We should all agree with this!

[Toddsterpatriot]

It looks as if these excess reserves at the central bank must be crowding out teh lending? Excess reserves + loans = deposits. Wrong. This is all double entry accounting.

When teh central bank decides to purchase assets in the private sector, not only are new deposits created, but so are new reserves. New deposits (liabilities) must have corresponding assets. So when a bank creates a deposit through lending to a borrower, that corresponding asset is the loan. When the central bank creates these deposits through asset purchases, the parallel asset is the increase in reserves, which are also created. Under this scenario, it doesn't matter how much a bank lends, if the central bank continues to create new reserves and deposits through purchasing assets from the private sector, deposits will constantly surpass loans by the amount of these new reserves.

Therefore, banks do not and cannot lend out reserves or deposits, nor do excess reserves have a crowding out effect. The positive interest rates on these excess reserves occur because the banking system is being forced to hold said reserves and pay the related fees for the deposits.

I found the article that is from, for anyone interested in the whole thing:
Banks Don't Lend Out Reserves - Forbes

It is a really great explanation of why excess reserves are so high. But the second part about about buying assets creating more reserves confuses me. When an asset is bought, the result is a decrease in equity. Why would the Fed also have to increase bank reserves? For example, if the Fed buys a $1000 asset, the equity would decrease by $1000 and everything balances. I do not understand why we can assume that when the Fed buys a $1000 asset, it also creates $1000 more in reserves for the banks.

Everything else in the article seems spot on, so I think I may be missing something here. Or maybe the article was unclear. For if the Fed buys assets, the result will be more deposits. This will also decrease excess reserves, which all else remaining equal decrease when deposits increase. The total volume of reserves will not actually change of course. For example, Say there are $3,000 in reserves and $10,000in deposits. The reserve ratio is 10%. Required reserves would be .10 x 10,000, which is $1000. Therefore, there are $3,000 - 1000 in excess reserves, which is $2000 in excess reserves.

Now say the Fed buys a $1,000 asset from an investor. We then have this: $3,000 in reserves and $11,000 in deposits. The volume of reserves is the same, but excess reserves would be less. The required reserves for $11,000 is $1100. Thus the excess is now $3000 - 1100, which is $1900 in excess reserves. So why would we assume the Fed is not only buying assets but increasing the volume of reserves at the same time? That runs contrary to its goal in reducing the excess.

A more logical reason is that the deposit-destroying effect of calling in loans and not creating new ones is counteracting the deposit-creating effect of QE. Banks simply are not creating more loans. In the above scenario, even with the QE decreasing the excess by $100, banks may have just called in a $100 loan. With no corresponding new loan, the deposits would fall by $100. Excess reserves would once again be $2000, despite QE.

In short, QE does not create more reserves in volume, and has the effect of reducing excess reserves all else remaining equal. All else is not equal, however, and if banks are not creating money through lending, but closing deposits by calling in loans, then QE will fail because the lack of lending has the precise opposite effect.

But the second part about about buying assets creating more reserves confuses me. When an asset is bought, the result is a decrease in equity. Why would the Fed also have to increase bank reserves?

When the Fed buys an asset, how do they pay for it?

They credit the sellers reserve account at the Fed.
They buy $1000 in bonds, add $1000 to the reserve account.

 

[Toddsterpatriot]

It looks as if these excess reserves at the central bank must be crowding out teh lending? Excess reserves + loans = deposits. Wrong. This is all double entry accounting.

When teh central bank decides to purchase assets in the private sector, not only are new deposits created, but so are new reserves. New deposits (liabilities) must have corresponding assets. So when a bank creates a deposit through lending to a borrower, that corresponding asset is the loan. When the central bank creates these deposits through asset purchases, the parallel asset is the increase in reserves, which are also created. Under this scenario, it doesn't matter how much a bank lends, if the central bank continues to create new reserves and deposits through purchasing assets from the private sector, deposits will constantly surpass loans by the amount of these new reserves.

Therefore, banks do not and cannot lend out reserves or deposits, nor do excess reserves have a crowding out effect. The positive interest rates on these excess reserves occur because the banking system is being forced to hold said reserves and pay the related fees for the deposits.

I found the article that is from, for anyone interested in the whole thing:
Banks Don't Lend Out Reserves - Forbes

It is a really great explanation of why excess reserves are so high. But the second part about about buying assets creating more reserves confuses me. When an asset is bought, the result is a decrease in equity. Why would the Fed also have to increase bank reserves? For example, if the Fed buys a $1000 asset, the equity would decrease by $1000 and everything balances. I do not understand why we can assume that when the Fed buys a $1000 asset, it also creates $1000 more in reserves for the banks.

