I did not read the original thread, but I am trying to wrap my head around something that I previously read on the Dope. I remember a (conservative) poster on here trying to explain that when a bank makes a loan, it was not actually loaning out the depositor’s money. What this poster said was that banks were actually creating wealth when they wrote a loan, because they just write a check to whomever the home is being bought from. The understanding I got about fractional reserve banking from this person was that a bank had no upper limit on the loans it could write, as long as it kept a fraction of the money (set by law) in reserve. (I guess this is similar to what the OP of the other thread was saying). So taking the bank that Little Nemo describes above, with a law of 3%, if a bank has $100 million in deposits, if they keep $3 million on hand, they can make $97 million in loans, but if they keep $30 million on hand, they can actually make $970 million in loans, and if they keep it all on hand, they could make $3.333 billion in loans. This is supported, kind of, by the “Money Multiplier” section of this wiki article. Fractional-reserve banking - Wikipedia. The graph basically shows that $100 in cash can generate $900 in “broad money” (M0?) in a 10% fractional reserve environment. Further down, there is a fictional balance sheet for a New Zealand bank that shows that indeed, assets cannot exceed liabilities, as Pleonast shows. So what is the wiki saying when it says that a $100 deposit can generate up to $900 “broad money”?
Example
Bank 1: $1 m0 and $10 m1
Bank 2: $1 m0 and $10 m1
Reserve requirement 10%
$1 m0 is withdrawn from bank 1. Mint replenished this.
It is now
Bank 1: $1 m0 and $9 m1
Bank 2: $1 m0 and $10 m1
“Consumer”: $1 m0
Now Bank 1 issues more loans to top up m1.
Bank 1: $1 m0 and $10 m1
Bank 2: $1 m0 and $10 m1
“Consumer”: $1 m0
Now consumer deposits in Bank 2.
Bank 1: $1 m0 and $10 m1
Bank 2: $2 m0 and $10 m1
Bank 2 can now create $20 of m1 and repeat infinitely.
Um, not really, no. The concept of fractional reserve banking intrinsically involves a statutory requirement to hold a reserve at the central bank. Fractional reserve banking is not just a matter of ensuring that a bank stays solvent, it’s also a mechanism by which the government (through the central bank) regulates money creation. One commercial bank could not (for example) just hold its fractional reserves as a deposit an another commercial bank, since that would be a circular process that would place no constraint on money creation. Reserve balances at the central bank are a different kind of money. Physical currency plus reserve balances at the central bank is the Monetary Base, the basis for the creation of other types of money. That’s how Open Market Operations work, increasing or decreasing the money supply by increasing or decreasing banks’ reserve balances at the Fed.
But fractional reserve banking does not limit money creation. Banks can just buy m0 forever and create exponentially more money.
So, banks are not creating an infinite amount of money for themselves because they are just too lazy to do it?
“Sure, I COULD have an infinite amount of money, but I’m just to lazy to do it. Instead I’ll risk my money by giving out loans that I hope will be paid back”
Something seems wrong to me about that line of reasoning.
As above, study up on double entry book-keeping. This part in particular doesn’t work the way you think it does.
But that part doesnt matter. Bank 1 can be a shell company that keeps crashing and being re established to feed money into bank 2.
Take a step back from the issue for a moment.
When you have a mental model for how something works, and it implies some apparently crazy thing, but that crazy thing is not actually happening, what should you conclude?
Ok, I won’t keep it a secret. You should conclude that your mental model for how that thing works probably includes some fundamental misconception.
The post by Hellestal above is a good starting point. Have you read it?
I did and explained why it was wrong.
You say the $1 is “replenished”. But that creates a liability.
They have $11 and also $1 in debt they took on to “replenish” their supply. That part doesn’t just come out of thin air, i.e. the Fed will send them $1 in physical cash, but it’ll cost the bank $1 to get it. Again, study up on double entry.
ETA: And if the bank doesn’t have enough in reserve at the Fed, they’re not getting any physical cash from them for that purpose. They’ll have to take out a loan to get that dollar bill from elsewhere.
Yes all the Bank 1 shell entities would collapse and be re established. Insolvency doesnt matter as long as bank 2 survives.
They collapse but they still have liabilities on the books. You keep ignoring that part.
Those liabilities will have to be eaten by somebody - either with the remaining assets of Bank 1 or whoever loaned them the money. Bank 1 can’t just ‘keep’ collapsing. That money appears as debits/credits on somebody else’s ledger. In the end, it all balances out.
ETA: so, yeah, I guess this is a way for Bank 2 to make some dirty money (not infinite but some) but at the cost of somebody else losing their shirt. It’s not coming out of thin air.
Again, given that the crazy thing that you hypothesize is not actually happening, which is more likely:
(a) you don’t understand this very well;
(b) everybody else (including all economists, and every central bank since the 17th century) don’t understand this very well, and no bank has ever spotted the loophole.
Until you stop blustering, accept the basic logical conclusion that (a) is most likely correct and adopt a more reasonable attitude, nobody is going to be much included to help you.
Its not the same Bank, its just different shells that keep being created by “consumers” using their fdic money from the collapses.
And it’s every single bank in the country that’s too lazy to do a little trading and produce infinite income. There’s not a single executive at any bank in the country who’s willing to get up off his ass and make himself fabulously wealthy. Seems like there’s a big opportunity for mustang19 to get himself a job at a bank and take over the world’s finances.
Exactly I will.
Step one - get an executive level job at a bank. Just show then your plan.
If you think the world works this way - start your own bank, and get rich!
They would have the same excuses you do.
I will.