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

[ImJustABill]

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.

Don't forget the creation of currency through credit cards!

Yes, credit cards is another form of credit creation. When you spend the $ from you available credit balance, you simultaneously create a liability to the bank (or asset for the bank depending on which side you are looking from).

 

[ImJustABill]

Haha. Good one!

 

[ImJustABill]

Banks do not lend out reserves.

if they hold an excess of reserves they can elect to lend out what were once reserves, if reserve requirements change they can elect to lend out what were once reserves.
If they lend out reserves they are no longer reserves so who knows what you mean?

No, they can lend them to other banks, but they do not lend out required or excess reserves to the public.

 

[Econ4Every1]

Where did this other bank get $20000 in excess reserves?

We've already been through this.

Historically the US wasn't created as a fiat economy.

I don't care, I just want to know where this other bank got the excess reserves that your new bank is borrowing.
Not the serial number of the FRNs, the source of the excess reserves.

The history of the banking system is such that when the economy switched over to a fiat economy there was already money circulating in the system. Money on deposit effectively became reserves.

That's where they came from. Now if a person takes a $100 loan, they create another $100 in reserves, which, at the 10% reserve requirement can be used as required reserves for another $1000 in money created by the banking system.

 

[Toddsterpatriot]

Where did this other bank get $20000 in excess reserves?

We've already been through this.

Historically the US wasn't created as a fiat economy.

I don't care, I just want to know where this other bank got the excess reserves that your new bank is borrowing.
Not the serial number of the FRNs, the source of the excess reserves.

The history of the banking system is such that when the economy switched over to a fiat economy there was already money circulating in the system. Money on deposit effectively became reserves.

That's where they came from. Now if a person takes a $100 loan, they create another $100 in reserves, which, at the 10% reserve requirement can be used as required reserves for another $1000 in money created by the banking system.

The history of the banking system is such that when the economy switched over to a fiat economy there was already money circulating in the system. Money on deposit effectively became reserves.

So the $20,000 in reserves you're borrowing based on my $200,000 mortgage came from a depositor at the other bank?

 

[Econ4Every1]

So the $20,000 in reserves you're borrowing based on my $200,000 mortgage came from a depositor at the other bank?

Pretty sure we've been over this. Customers don't borrow reserves.

 

[Toddsterpatriot]

So the $20,000 in reserves you're borrowing based on my $200,000 mortgage came from a depositor at the other bank?

Pretty sure we've been over this. Customers don't borrow reserves.

Pretty sure we've been over this.

Great. So when you said you were making my mortgage loan with no deposits, you were wrong.

 

[Econ4Every1]

Great. So when you said you were making my mortgage loan with no deposits, you were wrong.

Todd, I appreciate the discussion. I hope readers of this thread, who aren't familiar with economics, find it interesting and informative.

Unfortunately, we seem to have reached a dead end. You keep looping back and repeating something I never said and you seem unwilling or unable to make the distinction what I'm actually saying.

If I said, "you can't go to a theater and see a movie unless you buy a ticket". Your response is something analogous" to; "So you're saying they can't play the movie unless I buy a ticket?"

"No, I'm saying you can't see the movie without a ticket."

Now the example here is only analogous in the sense that you are addressing something different than what I'm saying.

Banks use reserves to settle up between each other, that's it. They aren't lent and they aren't spent.

When is the last time you heard about a bank that stopped making loans because they ran out of customer deposits to lend? It doesn't happen because banks don't lend customer deposits.

 

[Toddsterpatriot]

Great. So when you said you were making my mortgage loan with no deposits, you were wrong.

Todd, I appreciate the discussion. I hope readers of this thread, who aren't familiar with economics, find it interesting and informative.

Unfortunately, we seem to have reached a dead end. You keep looping back and repeating something I never said and you seem unwilling or unable to make the distinction what I'm actually saying.

If I said, "you can't go to a theater and see a movie unless you buy a ticket". Your response is something analogous" to; "So you're saying they can't play the movie unless I buy a ticket?"

"No, I'm saying you can't see the movie without a ticket."

Now the example here is only analogous in the sense that you are addressing something different than what I'm saying.

Banks use reserves to settle up between each other, that's it. They aren't lent and they aren't spent.

When is the last time you heard about a bank that stopped making loans because they ran out of customer deposits to lend? It doesn't happen because banks don't lend customer deposits.

When is the last time you heard about a bank that stopped making loans because they ran out of customer deposits to lend?

When is the first bank you heard of that didn't bother to take customer deposits because they didn't lend them back out?

Customer deposits are a pain to gather and service.