Everything else in the article seems spot on, so I think I may be missing something here. Or maybe the article was unclear. For if the Fed buys assets, the result will be more deposits. This will also decrease excess reserves, which all else remaining equal decrease when deposits increase. The total volume of reserves will not actually change of course. For example, Say there are $3,000 in reserves and $10,000in deposits. The reserve ratio is 10%. Required reserves would be .10 x 10,000, which is $1000. Therefore, there are $3,000 - 1000 in excess reserves, which is $2000 in excess reserves.

Now say the Fed buys a $1,000 asset from an investor. We then have this: $3,000 in reserves and $11,000 in deposits. The volume of reserves is the same, but excess reserves would be less. The required reserves for $11,000 is $1100. Thus the excess is now $3000 - 1100, which is $1900 in excess reserves. So why would we assume the Fed is not only buying assets but increasing the volume of reserves at the same time? That runs contrary to its goal in reducing the excess.

A more logical reason is that the deposit-destroying effect of calling in loans and not creating new ones is counteracting the deposit-creating effect of QE. Banks simply are not creating more loans. In the above scenario, even with the QE decreasing the excess by $100, banks may have just called in a $100 loan. With no corresponding new loan, the deposits would fall by $100. Excess reserves would once again be $2000, despite QE.

In short, QE does not create more reserves in volume, and has the effect of reducing excess reserves all else remaining equal. All else is not equal, however, and if banks are not creating money through lending, but closing deposits by calling in loans, then QE will fail because the lack of lending has the precise opposite effect.

Now say the Fed buys a $1,000 asset from an investor. We then have this: $3,000 in reserves and $11,000 in deposits. The volume of reserves is the same, but excess reserves would be less.

Nope. The bank has an extra asset ($1000 in vault cash or reserve balance at the Fed) and an extra liability (cust balance $1000 higher).

Excess reserves are $1000 higher.

 

[ShackledNation]

Yes, the bank gets more liabilities...

Because a bank with only $100 in liabilities can't loan $900.

Yes it can. I don't think you understand what happens when a loan is made. The bank creates both a liability and and asset of the same amount at the same time. Do you understand that when the bank creates a $900 loan it is really creating both a $900 asset (the loan itself) and a $900 liability (the deposit account for the debtor)?

Do you understand that when the bank creates a $900 loan it is really creating both a $900 asset (the loan itself) and a $900 liability (the deposit account for the debtor)?

Yes. And as soon as the borrower empties the deposit account by writing a check or sending a wire, you have a bank with a $100 deposit which cannot fund the $900 loan. Unless they get another $900 in deposits or borrow $900 from another bank's excess reserves.

Then you agree that the bank can make a $900 loan with only $100 in reserves. The money was still created out of thin air. What is being deposited later in the day after the loan money is spent is not cash, however, but more money created in the same way by another bank. Thus the overall money supply expands due to credit creation out of thin air by banks.

 

[Toddsterpatriot]

I found the article that is from, for anyone interested in the whole thing:
Banks Don't Lend Out Reserves - Forbes

It is a really great explanation of why excess reserves are so high. But the second part about about buying assets creating more reserves confuses me. When an asset is bought, the result is a decrease in equity. Why would the Fed also have to increase bank reserves? For example, if the Fed buys a $1000 asset, the equity would decrease by $1000 and everything balances. I do not understand why we can assume that when the Fed buys a $1000 asset, it also creates $1000 more in reserves for the banks.

Everything else in the article seems spot on, so I think I may be missing something here. Or maybe the article was unclear. For if the Fed buys assets, the result will be more deposits. This will also decrease excess reserves, which all else remaining equal decrease when deposits increase. The total volume of reserves will not actually change of course. For example, Say there are $3,000 in reserves and $10,000in deposits. The reserve ratio is 10%. Required reserves would be .10 x 10,000, which is $1000. Therefore, there are $3,000 - 1000 in excess reserves, which is $2000 in excess reserves.

Now say the Fed buys a $1,000 asset. We then have this: $3,000 in reserves and $11,000 in deposits. The volume of reserves is the same, but excess reserves would be less. The required reserves for $11,000 is $1100. Thus the excess is now $3000 - 1100, which is $1900 in excess reserves. So why would we assume the Fed is not only buying assets but increasing the volume of reserves at the same time? That runs contrary to its goal in reducing the excess.

A more logical reason is that the deposit-destroying effect of calling in loans and not creating new ones is counteracting the deposit-creating effect of QE. Banks simply are not creating more loans. In the above scenario, even with the QE decreasing the excess by $100, banks may have just called in a $100 loan. With no corresponding new loan, the deposits would fall by $100. Excess reserves would once again be $2000, despite QE.

