[Conversation starter] Where do banks get the money they lend to people in the private sector?

[Econ4Every1]

I know everyone isn't from the US, but this conversation is largely pointed at those in the US, though much of what I say will, to some degree apply in nations like Canada, Japan, UK and Australia.

So does anyone know where banks get the money they lend to people? I'm fascinated how few people, including people that work at banks, actually know the answer to this question.

Let's have a little "fun" and see how many people enjoy a good conversation out the economy.

-Cheers

 

[Toddsterpatriot]

I know everyone isn't from the US, but this conversation is largely pointed at those in the US, though much of what I say will, to some degree apply in nations like Canada, Japan, UK and Australia.

So does anyone know where banks get the money they lend to people? I'm fascinated how few people, including people that work at banks, actually know the answer to this question.

Let's have a little "fun" and see how many people enjoy a good conversation out the economy.

-Cheers

So does anyone know where banks get the money they lend to people?

Deposits.

 

[TNHarley]

I know everyone isn't from the US, but this conversation is largely pointed at those in the US, though much of what I say will, to some degree apply in nations like Canada, Japan, UK and Australia.

So does anyone know where banks get the money they lend to people? I'm fascinated how few people, including people that work at banks, actually know the answer to this question.

Let's have a little "fun" and see how many people enjoy a good conversation out the economy.

-Cheers

So does anyone know where banks get the money they lend to people?

Deposits.

Thats part of it. I think the rest is imaginary, as weird as that sounds.

 

[Econ4Every1]

I'm not going to sugar coat things for you, but I assure you in advance that my tone towards you is not meant to be aggressive or disrespectful. One of the limitations of this form of communication. looking forward to good conversations on the topic of economics.

Cheers

E4E1

I know everyone isn't from the US, but this conversation is largely pointed at those in the US, though much of what I say will, to some degree apply in nations like Canada, Japan, UK and Australia.

So does anyone know where banks get the money they lend to people? I'm fascinated how few people, including people that work at banks, actually know the answer to this question.

Let's have a little "fun" and see how many people enjoy a good conversation out the economy.

-Cheers

So does anyone know where banks get the money they lend to people?

Deposits.

This is the response I get from most people. This is what happens when the economy changes but school and college curriculums aren't updated.

So, no, loans do not come from deposits. This is why I was trying to get you to answer the savings question in the other thread (which you responded to me with a Misis article).

Fact, banks don't lend deposits to customers.

Evidence:

Standard and Poors Cheif global economist

Here's a paper from the Bank of England

Fractional Reserve Banking, at least how most Austrians understand it, ended in 1934 when convertibility to gold ended. The fact that most Austrians stubbornly refuse to acknowledge this is amazing and completely undermines the Austrian theory of economics.

Todd, everything you think you know about the economy is rooted in this idea and it's an idea that completely vanished in 1974 when the fiat standard was adopted.

You believe that saving supports lending and investment.

This is wrong. Savings does not support investment, investment supports savings.

Example. I bought my house. It is an investment, but no one's savings made it (see linked articles for evidence and understanding) possible . However, when I borrowed the money from a bank (that created the money it lent me out of thin air) and paid it to the previous owner, the seller took what was left after they paid off the house and deposited it as savings. See how that works? My investment supported their savings.

Think about it. How many people make large investments with cash? Some but most investments made via borrowing and that investment creates savings.

So what happens to the money you deposit at a bank?

Simple, 100% of it becomes bank reserves. Not 10%, not 3%, 100%.

Where does a bank get money to lend to customers?

Banks create it out of thin air. Simple keystrokes on a keyboard.

How does this happen?

Because the bank takes your approved loan and deposits it as an asset. An asset worth the value of the loan plus interest, minus the money created and lent. The bank profits from the interest and when you repay your loan, the bank uses that to zero out the cash it created.

So if you take a loan for $1, the bank deposits your loan (the note) as an asset for $1 and then creates and gives you $1. The bank expects you to return with it's dollar plus some interest which it keeps.

 

[Econ4Every1]

I know everyone isn't from the US, but this conversation is largely pointed at those in the US, though much of what I say will, to some degree apply in nations like Canada, Japan, UK and Australia.

So does anyone know where banks get the money they lend to people? I'm fascinated how few people, including people that work at banks, actually know the answer to this question.

Let's have a little "fun" and see how many people enjoy a good conversation out the economy.

-Cheers

So does anyone know where banks get the money they lend to people?

Deposits.

Thats part of it. I think the rest is imaginary, as weird as that sounds.

You were closer than Todd. The bank creates it out of thin air, but lest you believe that banks are unaccountable for this reason, that's not true either. Something I'll explain if you are interested.

 

[TNHarley]

I know everyone isn't from the US, but this conversation is largely pointed at those in the US, though much of what I say will, to some degree apply in nations like Canada, Japan, UK and Australia.

So does anyone know where banks get the money they lend to people? I'm fascinated how few people, including people that work at banks, actually know the answer to this question.

Let's have a little "fun" and see how many people enjoy a good conversation out the economy.

-Cheers

So does anyone know where banks get the money they lend to people?

Deposits.

Thats part of it. I think the rest is imaginary, as weird as that sounds.

You were closer than Todd. The bank creates it out of thin air, but lest you believe that banks are unaccountable for this reason, that's not true either. Something I'll explain if you are interested.

I didnt say they were unaccountable.

 

[Econ4Every1]

I know everyone isn't from the US, but this conversation is largely pointed at those in the US, though much of what I say will, to some degree apply in nations like Canada, Japan, UK and Australia.

So does anyone know where banks get the money they lend to people? I'm fascinated how few people, including people that work at banks, actually know the answer to this question.

Let's have a little "fun" and see how many people enjoy a good conversation out the economy.

-Cheers

So does anyone know where banks get the money they lend to people?

Deposits.

Thats part of it. I think the rest is imaginary, as weird as that sounds.

