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

[Econ4Every1]

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

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

You cut me deep....lol

No, I just want to know what you think.
_____________________________
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?

There is a distinction here, you are either missing or ignoring, and I can't figure out which.

Now go back and re-read what I wrote.

I said "Banks don't lend customer deposits to other customers"

If you don't understand the distinction, I'm not surprised you can't grasp what I'm trying to tell you.

If banks don't loan customer deposits to other customers, where do banks get the money they lend?

They create the money out of thin air. The loan is secured by the note which is deposited as an asset. The "backstop" (if you will) is the underlying asset (collateral) the borrower purchased (houses and cars as an example) that can be reclaimed and sold to cover the loan taken. If there is no collateral or it wasn't worth what it takes to repay the loan, the bank must withdraw from its capital to cover the loss. If the bank's liabilities exceed its capital, the bank is insolvent.
_______________________________
So deposits are useful, in a Pre-2008 world, bank deposits are the lowest cost reserve a bank usually had.

[Deposits are] Still are lowest cost. Still useful.

Yet we see interbank lending levels at rates we having seen since early 1980's. So they aren't as useful as they were pre-2008...Beeeeeeecasuse the excess reserve level is so high.

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

Yep, that was a mistake. Today we're just over 100 basis points.

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

Funny, because I provided several sources that say the opposite. What were your sources?

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

Just to be clear....Fed bank=Fed member bank. The regional banks and Federal reserve are settlement banks.

Again, pre-2008 the Fed target rates through open market operations. Those operations added or removed reserves in the system overall and thereby maintained a certain liquidity level, and thereby maintained the desired level of scarcity of reserves which helped the Fed target a certain "window" for interest rates. Loans create deposits and deposits are reserves thus the reserve level would continually increase (in a growing economy) without OMO removing excess reserves in exchange for securities.

Banks lend to other banks because some banks had excess reserves and other banks had a deficit of reserves. The banks with deficits would borrow reserves (usually overnight) from those that had an excess. Since banks weren't paid interest on excess reserves, then lending them to other banks (Perhaps you've heard of interbank lending?). If there was a deficit in the system overall, bank could borrow directly from the Fed.

This is why banks desire savers. So they can meet their reserve requirements without having to borrow from other banks or the Fed. In the best case, a bank would have enough reserves to meet their requirement and enough to lend to other banks.

Banks do not lend customer deposits to other customers, only to other banks. Reserves do not circulate in the economy.
_______________________

The $1 is created out of thin air

Cool.

View attachment 142643

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

Banks don't "print" money, they create money electronically. If a bank needs physical dollars it trades them to the Fed for reserves.

 

[Econ4Every1]

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.

Yeah, it's a bit more complicated than that. Excess reserves drive interest rates to near zero. People with stellar credit borrow money at a very low rate and need only to make a return higher than the rate they pay and they make money without risking their own money. This is called leverage.

Once you accept that banks create money from nothing and lend it, you'll understand that when a bank makes a $100k loan, the economy, overall has gained nothing because the bank holds a $100k liability (the money that must be repaid) against your 100K asset (the cash you borrowed). At the same time, the bank has a $100k asset in the note you signed promising to repay the 100K+interest and you have a $100k liability in that you must repay the loan.

So borrower > $100k Asset (cash) and $100k Liability (loan that must be repaid)
Lender> $100k Asset (note signed by the borrower) and $100k Liability that the bank must repay

It all sums to zero.

________________________
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.

Actually, it's funny you say that. We don't need a "thought experiment, someone actually did that experiment to prove that banks don't lend customer funds....

Enjoy:

Can banks individually create money out of nothing? — The theories and the empirical evidence

 

[Toddsterpatriot]

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

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

You cut me deep....lol

No, I just want to know what you think.
_____________________________
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?

There is a distinction here, you are either missing or ignoring, and I can't figure out which.

Now go back and re-read what I wrote.

I said "Banks don't lend customer deposits to other customers"

If you don't understand the distinction, I'm not surprised you can't grasp what I'm trying to tell you.

If banks don't loan customer deposits to other customers, where do banks get the money they lend?

They create the money out of thin air. The loan is secured by the note which is deposited as an asset. The "backstop" (if you will) is the underlying asset (collateral) the borrower purchased (houses and cars as an example) that can be reclaimed and sold to cover the loan taken. If there is no collateral or it wasn't worth what it takes to repay the loan, the bank must withdraw from its capital to cover the loss. If the bank's liabilities exceed its capital, the bank is insolvent.
_______________________________
So deposits are useful, in a Pre-2008 world, bank deposits are the lowest cost reserve a bank usually had.

[Deposits are] Still are lowest cost. Still useful.

Yet we see interbank lending levels at rates we having seen since early 1980's. So they aren't as useful as they were pre-2008...Beeeeeeecasuse the excess reserve level is so high.

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

Yep, that was a mistake. Today we're just over 100 basis points.

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

Funny, because I provided several sources that say the opposite. What were your sources?

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

Just to be clear....Fed bank=Fed member bank. The regional banks and Federal reserve are settlement banks.

Again, pre-2008 the Fed target rates through open market operations. Those operations added or removed reserves in the system overall and thereby maintained a certain liquidity level, and thereby maintained the desired level of scarcity of reserves which helped the Fed target a certain "window" for interest rates. Loans create deposits and deposits are reserves thus the reserve level would continually increase without OMO removing excess reserves in exchange for securities.

