# A catastrophic flaw in the Banking system that must be rectified **URL:** \ **Category:** Great Debates\ **Created:** [June 9, 2020, 3:55am UTC](https://boards.straightdope.com/t/a-catastrophic-flaw-in-the-banking-system-that-must-be-rectified/855282 "2020-06-09T03:55:59Z")\ **Posts on this page:** 1\ **Showing post:** 84
**Author:** ![Wrenching\_Spanners](https://avatars.discourse-cdn.com/v4/letter/w/ecb155/32.png) [@Wrenching\_Spanners](https://boards.straightdope.com/u/Wrenching_Spanners)\ **Post date:** [June 14, 2020, 12:01pm UTC](https://boards.straightdope.com/t/a-catastrophic-flaw-in-the-banking-system-that-must-be-rectified/855282/84 "2020-06-14T12:01:32Z")
> [@Askreddit](#): > > Its obvious that creating debt creates money under a fractional reserve system, and lawsuits are a way to create debt. It might not be the same kind of debt, but it shouldn’t matter for accounting purposes. > > Is that, like, the sticking point, that you dont think debt creation is identical to money creation? > > And for tech companies, apples Braeburn hedge fund is probably the biggest example of what you are saying. Apple makes free money just buying bonds and issuing them back at a higher rate > > [https://www.google.com/amp/s/seekingalpha.com/amp/article/4108372-apple-worlds-largest-bond-fund](https://www.google.com/amp/s/seekingalpha.com/amp/article/4108372-apple-worlds-largest-bond-fund) > > Obviously retarded and unsustainable, and it’s an example of these artifical liability games. The only way banks could ever lend to apple at a low rate and then pay braeburn owned bonds at a high rate is if they are dipping below their supposed reserve requirement or something stupid like that. Technically, money supply is created by bank deposits, not bank loans. This technicality is largely immaterial as bank loans are generally paid into bank accounts as deposits, rather than as a direct loan of currency notes. However, I’m raising this point because you are conflating bank loans, debt, and liabilities as the same items, which they are not. A liability is an accounting of an owed amount. In that respect, it is similar to a loan, but includes many things that are not loans. For example, a business may pay its salesmen annual bonuses such that the business calculates the current value of the bonus every month. If the salesman leaves before the end of the year, he forgoes his bonus. Therefore the calculated bonus, aka the accrual, is not a debt. It is however, a liability because it is accounted for on the business’s balance sheet. A business may also borrow from another business. This is generally referred to as credit and is a debt. It’s not optional (under general circumstances) for the business to decide not to pay the credit it’s been extended. Conceptually credit and loans are the same thing. However, business-to-business credit and bank loans fall outside of that concept. Business-to-business credit may have a tiny amount of exchangability, but is not considered money supply in any modern economy. A judgment from a lawsuit should be accounted for as a debt. But, again, this is separate from a bank loan. A bank loan is actually a financial instrument which the prior two examples are not. It has a legal definition and regulatory standing. If I’m understanding your ascertain, and I’m not confident that I am, you’re claiming that one bank can sue another bank, account for the expected judgment, and record it as an equivalent to a deposit. (BTW that would be an asset, not a liability, but then so is the cash side of money loaned into a bank, so I’ll ignore the term-hopping.) That’s simply not allowed. I doubt such a lawsuit would make it into a bank’s financial statements as anything other than a footnote if it chose to undertake such an endeavour. It certainly wouldn’t be included in a banks reports to its regulators on whether it was meeting its capital requirements. --- _[View the full topic](https://boards.straightdope.com/t/a-catastrophic-flaw-in-the-banking-system-that-must-be-rectified/855282)._