You were closer than Todd. The bank creates it out of thin air, but lest you believe that banks are unaccountable for this reason, that's not true either. Something I'll explain if you are interested.

I didnt say they were unaccountable.

Sorry, I didn't mean to imply that you did, it's just that few people understand the system of accountability.

 

[Toddsterpatriot]

I'm not going to sugar coat things for you, but I assure you in advance that my tone towards you is not meant to be aggressive or disrespectful. One of the limitations of this form of communication. looking forward to good conversations on the topic of economics.

Cheers

E4E1

I know everyone isn't from the US, but this conversation is largely pointed at those in the US, though much of what I say will, to some degree apply in nations like Canada, Japan, UK and Australia.

So does anyone know where banks get the money they lend to people? I'm fascinated how few people, including people that work at banks, actually know the answer to this question.

Let's have a little "fun" and see how many people enjoy a good conversation out the economy.

-Cheers

So does anyone know where banks get the money they lend to people?

Deposits.

This is the response I get from most people. This is what happens when the economy changes but school and college curriculums aren't updated.

So, no, loans do not come from deposits. This is why I was trying to get you to answer the savings question in the other thread (which you responded to me with a Misis article).

Fact, banks don't lend deposits to customers.

Evidence:

Standard and Poors Cheif global economist

Here's a paper from the Bank of England

Fractional Reserve Banking, at least how most Austrians understand it, ended in 1934 when convertibility to gold ended. The fact that most Austrians stubbornly refuse to acknowledge this is amazing and completely undermines the Austrian theory of economics.

Todd, everything you think you know about the economy is rooted in this idea and it's an idea that completely vanished in 1974 when the fiat standard was adopted.

You believe that saving supports lending and investment.

This is wrong. Savings does not support investment, investment supports savings.

Example. I bought my house. It is an investment, but no one's savings made it (see linked articles for evidence and understanding) possible . However, when I borrowed the money from a bank (that created the money it lent me out of thin air) and paid it to the previous owner, the seller took what was left after they paid off the house and deposited it as savings. See how that works? My investment supported their savings.

Think about it. How many people make large investments with cash? Some but most investments made via borrowing and that investment creates savings.

So what happens to the money you deposit at a bank?

Simple, 100% of it becomes bank reserves. Not 10%, not 3%, 100%.

Where does a bank get money to lend to customers?

Banks create it out of thin air. Simple keystrokes on a keyboard.

How does this happen?

Because the bank takes your approved loan and deposits it as an asset. An asset worth the value of the loan plus interest, minus the money created and lent. The bank profits from the interest and when you repay your loan, the bank uses that to zero out the cash it created.

So if you take a loan for $1, the bank deposits your loan (the note) as an asset for $1 and then creates and gives you $1. The bank expects you to return with it's dollar plus some interest which it keeps.

So, no, loans do not come from deposits.

They do.

You believe that saving supports lending and investment.

Only because it does.

Think about it. How many people make large investments with cash?

Who said all deposits were cash?

Because the bank takes your approved loan and deposits it as an asset.

You'll have to explain why a bank would go through the trouble and expense to accept my deposit, if they weren't using it for something useful, like lending.

 

[Toddsterpatriot]

I'm not going to sugar coat things for you, but I assure you in advance that my tone towards you is not meant to be aggressive or disrespectful. One of the limitations of this form of communication. looking forward to good conversations on the topic of economics.

Cheers

E4E1

I know everyone isn't from the US, but this conversation is largely pointed at those in the US, though much of what I say will, to some degree apply in nations like Canada, Japan, UK and Australia.

So does anyone know where banks get the money they lend to people? I'm fascinated how few people, including people that work at banks, actually know the answer to this question.

Let's have a little "fun" and see how many people enjoy a good conversation out the economy.

-Cheers

So does anyone know where banks get the money they lend to people?

Deposits.

This is the response I get from most people. This is what happens when the economy changes but school and college curriculums aren't updated.

So, no, loans do not come from deposits. This is why I was trying to get you to answer the savings question in the other thread (which you responded to me with a Misis article).

Fact, banks don't lend deposits to customers.

Evidence:

Standard and Poors Cheif global economist

Here's a paper from the Bank of England

Fractional Reserve Banking, at least how most Austrians understand it, ended in 1934 when convertibility to gold ended. The fact that most Austrians stubbornly refuse to acknowledge this is amazing and completely undermines the Austrian theory of economics.

Todd, everything you think you know about the economy is rooted in this idea and it's an idea that completely vanished in 1974 when the fiat standard was adopted.

You believe that saving supports lending and investment.

This is wrong. Savings does not support investment, investment supports savings.

Example. I bought my house. It is an investment, but no one's savings made it (see linked articles for evidence and understanding) possible . However, when I borrowed the money from a bank (that created the money it lent me out of thin air) and paid it to the previous owner, the seller took what was left after they paid off the house and deposited it as savings. See how that works? My investment supported their savings.

Think about it. How many people make large investments with cash? Some but most investments made via borrowing and that investment creates savings.

So what happens to the money you deposit at a bank?

Simple, 100% of it becomes bank reserves. Not 10%, not 3%, 100%.

Where does a bank get money to lend to customers?

Banks create it out of thin air. Simple keystrokes on a keyboard.

How does this happen?

Because the bank takes your approved loan and deposits it as an asset. An asset worth the value of the loan plus interest, minus the money created and lent. The bank profits from the interest and when you repay your loan, the bank uses that to zero out the cash it created.

So if you take a loan for $1, the bank deposits your loan (the note) as an asset for $1 and then creates and gives you $1. The bank expects you to return with it's dollar plus some interest which it keeps.

So if you take a loan for $1, the bank deposits your loan (the note) as an asset for $1 and then creates and gives you $1.

With no deposits, where does this $1 come from that they give me?