Banks lend to other banks because some banks had excess reserves and other banks had a deficit of reserves. The banks with deficits would borrow reserves (usually overnight) from those that had an excess. Since banks weren't paid interest on excess reserves, then lending them to other banks (Perhaps you've heard of interbank lending?). If there was a deficit in the system overall, bank could borrow directly from the Fed.

This is why banks desire savers. So they can meet their reserve requirements without having to borrow from other banks or the Fed. In the best case, a bank would have enough reserves to meet their requirement and enough to lend to other banks.

Banks do not lend customer deposits to other customers, only to other banks. Reserves do not circulate in the economy.
_______________________

The $1 is created out of thin air

Cool.

View attachment 142643

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

Banks don't "print" money, they create money electronically. If a bank needs physical dollars it trades them to the Fed for reserves.

I said "Banks don't lend customer deposits to other customers"

Yes, I saw your error, every time you repeated it.

They create the money out of thin air.

Cool. No need for deposits then? Why do they bother?

The loan is secured by the note which is deposited as an asset.

Yes. The loan is an asset.

Yet we see interbank lending levels at rates we having seen since early 1980's.

Banks have record levels of deposits.

Just to be clear....Fed bank=Fed member bank.

Yes.

Banks lend to other banks because some banks had excess reserves and other banks had a deficit of reserves.

You said banks never lend reserves to customers, so how does a bank have a deficit of reserves?

Banks don't "print" money, they create money electronically.

You said the bank deposits my note and creates the $1 out of thin air.
I don't need a thin air dollar, I need the physical stuff.

If a bank needs physical dollars it trades them to the Fed for reserves.

The bank has no reserves, no deposits, because you said they didn't need a deposit to loan me $1.
Were you mistaken?

 

[Toddsterpatriot]

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.

Yeah, it's a bit more complicated than that. Excess reserves drive interest rates to near zero. People with stellar credit borrow money at a very low rate and need only to make a return higher than the rate they pay and they make money without risking their own money. This is called leverage.

Once you accept that banks create money from nothing and lend it, you'll understand that when a bank makes a $100k loan, the economy, overall has gained nothing because the bank holds a $100k liability (the money that must be repaid) against your 100K asset (the cash you borrowed). At the same time, the bank has a $100k asset in the note you signed promising to repay the 100K+interest and you have a $100k liability in that you must repay the loan.

So borrower > $100k Asset (cash) and $100k Liability (loan that must be repaid)
Lender> $100k Asset (note signed by the borrower) and $100k Liability that the bank must repay

It all sums to zero.

________________________
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.

Actually, it's funny you say that. We don't need a "thought experiment, someone actually did that experiment to prove that banks don't lend customer funds....

Enjoy:

Can banks individually create money out of nothing? — The theories and the empirical evidence

Once you accept that banks create money from nothing and lend it, you'll understand that when a bank makes a $100k loan, the economy, overall has gained nothing because the bank holds a $100k liability (the money that must be repaid) against your 100K asset (the cash you borrowed).

You'll have to show where the bank has a liability. Do they have to pay the $100k back to thin air?

Actually, it's funny you say that. We don't need a "thought experiment"

Yeah, Werner is funny.
Now humor me, use my experiment and lend me the money I need with no deposits.

 

[Econ4Every1]

I said "Banks don't lend customer deposits to other customers"

Yes, I saw your error, every time you repeated it.

Yet you haven't demonstrated it.

They create the money out of thin air.

Cool. No need for deposits then? Why do they bother?

I've explained this to you at least twice. What part are you having a hard time understanding?

When a customer deposits money in a bank, that banks reserve level rises. Today banks are paid a flat rate in interest for excess reserves.

Pre-2008 a bank with excess reserves could lend those reserves to other banks that needed them to meet the required reserve level which, for larger banks is 10%.

Lending to banks isn't the same as lending to customers. Banks are not in any way constrained by the amount of reserves (as the Fed guarantees the availability of reserves). The real constraint on lending is the customer's willingness (to borrow at whatever the prevailing rate is) and credit worthiness. In other words it's the cost of borrowing that is the constraint, not the availability.

Yet we see interbank lending levels at rates we having seen since early 1980's.

Banks have record levels of deposits.

Not much of a correlation here:

Banks lend to other banks because some banks had excess reserves and other banks had a deficit of reserves.

You said banks never lend reserves to customers, so how does a bank have a deficit of reserves?

I'm glad you're asking questions so I can help you understand. You should be commended for that.

Ok, so let's say a bank has created $100 from thin air and lent it. The bank must maintain a 10% reserve ratio, thus it must have at least $10 on deposit at the Fed.

Now let's say the bank makes a $10 loan. Now it has $110 in loans and $10 as a reserve. The bank is $1 short. This it has a deficit of $1 of reserves. So it borrows $1 of reserves from another Fed member bank.

Banks don't "print" money, they create money electronically.

You said the bank deposits my note and creates the $1 out of thin air.
I don't need a thin air dollar, I need the physical stuff.

Sure, that's why banks keep a small amount of "physical stuff" on hand. As I said, in order for a bank to have physical dollars it must acquire them via deposits or it must swap reserves at the Fed.

So let's say the Christmas season is coming and a bank knows it's going to need $1 million more dollars to supply its ATM machines. The bank will make a request to the Fed to $1 million physical dollars in trade for reserves.

Physical dollars outside the banking system are simply reserves that exist outside of the banking system.

You will see excess reserve levels decline in November and December as banks swap reserves for dollars to fill the ATM's and after Christmas, you will see banks swapping physical dollars back for reserves.

