Fractional-reserve banking. Most people have no idea what it is, probably a good thing. You could argue that it’s not a “secret”, but most people aren’t aware of it regardless. I don’t think most people would be fond of grinding for $15 an hour if they knew banks could just lend money they don’t actually have. https://en.wikipedia.org/wiki/Fractional-reserve_banking
I didn’t know what it was called, but I think it’s common knowledge at this point that banks don’t actually have all our money. Pretty sure we (Americans at least) found that out during the great depression when everyone was trying to withdraw their money at the same time.
And to be fair, there’s stuff in place to stop bank runs now. If a bank goes under, the government takes over until it can find a buyer, so your money stays safe.
Fractional reserve banking works because most people don’t need all their money as soon as they get paid. Most businesses keep some money in the bank too. Banks have a required percent of deposits that they must keep on hand to allow these withdrawals. And if they run low on cash, they just borrow money for a day from other banks (literally just one day). The US government can adjust the percent of required reserves or the overnight lending rate to keep banks from lending too much money out.
Banks use this money to loan to businesses or people buying houses. It works well because whenever the money is loaned out it is used for a purchase and just redeposited in another bank. A percentage of that money is retained by the bank and the rest is loaned out again. And again and again. This way money is “created” when people buy things in the economy.
This seems like an already failed banking model which places lenders at the front of the pack and will lead to only larger asset bubbles. Japan’s Kiretsu system of banking led to banks taking out loans to cover up their own investment losses as they had put their money into an asset bubble which collapsed. Banks then committed wholesale fraud by disguising such losses on their books. The Japanese government then used quantitative easing. They create money ex nihilo, swap the money for a t bill, then they bought the toxic assets by giving t bills to the bank. The bank doesn’t sell the t bill, they merely collect interest on it.
The main effect is a system in which bubbles are never popped and consumers suffer a declining standard of living in order to keep asset prices high.
I mean, there’s all kinds of math that goes into making modern fractional reserve banking a self-correcting system with a reasonable theoretical basis, but I’m guessing you’ve made up your mind already.
Sorry I appreciate your comment. So I read (erroneously?) that central bankers had done away with the reserve ratio in the fractional reserve banking article. And that just seems like a reckless thing to do given how prone to bubbles our economy is.
One of the main points in “this time is different” is that despite the math, we are experiencing greater and greater asset bubbles and at no point in world history were things actually different.
In a lot of jurisdictions there’s no minimum reserve requirement anymore, in cash. It’s not really a problem, because at the big bank level money on paper is barely real. If they need more, they can almost just ask. They do have to have a certain minimum amount of capital, though, which can take a number of forms.
I mixed up my exact terms a bit earlier, sorry about that. I’m not a professional macroeconomist, I only know enough to know they’re not completely full of shit.
we are experiencing greater and greater asset bubbles and at no point in world history were things actually different.
I’m not sure what you mean by this. If things aren’t any different from before, how can we have bigger and bigger asset bubbles? I don’t know that we do, really. The niche for bear investors is very full, if something’s overvalued by the whole market you and me won’t know either.
Everything you wrote lined up with the article on wikipedia so if you got something wrong I didn’t see it.
I’m referring to the book “This Time Is Different: Eight Centuries of Financial Folly” the title of which mocks the oft repeated defense of bubble investors:
But their point is that every single asset bubble ended up popping, despite the protections instituted by banks and governments. They also point out that the bubbles have been getting bigger and bigger
It’s a little more complicated than that. Without fractional reserve banking, the economy would be more difficult to control. I would recommend a quick macroecon video or something.
I myself took quite a while to really understand why this was legal even during my macroecon credit. It actually makes sense when you think about it.
I don’t think you understand how fractional reserve banking works. The first paragraph of that Wikipedia page already clearly contradicts you. The banks can still only lend money they have (otherwise how would they lend it? Where would it come from? Only the central bank can print currency). What fractional reserve banking is saying is that banks can invest some portion of the customer deposits that they hold into non-liquid assets, often in the form of loans to other customers, but it could also be invested in other things eg government bonds. The interest banks earn by doing that helps pay for the interest they pay to customers on their saving. They also have to carefully manage their liquidity: maximising returns while still holding enough liquid assets to cover any potential spikes in withdrawals.
Even when investing customer funds, banks still have to meet captial requirements set by the regulators which basically say that their risk-adjusted assets have to cover the liabilities of customer deposits, so that for example they can’t just invest all the deposits in Bitcoin as that would pose too high a risk of insolvency. The reason SVB went insolvent recently was that they successfully lobbied the Trump administration to relax capital requirements for banks of their size, then made risky investments that lost money and they suddenly had less money than they owed their customers.
Fractional-reserve banking. Most people have no idea what it is, probably a good thing. You could argue that it’s not a “secret”, but most people aren’t aware of it regardless. I don’t think most people would be fond of grinding for $15 an hour if they knew banks could just lend money they don’t actually have. https://en.wikipedia.org/wiki/Fractional-reserve_banking
I didn’t know what it was called, but I think it’s common knowledge at this point that banks don’t actually have all our money. Pretty sure we (Americans at least) found that out during the great depression when everyone was trying to withdraw their money at the same time.