In short, QE does not create more reserves in volume, and has the effect of reducing excess reserves all else remaining equal. All else is not equal, however, and if banks are not creating money through lending, but closing deposits by calling in loans, then QE will fail because the lack of lending has the precise opposite effect.

We should maybe look at all banks in the aggregate, as opposed to individual banks if that makes sense. All banks, in the aggregate, and individual banks, cannot lend out reserves as we've pointed out. However, I think Francis could have gotten into more detail ( I read that article months ago, but imageshacked the FRED data, being to lazy to recreate it). Individuals banks can offload excess reserves through asset purchases or lending to other banks. However, all banks in the aggregate can't do this if that makes sense? Under such a circumstance, reserves that move from one bank's balance sheet move to another all while still remaining on the FED's balance sheet.

That makes sense, but it doesn't really explain my confusion. I am not looking at an individual bank buying an asset or lending to other banks. I am looking at what happens when the Fed buys assets from a private investor (not a bank). Why would excess reserves at banks increase as well? The investor would have more money in his deposit account, increasing aggregate deposits. But an increase in aggregate deposits does not necessitate an increase in assets--the banks may very well just have less equity overall. All else remaining equal, an increase in deposits will actually decrease excess reserves, which are a ratio of total reserves minus required reserves. Why? Higher deposits mean required reserves will be higher.

I am looking at what happens when the Fed buys assets from a private investor (not a bank). Why would excess reserves at banks increase as well? The investor would have more money in his deposit account, increasing aggregate deposits. But an increase in aggregate deposits does not necessitate an increase in assets--

Of course it has increased assets. The cash, or check, or wire that the Fed used to pay for the private investors bond.

 

[Toddsterpatriot]

Yes it can. I don't think you understand what happens when a loan is made. The bank creates both a liability and and asset of the same amount at the same time. Do you understand that when the bank creates a $900 loan it is really creating both a $900 asset (the loan itself) and a $900 liability (the deposit account for the debtor)?

Do you understand that when the bank creates a $900 loan it is really creating both a $900 asset (the loan itself) and a $900 liability (the deposit account for the debtor)?

Yes. And as soon as the borrower empties the deposit account by writing a check or sending a wire, you have a bank with a $100 deposit which cannot fund the $900 loan. Unless they get another $900 in deposits or borrow $900 from another bank's excess reserves.

Then you agree that the bank can make a $900 loan with only $100 in reserves. The money was still created out of thin air. What is being deposited later in the day after the loan money is spent is not cash, however, but more money created in the same way by another bank. Thus the overall money supply expands due to credit creation out of thin air by banks.

Then you agree that the bank can make a $900 loan with only $100 in reserves.

Clearly $100 in liabilities cannot support $900 in loans.

What is being deposited later in the day after the loan money is spent is not cash

The new liabilities do not have to be cash, a balance at the Fed works as well.

Thus the overall money supply expands due to credit creation out of thin air by banks.

Loans from previous (or future) deposits or borrowing another banks excess reserves

 

[ShackledNation]

Do you understand that when the bank creates a $900 loan it is really creating both a $900 asset (the loan itself) and a $900 liability (the deposit account for the debtor)?

Yes. And as soon as the borrower empties the deposit account by writing a check or sending a wire, you have a bank with a $100 deposit which cannot fund the $900 loan. Unless they get another $900 in deposits or borrow $900 from another bank's excess reserves.

Then you agree that the bank can make a $900 loan with only $100 in reserves. The money was still created out of thin air. What is being deposited later in the day after the loan money is spent is not cash, however, but more money created in the same way by another bank. Thus the overall money supply expands due to credit creation out of thin air by banks.

Then you agree that the bank can make a $900 loan with only $100 in reserves.

Clearly $100 in liabilities cannot support $900 in loans.

I am going in circles here. The loan creates $900 in liabilities as well because it creates demand deposits.

What is being deposited later in the day after the loan money is spent is not cash

The new liabilities do not have to be cash, a balance at the Fed works as well.

No, the new liabilities are not necessarily balances at the Fed either.

Remember?

Bank A has $100 in reserves and $100 deposits. Bank A then creates a $900 loan (and of course the $900 deposit account) for Bob. The $900 deposit is in the form of a check. Bob gives George the check. George goes to Bank A and deposits the check. Bank A debits $900 from Bob's account and credits $900 to George's account. Was cash ever deposited? No. Did the Fed ever credit the banks account? No. Well what was deposited? The $900 deposit the bank itself created out of thin air. Nothing is backing it but itself. There is no new deposit, the same deposit the bank created out of thin air merely changed hands.