If a bank needs physical dollars it trades them to the Fed for reserves.

The bank has no reserves, no deposits because you said they didn't need a deposit to loan me $1.
Were you mistaken?

Nope, you're just having a hard time grasping what I'm telling you.

Where did I say a bank doesn't need reserves/ deposits? You said that, not me. What I said is that banks don't lend customer deposits to other customers. Banks use deposits to meet reserve requirements (meaning they need reserves of which deposits are the lowest cost reserves availible to a bank) which (pre-2008) the Fed used to target interest rates by increasing or decreasing the level of reserves via daily repo/reverse repo operations (again, that was pre-2008). Today banks take deposits to earn IOER.

 

[westwall]

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.

No, your tone is condescending. For someone who claims to be so smart you sure don't understand the English language.

As far as your supposed conversation go's, yes, banks do get money to lend from deposits. The problem is they then engage in fractional-reserve banking so while they DO use a persons deposit, they then create imaginary money out of whole cloth being required to only hold a small portion of those deposits as actual reserves. Hence the term "fractional reserve banking.

 

[Econ4Every1]

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.

Yeah, it's a bit more complicated than that. Excess reserves drive interest rates to near zero. People with stellar credit borrow money at a very low rate and need only to make a return higher than the rate they pay and they make money without risking their own money. This is called leverage.

Once you accept that banks create money from nothing and lend it, you'll understand that when a bank makes a $100k loan, the economy, overall has gained nothing because the bank holds a $100k liability (the money that must be repaid) against your 100K asset (the cash you borrowed). At the same time, the bank has a $100k asset in the note you signed promising to repay the 100K+interest and you have a $100k liability in that you must repay the loan.

So borrower > $100k Asset (cash) and $100k Liability (loan that must be repaid)
Lender> $100k Asset (note signed by the borrower) and $100k Liability that the bank must repay

It all sums to zero.

________________________
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.

Actually, it's funny you say that. We don't need a "thought experiment, someone actually did that experiment to prove that banks don't lend customer funds....

Enjoy:

Can banks individually create money out of nothing? — The theories and the empirical evidence

Once you accept that banks create money from nothing and lend it, you'll understand that when a bank makes a $100k loan, the economy, overall has gained nothing because the bank holds a $100k liability (the money that must be repaid) against your 100K asset (the cash you borrowed).

You'll have to show where the bank has a liability. Do they have to pay the $100k back to thin air?

Pretty much.

I explained this already.

When a bank lends you $100k

Its accounts for it by creating a -$100k liability on it books. At the same time, it puts $100k on the asset side that is the "note".

It's called double entry accounting. It would really help you understand what's happening.

Yeah, Werner is funny.
Now humor me, use my experiment and lend me the money I need with no deposits.

I can't help you understand if you won't help yourself.

 

[Toddsterpatriot]

I said "Banks don't lend customer deposits to other customers"

Yes, I saw your error, every time you repeated it.

Yet you haven't demonstrated it.

They create the money out of thin air.

Cool. No need for deposits then? Why do they bother?

I've explained this to you at least twice. What part are you having a hard time understanding?

When a customer deposits money in a bank, that banks reserve level rises. Today banks are paid a flat rate in interest for excess reserves.

Pre-2008 a bank with excess reserves could lend those reserves to other banks that needed them to meet the required reserve level which, for larger banks is 10%.

Lending to banks isn't the same as lending to customers. Banks are not in any way constrained by the amount of reserves (as the Fed guarantees the availability of reserves). The real constraint on lending is the customer's willingness (to borrow at whatever the prevailing rate is) and credit worthiness. In other words it's the cost of borrowing that is the constraint, not the availability.

Yet we see interbank lending levels at rates we having seen since early 1980's.

Banks have record levels of deposits.

Not much of a correlation here:

Banks lend to other banks because some banks had excess reserves and other banks had a deficit of reserves.

You said banks never lend reserves to customers, so how does a bank have a deficit of reserves?

I'm glad you're asking questions so I can help you understand. You should be commended for that.

Ok, so let's say a bank has created $100 from thin air and lent it. The bank must maintain a 10% reserve ratio, thus it must have at least $10 on deposit at the Fed.

Now let's say the bank makes a $10 loan. Now it has $110 in loans and $10 as a reserve. The bank is $1 short. This it has a deficit of $1 of reserves. So it borrows $1 of reserves from another Fed member bank.

Banks don't "print" money, they create money electronically.

You said the bank deposits my note and creates the $1 out of thin air.
I don't need a thin air dollar, I need the physical stuff.

Sure, that's why banks keep a small amount of "physical stuff" on hand. As I said, in order for a bank to have physical dollars it must acquire them via deposits or it must swap reserves at the Fed.

So let's say the Christmas season is coming and a bank knows it's going to need $1 million more dollars to supply its ATM machines. The bank will make a request to the Fed to $1 million physical dollars in trade for reserves.

Physical dollars outside the banking system are simply reserves that exist outside of the banking system.

You will see excess reserve levels decline in November and December as banks swap reserves for dollars to fill the ATM's and after Christmas, you will see banks swapping physical dollars back for reserves.

If a bank needs physical dollars it trades them to the Fed for reserves.

The bank has no reserves, no deposits because you said they didn't need a deposit to loan me $1.
Were you mistaken?

Nope, you're just having a hard time grasping what I'm telling you.

