To complete the picture you should discuss how money gets destroyed. It's often left out that when loans are repaid the reverse happens - money/credit that was initially created is now destroyed/removed from the economy. What's left is the interest and whatever asset or enterprise the borrower purchased or created.
What is being obfuscated by our very language is: banks create credit, not currency. Credit is a claim on currency, not the currency itself. When a bank loans me $200k to buy a house, a real claim on real central bank currency must be transferred from me to the seller, either in the form of hard cash, or a claim on hard cash in a checking account. In exchange, I must retrieve $200k plus interest over the term of the loan by working for it, and giving the money I receive to the bank. In this way, banks don't really create money insofar as they create currency, banks create money insofar as they create future claims on currency: the central bank is still the one who creates the actual currency.
Basically, banks do not lend you 'money', they buy and sell securities/ IOUs created by the 'borrower' when they sign the agreement that allows the bank to create the funds/credit. Your signature creates a promissory note, an asset to the bank. Professor Richard Werner explains this also very well.
But they also have to give the borrower real cache. How can an IOU cost more than cache of equal nominal value? How do they make money? I can see that the economy as a whole gets more liquidity in this scheme, but I don't see how the bank does.
@@yasinmehmed5600 after the securitization process: long term: the Fed. In short, other investors. In America, you can find this information in The Federal Reserve Act, Specifically Section 16
@@ЙцукенПетрович You have created the 'cash' on their balance sheet first as an asset when they purchase the loan agreement from you. The Interest applied on the 'loan' is how they make money. As you pay off the 'loan' the original amount is just wiped off the balance sheet and they keep the interest as profit that increases their total equity.. Remember that its all accounting figures on a computer, not physical cash that moves around....
wow. just found out the truth about money creation and it's crazy. I don't know why I took so long to watch your videos even after subscribing your channel long ago. thanks for the video..! looking forward to your other videos. also your reference about the CORE is fantastic. The
Great video! It's taking too long for this explanation of money creation to become known. I was expecting, or maybe missed an additional constraint on banks creating money: Bank willingness to lend. It's rare, but after the GFC few banks were unwilling to lend , even at low interest rates, and it restricted the money supply. Keep up the great work! You just got a new subscriber!
I think you mean even at high interest rates. Interest rates are the returns on loans that banks make. Higher interest rate = higher return for the bank.
@@gallectee6032 Higher interest rates from Central Bank means higher costs for retail banks which supposedly reduces the willingness of banks to provide loans to customers. Higher returns on the interest of assets means that the price of that assets has gone down. Typically this means that customers have reduced their demand for such financial products. This could be for several reasons, such as the company that pays the dividend is about to go bust; or a government is about to default on its debt. These returns look high, but they could come with significant risks that a bank would want to avoid.
I love you, man. Thank you soooo much for this video (and other videos on banking and central banking). It breaks my heart seing all of those videos on UA-cam with millions of views, just propagating the myth of the money multiplier and then the people in the comments thinking they learned how the world works, while they did the EXACT OPPOSITE of that. Sadly, this myth is still dominating economic textbooks, universities and class rooms. This video deserves a lot more views. God bless you.
This videos title is a bit clickbatey to my taste and is grounded in a very pedantic interpretation of most introductory econ textbooks. From econ class I always viewed the multiplier as a function of banks propensity to to give out loans and the reserve requirements merely as a, rarely binding, hard ceiling on what banks will be able to lend out. Whether you call it a bank reserve requiremets, capital requirements or dis/incentivicing loan creation by playing with the interest rate, the effect will be the same as that which you would get from varying reserve requirements. From a pedagogical standpoint I find it perfectly justified to explain the multiplier assuming banks are eager lenders bound only by reserve requirements and add a bunch of caveats about the different forms these lending limitations can take after a simplified understanding of money creation has been established. While I agree completely with everything contained in this video it gave me the false expectation that my understanding of economics was about to be shattered XD. I guess you cant make a living on youtube with nuance XD. As an economics teacher I would actually stick to the way the multiplier is explained in most textbooks. Yes, its a simplification, but that is really all economics is. Then in a second step you can add nuance to students understanding, explaining there is more than one way to get banks to hold higher reserves and that by increasing interest rates or capital requirements you can also elicit reactions in the ratio of loans to reserve holdings, in fact banks might constrain the multiplier entirely on their own because they are to afraid to give out loans in an otherwise auspicious monetary environment. I think only few actual economist ever took reserve requirements to be more than an, admittedly misleading, synonym of banks propensity to loan money
that's not really much different than double entry accounting. Debit your cash, credit your liability, money is created from nothing. (and gets destroyed when you remove cash to pay liabilities.)
While I comprehend the information, there is a question which comes to mind after watching twice to examine carefully. With regards to the “other side” of the banking operation as a depository for customer savings, why does the bank not have the required reserves on hand to offset a bank run in the first place? If loans are solely “created by federal allowance” as you’ve demonstrated, that would suggest there would be an excess of reserves available for depositors, which we know for a fact is not the case. It seems default is inevitable and the system is wired to bust no matter what occurs.
Thanks for this. It's annoying that the same myths are still taught in business courses. It's no wonder the public doesn't understand economics, when so many economists either also don't understand it, or are lying to them.
@@19Borneo67 The way the story is usually told is that reserves are a percent of deposits received by the bank from customers. It's a very different situation when reserves are supplemented by the infinite credit limit credit card of the Federal Reserve. It means essentially there is no multiplier, other than whatever the number works out to be based on whatever the federal reserve happens to loan out, generally whatever they are asked for. It also puts in a very different light what's happening when the Fed tries to force banks to take loans from them, expecting the banks to then make loans to spur the economy. The reason they aren't already doing so is either that they don't trust that they will be repaid, or nobody wants to borrow because they are uncertain of their own ability to repay.
It actually makes a lot of sense that you don't really need private banks to have a minimum reserve %/amount. Since it's just a ledger at the bank, people can 'pull out their money' as much as they want and the bank/central bank can just say 'there's more where that came from'. It made me think that Depression-causing bank runs aren't really a problem anymore per se. More so that as you said, if no one wants to borrow because they are afraid of interest rates rising or their ability to pay it back etc., that's when you are actually in trouble. eg. if everyone started avoiding getting mortgages at these insane prices, the demand for owning houses would fall which in theory should push prices down until people start to feel ok getting mortgages again Nice explanation Dr. Schasfoort!
-we need banks for safekeeping our money and for their services such as money transfers. -also savers try to protect money from inflation (caused by the same arbitrary money creation) and sometimes some banks pay interests to savers above the inflation although they are not the only ones who offer investment services. For banks is cheaper to pay interests to customers than borrowing money from other banks or from the central bank which charge higher rates. Lastly having deposits gives them more stability and a wider margin to lend and earn more interests. Question is where do the interests money come from? From other loans. You can imagine this all breaks havoc in the economy
Isn't it far simpler? There is a disparity between the deposit and withdrawal in the multiplier myth, because it ignores that when money is withdrawn, you are taking the bank's reserves back out of the bank... so if they were following a fractional reserve, the amount of credit they could issue would collapse at the same rate when cash is withdrawn as it expands when it is deposited. So, the money multiplier myth is erroneous even within a fractional reserve system.
I think the fractional reserve concept does take into account some degree of "withdrawals" of hard currency (e.g., from an ATM) by the depositor and therefore the depositor's bank doesn't actually loan out ALL of the amount allowed by fractional reserve banking to its borrowers, rather it serves as a hard limit. Then, it counts on all the loaned-out money coming back with interest (along with newer deposits by original and newer depositors) before the original depositor has a need for further withdrawals. Does that help address your question?
@amitsondhi333 This is incorrect. Banks do not loan out deposits, period. They create new money. Every bank loan is newly created money which is destroyed as the loan is repaid.
I have no idea about the other countries, but I do believe Swedish banks are required to keep a reserve. In theory it would be possible to limit the needed reserves to small amounts by asking the agency overseeing it to accept the banks own method. But realistically that will immediately set of red flags if you want to use a system that sets your assumed risk close to 0. All of this is governed in a swedish law "Lag (2006:1371) om kapitaltäckning och stora exponeringar".