 

[Econ4Every1]

I'm not going to sugar coat things for you, but I assure you in advance that my tone towards you is not meant to be aggressive or disrespectful. One of the limitations of this form of communication. looking forward to good conversations on the topic of economics.

Cheers

E4E1

I know everyone isn't from the US, but this conversation is largely pointed at those in the US, though much of what I say will, to some degree apply in nations like Canada, Japan, UK and Australia.

So does anyone know where banks get the money they lend to people? I'm fascinated how few people, including people that work at banks, actually know the answer to this question.

Let's have a little "fun" and see how many people enjoy a good conversation out the economy.

-Cheers

So does anyone know where banks get the money they lend to people?

Deposits.

This is the response I get from most people. This is what happens when the economy changes but school and college curriculums aren't updated.

So, no, loans do not come from deposits. This is why I was trying to get you to answer the savings question in the other thread (which you responded to me with a Misis article).

Fact, banks don't lend deposits to customers.

Evidence:

Standard and Poors Cheif global economist

Here's a paper from the Bank of England

Fractional Reserve Banking, at least how most Austrians understand it, ended in 1934 when convertibility to gold ended. The fact that most Austrians stubbornly refuse to acknowledge this is amazing and completely undermines the Austrian theory of economics.

Todd, everything you think you know about the economy is rooted in this idea and it's an idea that completely vanished in 1974 when the fiat standard was adopted.

You believe that saving supports lending and investment.

This is wrong. Savings does not support investment, investment supports savings.

Example. I bought my house. It is an investment, but no one's savings made it (see linked articles for evidence and understanding) possible . However, when I borrowed the money from a bank (that created the money it lent me out of thin air) and paid it to the previous owner, the seller took what was left after they paid off the house and deposited it as savings. See how that works? My investment supported their savings.

Think about it. How many people make large investments with cash? Some but most investments made via borrowing and that investment creates savings.

So what happens to the money you deposit at a bank?

Simple, 100% of it becomes bank reserves. Not 10%, not 3%, 100%.

Where does a bank get money to lend to customers?

Banks create it out of thin air. Simple keystrokes on a keyboard.

How does this happen?

Because the bank takes your approved loan and deposits it as an asset. An asset worth the value of the loan plus interest, minus the money created and lent. The bank profits from the interest and when you repay your loan, the bank uses that to zero out the cash it created.

So if you take a loan for $1, the bank deposits your loan (the note) as an asset for $1 and then creates and gives you $1. The bank expects you to return with it's dollar plus some interest which it keeps.

So, no, loans do not come from deposits.

They do.

You believe that saving supports lending and investment.

Only because it does.

Think about it. How many people make large investments with cash?

Who said all deposits were cash?

Because the bank takes your approved loan and deposits it as an asset.

You'll have to explain why a bank would go through the trouble and expense to accept my deposit, if they weren't using it for something useful, like lending.

Who said all deposits were cash?

I didn't, but tell me then, what other kinds of deposits are there and how does it matter in the context of this conversation?

You'll have to explain why a bank would go through the trouble and expense to accept my deposit, if they weren't using it for something useful, like lending.

Sure...I never said banks didn't lend deposits. I said "banks don't lend [customer] deposits to other customers.

Banks deposit peoples savings as reserves. Prior to 2008 banks lent reserves to each other to meet the 10% reserve requirement. The Fed and the FOMC creates scarcity of reserves via the sale of assets. Banks trade excess reserves for assets from the Treasury or the Fed (the Treasury and Fed coordinate). This has the effect of removing reserves and creating scarcity necessary to cause the interest rate to rise above zero. When the Fed wants the rate to fall, it purchases assets.

Post-2008 QE tanked that system as the level of excess reserves went from 10's of billions ti multiple trillions. The bank no longer had a need to borrow from each other and the rate was effectively pushed to zero. The Fed responded by creating a rate floor by paying interest on excess reserves. Given the near zero risk, banks would only make loans in excess of what the Fed was paying.

So deposits are useful, in a Pre-2008 world, bank deposits are the lowest cost reserve a bank usually had. If a bank managed to attract lots of money in deposits, it could make money by lending to other banks.

In the post-2008 world, banks get paid 3 basis points on your deposits. Easy money.

However, what I said still stands.

Savings has ZERO effect on the interest rate and the rate and quantity of deposits do NOT affect a banks ability to make loans.

With no deposits, where does this $1 come from that they give me?

You're not reading carefully. I never said the bank didn't desire to hold deposits. Again, I said that deposits aren't lent to customers. They are lent within the Federal Reserve System to other Fed Member banks.

The $1 is created out of thin air and your bank is required to hold at least 10% of what it lends in reserves. The rest is excess and can be lent to other banks.

 

[Toddsterpatriot]

I'm not going to sugar coat things for you, but I assure you in advance that my tone towards you is not meant to be aggressive or disrespectful. One of the limitations of this form of communication. looking forward to good conversations on the topic of economics.

Cheers

E4E1

I know everyone isn't from the US, but this conversation is largely pointed at those in the US, though much of what I say will, to some degree apply in nations like Canada, Japan, UK and Australia.

So does anyone know where banks get the money they lend to people? I'm fascinated how few people, including people that work at banks, actually know the answer to this question.

Let's have a little "fun" and see how many people enjoy a good conversation out the economy.

-Cheers

So does anyone know where banks get the money they lend to people?

Deposits.

This is the response I get from most people. This is what happens when the economy changes but school and college curriculums aren't updated.

So, no, loans do not come from deposits. This is why I was trying to get you to answer the savings question in the other thread (which you responded to me with a Misis article).

Fact, banks don't lend deposits to customers.

Evidence:

Standard and Poors Cheif global economist

Here's a paper from the Bank of England

Fractional Reserve Banking, at least how most Austrians understand it, ended in 1934 when convertibility to gold ended. The fact that most Austrians stubbornly refuse to acknowledge this is amazing and completely undermines the Austrian theory of economics.