Where did I say a bank doesn't need reserves/ deposits? You said that, not me. What I said is that banks don't lend customer deposits to other customers. Banks use deposits to meet reserve requirements (meaning they need reserves of which deposits are the lowest cost reserves availible to a bank) which (pre-2008) the Fed used to target interest rates by increasing or decreasing the level of reserves via daily repo/reverse repo operations (again, that was pre-2008). Today banks take deposits to earn IOER.

When a customer deposits money in a bank, that banks reserve level rises.

Yes, deposits add to reserves, loans subtract from reserves.

Today banks are paid a flat rate in interest for excess reserves.

Banks are paid for reserves, not for excess reserves. Be precise.


Ok, so let's say a bank has created $100 from thin air and lent it. The bank must maintain a 10% reserve ratio, thus it must have at least $10 on deposit at the Fed.

Where can it get this $10 reserve?

Now let's say the bank makes a $10 loan. Now it has $110 in loans and $10 as a reserve. The bank is $1 short. This it has a deficit of $1 of reserves.

No, its deficit is $1 larger than before. Currently the deficit is $11.

Sure, that's why banks keep a small amount of "physical stuff" on hand. As I said, in order for a bank to have physical dollars it must acquire them via deposits or it must swap reserves at the Fed.

In order to lend me a $1 FRN, the bank needs deposits? Sounds like your claims are evolving.

Where did I say a bank doesn't need reserves/ deposits?

Post #4. "So, no, loans do not come from deposits."

What I said is that banks don't lend customer deposits to other customers.

Show me. Make me the $200,000 mortgage loan I need from your new bank. Don't use deposits!

Banks use deposits to meet reserve requirements

Right, deposits add to reserves and nothing subtracts from reserves. LOL!

 

[Toddsterpatriot]

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.

Yeah, it's a bit more complicated than that. Excess reserves drive interest rates to near zero. People with stellar credit borrow money at a very low rate and need only to make a return higher than the rate they pay and they make money without risking their own money. This is called leverage.

Once you accept that banks create money from nothing and lend it, you'll understand that when a bank makes a $100k loan, the economy, overall has gained nothing because the bank holds a $100k liability (the money that must be repaid) against your 100K asset (the cash you borrowed). At the same time, the bank has a $100k asset in the note you signed promising to repay the 100K+interest and you have a $100k liability in that you must repay the loan.

So borrower > $100k Asset (cash) and $100k Liability (loan that must be repaid)
Lender> $100k Asset (note signed by the borrower) and $100k Liability that the bank must repay

It all sums to zero.

________________________
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.

Actually, it's funny you say that. We don't need a "thought experiment, someone actually did that experiment to prove that banks don't lend customer funds....

Enjoy:

Can banks individually create money out of nothing? — The theories and the empirical evidence

Once you accept that banks create money from nothing and lend it, you'll understand that when a bank makes a $100k loan, the economy, overall has gained nothing because the bank holds a $100k liability (the money that must be repaid) against your 100K asset (the cash you borrowed).

You'll have to show where the bank has a liability. Do they have to pay the $100k back to thin air?

Pretty much.

I explained this already.

When a bank lends you $100k

Its accounts for it by creating a -$100k liability on it books. At the same time, it puts $100k on the asset side that is the "note".

It's called double entry accounting. It would really help you understand what's happening.

Yeah, Werner is funny.
Now humor me, use my experiment and lend me the money I need with no deposits.

I can't help you understand if you won't help yourself.

Its accounts for it by creating a -$100k liability on it books. At the same time, it puts $100k on the asset side that is the "note".

Who does it owe the liability to?

I can't help you understand if you won't help yourself.

Sounds like you can't explain.

 

[Econ4Every1]

No, your tone is condescending. For someone who claims to be so smart you sure don't understand the English language.

As far as your supposed conversation go's, yes, banks do get money to lend from deposits. The problem is they then engage in fractional-reserve banking so while they DO use a persons deposit, they then create imaginary money out of whole cloth being required to only hold a small portion of those deposits as actual reserves. Hence the term "fractional reserve banking.

So what you're saying is that I need to try harder not to hurt peoples feelings?

Really it's not my intention to be condescending. I assume that people on the other side are big boys and girls that can deal with being disagreed with.

I went so far as to preface my comments with a statement saying that this wasn't my intention. I just don't have time to make sure that peoples feeling aren't hurt, but if you think I'm being condescending and you are insulted, then I'm sorry, as I've said, this isn't my intention.

Now on to your comment. No, banks don't lend from deposits. I've posted at least 4 separate links from credible sources (the only person in the thread offering evidence from credible sources) that aren't affiliated with political groups or schools of economics. It's simply factual accounting.

I also posted a graduate level college course on banking. It's really not that hard. You just need to understand double entry accounting. You can learn double entry accounting in 5 minutes (if you don't already know) on you tube.

 

[westwall]

No, your tone is condescending. For someone who claims to be so smart you sure don't understand the English language.

As far as your supposed conversation go's, yes, banks do get money to lend from deposits. The problem is they then engage in fractional-reserve banking so while they DO use a persons deposit, they then create imaginary money out of whole cloth being required to only hold a small portion of those deposits as actual reserves. Hence the term "fractional reserve banking.

So what you're saying is that I need to try harder not to hurt peoples feelings?

Really it's not my intention to be condescending. I assume that people on the other side are big boys and girls that can deal with being disagreed with.

I went so far as to preface my comments with a statement saying that this wasn't my intention. I just don't have time to make sure that peoples feeling aren't hurt, but if you think I'm being condescending and you are insulted, then I'm sorry, as I've said, this isn't my intention.

