calitom wrote:MungoBrush wrote:calitom wrote:"Why don't you try it?
Deposit £1,000 into your bank account
Make a loan to your mother of £1,000
Deposit that £1,000 into her loan account
See how much better off you are?
You've just created "money" out of thin air.
It's that easy you should be rich in no time."
You didnt create any money out of thin air. What are you talking about?
This started when Fletch posted "Banks create money out of thin air"
I kid you not
Those are his actual words.
oi vay...;)---amazing how some banks go out of business then. Must be when they lose their magicians card.
That happens when banks have gambled too much and then lost. Creating money as loans is a bet. They are not lending someone else's money, the money never existed before the loan was made. The gamble is that the loan is repaid and then the created money can be deleted from the books and it's all back to normal. If the loan is not repaid, or in the case of a mortgage, the loan sliced and diced with others loans then sold on as financial investments, then there is a problem if the loan 'stops performing'. (goes in to default) The bank has to make up that loss.
What you have to remember is that all money is created
out of thin air on a computer as debt. ie a loan.
Regulation of banking means sticking to a leverage of around 35 times. The idea of capital reserves is that not all of the deposits can be used to create money, hence limiting banks to around the 35 times mentioned.
When a loan doesn't perform (defaults) it causes a liquidity problem. Suddenly banks are outside the lending ratios and have less ability to carry out day to day functions due to that imbalance. The solution in the 2008 crash was to inject capital so the lending ratios were back within limits and enable liquidity to be available for day to day business.It was in effect a paperwork exercise with the money to bail them out also being created on a computer with the government signing up to the debt. They took shares in the banks in return for the capital but those were also created at the time by the banks.
How loans become deposits:
Person A borrows 1000 from bank 1.
Bank 1 created the money when the loan was agreed
Person A buys a car from person B. He pays person B 1000 for car.
Person B pays the 1000 in to his bank, Bank 2.
Bank 2 now has 1000 deposit which can be leveraged to loan out 35,000.
Money is created as debt but has to be laundered through a third party. Banks can't create debt for themselves, only the BoE can do that. The central bank has no limit on how much it can create, commercial banks do.