Todd, everything you think you know about the economy is rooted in this idea and it's an idea that completely vanished in 1974 when the fiat standard was adopted.

You believe that saving supports lending and investment.

This is wrong. Savings does not support investment, investment supports savings.

Example. I bought my house. It is an investment, but no one's savings made it (see linked articles for evidence and understanding) possible . However, when I borrowed the money from a bank (that created the money it lent me out of thin air) and paid it to the previous owner, the seller took what was left after they paid off the house and deposited it as savings. See how that works? My investment supported their savings.

Think about it. How many people make large investments with cash? Some but most investments made via borrowing and that investment creates savings.

So what happens to the money you deposit at a bank?

Simple, 100% of it becomes bank reserves. Not 10%, not 3%, 100%.

Where does a bank get money to lend to customers?

Banks create it out of thin air. Simple keystrokes on a keyboard.

How does this happen?

Because the bank takes your approved loan and deposits it as an asset. An asset worth the value of the loan plus interest, minus the money created and lent. The bank profits from the interest and when you repay your loan, the bank uses that to zero out the cash it created.

So if you take a loan for $1, the bank deposits your loan (the note) as an asset for $1 and then creates and gives you $1. The bank expects you to return with it's dollar plus some interest which it keeps.

So, no, loans do not come from deposits.

They do.

You believe that saving supports lending and investment.

Only because it does.

Think about it. How many people make large investments with cash?

Who said all deposits were cash?

Because the bank takes your approved loan and deposits it as an asset.

You'll have to explain why a bank would go through the trouble and expense to accept my deposit, if they weren't using it for something useful, like lending.

Who said all deposits were cash?

I didn't, but tell me then, what other kinds of deposits are there and how does it matter in the context of this conversation?

You'll have to explain why a bank would go through the trouble and expense to accept my deposit, if they weren't using it for something useful, like lending.

Sure...I never said banks didn't lend deposits. I said "banks don't lend [customer] deposits to other customers.

Banks deposit peoples savings as reserves. Prior to 2008 banks lent reserves to each other to meet the 10% reserve requirement. The Fed and the FOMC creates scarcity of reserves via the sale of assets. Banks trade excess reserves for assets from the Treasury or the Fed (the Treasury and Fed coordinate). This has the effect of removing reserves and creating scarcity necessary to cause the interest rate to rise above zero. When the Fed wants the rate to fall, it purchases assets.

Post-2008 QE tanked that system as the level of excess reserves went from 10's of billions ti multiple trillions. The bank no longer had a need to borrow from each other and the rate was effectively pushed to zero. The Fed responded by creating a rate floor by paying interest on excess reserves. Given the near zero risk, banks would only make loans in excess of what the Fed was paying.

So deposits are useful, in a Pre-2008 world, bank deposits are the lowest cost reserve a bank usually had. If a bank managed to attract lots of money in deposits, it could make money by lending to other banks.

In the post-2008 world, banks get paid 3 basis points on your deposits. Easy money.

However, what I said still stands.

Savings has ZERO effect on the interest rate and the rate and quantity of deposits do NOT affect a banks ability to make loans.

With no deposits, where does this $1 come from that they give me?

You're not reading carefully. I never said the bank didn't desire to hold deposits. Again, I said that deposits aren't lent to customers. They are lent within the Federal Reserve System to other Fed Member banks.

The $1 is created out of thin air and your bank is required to hold at least 10% of what it lends in reserves. The rest is excess and can be lent to other banks.

I didn't, but tell me then, what other kinds of deposits are there

You don't know? Still in school, eh?

Sure...I never said banks didn't lend deposits.

Ummm....So, no, loans do not come from deposits.

Were you lying then, or are you lying now?

Banks deposit peoples savings as reserves.

You got one right!

QE tanked that system as the level of excess reserves went from 10's of billions ti multiple trillions.

Right again!

Given the near zero risk, banks would only make loans in excess of what the Fed was paying.

Yes, banks aren't making very many loans at rates below 1.25%. DERP!

So deposits are useful, in a Pre-2008 world, bank deposits are the lowest cost reserve a bank usually had.

Still are lowest cost. Still useful.

In the post-2008 world, banks get paid 3 basis points on your deposits.

Wow! So wrong. Just for fun, prove it.

However, what I said still stands.

Still stands......as an example of your errors.

Again, I said that deposits aren't lent to customers.

Yes, I pointed out you were wrong when you said that.

You're not reading carefully.

I'm reading all of your errors carefully.

Again, I said that deposits aren't lent to customers. They are lent within the Federal Reserve System to other Fed Member banks.

Really? Why would a Fed bank wish to borrow from another Fed bank? Spell out their logic in doing so.

The $1 is created out of thin air

Cool.

Did they print it?
Because I need to hit the vending machine down the hall.

 

[Silent Warrior]

Sorry, but your idea that banks create loan funds out of thin air is naive and ludicrous. They have several sources for loan funds. Deposits are the biggest. The funds used for lending are from timed deposits like CDs etc. and not from checking accounts etc. The Fed is always examining banks to make sure their source of deposit funds is not too short term compared to their loan terms. When they haven't generated enough deposit funds, they borrow funds from the federal reserve or other sources at favorable rates and then loan it out. They also use overnight funds on a limited basis to keep their balance sheet even. Just look up the Call Report for your own bank in your own state and you can see that you thin air theory is just that, thin air.

 

[BuckToothMoron]

I know everyone isn't from the US, but this conversation is largely pointed at those in the US, though much of what I say will, to some degree apply in nations like Canada, Japan, UK and Australia.

So does anyone know where banks get the money they lend to people? I'm fascinated how few people, including people that work at banks, actually know the answer to this question.

Let's have a little "fun" and see how many people enjoy a good conversation out the economy.

-Cheers

So does anyone know where banks get the money they lend to people?

Deposits.

Thats part of it. I think the rest is imaginary, as weird as that sounds.