Now on to your comment. No, banks don't lend from deposits. I've posted at least 4 separate links from credible sources (the only person in the thread offering evidence from credible sources) that aren't affiliated with political groups or schools of economics. It's simply factual accounting.

I also posted a graduate level college course on banking. It's really not that hard. You just need to understand double entry accounting. You can learn double entry accounting in 5 minutes (if you don't already know) on you tube.

No, what you need to do is not be a condescending ass. The majority of posters here are as educated, or of higher education level, than you. Yours is not a limitation of media used to convey ideas. Yours is a limitation of YOU, and your belief that you are smarter than everyone else. Thus, you are by nature, a condescending ass.

 

[Econ4Every1]

Who does it owe the liability to?

I explained this already. When the bank makes a loan, the liability is recorded on its books.

Sounds like you can't explain.

Economics is hard if it was easier more people would understand, which is, of course, why as a nation, we find ourselves in such a mess.

There is a belief among the economic elite that economics is too difficult and it's best to keep people ignorant.

 

[Econ4Every1]

No, what you need to do is not be a condescending ass. The majority of posters here are as educated, or of higher education level, than you. Yours is not a limitation of media used to convey ideas. Yours is a limitation of YOU, and your belief that you are smarter than everyone else. Thus, you are by nature, a condescending ass.

All that you perceive none of that is what I've stated.

 

[Toddsterpatriot]

Who does it owe the liability to?

I explained this already. When the bank makes a loan, the liability is recorded on its books.

Sounds like you can't explain.

Economics is hard if it was easier more people would understand, which is, of course, why as a nation, we find ourselves in such a mess.

There is a belief among the economic elite that economics is too difficult and it's best to keep people ignorant.

When the bank makes a loan, the liability is recorded on its books.

The bank records an asset on their books when they make a loan.
When I make a deposit, the bank has a liability payable to me.
When they create money out of thin air, they have a liability payable to thin air?
Perhaps you need to study up on double entry accounting?

Economics is hard if it was easier more people would understand

But enough about you.
Still working on my thin air, $200,000 mortgage?

 

[westwall]

No, what you need to do is not be a condescending ass. The majority of posters here are as educated, or of higher education level, than you. Yours is not a limitation of media used to convey ideas. Yours is a limitation of YOU, and your belief that you are smarter than everyone else. Thus, you are by nature, a condescending ass.

All that you perceive none of that is what I've stated.

Ahhhh, but it is dear boy, it is. I am one of those who is better educated than you, and I have been dealing with people like you for longer than you've been alive. There is what is stated, and there is what is implied, and I can read your implied thoughts quite easily.

The fact remains that without the initial deposit the bank can't engage in their fractional reserve banking BS. You are ignoring the root of the tree to make a point. One that you apparently don't understand very well.

 

[Econ4Every1]

When a customer deposits money in a bank, that banks reserve level rises.

Yes, deposits add to reserves, loans subtract from reserves.

Absolutely correct, but the reserves are transferred between banks accounts at the Fed. They aren't lent to customers.

Today banks are paid a flat rate in interest for excess reserves.

Banks are paid for reserves, not for excess reserves. Be precise.

The Fed only pays interest on excess reserves (do you dispute this?). The term "excess reserves" gives us some hint as to the fact that they are excess in that they aren't being used as reserves to meet a banks reserve requirement against loans made.

Banks don't earn interest on required reserves, they earn interest on the money they created and lent.

Ok, so let's say a bank has created $100 from thin air and lent it. The bank must maintain a 10% reserve ratio, thus it must have at least $10 on deposit at the Fed.

Where can it get this $10 reserve?

It can attract deposits or borrow it from other banks.

Now let's say the bank makes a $10 loan. Now it has $110 in loans and $10 as a reserve. The bank is $1 short. This it has a deficit of $1 of reserves.

No, its deficit is $1 larger than before. Currently the deficit is $11.

How could it have a deficit of $11 when it already had $10 in reserves and made a new loan of which it had to acquire an additional dollar in reserves?

Sure, that's why banks keep a small amount of "physical stuff" on hand. As I said, in order for a bank to have physical dollars it must acquire them via deposits or it must swap reserves at the Fed.

In order to lend me a $1 FRN, the bank needs deposits? Sounds like your claims are evolving.

See this is where things get really confusing. There is timing involved.

When a bank (a credit worthy and stable bank) makes a loan from thin air to a customer, they do not have to have the necessary reserves on hand to cover their reserve requirement. They can borrow reserves after the fact that night. This is why there is an overnight system for lending of reserves.

As a matter of fact, banks that do less than $15 million in transactions aren't required to keep any reserves at all.

Banks that do between $15-$115 are required to maintain a 3% reserve requirement and those over $115 million have a 10% requirement.

See Fed Regs here

Where did I say a bank doesn't need reserves/ deposits?

Post #4. "So, no, loans do not come from deposits."

At the risk of being condescending as I've been accused, but you realize that what I said and you said aren't the same thing, right?

Loans (more precisely) aren't funded from reserves, but most banks (see above) need to acquire reserves (if they lack adequate reserves) to meet their reserve requirements.

What I said is that banks don't lend customer deposits to other customers.

Show me. Make me the $200,000 mortgage loan I need from your new bank. Don't use deposits!

Sure....A banks loans are ultimately backed by capital, not reserves, but before I continue a little background on "reserves" and "captial" in case we disagree.

