Banks don't just create money because they like your smile. They issue their own liabilities at a discount against collateral, the charge over which they take as their own asset.
Keep in mind that there's a theory where bank loans are actually a way to create money that doesn't exist nor has any collateral.
Keep in mind that there's a theory where bank loans are actually a way to create money that doesn't exist nor has any collateral.
The "reserve multiplier" theory of money creation is incompatible with modern bank regulation, or even the meaning of the terms used (banks only lend reserves to each other, never to customers), nor does it describe how money creation works in real economies (despite the fact that it appears in wikipedia).
For a good overview of how money creation works, see this BoE report:
sorry, but fractional reserve banking is no longer used in modern banking. It was done away with several years ago. Here's a little explainer for you: https://www.youtube.com/watch?v=cDNSNX48Kmo
I wonder why it‘s „just“ called a theory. At least for the central european bank this is the reality.
In germany the term is „Giralgeldschöpfung“ which apparently translates to „giro money creation“ - so it seems we are talking about the same thing.
When i read about it a few years back and talked to people about it, was surprised how little people know about this. Especially the smart people from the financial industry that i know, or bankers… i just stumbled upon it accidentally.
I am not educated in the financial workings, but the recent history shows that the people in charge might seems educated, but shouldn‘t be trusted.
There is too much of a gap of interests and understanding between the financial industry and the actual economy.
Comments
Keep in mind that there's a theory where bank loans are actually a way to create money that doesn't exist nor has any collateral.
https://en.wikipedia.org/wiki/Money_creation
The "reserve multiplier" theory of money creation is incompatible with modern bank regulation, or even the meaning of the terms used (banks only lend reserves to each other, never to customers), nor does it describe how money creation works in real economies (despite the fact that it appears in wikipedia).
For a good overview of how money creation works, see this BoE report:
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
No, not really. The only requirement for the "banks create money through loans" theory is that banks practice fractional reserve banking.
https://en.wikipedia.org/wiki/Fractional-reserve_banking
sorry, but fractional reserve banking is no longer used in modern banking. It was done away with several years ago. Here's a little explainer for you: https://www.youtube.com/watch?v=cDNSNX48Kmo
I wonder why it‘s „just“ called a theory. At least for the central european bank this is the reality. In germany the term is „Giralgeldschöpfung“ which apparently translates to „giro money creation“ - so it seems we are talking about the same thing. When i read about it a few years back and talked to people about it, was surprised how little people know about this. Especially the smart people from the financial industry that i know, or bankers… i just stumbled upon it accidentally.
I am not educated in the financial workings, but the recent history shows that the people in charge might seems educated, but shouldn‘t be trusted.
There is too much of a gap of interests and understanding between the financial industry and the actual economy.