Now, before you run away, let's get back to my $200,000 mortgage with no customer deposits.
You went out and borrowed the customer deposits from another bank, $20,000, in order to meet
your reserve requirement. Correct?

Now the guy who sold me the home takes his $200,000 check and brings it over to B of A to deposit it into his Merrill Lynch brokerage account. B of A presents the check to the Fed but the Econ4Every1 Bank only has $20,000 in its reserve account. Now what?

Are you going to have to borrow more of those customer deposits that you said you didn't need?

Can you satisfy B of A with some of your thin air money?

 

[The Sage of Main Street]

Yes. We're not talking about the aggregate.

That's exactly what I was talking about. Reserves don't leave the banking system except as cash. I said several times that reserves are simply transferred between banks.

I said that banks create money Ex Nilo and account for those funds on their balance sheets.

That's exactly what I was talking about.

I'm talking about a single bank.
Still working on my $200,000 mortgage with no deposits?
Because, so far, you're failing to deliver.

I said several times that reserves are simply transferred between banks.

You said banks don't make loans from deposits or reserves.
I just showed you two ways you're wrong.

I said that banks create money Ex Nilo and account for those funds on their balance sheets.

And then you ruined it when you said they had to pay it back to thin air.

Banks do not lend out reserves to customers. There is inter-bank lending, but that is a separate topic.
Banks do transfer reserves as customers move deposits, make payments, or withdraw cash.

For your mortgage, a $200k asset was created for the bank along with a matching $200k liability. The liability could be a check or a deposit into another customer's account. If it goes to someone without a account at the same bank, then reserves are transferred to the other bank. In either case, additional deposits funds are created from your loan.

When payments are made from an account at one bank to someone with an account at a different bank, once again reserves are transferred accordingly.

When cash is withdrawn from a bank, that is effectively the same as a transfer of reserves (usually temporary) as cash is basically a portable reserve account.

For paying back the loan:
When you transfer money from your checking account to your loan account, both balances are reduced by the same amount and that credit is extinguished.

Banks do not lend out reserves to customers.

Then what good are reserves?

Banks do transfer reserves as customers move deposits, make payments, or withdraw cash.

Does my $200,000 mortgage reduce the reserves of the bank I borrowed from?
Are those reserves still available for my bank to use for their other business?

If I borrow $200,000 and ask for $20s, does my loan reduce the reserves of the bank I borrowed from?
Are those reserves still available for my bank to use for their other business?

For your mortgage, a $200k asset was created for the bank along with a matching $200k liability.

Yes.

The liability could be a check or a deposit into another customer's account

Yes.

If it goes to someone without a account at the same bank, then reserves are transferred to the other bank.

Yes.

Does my $200,000 mortgage reduce the reserves of the bank I borrowed from?
Depends. If the corresponding liability stays at the bank, then no. If the payment goes to a different bank, then yes.

The bank is still creating both an asset and liability and then settling that liability with cash the same as another other deposit account.

Does that mean the bank is more likely to give a motgage to someone whose homebuilder or original owner also has an account at that bank?

 

[The Sage of Main Street]

Where did this other bank get $20000 in excess reserves?

We've already been through this.

Historically the US wasn't created as a fiat economy.

I don't care, I just want to know where this other bank got the excess reserves that your new bank is borrowing.
Not the serial number of the FRNs, the source of the excess reserves.

The history of the banking system is such that when the economy switched over to a fiat economy there was already money circulating in the system. Money on deposit effectively became reserves.

That's where they came from. Now if a person takes a $100 loan, they create another $100 in reserves, which, at the 10% reserve requirement can be used as required reserves for another $1000 in money created by the banking system.

What are you after? What Greedhead oinkonomics do you want us to submit ourselves to? You seem to be condemning the banks' accounting practices and leading up to suggesting some self-serving alternative.

For one thing, "fiat" is a dishonest word sneaked into econobabble so that some snake-oil speculator can scare suckers into paying ever higher prices for his urine-colored rocks. Gold itself is a fiat currency, but scam artists know how to monopolize a term in order to give it the meaning most profitable to themseves.

 

[Econ4Every1]

When is the first bank you heard of that didn't bother to take customer deposits because they didn't lend them back out?

Didn't say banks don't lend deposits.

Now, before you run away

Not "running", I just don't need to convince you, just make a sound argument and let other readers decide for themselves. Once we reach an impasse, as we obviously have, I don't see any reason to continue.

let's get back to my $200,000 mortgage with no customer deposits.

Whew...Ok.

You went out and borrowed the customer deposits from another bank, $20,000, in order to meet
your reserve requirement. Correct?

