We should all agree with this!

[ShackledNation]

It was made of the simultaneously created deposits. Not thin air.

The deposits were created out of thin air.

When I go to ShackledBank and take out a $9000 loan, based on your $1000 in deposits, and wire the money out 2 minutes later, do you need more deposits, or loans from another bank, by the end of business? Why?

I've already answered that question in depth with an example of course. But money is still created out of thin air, because it comes before the deposits. In fact, the only reason the deposit of $9000 was possible was because the money was created out of thin air in the first place.

Bank A loans $9000 to Bob. Bob buys a car with a check from the Bank. Salesman Sue, a customer of Bank A, deposits the check at Bank A. Bank A credits Sue's account $9,000 and closes Bob's account. Answer this question: where did the $9000 deposit to fund the loan come from? Whose deposit financed the loan allowing it to be created? (Hint: Sue is the wrong answer). At the end of the day, where did the deposit from Sue ultimately come from? (Hint: Bob is the wrong answer).

The answer to both questions is...out of thin air.

But money is still created out of thin air, because it comes before the deposits.

Banks can create offsetting assets and liabilities all day long.
Hell, I'm not a bank and I can do that. Look, I just wrote a $1 million IOU to my wife!
The difference is that bank liabilities are considered money.

Exactly. Hence, money created "out of thin air." I am assuming you did not answer the questions because you finally acknowledge this.

 

[ShackledNation]

Reserves are counted as assets, not equity. These simple examples do not involve equity, nor do they need to. Also, $800 in deposits is not required to make $900 in loans.

You are correct. My mistake.

No worries. I wasn't even including equity and capital requirements into the equation to simplify it, and also because I don't know as much about how that factors in to be honest.

The transmission mechanism of monetary policy is primarily through the banks. (Or at least it used to be.) Banks are governed by rules and laws regarding capital ratios, which is the amount of assets a bank can hold relative to regulated capital (which is usually some form of equity). This is the amount of capital that acts as a buffer in case of losses to the bank. In your examples, it is the capital ratios which allow, or disallow, the leveraging of banks' high-powered money, i.e. reserves.

Sure, that is true. I was focusing on the reserve-requirement aspect.

Here is an example

A bank's balance sheet might look like this with a 9:1 capital ratio;

Loans $100
Assets $100

Deposits $90
Shareholders' Equity $10
Liabilities and Shareholders' Equity $100

That's a truism that MUST hold. Assets MUST equal liabilities and shareholders' equity.

Absolutely. Again, I apologize for my oversimplified example without equity involved.

Let's say that the economy faces a financial crisis and instead of the bank making loans, it deposits all it's money at the central bank. It's balance sheet would now look like this

Deposits at central bank $100
Assets $100

Deposits $90
Shareholders' Equity $10
Liabilities and Shareholders' Equity $100

The deposits at the central bank are now counted as reserves. But the bank does not have the ability to increase loans and the money supply because it is constrained by its capital ratio.

That was the point I was trying to make. Simply because reserves go up, it does not mean the money supply rises. This is what happened after the housing bubble.

I agree that banks do not have to loan money if the reserves are increased. My examples, however, were still basically correct insofar as the reserve requirement is required. They do, however, lack any description of how capital requirements effect the whole process.

I understand that deposits at central banks and bank vault cash both constitute reserves. I am a bit confused at how capital requirements play into loan creation. For example, in the above example the bank has excess reserves. The limit on loaning money is the reserve requirement. How does the capital requirement prevent the bank from loaning, saying a $910 loan? I know I am missing something, because I have heard that capital requirements restrict lending before. I have just never worked through it (hence why I use money-creation examples more typical of a textbook). With the loan, you would end up with this:

Reserves (deposits at central bank) = $100
Loans = $910
Total Assets = $1010

Deposits = $1000
Equity = $10
Total Liabilities + Equity = $1010

So clearly the balance sheet is ok, and the reserve ratio is ok at 10%, but I assume the capital requirements are not. My confusion is that I thought capital requirements were based on risk-weighted assets. Since the only assets here are reserves (which are 0% risk-weighted) how is the capital-requirement broken?

 

[Kimura]

The deposits were created out of thin air.


I've already answered that question in depth with an example of course. But money is still created out of thin air, because it comes before the deposits. In fact, the only reason the deposit of $9000 was possible was because the money was created out of thin air in the first place.