And to be fair, there’s stuff in place to stop bank runs now. If a bank goes under, the government takes over until it can find a buyer, so your money stays safe.
I’m always surprised how few people know about this. The banks are literally gaining interest on money they never had. It should be illegal.
Well, they have it in the sense that somebody deposited it with them, and they have some fraction of it held
in reserveto cover withdrawals.Edit: Well, in the form of capital, so that’s actually the wrong terminology.
Yes, they still have it. It’s just not in cash.
Fractional reserve banking works because most people don’t need all their money as soon as they get paid. Most businesses keep some money in the bank too. Banks have a required percent of deposits that they must keep on hand to allow these withdrawals. And if they run low on cash, they just borrow money for a day from other banks (literally just one day). The US government can adjust the percent of required reserves or the overnight lending rate to keep banks from lending too much money out.
Banks use this money to loan to businesses or people buying houses. It works well because whenever the money is loaned out it is used for a purchase and just redeposited in another bank. A percentage of that money is retained by the bank and the rest is loaned out again. And again and again. This way money is “created” when people buy things in the economy.
This seems like an already failed banking model which places lenders at the front of the pack and will lead to only larger asset bubbles. Japan’s Kiretsu system of banking led to banks taking out loans to cover up their own investment losses as they had put their money into an asset bubble which collapsed. Banks then committed wholesale fraud by disguising such losses on their books. The Japanese government then used quantitative easing. They create money ex nihilo, swap the money for a t bill, then they bought the toxic assets by giving t bills to the bank. The bank doesn’t sell the t bill, they merely collect interest on it.
The main effect is a system in which bubbles are never popped and consumers suffer a declining standard of living in order to keep asset prices high.
I mean, there’s all kinds of math that goes into making modern fractional reserve banking a self-correcting system with a reasonable theoretical basis, but I’m guessing you’ve made up your mind already.
Sorry I appreciate your comment. So I read (erroneously?) that central bankers had done away with the reserve ratio in the fractional reserve banking article. And that just seems like a reckless thing to do given how prone to bubbles our economy is.
One of the main points in “this time is different” is that despite the math, we are experiencing greater and greater asset bubbles and at no point in world history were things actually different.
In a lot of jurisdictions there’s no minimum reserve requirement anymore, in cash. It’s not really a problem, because at the big bank level money on paper is barely real. If they need more, they can almost just ask. They do have to have a certain minimum amount of capital, though, which can take a number of forms.
I mixed up my exact terms a bit earlier, sorry about that. I’m not a professional macroeconomist, I only know enough to know they’re not completely full of shit.
I’m not sure what you mean by this. If things aren’t any different from before, how can we have bigger and bigger asset bubbles? I don’t know that we do, really. The niche for bear investors is very full, if something’s overvalued by the whole market you and me won’t know either.
Everything you wrote lined up with the article on wikipedia so if you got something wrong I didn’t see it.
I’m referring to the book “This Time Is Different: Eight Centuries of Financial Folly” the title of which mocks the oft repeated defense of bubble investors:
https://www.nber.org/system/files/working_papers/w13882/w13882.pdf
But their point is that every single asset bubble ended up popping, despite the protections instituted by banks and governments. They also point out that the bubbles have been getting bigger and bigger
It’s a little more complicated than that. Without fractional reserve banking, the economy would be more difficult to control. I would recommend a quick macroecon video or something.
I myself took quite a while to really understand why this was legal even during my macroecon credit. It actually makes sense when you think about it.
Wait till you hear about how your bank account gains interest, hooo boy
That has already become outdated, at least according to some economists.
Banks can just create loans out of thin air without having to check their own reserves first.
https://en.wikipedia.org/wiki/Money_creation#Credit_theory_of_money
I don’t think you understand how fractional reserve banking works. The first paragraph of that Wikipedia page already clearly contradicts you. The banks can still only lend money they have (otherwise how would they lend it? Where would it come from? Only the central bank can print currency). What fractional reserve banking is saying is that banks can invest some portion of the customer deposits that they hold into non-liquid assets, often in the form of loans to other customers, but it could also be invested in other things eg government bonds. The interest banks earn by doing that helps pay for the interest they pay to customers on their saving. They also have to carefully manage their liquidity: maximising returns while still holding enough liquid assets to cover any potential spikes in withdrawals.
Even when investing customer funds, banks still have to meet captial requirements set by the regulators which basically say that their risk-adjusted assets have to cover the liabilities of customer deposits, so that for example they can’t just invest all the deposits in Bitcoin as that would pose too high a risk of insolvency. The reason SVB went insolvent recently was that they successfully lobbied the Trump administration to relax capital requirements for banks of their size, then made risky investments that lost money and they suddenly had less money than they owed their customers.