Not sure if you're being sloppy or literal here or you didn't understand what I've said or if I don't understand what you mean when you say you.

Unless you mean "me" as in I'm a bank...But let's see if this helps.

When a bank makes a loan it must acquire the required reserves (it's ok to acquire reserves after the fact (after the loan is made), usually at the end of the day, but I've read that it can be several days in some situations). If it doesn't the bank must acquire them, this is usually done via borrowing, but a bank can also sell assets.

How much a bank will need will depend on the day's activity.

You also seem to be confusing reserves requirements with the funds the bank creates when it makes a loan.

If my bank approved a loan to you for $200k, it creates the $200k and deposits it in an account of "my" bank. If "my" bank only had $20k in deposits (reserves) prior to funding the loan, once it funded the loan it would have $220k. Because loans create deposits.

Of course, my bank can't simply create money out of thin air deposit it. It can only create the money if there is a qualified lender subject to the terms of a loan agreement. To create money "my" bank needs an asset (the note, and perhaps collateral) to offset the liability (the funds it creates).

So you take the check from "my" bank to BoAMerrill and deposit it. If we isolate our transaction from all other transactions, during the overnight period, $200k in reserves are transferred from "my" bank to BoAMerrill's bank and assuming the $20k in my bank is excess reserves, then "my" bank doesn't have to borrow anything because the $20k would meet "my" bank's 10% reserve requirement. My bank just needs to transfer $200k it created to BoAMerrill's bank which now has another $200k in reserves. This transfer of funds takes place at the Fed. If a bank does 100's of millions in loans in a day, after it settles up it's possible that only a few million in reserves need to be transferred in the aggregate.

Your deposit at BoAMerrill are both an asset and a liability to BoAMerrill who can lend those reserves to other banks (asset) or you can, on demand withdraw them (liability) by transferring them to another bank (via a purchase or whatever) or you can take it out in cash. Though to be honest with you, I know Merrill is BoA's investment banking division, so I'm not as familiar with the procedures of investment banks, but I assume they are similar with respect to what we're discussing here.

Now the guy who sold me the home takes his $200,000 check and brings it over to B of A to deposit it into his Merrill Lynch brokerage account. B of A presents the check to the Fed but the Econ4Every1 Bank only has $20,000 in its reserve account. Now what?

Banks don't "present checks to the Fed". The Fed facilitates the settlement of reserves between banks at the end of each day only transferring the delta between banks.

Are you going to have to borrow more of those customer deposits that you said you didn't need?

Can you satisfy B of A with some of your thin air money?

No.

The only reason my bank would have to borrow anything is if the $20k in reserves were required to secure other loans. If that was the case, I'd have to borrow reserves from another bank or take an overdraft at the Fed (something that is generally frowned upon).

Just remember that banks borrow customer funds, NOT CUSTOMERS.[/QUOTE]

 

[Econ4Every1]

Does that mean the bank is more likely to give a motgage to someone whose homebuilder or original owner also has an account at that bank?

Not at all, though, if the borrower and the seller have accounts at the same bank, that's definitely good for the bank, but given the on-demand nature of bank accounts, the bank has little incentive to favor this arrangement.

 

[Toddsterpatriot]

When is the first bank you heard of that didn't bother to take customer deposits because they didn't lend them back out?

Didn't say banks don't lend deposits.

Now, before you run away

Not "running", I just don't need to convince you, just make a sound argument and let other readers decide for themselves. Once we reach an impasse, as we obviously have, I don't see any reason to continue.

let's get back to my $200,000 mortgage with no customer deposits.

Whew...Ok.

You went out and borrowed the customer deposits from another bank, $20,000, in order to meet
your reserve requirement. Correct?

Not sure if you're being sloppy or literal here or you didn't understand what I've said or if I don't understand what you mean when you say you.

Unless you mean "me" as in I'm a bank...But let's see if this helps.

When a bank makes a loan it must acquire the required reserves (it's ok to acquire reserves after the fact (after the loan is made), usually at the end of the day, but I've read that it can be several days in some situations). If it doesn't the bank must acquire them, this is usually done via borrowing, but a bank can also sell assets.

How much a bank will need will depend on the day's activity.

You also seem to be confusing reserves requirements with the funds the bank creates when it makes a loan.

If my bank approved a loan to you for $200k, it creates the $200k and deposits it in an account of "my" bank. If "my" bank only had $20k in deposits (reserves) prior to funding the loan, once it funded the loan it would have $220k. Because loans create deposits.

Of course, my bank can't simply create money out of thin air deposit it. It can only create the money if there is a qualified lender subject to the terms of a loan agreement. To create money "my" bank needs an asset (the note, and perhaps collateral) to offset the liability (the funds it creates).