Reserve requirements (in the video) are where banks hold their assets in the central bank. Capital coverage/requirements (kapitaltäckning) is discussed later as one of the limits for bank loaning, among demand and liquidity. An interesting case is when the borrower uses the credit in a transaction where the recieving party also uses the same bank, then the bank does not need to liquidate assets.
30 year home loan in the USA, the interest for the loan is about the same price as the house. If the house is $200,000 then the person will need to pay the bank back $400,000, so the person has to work and pay the bank back for 15 years to pay the interest, for the bank just tying in a journal entry on their balance sheet. 😕
Essentially, banks create money because they manipulate their ledger. When they give a loan, they change a few numbers on the bank account statements, and record on their spreadsheet that they owe bank account A $1M, and Bank Account A owes them $1M. When you want to spend your money, the bank debits a few digits off your end of the spreadsheet, and credits the account you pay. Since people accepts bank obligations at par to cash, the bank can create money by changing their spreadsheet to add points to someones account.
Fractional reserve banking describes a system whereby banks loan out a certain amount of the deposits that they have on their balance sheets. Fractional reserve banking facilitates lending, thereby expanding the economy. In most countries, banks are required to keep a certain amount of their customer's deposits in reserve. Banks with a low fractional reserve are vulnerable to bank runs because there is always a risk that withdrawals may exceed their available reserves.
Hey Joeri! Love your content, very happy it was recommended to me (1Dime brought me here initially). I have been learning a lot about banking, central banking and Macroeconomics in general. And I really really appreciate you using your specialised knowledge and make it so accessible! Thanks, keen to be watching more of your backlog and future videos 🙂
I'm confused by the new story. When I deposit money at the bank, I get that I'm getting a lower interest rate on that loan than I could get elsewhere. But how does that mean that I'm actually borrowing the same amount of money from the bank? It doesn't seem like I borrow anything from them, because they're not giving me anything right away that I agree to give back later.
I think Joeri's *borrowing and lending at the same time* explanation only referred to the process of the bank issuing a loan to a borrower, not to a depositor depositing money in their account.
I have a question - Are banks in the United States under the control of the Gov or can it interveen!! as we know 567 banks have failed since 1974 its a disaster. Malpracticing banks: 1.Wells Fargo: In 2016, for opening millions of unauthorized accounts on behalf of customers without their consent. 2.Bank of America:Its role in the subprime mortgage crisis. 3.JPMorgan Chase: The London Whale trading scandal. 4.Goldman Sachs: Its role in the 208 financial crisis. 5.HSBC:2012 for money laundering and other financial crimes. Why havent the Gov not canceled their licences ?
Aren't capital requirements just reserve requirements, but in reverse? So instead of people depositing money in the bank and the bank then using it to loan out a multiplier of that money, the bank loans out as much as it can, but has to then keep a percentage of that (7-8%) as capital.
Thanks Henrique. I really liked the book Money Changes everything by Goetzmann (although its from a different school of though than this video it still provides a valuable perspective). Also, I can recomment Debt: the first 5000 years by the late David Graeber.
If the money in circulation is created from loans, and banks charge interest on loans, then presumably the amount of debt owed to banks is higher than the amount of circulating currency? So where does the money to make up this difference come from? In other words, where does the money to pay the interest on the loans come from?
Yeah, I struggled with this question when first learning about money & banking as well. Turns out the answer is pretty simple. Basically, the number of transactions (flow) can be much bigger than the quantity of money (stock) precisely because money circulates. Let me give you an example. You borrow 100k from the bank that is due next year. Around the half year mark you have to pay 5k in interests. If that is all that is happening in the economy, it is of course impossible. However, in reality you borrowed that money to be productive. E.g. open a Garage. In that case, the banker will likely use your service ... perhaps in the second half of the year. Paying you back that 5k so that you can repay the 100k at the end. Does that make sense?
@@MoneyMacro hi! Thank you for your reply. Yes that makes sense. I think I’d still need some convincing to fully accept that this is how the money to pay interest comes back into circulation in the real economy. I think it’s just difficult for me to picture this all functioning without a good proportion of the interest being paid with base money. Or that at the very least the base money supply acts as a necessary supply of money for interest payments.
@@gx9254 Fair enough. Yeah the central bank still issues money. It's far less than what commercial banks do. But, still significant. Perhaps my video on the structure of the monetary financial system is of interest to you since it is about this issue. ua-cam.com/video/4xgHbW2A9KE/v-deo.html&ab_channel=Money%26Macro
@@MoneyMacro Hi, thanks again. That visualization was very helpful. I think I had all those ideas floating in my head but couldn't get them straight. So am I *roughly* correct in saying that the "monetary core" is equivalent to M0/MB, the "monetary periphery" is equivalent to M1 or M2 minus M0, and the financial crust is equivalent to M3 or M2 minus M1 (depending on how we decide to think of what qualifies as "peripheral" and what is in the "crust" of course)? Thank you for these videos and your quick responses by the way, they're extremely helpful and very high quality.
@@gx9254 Glad to hear it. Almost but not quite. I think M0 does indeed feature purely CB money so is equivalent to what I call the monetary core. However, I also include bank reserves in there because they are bank money and they are not in M0. M1, M2 & M3 includes lots of bank money (=monetary periphery). However it also includes money market funds deposits , which I classify as financial crust because one cannot buy stuff with it other than financial instruments. Then, there are quite a lot of grey area instruments which I broadly classify under the financial crust. Look, I have to be honest with you here. Us economists haven't fully figures out money. Actually, for that reason, M0, M1, M2 etc are not that often being used anymore. Even though they are still in textbooks.... I realize that I'm making things more confusing now.. But yeah these frameworks help in getting a feel for this stuff but there are lots of grey areas here.
Funny how they still teach money multiplier in Canada where the reserve ratio is 0%. I genuinely had no clue from what my university econ classes led me to believe, granted I only took a few.
Its correct that the loan itself is made out of thin air, but when he is used to purchase a car, for instance, the car dealer must be paid. If the seller insists on cash payment, the borrower must withdraw the required amount from the bank (Bank A) that granted him the loan in bills and coins. This means the bank must either have that cash on hand or get it from the nearest central bank office. In the first case, it will have to debit its cash holdings. In the second case, it will have to debit its account at the central bank. If the car is purchased with a check drawn on Bank A, the seller will deposit the check with his bank (Bank B). Bank B will then present the check to Bank A for payment, and Bank A will debit its account at the central bank by the amount of the purchase and credit the same amount to Bank B’s account at the central bank. It is only after Bank B acknowledges that its account at the central bank has received the funds from Bank A that the transaction is considered complete
What this means is that a bank must have sufficient cash or reserves at the central bank to make the loan. Otherwise, it cannot make any payments or grant any loans. The notion that a bank can create „money“ out of nothing is therefore I think disputable. Only banks that have plenty of cash or reserves can grant loans. In response to this, you argue in your video that reserves do not represent a constraint on bank lending because they are available from the central bank “on demand.” Although it is true that banks can borrow reserves from the central bank by posting high-quality collateral, both the availability of such collateral and the stigma attached to such borrowing (bigger banks can only use the FED‘s discount window three times a month if they dont want a visite from the FED‘s supervisors) discourage banks from relying on the central bank as a source of reserves except in emergencies. In the U.S., reserves borrowed from the Fed by commercial banks are called “borrowed reserves“ and represented just 0.86 percent of total reserves held by the banks even before the QE-programs. This means 99.14 percent of the reserves held by banks are obtained from private-sector sources who are willing to entrust their money with the bank, such as depositors, bond holders and shareholders. The notion that a bank can create money out of thin air because the central bank is always ready to provide reserves “on demand” is therefore wrong in my opinion. Banks do whatever they can to avoid borrowing from the central bank. Consequently, only banks with plenty of reserves grant loans and rely on the money they get from their customers.
Would it be possible in theory to prevent this from happening? For example by forcing banks to only lend out money they received from deposits and banning fractional reserve banking? Would this be desirable? Why have banks been granted this "privilege"? is there an economic advantage or is it just the banking "cartel"? Does the ability of banks to create new money distort markets and affect inflation?
Reserve requirements are designed to protect banks against runs by depositors; capital requirements are designed to absorb losses on loans and other investments
@@Vikingrings When private banks lend out more money than they have in deposit then they increase the amount of money in circulation. Is this a controversial statement?