Bank A loans $9000 to Bob. Bob buys a car with a check from the Bank. Salesman Sue, a customer of Bank A, deposits the check at Bank A. Bank A credits Sue's account $9,000 and closes Bob's account. Answer this question: where did the $9000 deposit to fund the loan come from? Whose deposit financed the loan allowing it to be created? (Hint: Sue is the wrong answer). At the end of the day, where did the deposit from Sue ultimately come from? (Hint: Bob is the wrong answer).

The answer to both questions is...out of thin air.

But money is still created out of thin air, because it comes before the deposits.

Banks can create offsetting assets and liabilities all day long.
Hell, I'm not a bank and I can do that. Look, I just wrote a $1 million IOU to my wife!
The difference is that bank liabilities are considered money.

Exactly. Hence, money created "out of thin air." I am assuming you did not answer the questions because you finally acknowledge this.

All money creation is ex-nihilo or "out of thin air".

 

[ShackledNation]

But money is still created out of thin air, because it comes before the deposits.

Banks can create offsetting assets and liabilities all day long.
Hell, I'm not a bank and I can do that. Look, I just wrote a $1 million IOU to my wife!
The difference is that bank liabilities are considered money.

Exactly. Hence, money created "out of thin air." I am assuming you did not answer the questions because you finally acknowledge this.

All money creation is ex-nihilo or "out of thin air".

Absolutely. Toddsterpatriot disagrees, unfortunately.

 

[Toddsterpatriot]

The deposits were created out of thin air.


I've already answered that question in depth with an example of course. But money is still created out of thin air, because it comes before the deposits. In fact, the only reason the deposit of $9000 was possible was because the money was created out of thin air in the first place.

Bank A loans $9000 to Bob. Bob buys a car with a check from the Bank. Salesman Sue, a customer of Bank A, deposits the check at Bank A. Bank A credits Sue's account $9,000 and closes Bob's account. Answer this question: where did the $9000 deposit to fund the loan come from? Whose deposit financed the loan allowing it to be created? (Hint: Sue is the wrong answer). At the end of the day, where did the deposit from Sue ultimately come from? (Hint: Bob is the wrong answer).

The answer to both questions is...out of thin air.

But money is still created out of thin air, because it comes before the deposits.

Banks can create offsetting assets and liabilities all day long.
Hell, I'm not a bank and I can do that. Look, I just wrote a $1 million IOU to my wife!
The difference is that bank liabilities are considered money.

Exactly. Hence, money created "out of thin air." I am assuming you did not answer the questions because you finally acknowledge this.

They can create no money without liabilities.
No liabilities, no money creation.
So how is that thin air?

 

[Toddsterpatriot]

But money is still created out of thin air, because it comes before the deposits.

Banks can create offsetting assets and liabilities all day long.
Hell, I'm not a bank and I can do that. Look, I just wrote a $1 million IOU to my wife!
The difference is that bank liabilities are considered money.

Exactly. Hence, money created "out of thin air." I am assuming you did not answer the questions because you finally acknowledge this.

All money creation is ex-nihilo or "out of thin air".

Only the central bank can create money out of thin air.

 

[Kimura]

But money is still created out of thin air, because it comes before the deposits.

Banks can create offsetting assets and liabilities all day long.
Hell, I'm not a bank and I can do that. Look, I just wrote a $1 million IOU to my wife!
The difference is that bank liabilities are considered money.

Exactly. Hence, money created "out of thin air." I am assuming you did not answer the questions because you finally acknowledge this.

They can create no money without liabilities.
No liabilities, no money creation.
So how is that thin air?

Right. Loans will always create a liability and deposit that's the same amount. So yeah, the total net amount of financial assets can't be changed via banking action alone. Deposits will increase the broad $$$$ supply, which makes deposits move from one bank to another, and must be balanced out at the end of business to meet "reserve requirements". This occurs on a daily basis. But banks simply can't create net financial assets without a corresponding liability. Only the central bank can engage is such transactions, so I actually agree with you.

 

[Toddsterpatriot]

Exactly. Hence, money created "out of thin air." I am assuming you did not answer the questions because you finally acknowledge this.

They can create no money without liabilities.
No liabilities, no money creation.
So how is that thin air?

Yes and no. Loans will always create a liability and deposit that's the same amount. So yeah, the total net amount of financial assets can't be changed via banking action alone. Deposits will increase the broad $$$$ supply, which makes deposits move from one bank to another, and must be balanced out at the end of business to meet reserve requirement. This occurs on a daily basis. But banks simply can't create net financial assets without a corresponding liability.

