That isn’t how fractional reserve lending works. An example will probably help.
You walk into Friendly Neighborhood Bank and ask for a loan, and since they’re friendly they make the loan. Now, what does that mean? From your perspective you now have a liability (the loan) and an asset (money in a bank account). From the bank’s perspective, they now have an asset (the loan), a liability (your bank account), and an income stream (the interest payments).
The bank didn’t have to move any money around from the Fed or other people’s savings accounts to make this happen. They just entered the debits and credits into their system and boom the money appears in your account, just as good as any other money. They literally created it out of thin air.
> That isn’t how fractional reserve lending works.
I'm not sure which part of the GP you're disagreeing with.
Fractional reserve is exactly that banks lend out a fraction of the deposits that they take in (the rest is kept in reserve).
The only reason it looks like money is created is because people (and economists) think of 'money in their account' as real money, when in fact it's just a IOU from the bank to you (possibly guaranteed by the government).
If you think of money-in-your-account as actually a debt the bank owes you, then it becomes quite clear that banks don't create money any more than lending money to a friend creates money. And there is a sense in which it does - lending money to a friend results in your friend having money and you having an asset (an IOU from your friend) that you expect to be able to use at some point in the future, so there is a sense in which the sum total of wealth has increased by the value of the IOU.
For every debit there has to be a matching credit so nothing comes out of thin air.
If you go to your Friendly Neighbourhood Bank for a loan they are giving you their money, so you can then give that money on to someone else.
Now the bank is not so friendly that it gives you their money, instead they offer to lend you their money, on the proviso you pay it back in full and with interest.
For example lets say you want to buy a new car, so you go to the bank to get the loan.
The bank transfers the money to pay for the new car to the car dealership and you end up with a new car and a whole lot of debt.
That is incorrect, they only are required to own a fraction of the loans they give in assets. When a bank lends someone money, they create that money https://en.m.wikipedia.org/wiki/Money_creation.
The Central bank in your link is the Federal Bank.
Basically when retail banks need money they get it from the Central Bank through the Open Market Operation.
What happens is the retail banks offering up theirs bonds (which are assets), and the Central bank effectively buys (or sell) these bonds using a swap or repurchase agreement.
The retail banks then use that money to offer up loans to the public.
So the Central bank has the ability to print money by being prepared to buy up these bonds (using money that is effectively printed), but retail banks don't have that ability.
Retail banks and companies can do something similar by offering up their own bonds and selling them to investors, however should that organisation go broke the bonds take on junk status which basically means any investor that paid good money for them has lost the money.
For these transaction the money being used is real money.
When a bank lends you money the money lands in your bank account which means the bank can lend it out again. Even if you spend it, the money is going to land in someone else's bank account again. If we assume that 100% of the money is in the banking system without any potential for a bank run then in theory the bank could lend out an infinite amount of money.
zrail|7 years ago
You walk into Friendly Neighborhood Bank and ask for a loan, and since they’re friendly they make the loan. Now, what does that mean? From your perspective you now have a liability (the loan) and an asset (money in a bank account). From the bank’s perspective, they now have an asset (the loan), a liability (your bank account), and an income stream (the interest payments).
The bank didn’t have to move any money around from the Fed or other people’s savings accounts to make this happen. They just entered the debits and credits into their system and boom the money appears in your account, just as good as any other money. They literally created it out of thin air.
kybernetikos|7 years ago
I'm not sure which part of the GP you're disagreeing with.
Fractional reserve is exactly that banks lend out a fraction of the deposits that they take in (the rest is kept in reserve).
The only reason it looks like money is created is because people (and economists) think of 'money in their account' as real money, when in fact it's just a IOU from the bank to you (possibly guaranteed by the government).
If you think of money-in-your-account as actually a debt the bank owes you, then it becomes quite clear that banks don't create money any more than lending money to a friend creates money. And there is a sense in which it does - lending money to a friend results in your friend having money and you having an asset (an IOU from your friend) that you expect to be able to use at some point in the future, so there is a sense in which the sum total of wealth has increased by the value of the IOU.
jussij|7 years ago
If you go to your Friendly Neighbourhood Bank for a loan they are giving you their money, so you can then give that money on to someone else.
Now the bank is not so friendly that it gives you their money, instead they offer to lend you their money, on the proviso you pay it back in full and with interest.
For example lets say you want to buy a new car, so you go to the bank to get the loan.
The bank transfers the money to pay for the new car to the car dealership and you end up with a new car and a whole lot of debt.
orbifold|7 years ago
jussij|7 years ago
Basically when retail banks need money they get it from the Central Bank through the Open Market Operation.
What happens is the retail banks offering up theirs bonds (which are assets), and the Central bank effectively buys (or sell) these bonds using a swap or repurchase agreement.
The retail banks then use that money to offer up loans to the public.
So the Central bank has the ability to print money by being prepared to buy up these bonds (using money that is effectively printed), but retail banks don't have that ability.
Retail banks and companies can do something similar by offering up their own bonds and selling them to investors, however should that organisation go broke the bonds take on junk status which basically means any investor that paid good money for them has lost the money.
For these transaction the money being used is real money.
imtringued|7 years ago
jussij|7 years ago
Banks, just like all institutions have to account for their money, hence the reason they employ accountants.
Those accountants all use the same accounting rules, rules that were in fact invented many centuries earlier by the monk, Luca Pacioli.
Those rules form the basis of double entry book keeping, which boils done to a very simple rule that for every credit there must be an equal debit.
What you are describing does not follow that rule because you are saying one credit can result in many other many other credits.
What you describe reads more like a pyramid scheme than a banking system.