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In this vid they say banks dont lend money they just create it out of nothing. Then they go on to explain that banks actually owe the public money, and that your deposit is actually a loan to the bank.
I thought that everyone knew that. At least everyone who ever took a Money, Credit, and Banking course. Then again, I would have thought that everyone understood that it was not necessary to abbreviate the word "video."
I don't see the problem. For things like mortgages there is an asset available if the buyer defaults. As long as they don't start handing out loans to anyone breathing at amounts the borrowers obviously cannot afford (see last housing crisis) then the system works.
Problems can often arise when those charged with monitoring and controlling designated markets choose to abrogate their responsibilities on disinformed philosophical grounds.
In this vid they say banks dont lend money they just create it out of nothing. Then they go on to explain that banks actually owe the public money, and that your deposit is actually a loan to the bank.
What do you think?
Most have it wrong and still believe that our deposits enable banks to loan.
I don't see the problem. For things like mortgages there is an asset available if the buyer defaults. As long as they don't start handing out loans to anyone breathing at amounts the borrowers obviously cannot afford (see last housing crisis) then the system works.
I am a bit confused by video, but I think it is saying that the banks are buying something from the people, but dont actually have that money. Instead they just change something in your "account", and essentially is money they promise to pay to you so you can make your payments. But the Banks dont actually have that kind of money, and they still owe it to you.
It's true, but is not evil. The general term used for this phenomena is the money multiplier effect. If you have access to any money and banking textbook, it will certainly cover this.
Say an area has only 1 bank and everyone deposits all of their money at the same bank. The bank has 100 in deposits from people with accounts there.
A takes a loan of 100 to buy B's property
B spends the money on items from C
C sensing good business, borrows 90 more to expand their business.
D gets a contract to expand C's business, and receives C's 90 loan up front.
D in turn buys construction equipment from E with the 90.
E merely places the money in the bank.
C has 100 in the bank and E has 90 in the bank. Also, the original depositors believe they also have 100 in the bank. So on everyone's balance sheet, the total cash is 290.
A owes the bank 100, C owes the bank 90. Total monies owed to the bank are 190.
So now there's two tricks that banks need to handle. The first one is that they need to charge enough interest on the 190 in order to cover their operating expenses, the interest paid on 290 in deposits and a suitable return on equity (albeit there's no capital in this example).
The second trick is in liquidity. Suppose C and E both decide to go to the bank at the same time and withdraw their money into cash? Eeks...there's not enough real money. A century ago, this was called a "run on the banks" and people would race to try and get their money back, causing a significant imbalance between loan length and the types of accounts held. To solve this, banks have created bank loans to one another as well as securitizing the mortgages to allow them to be sold to interested parties. There are also standards set for how many loans can be made from each type of dollar "deposited" with a bank in a complicated calculation where capital ratios are developed. In this way, it prevents the same money from being loaned out too many times and leaving the banking system too far expanded.
In the United States, for example, most banks now only originate home loans. As long as they are conforming, these loans are then immediately sold to the Fed's quasi-governmental entities, assuring liquidity at the local bank level. The Fed then contracts with loan servicers to actually collect the loan proceeds. Because the USA can borrow at the lowest costs*, it reduces the total amount of cost to make loans and the interest that needs to be charged for an acceptable gain.
I hope it helps. If this video was the first that showed you that banks are insolvent, then great. The kicker is that they are supposed to. Peer to peer lending on its own is too inefficient and the costs to excessive.
It's true, but is not evil. The general term used for this phenomena is the money multiplier effect. If you have access to any money and banking textbook, it will certainly cover this.
Say an area has only 1 bank and everyone deposits all of their money at the same bank. The bank has 100 in deposits from people with accounts there.
A takes a loan of 100 to buy B's property
B spends the money on items from C
C sensing good business, borrows 90 more to expand their business.
D gets a contract to expand C's business, and receives C's 90 loan up front.
D in turn buys construction equipment from E with the 90.
E merely places the money in the bank.
