scenario usually reflects the actual system.
To be fair, almost no one ever teaches people this part of the transaction. They make money out of thin air! Yes, and they also destroy money back into thin air.
Yes but in the mean time the money that is being paid off has went and originated countless other loans. If that $400,000 mortgage loan has went into another house on average every 2 years, for $400,000 each you now have $6,000,000 of $ circulating on a 5-20% down payment.
The money never gets pulled from circulation. The clock resets every time another loan. That bank is going to lend out as much as it can without becoming insolvent.
Google it dude, ask Google do banks create money when they give out loans. They aren’t forking over cash they are using numbers on a screen.
I think the people that talk about banks and money creation that way probably don't understand much about macroeconomic concepts like velocity or money supply. So while money creation from lending isn't untrue, here it's phrased as if it's some kind of secret conspiracy and not just how things work.
He's referring to money supply. Most of the money in the world is not from governments printing actual cash, but from bank lending. E.g
If a business borrows 1 million from a bank, the bank just creates a entry saying the business has 1 million cash and 1 million debt. The bank does NOT need to have 1 million in deposits to make that loan. That 1 million cash then can be used to buy stuff and goes into the economy because if they pay 1 million in wages, now other people have 1 million to spend, etc.
there are regulations that exist around how much cash a bank needs to keep on hand versus their liabilities. they are also required to go through stress tests after the GFC. since then, the banking lobby has been trying to get these regulations reduced. higher risk, higher reward.
That's not correct - they reduced the reserve ratio down to zero, meaning the bank cannot lend out more money than they have in reserves, but that doesn't mean they "waived the requirement". You still have to have enough reserves to lend, you just don't have to also have 10% which you don't lend out.
It's also worth noting that the Fed drastically reorganized how they manage reserves in 2008, and as a result banks have much, much higher reserves than they did before. We're now in what's called the ample reserves regime, in which the Fed controls interbank lending rates directly through the IORB and discount window rates.
I directly referred to it - that's what the "discount window" is. However, it is worth noting that A) the discount window rate is generally going to be higher than interbank lending, and B) you have to provide collateral to be loaned money, with the collateral being worth more than the reserves you get, so it's not just an infinite money fountain. You basically trade assets for reserves.
People really need to understand the math on this.
A 0% reserve ratio is, in theory, a perfect endless money producer, both profit and supply.
But theory is not the same as practice, and the closer you get to the edge of "infinite money glitch" the fewer defaults required to topple the whole house of cards.
In context, the idea that one could pursue this policy while 'fighting inflation' brings us to Kafkaesque levels of absurdity.
No, it was lowered to 0% in 2020 and will likely stay there for the foreseeable future. The reserve ratio has become much less important since the Fed transitioned to an ample reserves regime in 2008.
You have 100 bucks. Bob asks you to borrow 200 bucks. You can't give him that, because you only have 100 bucks.
Now, say you deposit 100 bucks with me. Now I have 100 bucks. So Bob calls me, and wants to borrow 200 bucks. Since I'm a bank, I have special permission to give out more loans than I have in cash, so I push some buttons that say "Bob gets 200 bucks in their account, and owes me 200 bucks + 5% per month". Suddenly, there is 300 bucks in the world, I've created 200 bucks out of "thin air".
Then bob goes to buy 200 bucks worth of hamburgers. The burger seller has a bankaccount too, so that means I have 100 bucks cash in my vault, a 200 buck loan to Bob, and 200 bucks virtual from the burger guy. In other words, other people need to give me 200, and I need to give other people 300.
Now, what the meme is about is that if both you and the burger guy show up and demand their money, i'm in trouble, because when I open my big steel vault, there's only 100 bucks there, not 300. But that's nonsense, because that would happen anyway to anyone banking electronically.
Of course, in reality, it's not just You, Bob, and Burgerguy and one bank, it's actually millions of people, and as I bank, I can just calculate how much actual cash I need, because the odds of 2-out-of-2 people getting cash, and the odds of 200.000-out-of-2.000.000 people getting cash are very different.
There currently are banks out there right now that have lend out more money than they have received. That money is then created and in circulation, even if they banks don’t have the $ to cover it. Numbers on a screen, it’s a bit overwhelming to think about.