So you take the check from "my" bank to BoAMerrill and deposit it. If we isolate our transaction from all other transactions, during the overnight period, $200k in reserves are transferred from "my" bank to BoAMerrill's bank
and assuming the $20k in my bank is excess reserves then "my" bank doesn't have to borrow anything
because the $20k would meet "my" bank's 10% reserve requirement. My bank just needs to transfer $200k it created to BoAMerrill's bank which now has another $200k in reserves. This transfer of funds takes place at the Fed. If a bank does 100's of millions in loans in a day, after it settles up it's possible that only a few million in reserves need to be transferred in the aggregate.

Your deposit at BoAMerrill are both an asset and a liability to BoAMerrill who can lend those reserves to other banks (asset) or you can, on demand withdraw them (liability) by transferring them to another bank (via a purchase or whatever) or you can take it out in cash. Though to be honest with you, I know Merrill is BoA's investment banking division, so I'm not as familiar with the procedures of investment banks, but I assume they are similar with respect to what we're discussing here.

Now the guy who sold me the home takes his $200,000 check and brings it over to B of A to deposit it into his Merrill Lynch brokerage account. B of A presents the check to the Fed but the Econ4Every1 Bank only has $20,000 in its reserve account. Now what?

Banks don't "present checks to the Fed". The Fed facilitates the settlement of reserves between banks at the end of each day only transferring the delta between banks.

Are you going to have to borrow more of those customer deposits that you said you didn't need?

Can you satisfy B of A with some of your thin air money?

No.

The only reason my bank would have to borrow anything is if the $20k in reserves were required to secure other loans. If that was the case, I'd have to borrow reserves from another bank or take an overdraft at the Fed (something that is generally frowned upon).

Just remember that banks borrow customer funds, NOT CUSTOMERS.

Not sure if you're being sloppy or literal here or you didn't understand what I've said or if I don't understand what you mean when you say you.

The thought experiment involved a new bank, Econ4Every1 Bank. That's you.
You're going to give me a $200,000 mortgage, with no customer deposits.

When a bank makes a loan it must acquire the required reserves (it's ok to acquire reserves after the fact (after the loan is made), usually at the end of the day, but I've read that it can be several days in some situations). If it doesn't the bank must acquire them, this is usually done via borrowing, but a bank can also sell assets.

Absolutely.


If my bank approved a loan to you for $200k, it creates the $200k and deposits it in an account of "my" bank. If "my" bank only had $20k in deposits (reserves) prior to funding the loan, once it funded the loan it would have $220k. Because loans create deposits.

Correct.
$220k in deposits, $20k in reserves.

So you take the check from "my" bank to BoAMerrill and deposit it. If we isolate our transaction from all other transactions, during the overnight period, $200k in reserves are transferred from "my" bank to BoAMerrill's bank

Yes.

and assuming the $20k in my bank is excess reserves

Well, your bank is new, so the $20,000 in deposits we're assuming are your only deposits.
So yes, you have $20,000 in reserves which are all excess.

then "my" bank doesn't have to borrow anything

No. You have $20,000 in reserves, B of A is looking for $200,000.

My bank just needs to transfer $200k it created to BoAMerrill's bank which now has another $200k in reserves.

And here's where you really go wrong.
Your creation of $200,000 in "bookkeeping money" on your books doesn't create any reserves at the Fed.
You can't transfer "thin air money" to B of A.

Banks don't "present checks to the Fed".

The Reserve Banks and Electronic Payments Network (EPN) are the two national ACH operators. As an ACH operator, the Reserve Banks receive files of ACH payments from originating depository financial institutions, edit and sort the payments, deliver the payments to receiving depository financial institutions, and settle the payments by crediting and debiting the depository financial institutions' settlement accounts.

The Fed - Automated Clearinghouse Services

The Fed facilitates the settlement of reserves between banks at the end of each day only transferring the delta between banks.

We're only interested in the delta between you and B of A.

The only reason my bank would have to borrow anything is if the $20k in reserves were required to secure other loans.

You only have the one loan. $200,000 mortgage.

 

[Econ4Every1]

What are you after? What Greedhead oinkonomics do you want us to submit ourselves to? You seem to be condemning the banks' accounting practices and leading up to suggesting some self-serving alternative.

I'm not "after" anything. I enjoy conversations on the topic. If I'm "after" anything it's sharing what I know and learning what other people believe. If someone disagrees then I hope for a good debate where, either I learn something or I share what I know.