You were closer than Todd. The bank creates it out of thin air, but lest you believe that banks are unaccountable for this reason, that's not true either. Something I'll explain if you are interested.

It all works fine with growth and dutiful lending by banks. Money is, or should be created thru growth. Unfortunately we have a central bank, the Feral Reserve, who believes they can reverse prime the economy by printing money, QE, to encourage growth. Instead they created asset inflation. Witness the stock market at an all time high even though we have had very slow growth since the 2008 recession. QE has also created high housing cost and made the wealth gap even worse.

 

[Econ4Every1]

I know everyone isn't from the US, but this conversation is largely pointed at those in the US, though much of what I say will, to some degree apply in nations like Canada, Japan, UK and Australia.

So does anyone know where banks get the money they lend to people? I'm fascinated how few people, including people that work at banks, actually know the answer to this question.

Let's have a little "fun" and see how many people enjoy a good conversation out the economy.

-Cheers

So does anyone know where banks get the money they lend to people?

Deposits.

Thats part of it. I think the rest is imaginary, as weird as that sounds.

You were closer than Todd. The bank creates it out of thin air, but lest you believe that banks are unaccountable for this reason, that's not true either. Something I'll explain if you are interested.

It all works fine with growth and dutiful lending by banks. Money is, or should be created thru growth. Unfortunately we have a central bank, the Feral Reserve, who believes they can reverse prime the economy by printing money, QE, to encourage growth. Instead they created asset inflation. Witness the stock market at an all time high even though we have had very slow growth since the 2008 recession. QE has also created high housing cost and made the wealth gap even worse.

Not that I'm defending QE as a policy (because I'm not), but people who bash it forget that the world economy was on the brink of disaster. Would you have let banks fail and the economy to implode, or would you have done something different? If so, what?

 

[BuckToothMoron]

I know everyone isn't from the US, but this conversation is largely pointed at those in the US, though much of what I say will, to some degree apply in nations like Canada, Japan, UK and Australia.

So does anyone know where banks get the money they lend to people? I'm fascinated how few people, including people that work at banks, actually know the answer to this question.

Let's have a little "fun" and see how many people enjoy a good conversation out the economy.

-Cheers

So does anyone know where banks get the money they lend to people?

Deposits.

Thats part of it. I think the rest is imaginary, as weird as that sounds.

You were closer than Todd. The bank creates it out of thin air, but lest you believe that banks are unaccountable for this reason, that's not true either. Something I'll explain if you are interested.

It all works fine with growth and dutiful lending by banks. Money is, or should be created thru growth. Unfortunately we have a central bank, the Feral Reserve, who believes they can reverse prime the economy by printing money, QE, to encourage growth. Instead they created asset inflation. Witness the stock market at an all time high even though we have had very slow growth since the 2008 recession. QE has also created high housing cost and made the wealth gap even worse.

Not that I'm defending QE as a policy (because I'm not), but people who bash it forget that the world economy was on the brink of disaster. Would you have let banks fail and the economy to implode, or would you have done something different? If so, what?

You talk as if the bailout worked and diverted disaster. The reality is we don't know how it will eventually unfold. Adding trillions of dollars into the economy and making too big to fail banks even bigger, driving asset prices thru the roof while creating less 2% growth will have consequences.
What those consequences are and the ultimate severity of pain caused is still in question.

The Big Bank Bailout
In an article Secrets and Lies of the Bailout, Matt Taibbi says “It was all a lie – one of the biggest and most elaborate falsehoods ever sold to the American people. We were told that the taxpayer was stepping in – only temporarily, mind you – to prop up the economy and save the world from financial catastrophe. What we actually ended up doing was the exact opposite: committing American taxpayers to permanent, blind support of an ungovernable, unregulatable, hyper concentrated new financial system that exacerbates the greed and inequality that caused the crash, and forces Wall Street banks like Goldman Sachs and Citigroup to increase risk rather than reduce it.

After the original $700 billion bailout, the ongoing bailout was kept very secret because Chairman Ben Bernanke, argued that revealing borrower details would create a stigma — investors and counterparties would shun firms that used the central bank as lender of last resort. In fact, $7.7 trillion of the secret emergency lending was only disclosed to the public after Congress forced a one-time audit of the Federal Reserve in November of 2011. After the audit the public found out the bailout was in trillions not billions; and that there were no requirements attached to the bailout money - the banks could use it for any purpose.

 

[Toddsterpatriot]

So does anyone know where banks get the money they lend to people?

Deposits.

Thats part of it. I think the rest is imaginary, as weird as that sounds.

You were closer than Todd. The bank creates it out of thin air, but lest you believe that banks are unaccountable for this reason, that's not true either. Something I'll explain if you are interested.

It all works fine with growth and dutiful lending by banks. Money is, or should be created thru growth. Unfortunately we have a central bank, the Feral Reserve, who believes they can reverse prime the economy by printing money, QE, to encourage growth. Instead they created asset inflation. Witness the stock market at an all time high even though we have had very slow growth since the 2008 recession. QE has also created high housing cost and made the wealth gap even worse.

Not that I'm defending QE as a policy (because I'm not), but people who bash it forget that the world economy was on the brink of disaster. Would you have let banks fail and the economy to implode, or would you have done something different? If so, what?

You talk as if the bailout worked and diverted disaster. The reality is we don't know how it will eventually unfold. Adding trillions of dollars into the economy and making too big to fail banks even bigger, driving asset prices thru the roof while creating less 2% growth will have consequences.
What those consequences are and the ultimate severity of pain caused is still in question.

The Big Bank Bailout
In an article Secrets and Lies of the Bailout, Matt Taibbi says “It was all a lie – one of the biggest and most elaborate falsehoods ever sold to the American people. We were told that the taxpayer was stepping in – only temporarily, mind you – to prop up the economy and save the world from financial catastrophe. What we actually ended up doing was the exact opposite: committing American taxpayers to permanent, blind support of an ungovernable, unregulatable, hyper concentrated new financial system that exacerbates the greed and inequality that caused the crash, and forces Wall Street banks like Goldman Sachs and Citigroup to increase risk rather than reduce it.

