Banks create money, but it's less impressive than it sounds
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Re: Banks create money, but it's less impressive than it sounds
#2Personal finance podcast clued me into this at some point.
Every time a loan is used to pay for goods or services, some fraction of that goes back to “the bank” where 90% of it can be loaned out again. Best case, where all money is moved electronically and instantly, I keep seeing that 100 dollars go out and come back a little smaller over and over and over again. The tenth time I see it I can write a loan for about $30.
Re: Banks create money, but it's less impressive than it sounds
#3Personal finance podcast clued me into this at some point. Every time a loan is used to pay for goods or services, some fraction of that goes back to “the bank” where 90% of it can be loaned out again. Best case, where all money is moved electronically and instantly, I keep seeing that 100 dollars go out and come back a little smaller over and over and over again. The tenth time I see it I can write a loan for about…
The current "fraction" in "fractional reserve" is zero.
Re: Banks create money, but it's less impressive than it sounds
#4I've done extremely well obtaining goods and services by operating under my unpopular perceptions of the world, including how banks make money and the purpose of money and currency. My unpopular perceptions have consensus with the people that matter (banks, lawyers, accountants, regulators, courts) but they just won't get very far on web forums if you try to tell people something that doesn't match their understanding.
The primary cognitive dissonance with other people comes from tying morality to prosperity. Or put simply "some people deserve money and when that criteria is not satisfied it is controversial", but what they really mean is that "someone should have the ability to have goods and services more than others", with the money itself only being a reductive surrogate to make that happen.
The further you abstract yourself away from that, the easier it becomes to operate and see opportunities, or how to exchange time for more food and shelter in a more efficient way. How to have enough resources that the money itself looses additional utility, no different than how an abundance of oxygen looses its utility while a known upcoming absence of oxygen will redirect all of your thoughts and resources into making sure that doesn't happen.
Yes, it should not be a mystery how banks can create money.
Re: Banks create money, but it's less impressive than it sounds
#5> The main argument presented here is that banks do not have central bank-like special powers in relation to money creation; the process in which banks create money is entirely pedestrian.
I think this is wrong in a subtle way. Regular banks have a reserve requirement that limits their ability to create money. They must hold a certain number of federal reserve notes to meet the reserve requirement. The Federal Reserve can create federal reserve notes.
Re: Banks create money, but it's less impressive than it sounds
#6> The main argument presented here is that banks do not have central bank-like special powers in relation to money creation; the process in which banks create money is entirely pedestrian. I think this is wrong in a subtle way. Regular banks have a reserve requirement that limits their ability to create money. They must hold a certain number of federal reserve notes to meet the reserve requirement. The Federal Reserv…
Reserve requirements haven't mattered in US banks for a long time. One way to think about it is that reserve requirements constrain bank behavior, but the optimal strategy for banks would be the same regardless of whether that requirement were removed.
The requirement was removed in the US in March 2020 but has been a formality for most banks for a long time.
https://www.federalreserve.gov/monetarypolicy/reservereq.htm
Re: Banks create money, but it's less impressive than it sounds
#7> These facts support the main argument of this article: that banks do not have any special powers in relation to money creation.
Nothing in this blog post comes even close to supporting the idea that banks have no special money creating power.
The hidden assumption is that this "iou power" is not regulated or enforced by government control over the money supply.
That you can write a cheque and then not cash it, and that a poker site can commit fraud, do not make banks unspecial.
This is just a libertarian is/aught fallacy dressed up in a lot of words.
Re: Banks create money, but it's less impressive than it sounds
#8> The main argument presented here is that banks do not have central bank-like special powers in relation to money creation; the process in which banks create money is entirely pedestrian. I think this is wrong in a subtle way. Regular banks have a reserve requirement that limits their ability to create money. They must hold a certain number of federal reserve notes to meet the reserve requirement. The Federal Reserv…
Even if there was no reserve requirements, or other regulation to limit money creation by banks, a regular bank still would not have powers similar to the central bank.
Imagine a fraudulent banker who keeps adding billions to his own account. Suppose no-one notices. The banker starts to buy mansions and islands with this made-up money. Every time his bank transfers money to other banks (to buy those mansions), the bank loses some reserves. At some point the bank has no reserves left. Even if the reserve requirement was 0, having no reserves would mean that you could no longer transfer money to other banks.
Re: Banks create money, but it's less impressive than it sounds
#9Personal finance podcast clued me into this at some point. Every time a loan is used to pay for goods or services, some fraction of that goes back to “the bank” where 90% of it can be loaned out again. Best case, where all money is moved electronically and instantly, I keep seeing that 100 dollars go out and come back a little smaller over and over and over again. The tenth time I see it I can write a loan for about…
The language used to describe fractional reserve is pretty misleading. Banks don't increase the total supply of money, all fraction reserve does is keep more of it in circulation. If a bank takes a $1,000,000 deposit one customer, and lends $850,000 of it to other customers, there isn't $1,850,000 worth of money all of a sudden. There is $850,000 worth of debt held by customers, and another customer with a $1,000,000 balance, which on the banks books will be represented by $150,000 or cash reserves and that $850,000 of debt.
The thing that seems to confuse people is the abstraction mechanism by which the $1,000,000 depositor doesn't see any of the $850,000 debt, and the by which they can withdraw the $1,000,000 without being involved in any debt transactions themselves. Fractional reserve banking doesn't create money out of thin air, it's just a system that allows for deposits to be put to productive use. The alternative is that deposits are entirely withdraw from the economy completely until the depositor wants to use them, which would be the economic equivalent of hoarding all your money under the mattress.
The rest of it also doesn't really "go to the bank", it's money that they must have on hand to service withdrawals, and absorb defaults and other losses.
Re: Banks create money, but it's less impressive than it sounds
#10I've done extremely well obtaining goods and services by operating under my unpopular perceptions of the world, including how banks make money and the purpose of money and currency. My unpopular perceptions have consensus with the people that matter (banks, lawyers, accountants, regulators, courts) but they just won't get very far on web forums if you try to tell people something that doesn't match their understandin…
Do you have a blog?