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Banks cannot and do not just pile unfunded loans up on their books. The loans have to be funded and that is done via banks using their financial reserves up to the limit allowed, and/or by selling the loans to investors or the Federal Reserve.
Lending banks are NOT creating money. They are earning profits by leveraging as much of their financial reserves as allowed. Only the Federal Reserve creates money in the US.
Financial literacy is something that parents need to learn to help teach and reinforce the lessons for their children. There are *so many* free resources online, at libraries, non-profits.
As far as social security - the main message to provide for every high school student AND college student is to start putting money away for the future, including for retirement, as soon as reasonably possible, in IRAs, 401Ks, etc, even with one's first job. That is the secret to being able to retire earlier in life and time + compounding will work its magic.
That's talking about the Federal Reserve, not lending banks.
The Federal Reserve creates money. Citibank, JP Morgan Chase, etc., do not, no matter HOW many loans they make. Their loans must be funded as there's a recipient expecting payment on the other side of the loan.
That's talking about the Federal Reserve, not lending banks.
The Federal Reserve creates money. Citibank, JP Morgan Chase, etc., do not, no matter HOW many loans they make. Their loans must be funded as there's a recipient expecting payment on the other side of the loan.
''The Money Creation Process
There are two interesting things that we will learn in this chapter. FIRST, banks create money when doing their normal business of accepting deposits and making loans. When banks make loans they create money. remember from chapter 12 that money (M1) is currency (coins and bills) AND checkable deposits. When I got a loan for my boat the bank called me up and said that they deposited the loan in my checking account. This new deposit is NEW MONEY created by the bank. they just turned on their computer, logged into my account, and changed the amount that I had. They created money.''
There are two interesting things that we will learn in this chapter. FIRST, banks create money when doing their normal business of accepting deposits and making loans. When banks make loans they create money. remember from chapter 12 that money (M1) is currency (coins and bills) AND checkable deposits. When I got a loan for my boat the bank called me up and said that they deposited the loan in my checking account. This new deposit is NEW MONEY created by the bank. they just turned on their computer, logged into my account, and changed the amount that I had. They created money.''
If so, then why are loans ever even necessary? Banks can just GIVE everyone the new money they're creating by depositing money into their checking accounts just like money was deposited into yours.
If so, then why are loans ever even necessary? Banks can just GIVE everyone the new money they're creating by depositing money into their checking accounts just like money was deposited into yours.
Our banking laws. Inflation. There must be others.
If a few banks made a few loans now and again like that, we most likely would not end up with a major problem. Remember there are typically assets of value that can recovered.
A very interesting example of this can be seen with WW2 and how the Fed guaranteed thousands of bank loans, secretly and in a short period of time in order to create the money needed fund the War. Banks at that time could have gotten away with some serious fraud. That did not happen.
Our banking laws. Inflation. There must be others.
If a few banks made a few loans now and again like that, we most likely would not end up with a major problem. Remember there are typically assets of value that can recovered.
So a loan is NOT creating new money. It's exchanging one form of asset (existing money) for another (ownership interest in a valuable financed asset until the loan is paid off).
Maybe this can explain it in a way you can understand...
Quote:
"In addressing what’s ridiculous, it’s probably best to start with something basic. Let’s imagine you the reader possess $1,000 in cash. As the owner of those funds you have no limits on what you can do with them. In other words, you could lend to someone else the $1,000 in total.
Which elicits a question: how much would you have after lending $1,000? That you would have $0 is a statement of the obvious, but sometimes the obvious requires stating.
It does given the popular view among financial journalists and Fed officials that banks, for being banks, can create money. A recent book review in the Wall Street Journal asserted just that. In an analysis of former Fed official Lev Menand’s new book, The Fed Unbound, the reviewer contended that banks, seemingly for being banks, are similarly unbound. According to the reviewer, when you take out a mortgage “your bank credits your account with dollars that did not previously exist.” Yes, the Fed official and the reviewer believe banks operate without boundaries. No, this thinking isn’t serious.
If it were, why would banks pay interest at all on deposits? If banks can just create the medium of exchange that borrowers go to banks in order to access, why pay rent to savers for their savings? After that, why doesn’t Southern Bank in Cairo, IL lend with “dollars that did not previously exist” so that it can build an asset base similar to J.P. Morgan’s? Most of all, if banks can just create assets with “dollars that did not previously exist,” why is it that Citibank has required so many bailouts over the last thirty years?"
Taking $900 of person A's $1,000 deposit and lending it out to person B (fractional reserve lending) does NOT create $900 in new money. It just does not. Period. The exact same $1,000 still exists, nothing more. There is NOT now $1,900.
As the one article clearly states... if banks can just create assets with “dollars that did not previously exist,” why is it that Citibank has required so many bailouts over the last thirty years?"
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