After the original $700 billion bailout, the ongoing bailout was kept very secret because Chairman Ben Bernanke, argued that revealing borrower details would create a stigma — investors and counterparties would shun firms that used the central bank as lender of last resort. In fact, $7.7 trillion of the secret emergency lending was only disclosed to the public after Congress forced a one-time audit of the Federal Reserve in November of 2011. After the audit the public found out the bailout was in trillions not billions; and that there were no requirements attached to the bailout money - the banks could use it for any purpose.

You talk as if the bailout worked and diverted disaster.

The banking system didn't collapse.
We didn't see widespread bank failures and a crash of the money supply.
That's what averting disaster means.

The reality is we don't know how it will eventually unfold.

Eventually? Please.

committing American taxpayers to permanent, blind support of an ungovernable, unregulatable, hyper concentrated new financial system

Blind support? Is that what you call the Obama administration's 8 year war against the banks?
Gee, I wonder why banks were reluctant to lend?
I wonder if reduced bank lending is part of the answer to such crappy growth?

 

[Econ4Every1]

It all works fine with growth and dutiful lending by banks. Money is, or should be created thru growth. Unfortunately we have a central bank, the Feral Reserve, who believes they can reverse prime the economy by printing money, QE, to encourage growth. Instead they created asset inflation. Witness the stock market at an all time high even though we have had very slow growth since the 2008 recession. QE has also created high housing cost and made the wealth gap even worse.

Not that I'm defending QE as a policy (because I'm not), but people who bash it forget that the world economy was on the brink of disaster. Would you have let banks fail and the economy to implode, or would you have done something different? If so, what?

You talk as if the bailout worked and diverted disaster. The reality is we don't know how it will eventually unfold. Adding trillions of dollars into the economy and making too big to fail banks even bigger, driving asset prices thru the roof while creating less 2% growth will have consequences.
What those consequences are and the ultimate severity of pain caused is still in question.

I think what you're saying is that the bailout averted the disaster in 2008, but may have caused another, potentially larger problem long term.

However, none of the money created via QE has circulated in the economy. What QE did was drive down the price of borrowing such that it has enticed the wealthy to borrow money at one rate, let's just say 2% and turn around and invest in markets. The thought is that if they can earn a return higher than 2% then basically it's free money.

I agree that this policy has driven the demand for assets, perhaps we might say artificially.

However, the real question is, are the loans made adequately capitalized?

If so, as loans fail bank investors (that that invest via investor capital common and preferred stock) will lose value.

If there is enough capital, the system will self-adjust, though it will have the effect of transferring wealth from investors to those that took and defaulted on those loans which present another issue altogether.

The other possibility is that as interest rates rise, investors will slowly withdraw their capital and repay their loans. The stock market will fall and companies will have to go back to "old fasioned" methods of capitilization and value, things like;

Investing in labor plant and equipment

Stop utilizing buy backs as a way to increase value.....

If this is done slowly markets will adjust.

The question is, is there adaquate incentive for the wealthy to repay the loans they took, or should they just default?

That is the real underlying problem. We saw what happens in 2008 when a market isn't adaquatly capitlized and the incentive of default outweighs the incentive to repay.

The Big Bank Bailout
In an article Secrets and Lies of the Bailout, Matt Taibbi says “It was all a lie – one of the biggest and most elaborate falsehoods ever sold to the American people. We were told that the taxpayer was stepping in – only temporarily, mind you – to prop up the economy and save the world from financial catastrophe. What we actually ended up doing was the exact opposite: committing American taxpayers to permanent, blind support of an ungovernable, unregulatable, hyper concentrated new financial system that exacerbates the greed and inequality that caused the crash, and forces Wall Street banks like Goldman Sachs and Citigroup to increase risk rather than reduce it.

After the original $700 billion bailout, the ongoing bailout was kept very secret because Chairman Ben Bernanke, argued that revealing borrower details would create a stigma — investors and counterparties would shun firms that used the central bank as lender of last resort. In fact, $7.7 trillion of the secret emergency lending was only disclosed to the public after Congress forced a one-time audit of the Federal Reserve in November of 2011. After the audit the public found out the bailout was in trillions not billions; and that there were no requirements attached to the bailout money - the banks could use it for any purpose.

Few thoughts....

First, it's really hard for me to comment on the entirety of the claims here. I will agree with this article in Forbes that I found when I Googled "The Big Bank Bailout" which says some of the same things you are saying.

There is undoubtedly financial corruption and the result is massive wealth transfers. IMO, much of it is the result of the speed of markets made possible by computer technologies. It also affords too much anonymity IMO...

That said, taxpayers aren't really funding this stuff...At least not directly. The explanation for that is long and requires that I go into a lot of underlying detail I'm going to skip here...For now unless you insist I explain.

The Fed is independently audited every year.

The problem isn't the Fed, or even the government, though they are FAR from perfect and need many changes. The Forbes article identified the problem, wholesale banking corruption and a lack of accountability.

The Fed to my knowledge has no enforcement arm, that is left to the Federal government and this is where the Federal government fails and must be reformed.

But again, the general population doesn't understand how the system we have works and as a result vote people into Congress to do things like "audit the Fed" (which, btw has nothing to do with auditing the Fed, it's about taking control of monetary policy) and running "balanced budgets", not doing things like removing the influence of money from government and getting rid of things like Citizens United and the idea that money is speach.

It's guys like Todd who promote ideas like banks lending customer deposits to other customers and the idea that the supply of savings affects in the interest rate that is so wrong he doesn't even understand the question, never mind the answer (and I say that with all the respect I can). Something I'll continue to debate with him you can make up your own mind about the strength of that argument.