For one thing, "fiat" is a dishonest word sneaked into econobabble so that some snake-oil speculator can scare suckers into paying ever higher prices for his urine-colored rocks. Gold itself is a fiat currency, but scam artists know how to monopolize a term in order to give it the meaning most profitable to themseves.

While I agree with you that gold is really, when you stop and think about it, a "fiat" currency. What makes gold unique is the number of people that agree it has value across almost every country on earth (if not all of them). No one has to enforce golds value, people just accept it.

Now the term fiat simply means that its value is determined by proclamation. In the case of gold, people proclaim to themselves that gold is valuable (which is why people hoard it because they know others find value in it), but in the case of a paper dollar, its value has to be enforced.

Of course, there are soooo many goods and services that can be purchased with a dollar we don't generally think of it like this. Many users of the dollar don't even think about the kinds of conversations we're having here. They simply take it for granted that dollars have value. How do they know? because then they go in Walmart there is $20 million dollars worth of crap they can trade their dollars for.

At the end of the day, the dollars are fiat because of the creator of those dollars, the US government no longer promises to trade those dollars for anything (other than perhaps to make change) or top satisfy your payments in the taxes it imposes on you.

I think the value of the dollar is derived extrinsically. Its value comes from what can be obtained with it, not in the thing itself (though too many people treat the dollar as intrinsically valuable).

For example, what is the value of a key? Let's say the key is actually a plastic card. If you had 1 ton of those cards it would cost you money to dispose of them. But what if that card was the key to a lock and you needed it to get out of a room. A room you could never escape from without that card?

The value of that key, at least for you, would be equal to how much you value your life.

So what about the dollar? (here is how dollar fiat differs from gold fiat)

The US government imposes taxes. If the dollar didn't buy anything, what would the value of the dollar be then?

If the government could still enforce a tax and the penalty for non-payment was a loss of dollars, a loss of property or a loss of freedom, you would value the dollar equal to your desire to avoid punishment (implicit in that statemnt is a belief that you could not stop the government from carrying out it's punishment).

Thus if the government made jobs available so that you could earn dollars to pay your tax, you would work for those dollars relative to your desire to avoid punishment. Now you might decide not to earn the dollars and fight the government, but that just means that you no longer see the governments threat of force as capable of enforcing the value of the dollar.

Make sense?

 

[ImJustABill]

That's exactly what I was talking about. Reserves don't leave the banking system except as cash. I said several times that reserves are simply transferred between banks.

I said that banks create money Ex Nilo and account for those funds on their balance sheets.

That's exactly what I was talking about.

I'm talking about a single bank.
Still working on my $200,000 mortgage with no deposits?
Because, so far, you're failing to deliver.

I said several times that reserves are simply transferred between banks.

You said banks don't make loans from deposits or reserves.
I just showed you two ways you're wrong.

I said that banks create money Ex Nilo and account for those funds on their balance sheets.

And then you ruined it when you said they had to pay it back to thin air.

Banks do not lend out reserves to customers. There is inter-bank lending, but that is a separate topic.
Banks do transfer reserves as customers move deposits, make payments, or withdraw cash.

For your mortgage, a $200k asset was created for the bank along with a matching $200k liability. The liability could be a check or a deposit into another customer's account. If it goes to someone without a account at the same bank, then reserves are transferred to the other bank. In either case, additional deposits funds are created from your loan.

When payments are made from an account at one bank to someone with an account at a different bank, once again reserves are transferred accordingly.

When cash is withdrawn from a bank, that is effectively the same as a transfer of reserves (usually temporary) as cash is basically a portable reserve account.

For paying back the loan:
When you transfer money from your checking account to your loan account, both balances are reduced by the same amount and that credit is extinguished.

Banks do not lend out reserves to customers.

Then what good are reserves?

Banks do transfer reserves as customers move deposits, make payments, or withdraw cash.

Does my $200,000 mortgage reduce the reserves of the bank I borrowed from?
Are those reserves still available for my bank to use for their other business?

If I borrow $200,000 and ask for $20s, does my loan reduce the reserves of the bank I borrowed from?
Are those reserves still available for my bank to use for their other business?

For your mortgage, a $200k asset was created for the bank along with a matching $200k liability.

Yes.

The liability could be a check or a deposit into another customer's account

Yes.

If it goes to someone without a account at the same bank, then reserves are transferred to the other bank.

Yes.

Does my $200,000 mortgage reduce the reserves of the bank I borrowed from?
Depends. If the corresponding liability stays at the bank, then no. If the payment goes to a different bank, then yes.

The bank is still creating both an asset and liability and then settling that liability with cash the same as another other deposit account.