As per my understanding, reserve requirements are based on the capital or equity of a bank. If a bank is valued high, it needs to have more reserves. Deposits have no role in reserve requirements.
If the reserve requirement in a country such as the UK is 0%, what is the purpose of banks allowing customers to hold regular accounts? Do every day current accounts that people get their wages paid into benefit banks in any way beyond transaction fees? Would banks be financially better off just issuing loans?
1. I get loan from bank which never existed before. 2. I buy the bank a house with that money. 3. I start to buy the house from the bank by paying the bank interest & capital with money I get as wages at my job. 4. Meanwhile the bank creates more money and loans it out to others who buy houses.....this in turn creates more demand for houses which drives up the prices of houses. 5. Because house prices are rising due to the bank creating money and loaning it out....the house I am buying from the bank is now worth more....so now the banks asset reserve is growing .... so now the bank can create more money to loan out
No man should ever have the right to create money for free that another man has to work for. Every man should refuse to work for and hold a money that another man can create for free, thereby diluting them and stealing from them. All roads lead to Bitcoin. That is now inevitable. This corrupt and evil fiat monetary system, whereby some can create money out of thin air, for free, to the dilutional cost, detriment and impoverishment of others, will be destroyed. That is why Bitcoin was born. Bitcoin is gunpowder. Adopt it and record your wealth on its immutable and incorruptible ledger; or become its victim.
Steps: 1. Raise tier 1 capital (eg. $10m). 2. Attract your first deposits (eg. up to $100m). 3. Make your first loan when you’ve attracted some deposits. 4. Profit. Moral: commercial bank Can’t make a loan without attracting deposits first.
Great video! Just discovered your channel and the content is great. Pardon my ignorance but it’s one thing to have the reserve ratio of the bank at 0, but the central bank still creates the £1 out of nothing and lends that to the bank to dispense. Doesn’t that £1 have to be paid back to the central back (crucially) with interest?…where does that interest come from? From what I understand it’s an impossible equation. Many thanks for reading and your response.
I wish Joeri had responded to your comment. My guess is that the interest paid on any loan is representative of the “value” added to the economy (capitalism assumes unlimited value create). For example, get loan, build house, sell house above loan value, repay loan with interest. The new house is value added to the economy and the money supply has increased. If my understanding is flawed, then hopefully Joeri will see this and make a detailed follow up video
I don't understand this part: if a customer takes a loan from the bank, bank borrows money from customer and customer borrows from a bank at the same time?
Well, at the end money is just purchasing power. Debt is the opposite, it's like anti-purchasing power. Money creation has to be creation of purchasing power that didn't existed before. So the question is, when the bank is giving purchasing power to the person, from where does that purchasing power comes from? From another person, from the bank's reserves or from the thin air? It's probably different for every loan, but I think we all agree that there is a constant influx of fresh new "thin air" in the mix. It's easier for me to think that the bank just gives as many loans as it wants. This is what we see in this video and also in the money multiplier explanation. I think the actual mechanism is the money multiplier, limited by the reasons explained in the video.
If I can just add a little bit to your comment. How about debt is anti-future purchasing power? Personally, I still wouldn't frame it like that often but I think that is a better frame. Yeah I agree with the 'thin air' statement although I tend not to use it because this activity is not risk free for the bank. But, how useful is the money multiplier mechanism if reserve requirements are 0? I'm not sure if I interpret your last paragraph correctly. But, it looks to me as though you are saying: "I'm going with the money multiplier because that is easier for me to comprehend." While I do sympathize with that, I don't think that is a very good argument. I do admit that thinking about money creation as described in this video is quite counter-intuitive. It hurts the brain a little bit. I suspect that's why it is only now catching on in mainstream economics.
I think about it like this. In most economies, there is a lot of slack. Meaning that people are not producing as much as they could. They could (and in small communities they do) work with each other in an informal debt-based system. I'll help you build a farm now given that you give me some of your crops later. This is a debt between us that can be created 'out of thin air.' Now you can think about banking in that it makes that relationship formal. The debt is created between the two people out of thin air. But, the banks formalizes it lending to the person who builds the farm. This way that person can now hire someone with whom he/she has no informal relationship. The bank of course runs a risk here (that the project fails) and also will be compensated for that risk in the form of interest. The kicker is that the 'out of thin air' creation happens between people. The bank just formalizes it. Search for "University of Groningen debt a great invention" on UA-cam for a more extended version of that argument.
Bank-created money has value because we are legally required to use it to pay taxes and settle debts (see LEGAL TENDER LAWS). But the only place to obtain this money is from private banks who create it out of thin air when they issue loans. Money Multiplier is a myth, and as far as I know it was first introduced by "Chicago School" economist Milton Friedman. He also pushed the lie that only governments create money on a printing press!
@@widehotep9257 Totally agree with the legal tender bit. The fact that for example employers have to pay you into a bank account is of course a hidden subsidy of the government sector to the banking sector. Would be interesting to see if central bank digital currencies can change this situation.
Any IOU is "purchasing power" --- if you can back your promise to redeem. Government can always back tax redemption since it runs the tax system, it issues tax credits (aka. "dollars") which you have to return if you do any taxable activity, that is, unless the government loses tax authority (which can happen, coup's war, etc.). Every debt is someone else's credit. They go together. What do you think Treasury securities are? They're safe money for people who already have money, but we call it "government debt" --- falsely thinking someone has to "pay it back." Wrong! The money was already issued, someone buys a T-security becasue they had cash reserves and they want the guaranteed interest, it's not to loan the currency-issuer government the currency only the government (or it's licenced banks) can originate.
Unfortunately, AP Macroeconomics is still being taught with this Money Multiplier myth deeply involved in its curriculum, so the AP Test will include it on their exams. Hopefully that begins to change in the next few years. :/
Maybe I am misunderstanding something and someone can help explain this to me. While the reserve requirement may not be entirely accurate, I remember only the rough concept of reserves as one of the constraints that banks have when it comes to their effect on the money supply being taught in university. This is then used to explore the maths of how much banks can affect the money supply for a given level of reserves or how much the money supply is increased if they manage to increase their capital. In that sense this oversimplification involving reserve requirements is not entirely accurate, but as a method to explain fractional reserve banking it is more than feasible and does not introduce many issues. I may be completely missing the point here though.
That is not how fractional reserve works! Banks lend money over long periods even after the interest is collected the value of the interest would be diminished by inflation and devaluation depending on the currency and the time. All banks would go bankrupt by this logic.
How about no more fractional reserve banking altogether - which can be interpreted as banks stealing in a way. Instead, when you deposit money you agree to it being locked for a certain time, during that time the banks can lend out that money probably for a fairly high rate. Therefore no money is created and no more speculative bubbles and crashes. I'm there's a lot to be ironed out but introducing money at a constant rate would lead to a far more stable economy.
Not sure if that is true though. Credit fuelling asset booms are also unstable if the liabilities of financial institutions do not trade as money. Look up shadow banking for example. These are not banks, they do not issue on demand deposits. Very unstable though and capable of inflating large asset bubbles.
If you think about it, its not really creating new money by issuing loans. Its just converting idle money sitting in savings to active money (to be used in spending).