In the end, the problem, IMO, is there are people making money hand over fist, who can use that idle money to influence policy. Things won't change until we can separate the influence of money on our government officials. I try not to mix policy decisions and fiscal reality because it often confuses people, but this thread is really a mix of policy and fiscal reality.

 

[Econ4Every1]

Sorry, but your idea that banks create loan funds out of thin air is naive and ludicrous. They have several sources for loan funds. Deposits are the biggest. The funds used for lending are from timed deposits like CDs etc. and not from checking accounts etc. The Fed is always examining banks to make sure their source of deposit funds is not too short term compared to their loan terms. When they haven't generated enough deposit funds, they borrow funds from the federal reserve or other sources at favorable rates and then loan it out. They also use overnight funds on a limited basis to keep their balance sheet even. Just look up the Call Report for your own bank in your own state and you can see that you thin air theory is just that, thin air.

It's not theory. I suggest you take a course on banking.

Here is a free college level course you can take (for free) and learn for yourself.

Economics of Money and Banking

Though I warn you, it's a graduate level course, if you don't have a background in economics you might want to start with some undergraduate level courses.

Banks do loan reserves, but NOT TO CUSTOMERS, only to other banks. Now that the banks are sitting on trillions in excess reserves:

As a result, banks aren't lending to each other either. Ever heard of the "discount window" or the interbank lending market?

what is the interbank lending rate these days?

1.16% This is the rate that banks lend to each other. The rate is low because the supply of reserves is so high driven mostly by the $2.2 trillion dollars in money created via QE. Money that isn't circulating in the economy, but sitting in accounts at the Federal Reserve.

If you'd just like to read the explanation you can follow the links I gave to Todd who hasn't acknowledged them.

Here is a different article, it's a bit easier to read and provides an easier explanation (with charts and everything). It's not "theory" it's accounting fact. It's all there, you have but to apply yourself and understand it.

Forbes - Banks cannot lend out reserves [to customers].

Some excerpts:

And there is a “Law of Accounting”: that “Assets equal Liabilities plus Capital”. And the belief that banks can lend out their reserves (excess or otherwise) violates the Law of Accounting.

In this model, if the Central Bank creates say $1 trillion, and the “Required Reserve Ratio” is 10%, then that $1 trillion of new reserves in banks will create $10 trillion worth of money in the real economy—so that the value of the “money multiplier” is 10. This is the model that Obama’s economic advisors used to convince him that the best way to rescue the economy from the crisis in 2009 was not to give money directly to the public, but to give it to the banks, and for them to then lend to the public:


And although there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks – "where's our bailout?," they ask – the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth. (“Obama’s Remarks on the Economy”, April 14 2009)

That is poppycock. The actual amount of money that banks can lend to “families and businesses” out of $1 trillion of new reserves is not $10 trillion, but $0. Zip. Nada. Nil.

Therefore, the $1.4 trillion of excess reserves that QE has created in the USA alone has added precisely $0 to the lending power of banks.

If you don't know what double entry bookkeeping is then you have to start there, because until you do you can't possible hope to understand the economy we live in.

 

[Toddsterpatriot]

Sorry, but your idea that banks create loan funds out of thin air is naive and ludicrous. They have several sources for loan funds. Deposits are the biggest. The funds used for lending are from timed deposits like CDs etc. and not from checking accounts etc. The Fed is always examining banks to make sure their source of deposit funds is not too short term compared to their loan terms. When they haven't generated enough deposit funds, they borrow funds from the federal reserve or other sources at favorable rates and then loan it out. They also use overnight funds on a limited basis to keep their balance sheet even. Just look up the Call Report for your own bank in your own state and you can see that you thin air theory is just that, thin air.

It's not theory. I suggest you take a course on banking.

Here is a free college level course you can take (for free) and learn for yourself.

Economics of Money and Banking

Though I warn you, it's a graduate level course, if you don't have a background in economics you might want to start with some undergraduate level courses.

Banks do loan reserves, but NOT TO CUSTOMERS, only to other banks. Now that the banks are sitting on trillions in excess reserves:

As a result, banks aren't lending to each other either. Ever heard of the "discount window" or the interbank lending market?

what is the interbank lending rate these days?

1.16% This is the rate that banks lend to each other. The rate is low because the supply of reserves is so high driven mostly by the $2.2 trillion dollars in money created via QE. Money that isn't circulating in the economy, but sitting in accounts at the Federal Reserve.

If you'd just like to read the explanation you can follow the links I gave to Todd who hasn't acknowledged them.

Here is a different article, it's a bit easier to read and provides an easier explanation (with charts and everything). It's not "theory" it's accounting fact. It's all there, you have but to apply yourself and understand it.

Forbes - Banks cannot lend out reserves [to customers].

Some excerpts:

And there is a “Law of Accounting”: that “Assets equal Liabilities plus Capital”. And the belief that banks can lend out their reserves (excess or otherwise) violates the Law of Accounting.

In this model, if the Central Bank creates say $1 trillion, and the “Required Reserve Ratio” is 10%, then that $1 trillion of new reserves in banks will create $10 trillion worth of money in the real economy—so that the value of the “money multiplier” is 10. This is the model that Obama’s economic advisors used to convince him that the best way to rescue the economy from the crisis in 2009 was not to give money directly to the public, but to give it to the banks, and for them to then lend to the public:


And although there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks – "where's our bailout?," they ask – the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth. (“Obama’s Remarks on the Economy”, April 14 2009)

That is poppycock. The actual amount of money that banks can lend to “families and businesses” out of $1 trillion of new reserves is not $10 trillion, but $0. Zip. Nada. Nil.

Therefore, the $1.4 trillion of excess reserves that QE has created in the USA alone has added precisely $0 to the lending power of banks.

If you don't know what double entry bookkeeping is then you have to start there, because until you do you can't possible hope to understand the economy we live in.