C has 100 in the bank and E has 90 in the bank. Also, the original depositors believe they also have 100 in the bank. So on everyone's balance sheet, the total cash is 290.
A owes the bank 100, C owes the bank 90. Total monies owed to the bank are 190.
So now there's two tricks that banks need to handle. The first one is that they need to charge enough interest on the 190 in order to cover their operating expenses, the interest paid on 290 in deposits and a suitable return on equity (albeit there's no capital in this example).
The second trick is in liquidity. Suppose C and E both decide to go to the bank at the same time and withdraw their money into cash? Eeks...there's not enough real money. A century ago, this was called a "run on the banks" and people would race to try and get their money back, causing a significant imbalance between loan length and the types of accounts held. To solve this, banks have created bank loans to one another as well as securitizing the mortgages to allow them to be sold to interested parties. There are also standards set for how many loans can be made from each type of dollar "deposited" with a bank in a complicated calculation where capital ratios are developed. In this way, it prevents the same money from being loaned out too many times and leaving the banking system too far expanded.
In the United States, for example, most banks now only originate home loans. As long as they are conforming, these loans are then immediately sold to the Fed's quasi-governmental entities, assuring liquidity at the local bank level. The Fed then contracts with loan servicers to actually collect the loan proceeds. Because the USA can borrow at the lowest costs*, it reduces the total amount of cost to make loans and the interest that needs to be charged for an acceptable gain.
I hope it helps. If this video was the first that showed you that banks are insolvent, then great. The kicker is that they are supposed to. Peer to peer lending on its own is too inefficient and the costs to excessive.
The above is now mostly passe, as due to Fed actions banks have significant excess reserves and don't need postrider money for loans.
It's true, but is not evil. The general term used for this phenomena is the money multiplier effect. If you have access to any money and banking textbook, it will certainly cover this.
Say an area has only 1 bank and everyone deposits all of their money at the same bank. The bank has 100 in deposits from people with accounts there.
A takes a loan of 100 to buy B's property
B spends the money on items from C
C sensing good business, borrows 90 more to expand their business.
D gets a contract to expand C's business, and receives C's 90 loan up front.
D in turn buys construction equipment from E with the 90.
E merely places the money in the bank.
C has 100 in the bank and E has 90 in the bank. Also, the original depositors believe they also have 100 in the bank. So on everyone's balance sheet, the total cash is 290.
A owes the bank 100, C owes the bank 90. Total monies owed to the bank are 190.
So now there's two tricks that banks need to handle. The first one is that they need to charge enough interest on the 190 in order to cover their operating expenses, the interest paid on 290 in deposits and a suitable return on equity (albeit there's no capital in this example).
The second trick is in liquidity. Suppose C and E both decide to go to the bank at the same time and withdraw their money into cash? Eeks...there's not enough real money. A century ago, this was called a "run on the banks" and people would race to try and get their money back, causing a significant imbalance between loan length and the types of accounts held. To solve this, banks have created bank loans to one another as well as securitizing the mortgages to allow them to be sold to interested parties. There are also standards set for how many loans can be made from each type of dollar "deposited" with a bank in a complicated calculation where capital ratios are developed. In this way, it prevents the same money from being loaned out too many times and leaving the banking system too far expanded.
In the United States, for example, most banks now only originate home loans. As long as they are conforming, these loans are then immediately sold to the Fed's quasi-governmental entities, assuring liquidity at the local bank level. The Fed then contracts with loan servicers to actually collect the loan proceeds. Because the USA can borrow at the lowest costs*, it reduces the total amount of cost to make loans and the interest that needs to be charged for an acceptable gain.
I hope it helps. If this video was the first that showed you that banks are insolvent, then great. The kicker is that they are supposed to. Peer to peer lending on its own is too inefficient and the costs to excessive.
Maybe what we can do is make it much easier for people to start their own financial institution. If you have under $100K pooled together then you can just play around with that money. If you have less than $10K you can just play with that money.
Why will peer to peer be less efficient? It can just follow the same model you stated but I guess with less money.
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