 

[Toddsterpatriot]

Then you agree that the bank can make a $900 loan with only $100 in reserves. The money was still created out of thin air. What is being deposited later in the day after the loan money is spent is not cash, however, but more money created in the same way by another bank. Thus the overall money supply expands due to credit creation out of thin air by banks.

Then you agree that the bank can make a $900 loan with only $100 in reserves.

Clearly $100 in liabilities cannot support $900 in loans.

I am going in circles here. The loan creates $900 in liabilities as well because it creates demand deposits.

What is being deposited later in the day after the loan money is spent is not cash

The new liabilities do not have to be cash, a balance at the Fed works as well.

No, the new liabilities are not necessarily balances at the Fed either.

Remember?

Bank A has $100 in reserves and $100 deposits. Bank A then creates a $900 loan (and of course the $900 deposit account) for Bob. The $900 deposit is in the form of a check. Bob gives George the check. George goes to Bank A and deposits the check. Bank A debits $900 from Bob's account and credits $900 to George's account. Was cash ever deposited? No. Did the Fed ever credit the banks account? No. Well what was deposited? The $900 deposit the bank itself created out of thin air. Nothing is backing it but itself. There is no new deposit, the same deposit the bank created out of thin air merely changed hands.

The loan creates $900 in liabilities as well because it creates demand deposits.

Yes. And because I'm interested in what happens by the end of the business day, not just the instant the loan is create, I understand that $100 in liabilities will not support the $900 loan the next day, when the funds move out of that newly created demand account.

There is no new deposit, the same deposit the bank created out of thin air merely changed hands.

Bank liabilities are considered money.
You can't create a liability out of thin air.
The liability at bank A was created from the asset in bank B.
And the other way around.

 

[Toddsterpatriot]

The money is created in the form of a deposit account, which is the liability--a liability that matches the loan created at the same time. When people say banks create money out of thin air, they are saying banks create deposit accounts out of thin air, which are liabilities, to balance the loans they create, which are assets.

When commercial banks issue loans, at the end of the day, all they're doing is crediting the bank account of the borrower, but they're not debiting their reserves. The bank has the asset as the amount of the loan, and the borrower assumes the liability of the loan repayment. Commercial banks aren't currency issuers.

See the difference?

Once again, I never said banks loaned reserves or debited them. They don't. I have said this numerous times, in fact that has been one of my primary arguments against Toddster. Where did you get the idea I believed banks loaned out reserves from the post of mine you quoted?

Once again, I never said banks loaned reserves or debited them. They don't.

But of course they lend out excess reserves.

A bank with $1 billion in excess reserves is not going to fund a $500 million loan with Fed Funds. They'll simply reduce their excess reserves to $500 million.

 

[Toddsterpatriot]

The money is created in the form of a deposit account, which is the liability--a liability that matches the loan created at the same time. When people say banks create money out of thin air, they are saying banks create deposit accounts out of thin air, which are liabilities, to balance the loans they create, which are assets.

When commercial banks issue loans, at the end of the day, all they're doing is crediting the bank account of the borrower, but they're not debiting their reserves. The bank has the asset as the amount of the loan, and the borrower assumes the liability of the loan repayment. Commercial banks aren't currency issuers.

See the difference?

Once again, I never said banks loaned reserves or debited them. They don't. I have said this numerous times, in fact that has been one of my primary arguments against Toddster. Where did you get the idea I believed banks loaned out reserves from the post of mine you quoted?

Once again, I never said banks loaned reserves or debited them.

And don't forget, when banks lend out excess reserves, thru the Fed Funds wire, they're lending out reserves.

 

[ShackledNation]

Then you agree that the bank can make a $900 loan with only $100 in reserves.

Clearly $100 in liabilities cannot support $900 in loans.

I am going in circles here. The loan creates $900 in liabilities as well because it creates demand deposits.

What is being deposited later in the day after the loan money is spent is not cash

The new liabilities do not have to be cash, a balance at the Fed works as well.

No, the new liabilities are not necessarily balances at the Fed either.

Remember?

Bank A has $100 in reserves and $100 deposits. Bank A then creates a $900 loan (and of course the $900 deposit account) for Bob. The $900 deposit is in the form of a check. Bob gives George the check. George goes to Bank A and deposits the check. Bank A debits $900 from Bob's account and credits $900 to George's account. Was cash ever deposited? No. Did the Fed ever credit the banks account? No. Well what was deposited? The $900 deposit the bank itself created out of thin air. Nothing is backing it but itself. There is no new deposit, the same deposit the bank created out of thin air merely changed hands.

The loan creates $900 in liabilities as well because it creates demand deposits.