Does that mean the bank is more likely to give a motgage to someone whose homebuilder or original owner also has an account at that bank?

I wouldn't make that assumption. You could ask a loan officer is they have any preference for that. Banks tend to make loans when they are profitable. The loan department does not know what the current reserve ratio is, nor do they care.

 

[Econ4Every1]

My bank just needs to transfer $200k it created to BoAMerrill's bank which now has another $200k in reserves.

And here's where you really go wrong.
Your creation of $200,000 in "bookkeeping money" on your books doesn't create any reserves at the Fed.
You can't transfer "thin air money" to B of A.

Banks don't "present checks to the Fed".

The Reserve Banks and Electronic Payments Network (EPN) are the two national ACH operators. As an ACH operator, the Reserve Banks receive files of ACH payments from originating depository financial institutions, edit and sort the payments, deliver the payments to receiving depository financial institutions, and settle the payments by crediting and debiting the depository financial institutions' settlement accounts.

The Fed - Automated Clearinghouse Services

So then loans aren't deposits?

 

[Toddsterpatriot]

My bank just needs to transfer $200k it created to BoAMerrill's bank which now has another $200k in reserves.

And here's where you really go wrong.
Your creation of $200,000 in "bookkeeping money" on your books doesn't create any reserves at the Fed.
You can't transfer "thin air money" to B of A.

Banks don't "present checks to the Fed".

The Reserve Banks and Electronic Payments Network (EPN) are the two national ACH operators. As an ACH operator, the Reserve Banks receive files of ACH payments from originating depository financial institutions, edit and sort the payments, deliver the payments to receiving depository financial institutions, and settle the payments by crediting and debiting the depository financial institutions' settlement accounts.

The Fed - Automated Clearinghouse Services

So then loans aren't deposits?

So then loans aren't deposits?

Who said that? Where?

Did your $200,000 loan to me create a balance at the Fed, or only on your books?

 

[Econ4Every1]

My bank just needs to transfer $200k it created to BoAMerrill's bank which now has another $200k in reserves.

And here's where you really go wrong.
Your creation of $200,000 in "bookkeeping money" on your books doesn't create any reserves at the Fed.
You can't transfer "thin air money" to B of A.

Banks don't "present checks to the Fed".

The Reserve Banks and Electronic Payments Network (EPN) are the two national ACH operators. As an ACH operator, the Reserve Banks receive files of ACH payments from originating depository financial institutions, edit and sort the payments, deliver the payments to receiving depository financial institutions, and settle the payments by crediting and debiting the depository financial institutions' settlement accounts.

The Fed - Automated Clearinghouse Services

So then loans aren't deposits?

So then loans aren't deposits?

Who said that? Where?

Did your $200,000 loan to me create a balance at the Fed, or only on your books?

As with so many questions in economics, the answer to this question depends on disambiguating the question, clearly distinguishing parts from wholes, and avoiding fallacies of composition and division.

I'm somewhat guilty of that in this debate because we're moving between the actions of a single bank and the banking system as a whole. I get to far in the weeds and I realize my mistake, that the parts cannot be separated from the whole and paint an accurate picture of what's happening, at least the way that you are asking it. And kudo's to you. You've asked the right questions in light of the explanation I was giving and you've helped me see my mistake.

The underlying premise of your argument (and please restate it if I get it wrong) is that savings deposits are lent and therefore an increase in savings reduces the cost of lending which in turn creates the incentive to borrow. Which in turn creates a sort of self-regulating system.

I disagree. An increase in savings, in itself, has no effect on the cost of borrowing, though, separately, the conditions that created the incentives to save might affect the cost of borrowing via changes made by the Fed based on certain policy decisions and I believe that is indeed the case, which is why, intuitively, it's easy to be convinced that this is the case.

Now I said that banks do not lend reserves. I'd like to amend that statement slightly in light of the conversation we've had keeping in mind that the parts are not representative of the whole while also remembering the point of the debate which is the effect of savings on the cost of lending.

An individual bank certainly can lend out its reserves. The total reserves of a Fed member bank consist of the balance in the bank’s reserve account at the Fed plus the sum of its vault cash. When a bank customer borrows money from a bank, that borrower may ask for all or part of the loaned amount in cash. If that happens, the bank will remove some cash from its vault and give it to the borrower. Suppose the amount borrowed is $10,000 and it is all taken in cash. Then the bank books a new loan asset worth $10,000, and concurrently books a $10,000 reduction in its cash assets. The net balance sheet effect is zero. (There are different ways in which the interest on the loan can be handled in the accounting, and so I’m leaving that out.)