The name "reserves" is perhaps a major source of confusion because a reserve is conceived of as some sort of backup plan, something set aside in case of an emergency.

In accounting, a reserve is an acknowledgment of a contingent liability designed to prevent us from being caught short if that liability arises.

Reserve balances "on deposit at the Fed" don't serve any of those functions: none of them.

If your bank fails, its depositors will never see a dime of "reserves". If a bank gets into trouble, it cannot withdraw "reserves" to pay creditors. A bank cannot lend "reserves" to customers, or buy Wall Street assets with them.

What we oddly call reserves (in this context) are what is called, in most countries, "settlement funds".

Ok, so the solvency of a bank is determined by its capital relative to its liabilities, not it's reserves. Loans defaulted on are paid for with the collateral that secured them and if that is insufficient, the banks capital.

Ok, so how do we start a bank without deposits? Simple.

First, depending on the risk profile you wish to make loans you might need between $6-$20 million in capital. 20-25% of which must come from individual investors. The rest can be collected from shareholders of which there should be at least 750 to 1000 or more. This capital is deposited at the Fed. (Find all the rules here).

To sell you a $200,000 mortgage a new bank (with no deposits) could, as I said, create the loan out of thin air and acquire the necessary reserves after the fact via the interbank market (borrowing other banks excess reserves). Substantiating my claim that loans aren't lent from reserves.

So my bank now has a $200k liability and a $200k asset plus interest. That night it goes on the interbank market and borrows the necessary reserves, in this case, $2000. If my bank lends to you at ~4% and acquires the required reserves for 1.12%, then I would make 4% on $200k and pay 1.12% on $2k.

Now here is where savers come in. Let's say the next day someone opens a checking account and deposits $1000. Since I don't pay interest on checking accounts, I now have $1000 in excess reserves (as long as the average daily balance of all my depositors checking accounts is $1000

So I can make loans without deposits, but deposits increase my profits.

Banks use deposits to meet reserve requirements.

Right, deposits add to reserves and nothing subtracts from reserves. LOL!

First, reserves are split into two categories, required and excess.

If a bank has excess (pre-2008) they were earn nothing and would be incentivized to lend them to another bank. Post 2008 banks either keep their excess reserves and get paid 1.25% or they lend the

 

[Econ4Every1]

No, what you need to do is not be a condescending ass. The majority of posters here are as educated, or of higher education level, than you. Yours is not a limitation of media used to convey ideas. Yours is a limitation of YOU, and your belief that you are smarter than everyone else. Thus, you are by nature, a condescending ass.

All that you perceive none of that is what I've stated.

Ahhhh, but it is dear boy, it is. I am one of those who is better educated than you, and I have been dealing with people like you for longer than you've been alive. There is what is stated, and there is what is implied, and I can read your implied thoughts quite easily.

The fact remains that without the initial deposit the bank can't engage in their fractional reserve banking BS. You are ignoring the root of the tree to make a point. One that you apparently don't understand very well.

You sound really insecure touting your education like high school kids might talk about the size of the penis'. Seriously?

Look, I apologized to you and said I was sorry. Then you went on some tirade prescribing to me intentions and motives, none of which you can substantiate. It's obvious you have the problem. I suggest you put me on ignore if you can't handle debate.

 

[westwall]

No, what you need to do is not be a condescending ass. The majority of posters here are as educated, or of higher education level, than you. Yours is not a limitation of media used to convey ideas. Yours is a limitation of YOU, and your belief that you are smarter than everyone else. Thus, you are by nature, a condescending ass.

All that you perceive none of that is what I've stated.

Ahhhh, but it is dear boy, it is. I am one of those who is better educated than you, and I have been dealing with people like you for longer than you've been alive. There is what is stated, and there is what is implied, and I can read your implied thoughts quite easily.

The fact remains that without the initial deposit the bank can't engage in their fractional reserve banking BS. You are ignoring the root of the tree to make a point. One that you apparently don't understand very well.

You sound really insecure touting your education like high school kids might talk about the size of the penis'. Seriously?

Look, I apologized to you and said I was sorry. Then you went on some tirade prescribing to me intentions and motives, none of which you can substantiate. It's obvious you have the problem. I suggest you put me on ignore if you can't handle debate.

No, I am quite secure in my education and have dealt with silly people who thought real highly of themselves for decades, like I said. I don't put people on ignore because they are condescending, hell, I don't place people on ignore for anything. Even the ones who are simple idiots sometimes amuse me. But, to your "point", you have dodged Todds observations and instead responded with pithy propaganda.

If you wish to have a conversation and impress people with how clever you are I suggest you actually address the points with facts, and not with opinions or propaganda.

 

[Toddsterpatriot]

When a customer deposits money in a bank, that banks reserve level rises.

Yes, deposits add to reserves, loans subtract from reserves.

Absolutely correct, but the reserves are transferred between banks accounts at the Fed. They aren't lent to customers.

Today banks are paid a flat rate in interest for excess reserves.

Banks are paid for reserves, not for excess reserves. Be precise.

The Fed only pays interest on excess reserves (do you dispute this?). The term "excess reserves" gives us some hint as to the fact that they are excess in that they aren't being used as reserves to meet a banks reserve requirement against loans made.

Banks don't earn interest on required reserves, they earn interest on the money they created and lent.

Ok, so let's say a bank has created $100 from thin air and lent it. The bank must maintain a 10% reserve ratio, thus it must have at least $10 on deposit at the Fed.

Where can it get this $10 reserve?

It can attract deposits or borrow it from other banks.