Yes. And because I'm interested in what happens by the end of the business day, not just the instant the loan is create, I understand that $100 in liabilities will not support the $900 loan the next day, when the funds move out of that newly created demand account.

There is no new deposit, the same deposit the bank created out of thin air merely changed hands.

Bank liabilities are considered money.
You can't create a liability out of thin air.
The liability at bank A was created from the asset in bank B.
And the other way around.

Bank A has $100 in reserves and $100 deposits. Bank A then creates a $900 loan (and of course the $900 deposit account) for Bob. The $900 deposit is in the form of a check. Bob gives George the check. George goes to Bank A and deposits the check. Bank A debits $900 from Bob's account and credits $900 to George's account. Was cash ever deposited? No. Did the Fed ever credit the banks account? No. Well what was deposited? The $900 deposit the bank itself created out of thin air. Nothing is backing it but itself. There is no new deposit, the same deposit the bank created out of thin air merely changed hands.

Look at that, the bank created a liability out of thin air. It's called a demand deposit (or check). The example completely debunked your argument, which is why you ignored it. From now on, I will continue to repost it until you point out where in the example something illegal or impossible happened.

Once again, I never said banks loaned reserves or debited them. They don't.

But of course they lend out excess reserves.

A bank with $1 billion in excess reserves is not going to fund a $500 million loan with Fed Funds. They'll simply reduce their excess reserves to $500 million.

Banks do not loan out their reserves to customers. That is 100% false.

And don't forget, when banks lend out excess reserves, thru the Fed Funds wire, they're lending out reserves.

To other banks. Banks do not lend out reserves to customers. This is simply a fact.

 

[Toddsterpatriot]

I am going in circles here. The loan creates $900 in liabilities as well because it creates demand deposits.


No, the new liabilities are not necessarily balances at the Fed either.

Remember?

Bank A has $100 in reserves and $100 deposits. Bank A then creates a $900 loan (and of course the $900 deposit account) for Bob. The $900 deposit is in the form of a check. Bob gives George the check. George goes to Bank A and deposits the check. Bank A debits $900 from Bob's account and credits $900 to George's account. Was cash ever deposited? No. Did the Fed ever credit the banks account? No. Well what was deposited? The $900 deposit the bank itself created out of thin air. Nothing is backing it but itself. There is no new deposit, the same deposit the bank created out of thin air merely changed hands.

The loan creates $900 in liabilities as well because it creates demand deposits.

Yes. And because I'm interested in what happens by the end of the business day, not just the instant the loan is create, I understand that $100 in liabilities will not support the $900 loan the next day, when the funds move out of that newly created demand account.

There is no new deposit, the same deposit the bank created out of thin air merely changed hands.

Bank liabilities are considered money.
You can't create a liability out of thin air.
The liability at bank A was created from the asset in bank B.
And the other way around.

Bank A has $100 in reserves and $100 deposits. Bank A then creates a $900 loan (and of course the $900 deposit account) for Bob. The $900 deposit is in the form of a check. Bob gives George the check. George goes to Bank A and deposits the check. Bank A debits $900 from Bob's account and credits $900 to George's account. Was cash ever deposited? No. Did the Fed ever credit the banks account? No. Well what was deposited? The $900 deposit the bank itself created out of thin air. Nothing is backing it but itself. There is no new deposit, the same deposit the bank created out of thin air merely changed hands.

Look at that, the bank created a liability out of thin air. It's called a demand deposit (or check). The example completely debunked your argument, which is why you ignored it. From now on, I will continue to repost it until you point out where in the example something illegal or impossible happened.

Once again, I never said banks loaned reserves or debited them. They don't.

But of course they lend out excess reserves.

A bank with $1 billion in excess reserves is not going to fund a $500 million loan with Fed Funds. They'll simply reduce their excess reserves to $500 million.

Banks do not loan out their reserves to customers. That is 100% false.

And don't forget, when banks lend out excess reserves, thru the Fed Funds wire, they're lending out reserves.

To other banks. Banks do not lend out reserves to customers. This is simply a fact.

Banks do not loan out their reserves to customers. That is 100% false.

How would you suggest the bank with $1 billion in excess reserves fund the loan for $500 million?

 

[ShackledNation]

The loan creates $900 in liabilities as well because it creates demand deposits.

Yes. And because I'm interested in what happens by the end of the business day, not just the instant the loan is create, I understand that $100 in liabilities will not support the $900 loan the next day, when the funds move out of that newly created demand account.

There is no new deposit, the same deposit the bank created out of thin air merely changed hands.

Bank liabilities are considered money.
You can't create a liability out of thin air.
The liability at bank A was created from the asset in bank B.
And the other way around.

