FTX tapped into customer accounts to fund risky bets, setting up its downfall

> Furthermore, it's not clear to me how you believe that the BoE article contradicts what I'm saying. I'm under the impression that you (along with most other people) are simply misunderstanding what you are reading here.

The contradiction seems fundamental. You're suggesting existing deposits facilitate the creation of loans. The entire BoE article is a repeated attempt at showing how loans create deposits.

> Do you think that a bank which has NO MONEY is able to (in a practical sense) create infinite money out of thin air? Sure it can type "9999999999999 dollars" on a computer, but that wouldn't be "real money" in any practical sense, because you wouldn't be able to exchange it for goods and services.

That's ... exactly how it works. If the bank believes you are good for 9999999999999 dollars over the term of the loan, they put +x in your demand deposit account, and -x in your loan account (and from bank's view those are respectively the bank's own liabilities and assets).

You can then go and send that money (demand deposit) somewhere else to buy a house or whatever (goods and services). Bank A and bank B both have banking licences, which means they mutually trust using each other's customer demand deposit accounts as 'money'.

You mentioned you wouldn't be able to exchange that for goods and services - but that's exactly what happens. You then need to find those dollars and pay back the loan eventually from a job or whatever, or else you go bankrupt.

If you would like to turn that demand deposit into hard cash to keep under the mattress, your commercial bank will send your demand deposit to the commercial bank's account with the central bank, and the central bank will truck over some cash in return.

I know you get this since you write it as IOUs in the article. What I'm trying to get across is that nothing has to precede the creation of the IOU, whereas I think you say an initial deposit of government-issued central bank money (cash) is required.

> Follow-up question: if you genuinely believe this to be possible, then why isn't anybody doing that? Surely there are many people working at banks who would like to collude with their friends and family to create infinite money. If you believe that to be possible, why has it literally never happened?

Try it :) I think odds are you end up in jail.

And if a bank (or crypto exchange!) is in the business of writing crap to counterparties who can't pay them back, the bank probably goes out of business once everyone realizes the bank assets (loans) are garbage.

Trying to get a loan without intention of paying it back is bank fraud. It happens and occasionally for very large sums; https://www.afr.com/companies/financial-services/papas-mazco...

Further, regulators like to see banks hold capital against their assets to make sure they can fill the gap when some loans inevitably go bad. That capital could be retained earnings, shareholder capital, etc etc. It just doesn't have to come from an initial deposit.

Haha indeed, I forgot this existed! What a long and winding trail our languages are!

Thanks, your pedantry is greatly appreciated, it makes HN fun and educational

> If I take a loan out of a bank in physical banknotes, then the bank physically loses the amount of banknotes that I physically receive. Physical banknotes are not duplicated

The withdrawl of money from a bank as notes/coins is a different operation than the origination of a loan. When banks originate a loan, the first thing that happens is that you see the balance appear in your account. You can then choose to withdraw that in cash.

> If I take a loan out of a bank in the form of electronic transfer to another bank, then usually one of 2 things happen:

Again, the origination of the loan and the transfer of settlement funds to another bank are separate operations. You cannot take out a loan in the form of electronic transfer to another bank.

> 1. The receiving bank requires ... they didn't magically gain "free money" by providing a loan to their customer.

Agreed, so what you've described so far is that banks need reserve balances sufficient to cover interbank settlements and cash withdrawls, and banks do not receive money by originating loans.

What they do when they originate loans is provide an asset to the customer (a demand deposit balance) in exchange for a liability of the customer (the loan agreement).

> I believe this is referring to the creation of the accounting entry

All "money" is simply an accounting entry.

> It's true in the most pedantic sense, which is incredibly misleading and unhelpful.

It's true in every sense, and is very helpful if you want to understand how banking and money work.

> Yes, when you type a number into a computer, you can type any number. If I were to open a business where I operate like a bank, taking deposits from people and loaning money to people

You haven't described the mechanism by which a bank can use deposits it has taken from customers to originate loans to other customers.

> and I were to keep a ledger of how much money each person has at their "accounts" with me, I could type any number I want in that ledger. Let's say I type in "9999999999999 dollars". Sure, why not. If your argument is that one can type in any number they want on a computer, then that's true, but it's not a useful argument to make.

Yes it is, because it's an accurate description of how banks originate loans.

> Do you think that a bank which has NO MONEY is able to (in a practical sense) create infinite money out of thin air? Sure it can type "9999999999999 dollars" on a computer, but that wouldn't be "real money" in any practical sense, because you wouldn't be able to exchange it for goods and services.

Deposits created by a bank are good for all transactions within that bank. If all people were customers of the same bank (some sort of "central bank" if you will) and all currency were digital, then the bank could indeed create infinity dollars without liquidity risk, because all transactions would occur within their own accounting system with no external settlements.

> Follow-up question: if you genuinely believe this to be possible, then why isn't anybody doing that? Surely there are many people working at banks who would like to collude with their friends and family to create infinite money. If you believe that to be possible, why has it literally never happened?

The reason it has never happened in precisely the way you outline above is quite simply regulation. But also, it does happen, fraud in loan origination isn't that rare. Here's a recent example of a banker originating $16m in loans to Paul Manafort in exchange for a shot at working with Trump:

https://www.cnbc.com/2019/05/23/banker-indicted-for-loaning-...

But let's imagine that a bank did attempt to operate without any settlement balances. What would that look like?

It would originate loans by adding $9,999,999,999 to someone's account, and since they're not the only bank, the person has the choice to spend that money wherever they please and some of that money will end up being withdrawn as notes/coins or transferred to another bank.

The originator of the loan would then have to borrow settlement balances sufficient to cover withdrawals in notes/coins and cover interbank settlements. As a result it would be paying interest, which puts up its costs. Now let's imagine all banks did that, starting from $0 on day one.

What happens? The central bank, which is the lender of last resort, lends money to all those banks and they have to pay interest on it, but in lending the money, the central bank has created reserve balances. Now, the bank that is most successful at attracting people to create accounts receives more reserve balances than the others, which they can use to pay back the central bank, thus reducing their costs. If they continue being more successful, they will eventually not only have paid back the central bank, but will have excess reserves which they can use to satisfy future interbank settlements and cash withdrawls and they may even have so much in reserve that they can compete with the central bank to lend those reserves to other banks (at an interest rate just below what the central bank charges -- ringing any bells?) which makes them EVEN MORE money.

So the reason banks like to attract deposits is that it makes them more profitable.

Of course, there are also regulations and capital requirements that are imposed on banks, and the government also creates net financial assets in the banking sector by issuing bonds on the primary market (which is a vestigial way of overt money creation kept in place because it is convenient for a bunch of rich people to get richer, but that's another story).

But fundamentally, we could have a banking system that operates exactly as I described where ALL money creation occurred only through the origination of private credit and subsequent lending of reserve balances by the central bank. It would be a horrible economy with massive inequality and instability, but you could do it, if you so desired. The reason we regulate it is to remove some of that instability (removing the inequality, we're still working on!)

11 months old isn't brand new.

The way I find the OP isn't a blatant lie. It's the truth: how I find the OP.

Now I'm wondering about you.

You wrote too many false sentences. Here's one: "the technology is useless beyond any kind of recovery."

The technology works. People use crypto for payments.

> Now the only real way to force all these people to use a single blockchain and make them follow normal accounting procedures would be to pass a law making them do it.

I wouldn't be surprised if someone put you up to coming here and writing all this, so you can go back and claim something like "I ran this by lots of smart people and they agree the only way is to pass a law", and then use this to back some legislation.