Now let's say the bank makes a $10 loan. Now it has $110 in loans and $10 as a reserve. The bank is $1 short. This it has a deficit of $1 of reserves.

No, its deficit is $1 larger than before. Currently the deficit is $11.

How could it have a deficit of $11 when it already had $10 in reserves and made a new loan of which it had to acquire an additional dollar in reserves?

Sure, that's why banks keep a small amount of "physical stuff" on hand. As I said, in order for a bank to have physical dollars it must acquire them via deposits or it must swap reserves at the Fed.

In order to lend me a $1 FRN, the bank needs deposits? Sounds like your claims are evolving.

See this is where things get really confusing. There is timing involved.

When a bank (a credit worthy and stable bank) makes a loan from thin air to a customer, they do not have to have the necessary reserves on hand to cover their reserve requirement. They can borrow reserves after the fact that night. This is why there is an overnight system for lending of reserves.

As a matter of fact, banks that do less than $15 million in transactions aren't required to keep any reserves at all.

Banks that do between $15-$115 are required to maintain a 3% reserve requirement and those over $115 million have a 10% requirement.

See Fed Regs here

Where did I say a bank doesn't need reserves/ deposits?

Post #4. "So, no, loans do not come from deposits."

At the risk of being condescending as I've been accused, but you realize that what I said and you said aren't the same thing, right?

Loans (more precisely) aren't funded from reserves, but most banks (see above) need to acquire reserves (if they lack adequate reserves) to meet their reserve requirements.

What I said is that banks don't lend customer deposits to other customers.

Show me. Make me the $200,000 mortgage loan I need from your new bank. Don't use deposits!

Sure....A banks loans are ultimately backed by capital, not reserves, but before I continue a little background on "reserves" and "captial" in case we disagree.

The name "reserves" is perhaps a major source of confusion because a reserve is conceived of as some sort of backup plan, something set aside in case of an emergency.

In accounting, a reserve is an acknowledgment of a contingent liability designed to prevent us from being caught short if that liability arises.

Reserve balances "on deposit at the Fed" don't serve any of those functions: none of them.

If your bank fails, its depositors will never see a dime of "reserves". If a bank gets into trouble, it cannot withdraw "reserves" to pay creditors. A bank cannot lend "reserves" to customers, or buy Wall Street assets with them.

What we oddly call reserves (in this context) are what is called, in most countries, "settlement funds".

Ok, so the solvency of a bank is determined by its capital relative to its liabilities, not it's reserves. Loans defaulted on are paid for with the collateral that secured them and if that is insufficient, the banks capital.

Ok, so how do we start a bank without deposits? Simple.

First, depending on the risk profile you wish to make loans you might need between $6-$20 million in capital. 20-25% of which must come from individual investors. The rest can be collected from shareholders of which there should be at least 750 to 1000 or more. This capital is deposited at the Fed. (Find all the rules here).

To sell you a $200,000 mortgage a new bank (with no deposits) could, as I said, create the loan out of thin air and acquire the necessary reserves after the fact via the interbank market (borrowing other banks excess reserves). Substantiating my claim that loans aren't lent from reserves.

So my bank now has a $200k liability and a $200k asset plus interest. That night it goes on the interbank market and borrows the necessary reserves, in this case, $2000. If my bank lends to you at ~4% and acquires the required reserves for 1.12%, then I would make 4% on $200k and pay 1.12% on $2k.

Now here is where savers come in. Let's say the next day someone opens a checking account and deposits $1000. Since I don't pay interest on checking accounts, I now have $1000 in excess reserves (as long as the average daily balance of all my depositors checking accounts is $1000

So I can make loans without deposits, but deposits increase my profits.

Banks use deposits to meet reserve requirements.

Right, deposits add to reserves and nothing subtracts from reserves. LOL!

First, reserves are split into two categories, required and excess.

If a bank has excess (pre-2008) they were earn nothing and would be incentivized to lend them to another bank. Post 2008 banks either keep their excess reserves and get paid 1.25% or they lend the

Absolutely correct, but the reserves are transferred between banks accounts at the Fed.

Reserves leave a bank when they make a loan or return a deposit. Correct?

The Fed only pays interest on excess reserves (do you dispute this?).

I do. The Fed pays interest on all reserves.

Banks don't earn interest on required reserves,

They do. You are wrong.

At the risk of being condescending as I've been accused, but you realize that what I said and you said aren't the same thing, right?

Right. You said banks don't make loans from deposits, I said they do.

Loans (more precisely) aren't funded from reserves

What are loans funded from?

To sell you a $200,000 mortgage a new bank (with no deposits) could, as I said, create the loan out of thin air and acquire the necessary reserves after the fact via the interbank market (borrowing other banks excess reserves).

These excess reserves that your bank borrows.......why does the other bank have them?
Where did the other bank get them from?

So my bank now has a $200k liability and a $200k asset plus interest. That night it goes on the interbank market and borrows the necessary reserves, in this case, $2000.

Why do you have a $200k liability? Remember, you have no deposits.

 

[westwall]

When a customer deposits money in a bank, that banks reserve level rises.

Yes, deposits add to reserves, loans subtract from reserves.

Absolutely correct, but the reserves are transferred between banks accounts at the Fed. They aren't lent to customers.

Today banks are paid a flat rate in interest for excess reserves.

Banks are paid for reserves, not for excess reserves. Be precise.

The Fed only pays interest on excess reserves (do you dispute this?). The term "excess reserves" gives us some hint as to the fact that they are excess in that they aren't being used as reserves to meet a banks reserve requirement against loans made.