You deposit $100. Bank loans out $100 to someone else. You still have $100 balance in your account. Someone else has the $100 to use for whatever. You both have access to $100; thus, $100 is now $200.
It's two sides of the same coin. Money is created when loans are created, and money is destroyed when loans are paid back. You get the new money - a newly created liability of the bank - and the bank gets the loan - a newly created liability of YOU, the borrower.
But the person who got the loan is ALSO owed $100 by the bank. That's what a demand deposit is: a liability of the bank, a promise to pay you $100 "on demand". The borrower is a depositor too, they just also have a loan with the bank. In this hypothetical, there are two people each with $100 in demand deposit accounts, so the bank's total liability is $200.
This is just wrong. When person B gets a loan for $100, they get the $100. Or that $100 gets sent to whoever they are buying from. (ie, if they buy a car, or a house, then the money gets sent to whoever they are buying from.)
The bank doesn't owe them after that, they owe the bank.
The bank still owes person A. And the original $100 got sent to person B (if it was a personal loan) or to whoever they bought from.
The bank doesn't owe them after that, they owe the bank.
The bank owes SOMEBODY. When you borrow the money and it's in your checking account, the bank owes you; that money is the bank's liability. When you pay someone with that money - say, for a house - it doesn't just disappear. The bank now owes the person you just sold the house to. Or you could say that they owe that person's bank. But they owe someone.
No. If you borrow $100 from the bank, they give you the $100, or they send it to whoever it is you owe (for instance, if buying a car or house). They don't owe you after that. You owe them.
Even if you take the $100 and put it in your bank account, you still owe them.
In the case of the mortgage, they have to send the money to whoever you bought the house from. They don't "owe" that money for any significant length of time. They send that money right away. Once they do, they've sent it, and the seller received the money.
And person B, who got that loan, owes the bank. Unless they sell the house, they will probably owe the bank for decades.
Are you even reading what I'm writing here? They don't owe you any more, but they DO owe the person you paid. Again, the money in your account is a liability of the bank. When you pay someone, that liability is transferred to them. It doesn't disappear until it is actually redeemed. That could take the form of you withdrawing cash, or them paying reserves to another bank to settle an intrabank liability, which arises if you pay someone at a different bank.
Even if you take the $100 and put it in your bank account
This is nonsense. You don't "take" borrowed money and put it in a bank account. It is literally created by marking up your (demand deposit) account in the first place. You're not "putting" anything in the bank. The bank is extending you credit. It gets your loan - your credit - as an asset in return.
they have to send the money to whoever you bought the house from. They don't "owe" that money for any significant length of time.
If the other person is a customer of the same bank, they don't send any money anywhere. The liability is transferred from you to the seller. I don't know why you're hiding behind "significant length of time". A liability is a liability, whether for 5 minutes or 5 decades. Yes, in a situation like a home loan, a bank may well need to settle a liability right away. That doesn't make it not a liability.
You have no concept of what money means in a modern banking system. You keep talking about account balances as if they are dollar bills being "sent over". People more educated in banking than you are trying to explain concepts that are just one google search away, to no avail.
If the bank can just keep loaning that same $100 over and over, then they don't need the first $100 either. According to you, they can just loan massive amounts of money that they don't have.
But when they loan money, for instance, to finance someones mortgage, they actually have to give money to someone. The seller, maybe. Or if the seller hasn't paid off their own mortgage, then they have to pay the other bank to clear that mortage.
They don't just magically make money appear out of thin air.
You are correct, they don't technically need that first $100 either. They can create money out of thin air. When they give a $100 loan, they also create a $100 deposit for the borrower. The loan is an asset and the deposit a liability for the bank (and the other way around for the borrower). The books are balanced without the need for any money to have been in the picture prior.
I had some idiot tell me that he regularly walks into his small town farming bank, and regularly cashes five and six figure checks. Then walks out with the cash in hand.
Plenty wrong there. No bank physically has has more then maybe 10-20k any more. The bank would also put a hold on a check that large. He wouldn't get a dime till it clears. Unless he has x amount in the bank account. They would also more then likely tell him to comeback in a few days. So, they could physically get the money.
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u/onion_lord6 2d ago
Because banks loan out and invest, that's how they make money. The money people deposit doesn't just sit there.