Only a portion of it since the economy is growing new money is necessary hence there is not enough savings to cover the loans therefore money creation is mandatory. If there was X amount of money and the economy grows that X amount represents the economy before growth, when more goods and services are produced then a corresponding amount of money must be created however this money is always created as a loan causing an artificial scarcity of money
@@alrey72 central banks issue notes and coins that enter the economy mostly through private banks or when government borrows from Central banks, then private banks extend credit that enters the economy when people use credit cards, car loans, mortgages etc. Both are used as legal tender, then the interplay between central and private banks happen when they try to balance the amount of credit or notes required in different locations or parts of the economy and when there are many defaults due to speculation. However it is simply to understand if there was an X initial amount of money and then the economy grows, more money is required firms and households go to the only source of money available to them (private banks) we belive it is other peoples deposits but since X remains constant most of the new money is credit created that has to be repaid with interests. X can probably grow when the money is not returned and banks get the collateral in physical assets and also with government expenditure for a while since that money will be paid on the long run by taxpayers. The percentage of savings is quite small in comparison to credit created
as an undergrad studying to enroll on a master's, this video is most welcome (although it won't be used for ANPEC, but it's still cool to learn about it before getting into a program). what model describes this idea? would you have any studying recs for it? I ask this because I'm never fully comfortable with a theory before learning its formalization. I tried going to your in-depth discussion, but the blog link is broken 😭 edit: I know there are other recs (besides the blog post) on the description, but what I'm excited about is to learn about a formal model, not necessarily the (informal) ideas that surround this theory
Hey, here is the blogpost. www.moneymacro.rocks/2020-03-28-banks-make-money/ As far as I know, there is not a formal banking model of this process specifically. There are some macro models with endogeneous money though: see e.g. the textbook: amzn.to/3NkzIEy
@@MoneyMacro thank you so much for the reply! I was wondering, though, how can we test this theory if it's not formalized? I mean, test it against data? if we can't do this, how can we be sure that's how money creation works? and I hope I don't sound cringe, but isn't this book a tad too heterodox? I mean, I know science is conservative by default, but I don't see how these models would work better than mainstream ones and simultaneously not be widely adopted. my undergrad program was housed by a heterodox school and these problems were always very present
@@urieldaboamorte well, you don't need a formal model to test something empirically. The testable implications of bank money creation is that the money supply outside of CB money increases. That is what we see in the data. Then Money multiplier versus just creation ... how can we test that. Well, I think that people telling you how it actually works in the field are a scientific way of testing things. I would argue that making a formal model in itself is not scientific per sé. Testing theory predictions against empirical observations is.
@@MoneyMacro sure, of course not! I'm not claiming formal models are sufficient for scientific scrutinity. and also not entirely necessary, but it does help, right? I'm just saying it's easier to understand and generalize a theory if there's a formal model. and again, I'm just an undergrad. I don't know shit. but I understand what you're saying. I do hope though that a model will be developed because then we can more easily view this phenomenon in the broad context of decision theory, behavorial econ etc
@@urieldaboamorte I don’t know about you but there was a number of red flags in his response to writing off the importance of testable data driven equations
Fractional reserve banking actually sounds much more complicated than how it goes in real life. I guess it is just hard to wrap you head around the concept that banks and their customers issue debt at the same time.
ua-cam.com/video/iiKr-i022mY/v-deo.html The Progressive Growth of the Money Supply Principle (year 2013) tells us the exact quantity of new money the economy needs to works correctly, driving us to the Wicksell interest rate or natural interest. This principle will force central banks to change monetary policy.
There hasn't been fractional reserve banking in the USA since 1933 when Roosevelt confiscated all the citizen's gold and forced them to deposit it with the privately-owned Federal Reserve Corporation. Since then, all American money has been created out of thin air when privately-owned banks issue loans. "FICTIONAL Reserve Banking" is a better description of the current scam.
@@MoneyMacro Fractional reserve banking is IMPOSSIBLE if the actuaries/accountants get their banking software licenced (which they must do to get a bank licence), since it violates basic double-entry book-keeping rules. Although a bit geeky, see: ua-cam.com/video/L9Pc23r_m6k/v-deo.html
@@herbertspencer8293 No it won't. The currency is a state monopoly (in the UK, USA, Canada, Australia, Japan,... most countries outside the eurozone) so the government chooses the interest rate. Natural rate of interest is ZERO. You are probably thinking of how a gold standard has to work (tightening of rates to protect the gold reserves) which is inapplicable for a fiat currency tax credit driven system. See, www.jstor.org/stable/pdfplus/4228167 or, www.pragcap.com/wp-content/uploads/2011/02/WP37-MoslerForstater.pdf
So the limit to bank money or financial credit creation is not customer demand only but also customer credit worthiness. And it is preferable (for the bank) if that money reminds as banking figures rather than turning it into cash by borrowers because if the loans become cash and it surpasses the reserves then the bank has to ask the central bank for more printed money. But this system should be called different to avoid the confusion with the historical fractional reserve system
Hey Joeri, thanks for explaining so well. However, isnt there another dimension of multiplying? The koney banks lend to a company is paid out as wages or saleries or as income for suppliers which in turn spend the money on other companies goods or workers. So each Euro or Dollar can be used several times if not saved or taxed away too early. Shouldn't this determine how much or little circulating money we need to run all required transactions of our economy. Is this a multiplyer effect? Thanks for any response! 🙏
Isn’t the hard limit the credit worthiness of the customers themselves and the competition for them. If I’m a bank and I’m worried you’ll default on your loan, then I’m not going to do the a loan because there’s a good chance I’ll have to write it off and eat the bad debt expense.
I’m not sure about this,but if the bank doesn’t have to have any reserve and can go to the central bank to ask for money,why should the Silicon Valley collapse because of lack of reserve,can anyone answer this?
But, one issue is that liquidity depends on the circumstances. Lets say a bank holds real estate for example as an asset, or debt linked to those assets and the floor falls out, then there really isn’t any liquidity is there? Almost all liquid assets only really function as such when they are not volatile, if everyone tries to sell their stonks the same day we all pretty much die.
Really interesting to see this video in 2022 with this hyperinflationary environment. I don't get something, in Romania banks are now giving a better rate on your deposit, than they receive on a credit for housing purposes. This contradicts what this video states
Central banks are the necessary condition for long term inflation because their existence creates an incentive structure that leads to banks not worrying about how many deposits they create; they can create lots of money because the central bank is always there to bail them out. With no central bank, all banks who loan out more money than they actually have would cause bank runs and be thrown out of business; the system would tend towards 100% reserve banking where the banks function purely as either paid security for money or merely as a financial intermediary.
Doesn’t the central bank give money but that comes in the cost of over night interest rates for reserve requirements in the deposit window. So the fed is not giving money as much as loaning the money overnight so they have a place to sleep for the night
Neither MMT nor Austrian Economics have The walking promissory note A gold certificate is a promissory The promissory note quagmire A person signs a mortgage promissory The asset is the promissory note it
One thing I'd like to clear up is if you have deposits at a bank but no loan, does this count as a loan to the bank or not? If not, what does the bank do with the 'money'? I understand that your deposits are technically the property of the bank, although you can call on it at any time.
@@Vroomfondle1066 Right. So they're a liability on the bank's asset balance, used to cover demands when people call on their 'cash' which they have a right to do at any time. I can also claim my cash at any time. This explains the concept of a bank run then. Technically it's the bank's property but I can reclaim it as my property at any moment no questions asked (or transfer it to another bank). A slightly strange phenomenon. Thanks for replying.
I don't understand how there can be a myth, and needing "research" to disprove something like this? Either the banks loan money they don't have, or they don't. So all this time economists and bankers have thought banks loan money they don't have, but in reality they've had the money all the time? How can thousands of banks exist, who's main mission and expertise are loans, money, and ledger, been surviving without even knowing how much money they have and how mush they have lended out? If I Gonnaga Bank have 1 million, and I loan out 2 million, I've done the Money Multiplier trick. But I haven't? I've actually earned my money by loaning 1 million and getting 1,2 back over the course of 20 years. HOW has this NOT been common knowledge if that's the case? HOW can you run a company that only needs to know plus and minus, and not knowing basic plus and minus? HOW can tens of thousands of companies whos only criteria is knowing plus and minus not knowing plus and minus, at the same time??
So comercial banks borrow money from the central bank, but are these loans ever paid back? Does that even matter? Doesn't the central bank have to constantly lend more money than calls back?
omg money multiplier theory sounds so much more complicated and also if the money multiplier theory was correct, then the money supply and demand circles would be much less controllable. no wonder there are groups of people who are so worried about "unstoppable money printing"..
Hasn’t QE put enough money in the system ? So banks don’t look for funding after the loans most big banks have the reserves to meet payment obligations. How does Fed add more reserves ?
I have watched your video a few times, you do not discredit that banks create money. You just explain some extra steps involved in the money creation, but they do create money still
🎯 Key Takeaways for quick navigation: 00:00 💰 Understanding Money Creation 02:04 💵 How Banks Create Money 05:26 🕒 Timing and Money Creation 07:15 💳 Constraints on Money Creation 11:20 📚 Further Reading and Recap Made with HARPA AI
Seems to me that reserve requirements and capital requirements are synonymous. Captial requirement ratio is a bit broader and includes other assets than just reserves, but wouldn't banks still overcome this stop by requesting more reserves from the central bank?