Banks don't earn interest on required reserves, they earn interest on the money they created and lent.

Ok, so let's say a bank has created $100 from thin air and lent it. The bank must maintain a 10% reserve ratio, thus it must have at least $10 on deposit at the Fed.

Where can it get this $10 reserve?

It can attract deposits or borrow it from other banks.

Now let's say the bank makes a $10 loan. Now it has $110 in loans and $10 as a reserve. The bank is $1 short. This it has a deficit of $1 of reserves.

No, its deficit is $1 larger than before. Currently the deficit is $11.

How could it have a deficit of $11 when it already had $10 in reserves and made a new loan of which it had to acquire an additional dollar in reserves?

Sure, that's why banks keep a small amount of "physical stuff" on hand. As I said, in order for a bank to have physical dollars it must acquire them via deposits or it must swap reserves at the Fed.

In order to lend me a $1 FRN, the bank needs deposits? Sounds like your claims are evolving.

See this is where things get really confusing. There is timing involved.

When a bank (a credit worthy and stable bank) makes a loan from thin air to a customer, they do not have to have the necessary reserves on hand to cover their reserve requirement. They can borrow reserves after the fact that night. This is why there is an overnight system for lending of reserves.

As a matter of fact, banks that do less than $15 million in transactions aren't required to keep any reserves at all.

Banks that do between $15-$115 are required to maintain a 3% reserve requirement and those over $115 million have a 10% requirement.

See Fed Regs here

Where did I say a bank doesn't need reserves/ deposits?

Post #4. "So, no, loans do not come from deposits."

At the risk of being condescending as I've been accused, but you realize that what I said and you said aren't the same thing, right?

Loans (more precisely) aren't funded from reserves, but most banks (see above) need to acquire reserves (if they lack adequate reserves) to meet their reserve requirements.

What I said is that banks don't lend customer deposits to other customers.

Show me. Make me the $200,000 mortgage loan I need from your new bank. Don't use deposits!

Sure....A banks loans are ultimately backed by capital, not reserves, but before I continue a little background on "reserves" and "captial" in case we disagree.

The name "reserves" is perhaps a major source of confusion because a reserve is conceived of as some sort of backup plan, something set aside in case of an emergency.

In accounting, a reserve is an acknowledgment of a contingent liability designed to prevent us from being caught short if that liability arises.

Reserve balances "on deposit at the Fed" don't serve any of those functions: none of them.

If your bank fails, its depositors will never see a dime of "reserves". If a bank gets into trouble, it cannot withdraw "reserves" to pay creditors. A bank cannot lend "reserves" to customers, or buy Wall Street assets with them.

What we oddly call reserves (in this context) are what is called, in most countries, "settlement funds".

Ok, so the solvency of a bank is determined by its capital relative to its liabilities, not it's reserves. Loans defaulted on are paid for with the collateral that secured them and if that is insufficient, the banks capital.

Ok, so how do we start a bank without deposits? Simple.

First, depending on the risk profile you wish to make loans you might need between $6-$20 million in capital. 20-25% of which must come from individual investors. The rest can be collected from shareholders of which there should be at least 750 to 1000 or more. This capital is deposited at the Fed. (Find all the rules here).

To sell you a $200,000 mortgage a new bank (with no deposits) could, as I said, create the loan out of thin air and acquire the necessary reserves after the fact via the interbank market (borrowing other banks excess reserves). Substantiating my claim that loans aren't lent from reserves.

So my bank now has a $200k liability and a $200k asset plus interest. That night it goes on the interbank market and borrows the necessary reserves, in this case, $2000. If my bank lends to you at ~4% and acquires the required reserves for 1.12%, then I would make 4% on $200k and pay 1.12% on $2k.

Now here is where savers come in. Let's say the next day someone opens a checking account and deposits $1000. Since I don't pay interest on checking accounts, I now have $1000 in excess reserves (as long as the average daily balance of all my depositors checking accounts is $1000

So I can make loans without deposits, but deposits increase my profits.

Banks use deposits to meet reserve requirements.

Right, deposits add to reserves and nothing subtracts from reserves. LOL!

First, reserves are split into two categories, required and excess.

If a bank has excess (pre-2008) they were earn nothing and would be incentivized to lend them to another bank. Post 2008 banks either keep their excess reserves and get paid 1.25% or they lend the

Absolutely correct, but the reserves are transferred between banks accounts at the Fed.

Reserves leave a bank when they make a loan or return a deposit. Correct?

The Fed only pays interest on excess reserves (do you dispute this?).

I do. The Fed pays interest on all reserves.

Banks don't earn interest on required reserves,

They do. You are wrong.

At the risk of being condescending as I've been accused, but you realize that what I said and you said aren't the same thing, right?

Right. You said banks don't make loans from deposits, I said they do.

Loans (more precisely) aren't funded from reserves

What are loans funded from?

To sell you a $200,000 mortgage a new bank (with no deposits) could, as I said, create the loan out of thin air and acquire the necessary reserves after the fact via the interbank market (borrowing other banks excess reserves).

These excess reserves that your bank borrows.......why does the other bank have them?
Where did the other bank get them from?

So my bank now has a $200k liability and a $200k asset plus interest. That night it goes on the interbank market and borrows the necessary reserves, in this case, $2000.

Why do you have a $200k liability? Remember, you have no deposits.

My sister actually works for the Fed, this guy has no idea what he's talking about.