Bank A has $100 in reserves and $100 deposits. Bank A then creates a $900 loan (and of course the $900 deposit account) for Bob. The $900 deposit is in the form of a check. Bob gives George the check. George goes to Bank A and deposits the check. Bank A debits $900 from Bob's account and credits $900 to George's account. Was cash ever deposited? No. Did the Fed ever credit the banks account? No. Well what was deposited? The $900 deposit the bank itself created out of thin air. Nothing is backing it but itself. There is no new deposit, the same deposit the bank created out of thin air merely changed hands.

Look at that, the bank created a liability out of thin air. It's called a demand deposit (or check). The example completely debunked your argument, which is why you ignored it. From now on, I will continue to repost it until you point out where in the example something illegal or impossible happened.


Banks do not loan out their reserves to customers. That is 100% false.

And don't forget, when banks lend out excess reserves, thru the Fed Funds wire, they're lending out reserves.

To other banks. Banks do not lend out reserves to customers. This is simply a fact.

Banks do not loan out their reserves to customers. That is 100% false.

How would you suggest the bank with $1 billion in excess reserves fund the loan for $500 million?

I already answered that with my example you ignored. Once again:

Bank A has $100 in reserves and $100 deposits. Bank A then creates a $900 loan (and of course the $900 deposit account) for Bob. The $900 deposit is in the form of a check. Bob gives George the check. George goes to Bank A and deposits the check. Bank A debits $900 from Bob's account and credits $900 to George's account. Was cash ever deposited? No. Did the Fed ever credit the banks account? No. Well what was deposited? The $900 deposit the bank itself created out of thin air. Nothing is backing it but itself. There is no new deposit, the same deposit the bank created out of thin air merely changed hands.

Look at that, the bank created a liability out of thin air. It's called a demand deposit (or check). From now on, I will continue to repost it until you point out where in the example something illegal or impossible happened.

 

[Toddsterpatriot]

Bank A has $100 in reserves and $100 deposits. Bank A then creates a $900 loan (and of course the $900 deposit account) for Bob. The $900 deposit is in the form of a check. Bob gives George the check. George goes to Bank A and deposits the check. Bank A debits $900 from Bob's account and credits $900 to George's account. Was cash ever deposited? No. Did the Fed ever credit the banks account? No. Well what was deposited? The $900 deposit the bank itself created out of thin air. Nothing is backing it but itself. There is no new deposit, the same deposit the bank created out of thin air merely changed hands.

Look at that, the bank created a liability out of thin air. It's called a demand deposit (or check). The example completely debunked your argument, which is why you ignored it. From now on, I will continue to repost it until you point out where in the example something illegal or impossible happened.


Banks do not loan out their reserves to customers. That is 100% false.


To other banks. Banks do not lend out reserves to customers. This is simply a fact.

Banks do not loan out their reserves to customers. That is 100% false.

How would you suggest the bank with $1 billion in excess reserves fund the loan for $500 million?

I already answered that with my example you ignored. Once again:

Bank A has $100 in reserves and $100 deposits. Bank A then creates a $900 loan (and of course the $900 deposit account) for Bob. The $900 deposit is in the form of a check. Bob gives George the check. George goes to Bank A and deposits the check. Bank A debits $900 from Bob's account and credits $900 to George's account. Was cash ever deposited? No. Did the Fed ever credit the banks account? No. Well what was deposited? The $900 deposit the bank itself created out of thin air. Nothing is backing it but itself. There is no new deposit, the same deposit the bank created out of thin air merely changed hands.

Look at that, the bank created a liability out of thin air. It's called a demand deposit (or check). From now on, I will continue to repost it until you point out where in the example something illegal or impossible happened.

No you didn't.

How would you suggest the bank with $1 billion in excess reserves fund the loan for $500 million?

Look at that, the bank created a liability out of thin air.

Banks can't create liabilities out of thin air.
Except central banks.

 

[ShackledNation]

Banks do not loan out their reserves to customers. That is 100% false.

How would you suggest the bank with $1 billion in excess reserves fund the loan for $500 million?

I already answered that with my example you ignored. Once again:

Bank A has $100 in reserves and $100 deposits. Bank A then creates a $900 loan (and of course the $900 deposit account) for Bob. The $900 deposit is in the form of a check. Bob gives George the check. George goes to Bank A and deposits the check. Bank A debits $900 from Bob's account and credits $900 to George's account. Was cash ever deposited? No. Did the Fed ever credit the banks account? No. Well what was deposited? The $900 deposit the bank itself created out of thin air. Nothing is backing it but itself. There is no new deposit, the same deposit the bank created out of thin air merely changed hands.