Do you mean liquidity requirements and reserve requirements? If so... Yes liquidity requirements are just a bit broader and can theoretically be overcome like that.
I have a question, what stops people of starting their own bank and doing dumb loans to their friends if the money doesn't exist at the beginning? Or simply starting your own bank to finance yourself?
I would be interested in knowing how all this process of lending and money creation works in an country that uses another currency, like Panama. Can an local banks in such countries create new usd money in the form of bank deposits by making a loan?
I agree that the fractional reserve theory of banking is ridiculous. However, the financial intermediary theory of banking is also bunk. Banks create money out of nothing when they issue a loan. 97% of the money supply is bank credit denominated in the common unit of account. Base money, federally issued money, is created whenever the federal government spends into the private sector. Federal taxes are how base money is destroyed. Federal revenue is not a funding mechanism for the federal government and reserves never leave the reserve banking system. The neoliberal order believes that all money aught to be bank credit and push for balanced budget laws and fiscal surpluses. This is the hight of economic stupidity. Public sector debt is the only way for the private sector to net save. Great video.
magine a dollar as an inch on a ruler. A foot of lumber cost 12 inches. Today that equates to $12 dollars. We counterfeit a couple trillion dollars to add to existing supply. Now back to our lumber. A foot of lumber still costs 12 inches. However, the dollar no longer equates to an inch, but instead because of the added units, equates to 1/3rd of an inch. 12 inches now equates to $36 dollars.
focusing on the fractional reserve element hoodwinks people to not see the elephant in the room, which is private entity's having the extreme privilege of money creation and receiving the interest payments on that newly created money which of course is the primary cause of inequality and poverty on a global scale..
I do not understand how the topics you mentioned limit money creation. Wouldn't this mean that the cost of capital creation / cost of capital for the bank is at 0? 1. Demand for loans - can't banks just create money to lend to themselves (or subsidiaries) and use it to acquire a bunch of real assets? Later they could forgive the loans and have the real assets? 2. Capital - can't they loan money to themselves and put them as reserves/buy short term debt in other banks? 3. liquidity? - when a bank gives out a loan, and the recipient goes and spends that loan (typically with bank transfers, credit cards etc) - doesn't that mean that the liquidity risk gets spread out to the whole economy - not just the bank itself, thus not stopping the bank to keep increasing its share of money creation? In other words, why would banks even care whether they have deposits or whether loans get repaid if they can always just create more money for free and purchase real assets with it?
1. yes banks could acquire real estate by issuing liabilities on themselves (money indeed). But, real estate is a very risky asset to hold (much more so than a mortgage) so this has been regulated and is typically less in their economic interest (BASEL 2-3) since then it would just implode with real estate downturn. 2. loan what money to themselves...? reserves? to acquire reserves...? It is important to realise here that debt money creation is a swap of debt... you cannot do that on your own. 3. liquidity is about the asset side of the bank balance sheet not the liability side. In other words if a customer wants to withdraw their deposit a bank needs reserves / cash to fulfill that demand or if customer wants to transfer money to other bank a bank needs another depositor to fill that gap (or borrow from other bank). Banks create money ... rephrased is that that banks monetize our debts.... This way of thinking I've explored in my video on how credit money tranformed medieval Europe I recommend checking that one out (it is complementary).
@@MoneyMacro Thanks for the reply! My confusion stemmed from misunderstanding the concept of reserves and intra-bank settlements which I saw in a different video you had. I conflated the bank receivables with bank reserves.
I think it's a bit too easy to call it a myth, that 7-8% reserve the banks keep is linked to this multiplicator, it's not imaginary... It would be a myth if the textbooks would make it sound like that's why a run on the bank is so dangerous, because from you 100 euro, there's only 8 euro that still exists and all the rest is gone up in debt-smoke... I guess reality of the danger of a bankrun is that the loans are long term contracts and the deposits that immediately follow the loan when the borrower pays his bills and this money gets saved by other people, and this happens with short(er) term contracts, which makes for a dangerous balancing act. I'd still say that the multiplication increases the risk and makes the entire system basically a joyride towards the next crash.
Banks is not stealing money you see because when you deposit or sign .(your)money by your (signature) you transfer title of that money over to the bank ....you become an unsecured creditor ??
Money is created with debts. You go at the bank for a mortgage etc… They will lend you money that doesn’t even exist but it will when you will be done paying it. That’s how they create money. Simple as that.
F yeah! Me too! Excellent channel! I hope you attack the MMT crowd. The foundation of their philosophy includes the belief that ONLY governments create new money, and that banks increase the money supply using the Money Multiplier Effect.
Svb failed cuz it couldnt fund customer deposit demand What did they do with that deposit money ? use to buy securities that lost value with interest rate rising?
Great video! Given this information, could you help me clarify these two questions? 1) What motivates banks to attract deposits? I think I understand that when a client moves deposits from bank A to bank B, it corresponds to an increase of B's reserves at the expense of A's reserves, which makes B overall less likely to need to borrow reserves from the central bank (or B can repay some of its current reserve loans). Is there anything else that makes it advantageous to attract deposits? 2) I read elsewhere that banks also create money when they buy bonds (in a similar way as when they make loans). Is that correct? Could you roughly characterize the types of money operations when banks actually create new money, and when they only transfer money?
What motivates banks to attract deposits? Deposits can be used to purchased fixed-income securities. Remember that bank accounting is ass-backwards. Deposits are liabilities. Loans are assets. Fixed income securities are also assets. banks also create money when they buy bonds Banks buy bonds with cash. Its a trade-off. No money is created.
Deposits are a liability for the bank, so when deposits flows are imbalanced, more goes from A to B than B to A, the bank A must give the bank B a compensation, in the form of central bank money, a special kind of currency used only by banks. Loans however are assets, they yield interests, and they can also sell them (through securitization). The point of getting deposits is to gain clients to sell loans or financial products to. It also allows the banks to sell payment terminals and take transaction fees each time their clients use their payment card.
i love how this incorporates the facts of accounting in regards of bank and customer creating "debt" to each other.
To complete the picture you should discuss how money gets destroyed.
It's often left out that when loans are repaid the reverse happens - money/credit that was initially created is now destroyed/removed from the economy.
What's left is the interest and whatever asset or enterprise the borrower purchased or created.
I suspect destruction is sidestepped by artificially maintaining loans at all time.
@@musaran2 yes, but more importantly that money gets destroyed means there's something more nuanced than money-printing or even fiat going on.
Yes - That is something that is vital for people to understand and unfortunately missing from this presentation.
What is being obfuscated by our very language is: banks create credit, not currency. Credit is a claim on currency, not the currency itself. When a bank loans me $200k to buy a house, a real claim on real central bank currency must be transferred from me to the seller, either in the form of hard cash, or a claim on hard cash in a checking account. In exchange, I must retrieve $200k plus interest over the term of the loan by working for it, and giving the money I receive to the bank. In this way, banks don't really create money insofar as they create currency, banks create money insofar as they create future claims on currency: the central bank is still the one who creates the actual currency.
Basically, banks do not lend you 'money', they buy and sell securities/ IOUs created by the 'borrower' when they sign the agreement that allows the bank to create the funds/credit. Your signature creates a promissory note, an asset to the bank.
Professor Richard Werner explains this also very well.
But they also have to give the borrower real cache. How can an IOU cost more than cache of equal nominal value? How do they make money? I can see that the economy as a whole gets more liquidity in this scheme, but I don't see how the bank does.
Of course banks lend you money, what else would they give you? Corn dogs?
Who do they actually sell the securities to?
@@yasinmehmed5600 after the securitization process: long term: the Fed. In short, other investors. In America, you can find this information in The Federal Reserve Act, Specifically Section 16
@@ЙцукенПетрович You have created the 'cash' on their balance sheet first as an asset when they purchase the loan agreement from you. The Interest applied on the 'loan' is how they make money. As you pay off the 'loan' the original amount is just wiped off the balance sheet and they keep the interest as profit that increases their total equity.. Remember that its all accounting figures on a computer, not physical cash that moves around....
wow. just found out the truth about money creation and it's crazy. I don't know why I took so long to watch your videos even after subscribing your channel long ago. thanks for the video..! looking forward to your other videos. also your reference about the CORE is fantastic. The
How can this person, ROCHELLE DUNGCA-SCHREIBER be reached please..