If you'd just like to read the explanation you can follow the links I gave to Todd who hasn't acknowledged them.

Your links were fine. They just don't mean what you think they mean.

Banks do loan reserves, but NOT TO CUSTOMERS, only to other banks.

You never did explain why a bank would need to borrow reserves from other banks.

The actual amount of money that banks can lend to “families and businesses” out of $1 trillion of new reserves is not $10 trillion, but $0.

The Fed bought Treasuries and MBS. The sellers put the proceeds in their bank. Of course banks can lend to families and businesses out of their deposits.

 

[Toddsterpatriot]

It all works fine with growth and dutiful lending by banks. Money is, or should be created thru growth. Unfortunately we have a central bank, the Feral Reserve, who believes they can reverse prime the economy by printing money, QE, to encourage growth. Instead they created asset inflation. Witness the stock market at an all time high even though we have had very slow growth since the 2008 recession. QE has also created high housing cost and made the wealth gap even worse.

Not that I'm defending QE as a policy (because I'm not), but people who bash it forget that the world economy was on the brink of disaster. Would you have let banks fail and the economy to implode, or would you have done something different? If so, what?

You talk as if the bailout worked and diverted disaster. The reality is we don't know how it will eventually unfold. Adding trillions of dollars into the economy and making too big to fail banks even bigger, driving asset prices thru the roof while creating less 2% growth will have consequences.
What those consequences are and the ultimate severity of pain caused is still in question.

I think what you're saying is that the bailout averted the disaster in 2008, but may have caused another, potentially larger problem long term.

However, none of the money created via QE has circulated in the economy. What QE did was drive down the price of borrowing such that it has enticed the wealthy to borrow money at one rate, let's just say 2% and turn around and invest in markets. The thought is that if they can earn a return higher than 2% then basically it's free money.

I agree that this policy has driven the demand for assets, perhaps we might say artificially.

However, the real question is, are the loans made adequately capitalized?

If so, as loans fail bank investors (that that invest via investor capital common and preferred stock) will lose value.

If there is enough capital, the system will self-adjust, though it will have the effect of transferring wealth from investors to those that took and defaulted on those loans which present another issue altogether.

The other possibility is that as interest rates rise, investors will slowly withdraw their capital and repay their loans. The stock market will fall and companies will have to go back to "old fasioned" methods of capitilization and value, things like;

Investing in labor plant and equipment

Stop utilizing buy backs as a way to increase value.....

If this is done slowly markets will adjust.

The question is, is there adaquate incentive for the wealthy to repay the loans they took, or should they just default?

That is the real underlying problem. We saw what happens in 2008 when a market isn't adaquatly capitlized and the incentive of default outweighs the incentive to repay.

The Big Bank Bailout
In an article Secrets and Lies of the Bailout, Matt Taibbi says “It was all a lie – one of the biggest and most elaborate falsehoods ever sold to the American people. We were told that the taxpayer was stepping in – only temporarily, mind you – to prop up the economy and save the world from financial catastrophe. What we actually ended up doing was the exact opposite: committing American taxpayers to permanent, blind support of an ungovernable, unregulatable, hyper concentrated new financial system that exacerbates the greed and inequality that caused the crash, and forces Wall Street banks like Goldman Sachs and Citigroup to increase risk rather than reduce it.

After the original $700 billion bailout, the ongoing bailout was kept very secret because Chairman Ben Bernanke, argued that revealing borrower details would create a stigma — investors and counterparties would shun firms that used the central bank as lender of last resort. In fact, $7.7 trillion of the secret emergency lending was only disclosed to the public after Congress forced a one-time audit of the Federal Reserve in November of 2011. After the audit the public found out the bailout was in trillions not billions; and that there were no requirements attached to the bailout money - the banks could use it for any purpose.

Few thoughts....

First, it's really hard for me to comment on the entirety of the claims here. I will agree with this article in Forbes that I found when I Googled "The Big Bank Bailout" which says some of the same things you are saying.

There is undoubtedly financial corruption and the result is massive wealth transfers. IMO, much of it is the result of the speed of markets made possible by computer technologies. It also affords too much anonymity IMO...

That said, taxpayers aren't really funding this stuff...At least not directly. The explanation for that is long and requires that I go into a lot of underlying detail I'm going to skip here...For now unless you insist I explain.

The Fed is independently audited every year.

The problem isn't the Fed, or even the government, though they are FAR from perfect and need many changes. The Forbes article identified the problem, wholesale banking corruption and a lack of accountability.

The Fed to my knowledge has no enforcement arm, that is left to the Federal government and this is where the Federal government fails and must be reformed.

But again, the general population doesn't understand how the system we have works and as a result vote people into Congress to do things like "audit the Fed" (which, btw has nothing to do with auditing the Fed, it's about taking control of monetary policy) and running "balanced budgets", not doing things like removing the influence of money from government and getting rid of things like Citizens United and the idea that money is speach.

It's guys like Todd who promote ideas like banks lending customer deposits to other customers and the idea that the supply of savings affects in the interest rate that is so wrong he doesn't even understand the question, never mind the answer (and I say that with all the respect I can). Something I'll continue to debate with him you can make up your own mind about the strength of that argument.

In the end, the problem, IMO, is there are people making money hand over fist, who can use that idle money to influence policy. Things won't change until we can separate the influence of money on our government officials. I try not to mix policy decisions and fiscal reality because it often confuses people, but this thread is really a mix of policy and fiscal reality.

However, none of the money created via QE has circulated in the economy.......

I agree that this policy has driven the demand for assets

Money can't drive the demand for assets if it doesn't circulate.

It's guys like Todd who promote ideas like banks lending customer deposits to other customers

We should try a little thought experiment.
Open a new bank. Call it Econ4Every1 bank.

I come to your bank to buy a home. I'd like to borrow $200,000.
Help me with my mortgage without using any customer deposits.