Look at that, the bank created a liability out of thin air. It's called a demand deposit (or check). From now on, I will continue to repost it until you point out where in the example something illegal or impossible happened.

No you didn't.

How would you suggest the bank with $1 billion in excess reserves fund the loan for $500 million?

Look at that, the bank created a liability out of thin air.

Banks can't create liabilities out of thin air.
Except central banks.

You keep repeating your same assertion, but it is simply wrong. You can call a pear a mango for as long as you want, but a pear is still a pear.

Banks can and do create liabilities out of thin air. The liability is a demand deposit. Even I can create a liability out of thin air. I can give my friend a note saying IOU $10. Poof. I have a new liability.

Bank A has $100 in reserves and $100 deposits. Bank A then creates a $900 loan (and of course the $900 deposit account) for Bob. The $900 deposit is in the form of a check. Bob gives George the check. George goes to Bank A and deposits the check. Bank A debits $900 from Bob's account and credits $900 to George's account. Was cash ever deposited? No. Did the Fed ever credit the banks account? No. Well what was deposited? The $900 deposit the bank itself created out of thin air. Nothing is backing it but itself. There is no new deposit, the same deposit the bank created out of thin air merely changed hands.

Look at that, the bank created a liability out of thin air. It's called a demand deposit (or check). From now on, I will continue to repost it until you point out where in the example something illegal or impossible happened.

 

[Toddsterpatriot]

I already answered that with my example you ignored. Once again:

Bank A has $100 in reserves and $100 deposits. Bank A then creates a $900 loan (and of course the $900 deposit account) for Bob. The $900 deposit is in the form of a check. Bob gives George the check. George goes to Bank A and deposits the check. Bank A debits $900 from Bob's account and credits $900 to George's account. Was cash ever deposited? No. Did the Fed ever credit the banks account? No. Well what was deposited? The $900 deposit the bank itself created out of thin air. Nothing is backing it but itself. There is no new deposit, the same deposit the bank created out of thin air merely changed hands.

Look at that, the bank created a liability out of thin air. It's called a demand deposit (or check). From now on, I will continue to repost it until you point out where in the example something illegal or impossible happened.

No you didn't.

How would you suggest the bank with $1 billion in excess reserves fund the loan for $500 million?

Look at that, the bank created a liability out of thin air.

Banks can't create liabilities out of thin air.
Except central banks.

You keep repeating your same assertion, but it is simply wrong. You can call a pear a mango for as long as you want, but a pear is still a pear.

Banks can and do create liabilities out of thin air. The liability is a demand deposit. Even I can create a liability out of thin air. I can give my friend a note saying IOU $10. Poof. I have a new liability.

Bank A has $100 in reserves and $100 deposits. Bank A then creates a $900 loan (and of course the $900 deposit account) for Bob. The $900 deposit is in the form of a check. Bob gives George the check. George goes to Bank A and deposits the check. Bank A debits $900 from Bob's account and credits $900 to George's account. Was cash ever deposited? No. Did the Fed ever credit the banks account? No. Well what was deposited? The $900 deposit the bank itself created out of thin air. Nothing is backing it but itself. There is no new deposit, the same deposit the bank created out of thin air merely changed hands.

Look at that, the bank created a liability out of thin air. It's called a demand deposit (or check). From now on, I will continue to repost it until you point out where in the example something illegal or impossible happened.

How would you suggest the bank with $1 billion in excess reserves fund the loan for $500 million?

 

[Kimura]

It looks as if these excess reserves at the central bank must be crowding out teh lending? Excess reserves + loans = deposits. Wrong. This is all double entry accounting.

When teh central bank decides to purchase assets in the private sector, not only are new deposits created, but so are new reserves. New deposits (liabilities) must have corresponding assets. So when a bank creates a deposit through lending to a borrower, that corresponding asset is the loan. When the central bank creates these deposits through asset purchases, the parallel asset is the increase in reserves, which are also created. Under this scenario, it doesn't matter how much a bank lends, if the central bank continues to create new reserves and deposits through purchasing assets from the private sector, deposits will constantly surpass loans by the amount of these new reserves.

Therefore, banks do not and cannot lend out reserves or deposits, nor do excess reserves have a crowding out effect. The positive interest rates on these excess reserves occur because the banking system is being forced to hold said reserves and pay the related fees for the deposits.

Therefore, banks do not and cannot lend out reserves or deposits,

If a bank has $10,000 in deposits and a borrower withdraws $5000 in cash to buy a car, what has the bank lent out?

Sorry, I didn't see your post.

There is zero lending when a depositor withdraws cash from his/her bank account. All that occurs is a reduction of cash reserves which the bank may or may not have to replenish depending on its supply.