Wow! I just looked up this person out of curiosity and I'm super impressed with her qualifications. Thanks for sharing.
@@lailaalfaddil7389guys, you're trying too hard. Bots.
Wow what an obvious made up comment.
Great video! It's taking too long for this explanation of money creation to become known. I was expecting, or maybe missed an additional constraint on banks creating money: Bank willingness to lend. It's rare, but after the GFC few banks were unwilling to lend , even at low interest rates, and it restricted the money supply.
Keep up the great work! You just got a new subscriber!
Welcome! Glad to have you as a subscriber.
I think you mean even at high interest rates.
Interest rates are the returns on loans that banks make. Higher interest rate = higher return for the bank.
@@gallectee6032 Higher interest rates from Central Bank means higher costs for retail banks which supposedly reduces the willingness of banks to provide loans to customers.
Higher returns on the interest of assets means that the price of that assets has gone down. Typically this means that customers have reduced their demand for such financial products. This could be for several reasons, such as the company that pays the dividend is about to go bust; or a government is about to default on its debt. These returns look high, but they could come with significant risks that a bank would want to avoid.
I love you, man. Thank you soooo much for this video (and other videos on banking and central banking).
It breaks my heart seing all of those videos on UA-cam with millions of views, just propagating the myth of the money multiplier and then the people in the comments thinking they learned how the world works, while they did the EXACT OPPOSITE of that.
Sadly, this myth is still dominating economic textbooks, universities and class rooms.
This video deserves a lot more views. God bless you.
Is it really a myth or is it the way the Financial system used to work before?
This videos title is a bit clickbatey to my taste and is grounded in a very pedantic interpretation of most introductory econ textbooks. From econ class I always viewed the multiplier as a function of banks propensity to to give out loans and the reserve requirements merely as a, rarely binding, hard ceiling on what banks will be able to lend out. Whether you call it a bank reserve requiremets, capital requirements or dis/incentivicing loan creation by playing with the interest rate, the effect will be the same as that which you would get from varying reserve requirements. From a pedagogical standpoint I find it perfectly justified to explain the multiplier assuming banks are eager lenders bound only by reserve requirements and add a bunch of caveats about the different forms these lending limitations can take after a simplified understanding of money creation has been established. While I agree completely with everything contained in this video it gave me the false expectation that my understanding of economics was about to be shattered XD. I guess you cant make a living on youtube with nuance XD.
As an economics teacher I would actually stick to the way the multiplier is explained in most textbooks. Yes, its a simplification, but that is really all economics is.
Then in a second step you can add nuance to students understanding, explaining there is more than one way to get banks to hold higher reserves and that by increasing interest rates or capital requirements you can also elicit reactions in the ratio of loans to reserve holdings, in fact banks might constrain the multiplier entirely on their own because they are to afraid to give out loans in an otherwise auspicious monetary environment. I think only few actual economist ever took reserve requirements to be more than an, admittedly misleading, synonym of banks propensity to loan money
that's not really much different than double entry accounting.
Debit your cash, credit your liability, money is created from nothing. (and gets destroyed when you remove cash to pay liabilities.)
Thanks.
I made a video on the outdated story some time ago.
This new way of looking things at is a breath of fresh air.
While I comprehend the information, there is a question which comes to mind after watching twice to examine carefully. With regards to the “other side” of the banking operation as a depository for customer savings, why does the bank not have the required reserves on hand to offset a bank run in the first place?
If loans are solely “created by federal allowance” as you’ve demonstrated, that would suggest there would be an excess of reserves available for depositors, which we know for a fact is not the case.
It seems default is inevitable and the system is wired to bust no matter what occurs.
Thanks for this. It's annoying that the same myths are still taught in business courses. It's no wonder the public doesn't understand economics, when so many economists either also don't understand it, or are lying to them.
@@19Borneo67 The way the story is usually told is that reserves are a percent of deposits received by the bank from customers. It's a very different situation when reserves are supplemented by the infinite credit limit credit card of the Federal Reserve. It means essentially there is no multiplier, other than whatever the number works out to be based on whatever the federal reserve happens to loan out, generally whatever they are asked for.
It also puts in a very different light what's happening when the Fed tries to force banks to take loans from them, expecting the banks to then make loans to spur the economy. The reason they aren't already doing so is either that they don't trust that they will be repaid, or nobody wants to borrow because they are uncertain of their own ability to repay.
These videos are so level-headed and informative. You really know your stuff. How do you not have more followers??
Thank you!!
He has no more followers becauze people are too busy spending their debt
It actually makes a lot of sense that you don't really need private banks to have a minimum reserve %/amount. Since it's just a ledger at the bank, people can 'pull out their money' as much as they want and the bank/central bank can just say 'there's more where that came from'.
It made me think that Depression-causing bank runs aren't really a problem anymore per se. More so that as you said, if no one wants to borrow because they are afraid of interest rates rising or their ability to pay it back etc., that's when you are actually in trouble. eg. if everyone started avoiding getting mortgages at these insane prices, the demand for owning houses would fall which in theory should push prices down until people start to feel ok getting mortgages again
Nice explanation Dr. Schasfoort!
Thank you for this explanation
can somebody explain why banks need people to deposit money and why they pay interest on customer savings?
-we need banks for safekeeping our money and for their services such as money transfers.
-also savers try to protect money from inflation (caused by the same arbitrary money creation) and sometimes some banks pay interests to savers above the inflation although they are not the only ones who offer investment services.
For banks is cheaper to pay interests to customers than borrowing money from other banks or from the central bank which charge higher rates.
Lastly having deposits gives them more stability and a wider margin to lend and earn more interests.
Question is where do the interests money come from? From other loans. You can imagine this all breaks havoc in the economy
Isn't it far simpler? There is a disparity between the deposit and withdrawal in the multiplier myth, because it ignores that when money is withdrawn, you are taking the bank's reserves back out of the bank... so if they were following a fractional reserve, the amount of credit they could issue would collapse at the same rate when cash is withdrawn as it expands when it is deposited. So, the money multiplier myth is erroneous even within a fractional reserve system.
I think the fractional reserve concept does take into account some degree of "withdrawals" of hard currency (e.g., from an ATM) by the depositor and therefore the depositor's bank doesn't actually loan out ALL of the amount allowed by fractional reserve banking to its borrowers, rather it serves as a hard limit. Then, it counts on all the loaned-out money coming back with interest (along with newer deposits by original and newer depositors) before the original depositor has a need for further withdrawals. Does that help address your question?
@amitsondhi333 This is incorrect. Banks do not loan out deposits, period. They create new money. Every bank loan is newly created money which is destroyed as the loan is repaid.
I have no idea about the other countries, but I do believe Swedish banks are required to keep a reserve.
In theory it would be possible to limit the needed reserves to small amounts by asking the agency overseeing it to accept the banks own method.
But realistically that will immediately set of red flags if you want to use a system that sets your assumed risk close to 0.
All of this is governed in a swedish law "Lag (2006:1371) om kapitaltäckning och stora exponeringar".
Reserve requirements (in the video) are where banks hold their assets in the central bank. Capital coverage/requirements (kapitaltäckning) is discussed later as one of the limits for bank loaning, among demand and liquidity. An interesting case is when the borrower uses the credit in a transaction where the recieving party also uses the same bank, then the bank does not need to liquidate assets.
30 year home loan in the USA, the interest for the loan is about the same price as the house. If the house is $200,000 then the person will need to pay the bank back $400,000, so the person has to work and pay the bank back for 15 years to pay the interest, for the bank just tying in a journal entry on their balance sheet. 😕
I don't think anyone really understands the world's financial system - an important central bank official actually told me this a few years ago.
Essentially, banks create money because they manipulate their ledger. When they give a loan, they change a few numbers on the bank account statements, and record on their spreadsheet that they owe bank account A $1M, and Bank Account A owes them $1M. When you want to spend your money, the bank debits a few digits off your end of the spreadsheet, and credits the account you pay. Since people accepts bank obligations at par to cash, the bank can create money by changing their spreadsheet to add points to someones account.
Fractional reserve banking describes a system whereby banks loan out a certain amount of the deposits that they have on their balance sheets.
Fractional reserve banking facilitates lending, thereby expanding the economy.