But in most cases, the borrower will take the borrowed funds on account. The bank will credit the borrower’s account with $10,000, which in turn represents a liability of the bank. Again, the bank will book a $10,000 loan asset, and so the total balance sheet effect will be zero. In the first case, the balance sheet effect was zero because a reduction in cash assets was offset by an increase in loan assets. In this second case, the balance sheet effect is zero because the increase in the bank’s loan assets is offset by a corresponding increase in the bank’s liabilities.

But even if the borrower takes the loan in the form of the deposit balance, as soon as the borrower begins spending the money in the account, some of the bank reserves will likely leave the bank. It is possible that they would not leave the bank if the borrower’s spending all goes to depositors at the same bank. In that case, the result of the settlement and clearing of the payments will just be a reduction in the bank’s liability to the borrower and an increase in its liabilities to the payees. But in most cases, many of the people the borrower pays will be depositors at other banks. The settlement of these payments will thus require a settlement between the two banks, resulting in a Fedwire transfer of reserve funds from the borrower’s bank to the payee’s bank.
Consider the first case, where the borrower has taken the loaned amount in cash. As the borrower proceeds to spend the $10,000 in cash that was removed from the first bank’s vault at the time of the loan, the businesses who receive these cash payments will make routine deposits of their cash receipts at their own banks, at which point it goes back into the cash vaults in the banking system. Similarly, if the borrower’s funds are in the form of a deposit account balance, then as the borrower makes payments by check, debit card or another instrument against that account, the clearing of the payments will result in reserve transfers from the borrower’s bank to the reserve accounts of other banks.

The end result is that an aggregate increase in commercial bank lending is unlikely to diminish in any appreciable way the total quantity of bank reserves; it just changes the pace at which those reserves circulate from bank to bank.

So yes, individual banks can (technically) lend their reserves. But the more important question is what happens to the reserves of the banking system as a whole in response to expanded bank lending. And in this case, the answer to the question is that those reserves will not appreciably change.

This invalidates your argument that the quantity of loanable funds can increase and decrease based on the supply of deposits. Or have I misstated your argument?

Should you ask me to validate the $200k loan scenario, I'll simply point out that the example is not representative of the whole and the point that started this debate. Again, thank you for helping me uncover my mistake. This is why I have these conversations.

 

[Toddsterpatriot]

My bank just needs to transfer $200k it created to BoAMerrill's bank which now has another $200k in reserves.

And here's where you really go wrong.
Your creation of $200,000 in "bookkeeping money" on your books doesn't create any reserves at the Fed.
You can't transfer "thin air money" to B of A.

Banks don't "present checks to the Fed".

The Reserve Banks and Electronic Payments Network (EPN) are the two national ACH operators. As an ACH operator, the Reserve Banks receive files of ACH payments from originating depository financial institutions, edit and sort the payments, deliver the payments to receiving depository financial institutions, and settle the payments by crediting and debiting the depository financial institutions' settlement accounts.

The Fed - Automated Clearinghouse Services

So then loans aren't deposits?

So then loans aren't deposits?

Who said that? Where?

Did your $200,000 loan to me create a balance at the Fed, or only on your books?

As with so many questions in economics, the answer to this question depends on disambiguating the question, clearly distinguishing parts from wholes, and avoiding fallacies of composition and division.

I'm somewhat guilty of that in this debate because we're moving between the actions of a single bank and the banking system as a whole. I get to far in the weeds and I realize my mistake, that the parts cannot be separated from the whole and paint an accurate picture of what's happening, at least the way that you are asking it. And kudo's to you. You've asked the right questions in light of the explanation I was giving and you've helped me see my mistake.

The underlying premise of your argument (and please restate it if I get it wrong) is that savings deposits are lent and therefore an increase in savings reduces the cost of lending which in turn creates the incentive to borrow. Which in turn creates a sort of self-regulating system.

I disagree. An increase in savings, in itself, has no effect on the cost of borrowing, though, separately, the conditions that created the incentives to save might affect the cost of borrowing via changes made by the Fed based on certain policy decisions and I believe that is indeed the case, which is why, intuitively, it's easy to be convinced that this is the case.

Now I said that banks do not lend reserves. I'd like to amend that statement slightly in light of the conversation we've had keeping in mind that the parts are not representative of the whole while also remembering the point of the debate which is the effect of savings on the cost of lending.

An individual bank certainly can lend out its reserves. The total reserves of a Fed member bank consist of the balance in the bank’s reserve account at the Fed plus the sum of its vault cash. When a bank customer borrows money from a bank, that borrower may ask for all or part of the loaned amount in cash. If that happens, the bank will remove some cash from its vault and give it to the borrower. Suppose the amount borrowed is $10,000 and it is all taken in cash. Then the bank books a new loan asset worth $10,000, and concurrently books a $10,000 reduction in its cash assets. The net balance sheet effect is zero. (There are different ways in which the interest on the loan can be handled in the accounting, and so I’m leaving that out.)