But banks simply can't create net financial assets without a corresponding liability.

That's what I've been saying.

 

[Kimura]

Exactly. Hence, money created "out of thin air." I am assuming you did not answer the questions because you finally acknowledge this.

All money creation is ex-nihilo or "out of thin air".

Only the central bank can create money out of thin air.

I agree.

 

[Kimura]

They can create no money without liabilities.
No liabilities, no money creation.
So how is that thin air?

Yes and no. Loans will always create a liability and deposit that's the same amount. So yeah, the total net amount of financial assets can't be changed via banking action alone. Deposits will increase the broad $$$$ supply, which makes deposits move from one bank to another, and must be balanced out at the end of business to meet reserve requirement. This occurs on a daily basis. But banks simply can't create net financial assets without a corresponding liability.

But banks simply can't create net financial assets without a corresponding liability.

That's what I've been saying.

Right, lol, I actually agree with you.

 

[ShackledNation]

But money is still created out of thin air, because it comes before the deposits.

Banks can create offsetting assets and liabilities all day long.
Hell, I'm not a bank and I can do that. Look, I just wrote a $1 million IOU to my wife!
The difference is that bank liabilities are considered money.

Exactly. Hence, money created "out of thin air." I am assuming you did not answer the questions because you finally acknowledge this.

They can create no money without liabilities.
No liabilities, no money creation.
So how is that thin air?

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.

 

[Kimura]

Exactly. Hence, money created "out of thin air." I am assuming you did not answer the questions because you finally acknowledge this.

They can create no money without liabilities.
No liabilities, no money creation.
So how is that thin air?

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?

 

[EdwardBaiamonte]

When people say banks create money out of thin air

this is something that libertarians love to pretend is true so then they can say inflation is huge and money has no value. In reality the Fed strictly limits supply and velocity to keep inflation at 2-3 %

 

[Toddsterpatriot]

Exactly. Hence, money created "out of thin air." I am assuming you did not answer the questions because you finally acknowledge this.

They can create no money without liabilities.
No liabilities, no money creation.
So how is that thin air?

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.

The money is created in the form of a deposit account, which is the liability

And when the borrowers funds leave the bank, they need to get more liabilities.
Because deposits are larger than loans.
Because banks aren't magic.

 

[ShackledNation]

When people say banks create money out of thin air

this is something that libertarians love to pretend is true so then they can say inflation is huge and money has no value. In reality the Fed strictly limits supply and velocity to keep inflation at 2-3 %

You deny banks create money? Really?

 

[ShackledNation]

They can create no money without liabilities.
No liabilities, no money creation.
So how is that thin air?

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?

 

[ShackledNation]

They can create no money without liabilities.
No liabilities, no money creation.
So how is that thin air?

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.

The money is created in the form of a deposit account, which is the liability

And when the borrowers funds leave the bank, they need to get more liabilities.
Because deposits are larger than loans.
Because banks aren't magic.

Yes, the bank gets more liabilities...which are simply deposits that were created out of thin air at another bank. If the bank is a monopoly bank, then the deposit is literally the same one the bank created, just shifted to another person.

 

[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.

The money is created in the form of a deposit account, which is the liability

And when the borrowers funds leave the bank, they need to get more liabilities.
Because deposits are larger than loans.
Because banks aren't magic.

Yes, the bank gets more liabilities...which are simply deposits that were created out of thin air at another bank. If the bank is a monopoly bank, then the deposit is literally the same one the bank created, just shifted to another person.

Yes, the bank gets more liabilities...

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

 

[Kimura]

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?

Gotcha...

It was from the other thread:

We do have a fractional reserve system--banks do still hold reserves--the reserve requirement is just not a very good limit. Even with no reserve requirement, banks would be keeping a certain percentage of deposits as reserves. For the past several years, for example, banks have been given more reserves but have not expanded lending significantly.

I interpreted that post as you insinuating the banks lend out reserves but simply choose not to. Glad we cleared that up.

 

[Toddsterpatriot]

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?

Gotcha...

It was from the other thread:

We do have a fractional reserve system--banks do still hold reserves--the reserve requirement is just not a very good limit. Even with no reserve requirement, banks would be keeping a certain percentage of deposits as reserves. For the past several years, for example, banks have been given more reserves but have not expanded lending significantly.

I interpreted that post as you insinuating the banks lend out reserves but simply choose not to. Glad we cleared that up.

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.