In most countries, banks are required to keep a certain amount of their customer's deposits in reserve.
Banks with a low fractional reserve are vulnerable to bank runs because there is always a risk that withdrawals may exceed their available reserves.
Many thanks, that was the most logical explanation and well explained too.
Hey Joeri!
Love your content, very happy it was recommended to me (1Dime brought me here initially).
I have been learning a lot about banking, central banking and Macroeconomics in general. And I really really appreciate you using your specialised knowledge and make it so accessible!
Thanks, keen to be watching more of your backlog and future videos 🙂
I'm confused by the new story. When I deposit money at the bank, I get that I'm getting a lower interest rate on that loan than I could get elsewhere. But how does that mean that I'm actually borrowing the same amount of money from the bank? It doesn't seem like I borrow anything from them, because they're not giving me anything right away that I agree to give back later.
I think Joeri's *borrowing and lending at the same time* explanation only referred to the process of the bank issuing a loan to a borrower, not to a depositor depositing money in their account.
I have a question -
Are banks in the United States under the control of the Gov or can it interveen!! as we know 567 banks have failed since 1974 its a disaster.
Malpracticing banks:
1.Wells Fargo: In 2016, for opening millions of unauthorized accounts on behalf of customers without their consent.
2.Bank of America:Its role in the subprime mortgage crisis.
3.JPMorgan Chase: The London Whale trading scandal.
4.Goldman Sachs: Its role in the 208 financial crisis.
5.HSBC:2012 for money laundering and other financial crimes.
Why havent the Gov not canceled their licences ?
Great vid, reminds me of Prof. Richard Werner's vids
Aren't capital requirements just reserve requirements, but in reverse?
So instead of people depositing money in the bank and the bank then using it to loan out a multiplier of that money, the bank loans out as much as it can, but has to then keep a percentage of that (7-8%) as capital.
This is a great video. Thank you, Professor Joeri. May I ask you for good books about the history of the monetary system and central banks?
Thanks Henrique. I really liked the book Money Changes everything by Goetzmann (although its from a different school of though than this video it still provides a valuable perspective). Also, I can recomment Debt: the first 5000 years by the late David Graeber.
A bit late, but there are a few videos with Graeber still on youtube, some of them about this book. Can recommend.
@@MoneyMacro everyone should UA-cam David. I haven't had time to devour his book but he has a lot of media and his eyes are open af
A hard thank you! I am not an econ major so the original money multiplier theory has puzzled me for years -- it just doesn't make sense to me!
Happy to hear that. Thanks for the support!
Strange, I studied econometrics, but I cannot remember ever heard about a money multiplier.
Good video, by the way.
If the money in circulation is created from loans, and banks charge interest on loans, then presumably the amount of debt owed to banks is higher than the amount of circulating currency? So where does the money to make up this difference come from? In other words, where does the money to pay the interest on the loans come from?
Yeah, I struggled with this question when first learning about money & banking as well. Turns out the answer is pretty simple. Basically, the number of transactions (flow) can be much bigger than the quantity of money (stock) precisely because money circulates.
Let me give you an example. You borrow 100k from the bank that is due next year. Around the half year mark you have to pay 5k in interests. If that is all that is happening in the economy, it is of course impossible. However, in reality you borrowed that money to be productive. E.g. open a Garage. In that case, the banker will likely use your service ... perhaps in the second half of the year. Paying you back that 5k so that you can repay the 100k at the end.
Does that make sense?
@@MoneyMacro hi! Thank you for your reply. Yes that makes sense. I think I’d still need some convincing to fully accept that this is how the money to pay interest comes back into circulation in the real economy. I think it’s just difficult for me to picture this all functioning without a good proportion of the interest being paid with base money. Or that at the very least the base money supply acts as a necessary supply of money for interest payments.
@@gx9254 Fair enough. Yeah the central bank still issues money. It's far less than what commercial banks do. But, still significant. Perhaps my video on the structure of the monetary financial system is of interest to you since it is about this issue.
ua-cam.com/video/4xgHbW2A9KE/v-deo.html&ab_channel=Money%26Macro
@@MoneyMacro Hi, thanks again. That visualization was very helpful. I think I had all those ideas floating in my head but couldn't get them straight. So am I *roughly* correct in saying that the "monetary core" is equivalent to M0/MB, the "monetary periphery" is equivalent to M1 or M2 minus M0, and the financial crust is equivalent to M3 or M2 minus M1 (depending on how we decide to think of what qualifies as "peripheral" and what is in the "crust" of course)? Thank you for these videos and your quick responses by the way, they're extremely helpful and very high quality.
@@gx9254 Glad to hear it. Almost but not quite. I think M0 does indeed feature purely CB money so is equivalent to what I call the monetary core. However, I also include bank reserves in there because they are bank money and they are not in M0. M1, M2 & M3 includes lots of bank money (=monetary periphery). However it also includes money market funds deposits , which I classify as financial crust because one cannot buy stuff with it other than financial instruments. Then, there are quite a lot of grey area instruments which I broadly classify under the financial crust.
Look, I have to be honest with you here. Us economists haven't fully figures out money. Actually, for that reason, M0, M1, M2 etc are not that often being used anymore. Even though they are still in textbooks.... I realize that I'm making things more confusing now.. But yeah these frameworks help in getting a feel for this stuff but there are lots of grey areas here.
Funny how they still teach money multiplier in Canada where the reserve ratio is 0%. I genuinely had no clue from what my university econ classes led me to believe, granted I only took a few.
Yes! Thank you for uploading your video.... So many people don't know about how lending process and money creation....
Its correct that the loan itself is made out of thin air, but when he is used to purchase a car, for instance, the car dealer must be paid. If the seller insists on cash payment, the borrower must withdraw the required amount from the bank (Bank A) that granted him the loan in bills and coins. This means the bank must either have that cash on hand or get it from the nearest central bank office. In the first case, it will have to debit its cash holdings. In the second case, it will have to debit its account at the central bank. If the car is purchased with a check drawn on Bank A, the seller will deposit the check with his bank (Bank B). Bank B will then present the check to Bank A for payment, and Bank A will debit its account at the central bank by the amount of the purchase and credit the same amount to Bank B’s account at the central bank. It is only after Bank B acknowledges that its account at the central bank has received the funds from Bank A that the transaction is considered complete
What this means is that a bank must have sufficient cash or reserves at the central bank to make the loan. Otherwise, it cannot make any payments or grant any loans. The notion that a bank can create „money“ out of nothing is therefore I think disputable. Only banks that have plenty of cash or reserves can grant loans. In response to this, you argue in your video that reserves do not represent a constraint on bank lending because they are available from the central bank “on demand.” Although it is true that banks can borrow reserves from the central bank by posting high-quality collateral, both the availability of such collateral and the stigma attached to such borrowing (bigger banks can only use the FED‘s discount window three times a month if they dont want a visite from the FED‘s supervisors) discourage banks from relying on the central bank as a source of reserves except in emergencies. In the U.S., reserves borrowed from the Fed by commercial banks are called “borrowed reserves“ and represented just 0.86 percent of total reserves held by the banks even before the QE-programs. This means 99.14 percent of the reserves held by banks are obtained from private-sector sources who are willing to entrust their money with the bank, such as depositors, bond holders and shareholders. The notion that a bank can create money out of thin air because the central bank is always ready to provide reserves “on demand” is therefore wrong in my opinion. Banks do whatever they can to avoid borrowing from the central bank. Consequently, only banks with plenty of reserves grant loans and rely on the money they get from their customers.
Would it be possible in theory to prevent this from happening? For example by forcing banks to only lend out money they received from deposits and banning fractional reserve banking? Would this be desirable? Why have banks been granted this "privilege"? is there an economic advantage or is it just the banking "cartel"? Does the ability of banks to create new money distort markets and affect inflation?
What is the difference between reserve requirements and capitol requirements/liquidity?
Reserve requirements are designed to protect banks against runs by depositors; capital requirements are designed to absorb losses on loans and other investments
@@Vikingrings Thanks
in money multiplier banks get money from central banks, he says in reality banks can create money without centrak bank, do u kno wat how?
@@Vikingrings When private banks lend out more money than they have in deposit then they increase the amount of money in circulation. Is this a controversial statement?
