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Loans don't create new money. When a bank uses its capital, depositors' money, or money they borrowed from a larger bank to finance a loan, the money supply is unchanged -- the money simply moves from the bank's investors or depositors or from the bank's lender, to the borrower, one pocket to another, net change $0. Money was moved, but no new money was created.
If banks could simply create new money by issuing loans, there'd be no reason for Fannie and Freddie to exist to provide the funding for 70% of the US mortgage market (Fannie's and Freddie's mortgage purchases, likewise, are funded by their investors and MBS buyers -- STILL no new money created in the process).
When the Federal Reserve buys Fannie and Freddie MBS, THAT'S the creation of new money.
It's already severely lopsided. That's what makes SS a progressive program. Those who pay in the least get the most return in benefits. Those who pay in the most get the least return.
WHY are there suggestions to make this lopsidedness even worse?
You are probably not going to like this with your views. I applied for SS 10 years ago at 65. I worked full time for a total of about 20 years. Didn't work at all when my kids were very young, then went back to work part-time while they were still in school.
My salary was nowhere near what my husband made. Based on my working years. and income, I would have been collecting $900 at the time. SS told me I could collect HALF of what my husband's SS amount was if mine was lower! They called it Spousal benefits. Like THAT? Want to change it? I suppose you could say marriage has it's benefits,
This explains it simply and correctly.
It's shocking that people would think that banks don't loan real cash out for mortgages. The cash has to be there, and if it's not liquid enough, that's when bank runs can happen.
''Banks lend by simultaneously creating a loan asset and a deposit liability on their balance sheet. That is why it is called credit "creation"--credit is created literally out of thin air (or with the stroke of a keyboard). The loan is not created out of reserves. And the loan is not created out of deposits: Loans create deposits, not the other way around.''
Most new money is created by banks, not gov'ts. This is the UK, but same in the USA:
''Banks lend by simultaneously creating a loan asset and a deposit liability on their balance sheet. That is why it is called credit "creation"--credit is created literally out of thin air (or with the stroke of a keyboard). The loan is not created out of reserves. And the loan is not created out of deposits: Loans create deposits, not the other way around.''
Most new money is created by banks, not gov'ts. This is the UK, but same in the USA:
The Federal Reserve is a bank. A Central Bank. It is not the US Government.
You still have not explained how these supposed "creating new money" bank loans get funded. WHERE does the funding come from for the loan?
For the US mortgage market, 70% of the funding comes from Fannie's and Freddie's investors and MBS buyers. They actually have to fork over money to invest in F&F or buy their MBS. That already existing money is then used to finance the vast majority of the US's mortgage market.
If banks can just create new money to fund mortgages, why is there ever even a need for Fannie and Freddie and MBS?
If loans really created new money, no one would ever have to pay back their credit card debt, mortgages, car loans, student debt, etc.
Loans are contracts and have to be paid back. And when that happens the previously created bank money is effectively destroyed. Same as with the Fed's QE's.
But the point is that our deposited money is not necessarily needed for the bank to make loans. Same as with WW2. The public purchased bonds thinking they were supporting the War effort. These moneys were not needed for that, since thousands of banks provided the new money. The bond drive was to help squelch inflation.
Loans are contracts and have to be paid back. And when that happens the previously created bank money is effectively destroyed. Same as with the Fed's QE's.
But the point is that our deposited money is not necessarily needed for the bank to make loans. Same as with WW2. The public purchased bonds thinking they were supporting the War effort. These moneys were not needed for that, since thousands of banks provided the new money. The bond drive was to help squelch inflation.
I'm not buying it. According to what you believe, loans create new money and therefore deposits increase.
But that's NOT what happened.
Quote:
Deposits at U.S. commercial banks fell toward the end of April to the lowest in nearly two years... while overall credit provided by banks moved up, led by a record level of outstanding loans and leases.
Excellent and timely question! As shown outflows/withdrawals due to the recent bank failures, tax season. More loans paid down/off then created.
No doubt this is all cyclical.
You've understood the info incorrectly. Credit is UP but deposits are down. If extending credit created new money, that shouldn't be happening. Deposits should be increasing along with the increase in credit.
Here's a direct refutation from FRED (Federal Reserve Economic Data) of the alleged theory that "Loans create Deposits" which has been taken to mean that banks create money by making loans. Look at what happens as Borrowings (loans) increase. Deposits DECREASE:
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