 

[Toddsterpatriot]

It looks as if these excess reserves at the central bank must be crowding out teh lending? Excess reserves + loans = deposits. Wrong. This is all double entry accounting.

When teh central bank decides to purchase assets in the private sector, not only are new deposits created, but so are new reserves. New deposits (liabilities) must have corresponding assets. So when a bank creates a deposit through lending to a borrower, that corresponding asset is the loan. When the central bank creates these deposits through asset purchases, the parallel asset is the increase in reserves, which are also created. Under this scenario, it doesn't matter how much a bank lends, if the central bank continues to create new reserves and deposits through purchasing assets from the private sector, deposits will constantly surpass loans by the amount of these new reserves.

Therefore, banks do not and cannot lend out reserves or deposits, nor do excess reserves have a crowding out effect. The positive interest rates on these excess reserves occur because the banking system is being forced to hold said reserves and pay the related fees for the deposits.

Therefore, banks do not and cannot lend out reserves or deposits,

If a bank has $10,000 in deposits and a borrower withdraws $5000 in cash to buy a car, what has the bank lent out?

Sorry, I didn't see your post.

There is zero lending when a depositor withdraws cash from his/her bank account. All that occurs is a reduction of cash reserves, which the bank may or may not have to replenish, depending on its supply.

No, a borrower takes out a $5000 loan, takes it in cash.

 

[Kimura]

Therefore, banks do not and cannot lend out reserves or deposits,

If a bank has $10,000 in deposits and a borrower withdraws $5000 in cash to buy a car, what has the bank lent out?

Sorry, I didn't see your post.

There is zero lending when a depositor withdraws cash from his/her bank account. All that occurs is a reduction of cash reserves, which the bank may or may not have to replenish, depending on its supply.

No, a borrower takes out a $5000 loan, takes it in cash.

Okay, so we're talking a 10K loan, then the borrower takes 5K in cash? I thought you meant the bank had 10k in deposits, he withdraws 5k cash. Remember, and you said you agree, loans create deposits, it's a fairly simply process. Banks only hold physical cash reserves to satisfy their customers demand for cash withdrawals.

 

[Toddsterpatriot]

Sorry, I didn't see your post.

There is zero lending when a depositor withdraws cash from his/her bank account. All that occurs is a reduction of cash reserves, which the bank may or may not have to replenish, depending on its supply.

No, a borrower takes out a $5000 loan, takes it in cash.

Okay, so we're talking a 10K loan, then the borrower takes 5K in cash? I thought you meant the bank had 10k in deposits, he withdraws 5k cash. Remember, and you said you agree, loans create deposits, it's a fairly simply process. Banks only hold physical cash reserves to satisfy their customers demand for cash withdrawals.

Okay, so we're talking a 10K loan, then the borrower takes 5K in cash?

No. A bank has $10,000 in deposits. $5000 in vault cash, $5000 in an account at the Fed.

A guy comes in to borrow $5000, takes it in cash. What has the bank lent out?

A guy comes in to borrow $5000, takes it as a wire transfer. What has the bank lent out?

 

[Kimura]

No, a borrower takes out a $5000 loan, takes it in cash.

Okay, so we're talking a 10K loan, then the borrower takes 5K in cash? I thought you meant the bank had 10k in deposits, he withdraws 5k cash. Remember, and you said you agree, loans create deposits, it's a fairly simply process. Banks only hold physical cash reserves to satisfy their customers demand for cash withdrawals.

Okay, so we're talking a 10K loan, then the borrower takes 5K in cash?

No. A bank has $10,000 in deposits. $5000 in vault cash, $5000 in an account at the Fed.

A guy comes in to borrow $5000, takes it in cash. What has the bank lent out?

A guy comes in to borrow $5000, takes it as a wire transfer. What has the bank lent out?

Banks rarely lend in such a fashion. We don't leave banks with wheelbarrows in tow. A bank will credit your deposit account, or they'll directly make a payment for you, such as your mortgage, the auto dealer, boat dealer, etc.

However, with that being said, you can certainly obtain an overdraft withdrawal, so you can leave with the cash in hand. In the event the bank was short of vault cash (also part of its reserves), you'd have to wait thirty days as a requirement for savings deposits, but banks almost never do that for an armored truck delivery from the Federal Reserve.

If the bank doesn't have enough reserves at the FED to cover an armored truck delivery, the FED will directly lend them the reserves. They'll give you the cash and the liability would be the reserves they owe to the FED.

Banking lending should be thought of as keystrokes, not as cash withdrawals. It doesn't matter since the FED will always lend out cash on demand.