But in most cases, the borrower will take the borrowed funds on account. The bank will credit the borrower’s account with $10,000, which in turn represents a liability of the bank. Again, the bank will book a $10,000 loan asset, and so the total balance sheet effect will be zero. In the first case, the balance sheet effect was zero because a reduction in cash assets was offset by an increase in loan assets. In this second case, the balance sheet effect is zero because the increase in the bank’s loan assets is offset by a corresponding increase in the bank’s liabilities.

But even if the borrower takes the loan in the form of the deposit balance, as soon as the borrower begins spending the money in the account, some of the bank reserves will likely leave the bank. It is possible that they would not leave the bank if the borrower’s spending all goes to depositors at the same bank. In that case, the result of the settlement and clearing of the payments will just be a reduction in the bank’s liability to the borrower and an increase in its liabilities to the payees. But in most cases, many of the people the borrower pays will be depositors at other banks. The settlement of these payments will thus require a settlement between the two banks, resulting in a Fedwire transfer of reserve funds from the borrower’s bank to the payee’s bank.
Consider the first case, where the borrower has taken the loaned amount in cash. As the borrower proceeds to spend the $10,000 in cash that was removed from the first bank’s vault at the time of the loan, the businesses who receive these cash payments will make routine deposits of their cash receipts at their own banks, at which point it goes back into the cash vaults in the banking system. Similarly, if the borrower’s funds are in the form of a deposit account balance, then as the borrower makes payments by check, debit card or another instrument against that account, the clearing of the payments will result in reserve transfers from the borrower’s bank to the reserve accounts of other banks.

The end result is that an aggregate increase in commercial bank lending is unlikely to diminish in any appreciable way the total quantity of bank reserves; it just changes the pace at which those reserves circulate from bank to bank.

So yes, individual banks can (technically) lend their reserves. But the more important question is what happens to the reserves of the banking system as a whole in response to expanded bank lending. And in this case, the answer to the question is that those reserves will not appreciably change.

This invalidates your argument that the quantity of loanable funds can increase and decrease based on the supply of deposits. Or have I misstated your argument?

Should you ask me to validate the $200k loan scenario, I'll simply point out that the example is not representative of the whole and the point that started this debate. Again, thank you for helping me uncover my mistake. This is why I have these conversations.

The underlying premise of your argument (and please restate it if I get it wrong) is that savings deposits are lent and therefore an increase in savings reduces the cost of lending which in turn creates the incentive to borrow. Which in turn creates a sort of self-regulating system.

No. I've never made any claim about the cost of lending.

An individual bank certainly can lend out its reserves.

Excellent! That's what I said.

Then the bank books a new loan asset worth $10,000, and concurrently books a $10,000 reduction in its cash assets. The net balance sheet effect is zero.

Yes. The loan caused a reduction in reserves.

The settlement of these payments will thus require a settlement between the two banks, resulting in a Fedwire transfer of reserve funds from the borrower’s bank to the payee’s bank.

Yes. The loan caused a reduction in reserves.

As the borrower proceeds to spend the $10,000 in cash that was removed from the first bank’s vault at the time of the loan, the businesses who receive these cash payments will make routine deposits of their cash receipts at their own banks, at which point it goes back into the cash vaults in the banking system. Similarly, if the borrower’s funds are in the form of a deposit account balance, then as the borrower makes payments by check, debit card or another instrument against that account, the clearing of the payments will result in reserve transfers from the borrower’s bank to the reserve accounts of other banks.

Yes. That's what your sources (usually) meant when they said bank loans don't use up reserves (of the system).

So yes, individual banks can (technically) lend their reserves.

Technically and actually.

This invalidates your argument that the quantity of loanable funds can increase and decrease based on the supply of deposits.

At my bank, the quantity of their loanable funds will increase if they get more deposits.
More deposits, higher reserve balances.
They loan out those deposits. And when they do, their reserve balance decreases.

Should you ask me to validate the $200k loan scenario, I'll simply point out that the example is not representative of the whole and the point that started this debate.

Right, a single mortgage at a single bank is not representative of the entire banking system.

You need to remember that every loan is fully funded.
Your bank needs not only the $20,000 reserve balance, but also enough reserves to clear the mortgage check.
$220,000 in deposits would cover it.
Whether they're deposits at your bank, or deposits at another that you borrow.