What is the difference between the 7-8% loan/cash requirement, and the fractional reserve requirement? seems the same.
As per my understanding, reserve requirements are based on the capital or equity of a bank. If a bank is valued high, it needs to have more reserves. Deposits have no role in reserve requirements.
This is the only guy who looks for the truth and tells the truth
If the reserve requirement in a country such as the UK is 0%, what is the purpose of banks allowing customers to hold regular accounts? Do every day current accounts that people get their wages paid into benefit banks in any way beyond transaction fees? Would banks be financially better off just issuing loans?
They want your data, that's why
@@raimonestanol8234 is it just for data?
1. I get loan from bank which never existed before.
2. I buy the bank a house with that money.
3. I start to buy the house from the bank by paying the bank interest & capital with money I get as wages at my job.
4. Meanwhile the bank creates more money and loans it out to others who buy houses.....this in turn creates more demand for houses which drives up the prices of houses.
5. Because house prices are rising due to the bank creating money and loaning it out....the house I am buying from the bank is now worth more....so now the banks asset reserve is growing .... so now the bank can create more money to loan out
No man should ever have the right to create money for free that another man has to work for. Every man should refuse to work for and hold a money that another man can create for free, thereby diluting them and stealing from them. All roads lead to Bitcoin. That is now inevitable. This corrupt and evil fiat monetary system, whereby some can create money out of thin air, for free, to the dilutional cost, detriment and impoverishment of others, will be destroyed. That is why Bitcoin was born. Bitcoin is gunpowder. Adopt it and record your wealth on its immutable and incorruptible ledger; or become its victim.
Great video! I'm member of Rethinking Economics at Università Bocconi in Milan, we'll share this on our social media!
Thanks Federico!!!
Love a good throwback to see humble origins
Steps:
1. Raise tier 1 capital (eg. $10m).
2. Attract your first deposits (eg. up to $100m).
3. Make your first loan when you’ve attracted some deposits.
4. Profit.
Moral: commercial bank Can’t make a loan without attracting deposits first.
Great video! Just discovered your channel and the content is great. Pardon my ignorance but it’s one thing to have the reserve ratio of the bank at 0, but the central bank still creates the £1 out of nothing and lends that to the bank to dispense. Doesn’t that £1 have to be paid back to the central back (crucially) with interest?…where does that interest come from? From what I understand it’s an impossible equation.
Many thanks for reading and your response.
I wish Joeri had responded to your comment. My guess is that the interest paid on any loan is representative of the “value” added to the economy (capitalism assumes unlimited value create). For example, get loan, build house, sell house above loan value, repay loan with interest. The new house is value added to the economy and the money supply has increased. If my understanding is flawed, then hopefully Joeri will see this and make a detailed follow up video
I don't understand this part: if a customer takes a loan from the bank, bank borrows money from customer and customer borrows from a bank at the same time?
If you want your loan in cash, where does the cash come from???
Well, at the end money is just purchasing power. Debt is the opposite, it's like anti-purchasing power. Money creation has to be creation of purchasing power that didn't existed before. So the question is, when the bank is giving purchasing power to the person, from where does that purchasing power comes from? From another person, from the bank's reserves or from the thin air? It's probably different for every loan, but I think we all agree that there is a constant influx of fresh new "thin air" in the mix.
It's easier for me to think that the bank just gives as many loans as it wants. This is what we see in this video and also in the money multiplier explanation. I think the actual mechanism is the money multiplier, limited by the reasons explained in the video.
If I can just add a little bit to your comment. How about debt is anti-future purchasing power? Personally, I still wouldn't frame it like that often but I think that is a better frame.
Yeah I agree with the 'thin air' statement although I tend not to use it because this activity is not risk free for the bank.
But, how useful is the money multiplier mechanism if reserve requirements are 0? I'm not sure if I interpret your last paragraph correctly. But, it looks to me as though you are saying: "I'm going with the money multiplier because that is easier for me to comprehend." While I do sympathize with that, I don't think that is a very good argument.
I do admit that thinking about money creation as described in this video is quite counter-intuitive. It hurts the brain a little bit. I suspect that's why it is only now catching on in mainstream economics.
I think about it like this. In most economies, there is a lot of slack. Meaning that people are not producing as much as they could. They could (and in small communities they do) work with each other in an informal debt-based system. I'll help you build a farm now given that you give me some of your crops later. This is a debt between us that can be created 'out of thin air.'
Now you can think about banking in that it makes that relationship formal. The debt is created between the two people out of thin air. But, the banks formalizes it lending to the person who builds the farm. This way that person can now hire someone with whom he/she has no informal relationship.
The bank of course runs a risk here (that the project fails) and also will be compensated for that risk in the form of interest.
The kicker is that the 'out of thin air' creation happens between people. The bank just formalizes it.
Search for "University of Groningen debt a great invention" on UA-cam for a more extended version of that argument.
Bank-created money has value because we are legally required to use it to pay taxes and settle debts (see LEGAL TENDER LAWS). But the only place to obtain this money is from private banks who create it out of thin air when they issue loans. Money Multiplier is a myth, and as far as I know it was first introduced by "Chicago School" economist Milton Friedman. He also pushed the lie that only governments create money on a printing press!
@@widehotep9257 Totally agree with the legal tender bit. The fact that for example employers have to pay you into a bank account is of course a hidden subsidy of the government sector to the banking sector. Would be interesting to see if central bank digital currencies can change this situation.
Any IOU is "purchasing power" --- if you can back your promise to redeem. Government can always back tax redemption since it runs the tax system, it issues tax credits (aka. "dollars") which you have to return if you do any taxable activity, that is, unless the government loses tax authority (which can happen, coup's war, etc.).
Every debt is someone else's credit. They go together. What do you think Treasury securities are? They're safe money for people who already have money, but we call it "government debt" --- falsely thinking someone has to "pay it back." Wrong! The money was already issued, someone buys a T-security becasue they had cash reserves and they want the guaranteed interest, it's not to loan the currency-issuer government the currency only the government (or it's licenced banks) can originate.
Unfortunately, AP Macroeconomics is still being taught with this Money Multiplier myth deeply involved in its curriculum, so the AP Test will include it on their exams. Hopefully that begins to change in the next few years. :/
Maybe I am misunderstanding something and someone can help explain this to me.
While the reserve requirement may not be entirely accurate, I remember only the rough concept of reserves as one of the constraints that banks have when it comes to their effect on the money supply being taught in university.
This is then used to explore the maths of how much banks can affect the money supply for a given level of reserves or how much the money supply is increased if they manage to increase their capital.
In that sense this oversimplification involving reserve requirements is not entirely accurate, but as a method to explain fractional reserve banking it is more than feasible and does not introduce many issues. I may be completely missing the point here though.
That is not how fractional reserve works! Banks lend money over long periods even after the interest is collected the value of the interest would be diminished by inflation and devaluation depending on the currency and the time. All banks would go bankrupt by this logic.
How about no more fractional reserve banking altogether - which can be interpreted as banks stealing in a way.
Instead, when you deposit money you agree to it being locked for a certain time, during that time the banks can lend out that money probably for a fairly high rate. Therefore no money is created and no more speculative bubbles and crashes. I'm there's a lot to be ironed out but introducing money at a constant rate would lead to a far more stable economy.
Not sure if that is true though. Credit fuelling asset booms are also unstable if the liabilities of financial institutions do not trade as money.
Look up shadow banking for example. These are not banks, they do not issue on demand deposits. Very unstable though and capable of inflating large asset bubbles.
If you think about it, its not really creating new money by issuing loans. Its just converting idle money sitting in savings to active money (to be used in spending).
Only a portion of it since the economy is growing new money is necessary hence there is not enough savings to cover the loans therefore money creation is mandatory.
If there was X amount of money and the economy grows that X amount represents the economy before growth, when more goods and services are produced then a corresponding amount of money must be created however this money is always created as a loan causing an artificial scarcity of money
@@DistributistHound Yes agreed but isn't the creation of money for central banks only? Ordinary banks cant create money.
@@alrey72 central banks issue notes and coins that enter the economy mostly through private banks or when government borrows from Central banks, then private banks extend credit that enters the economy when people use credit cards, car loans, mortgages etc.
Both are used as legal tender, then the interplay between central and private banks happen when they try to balance the amount of credit or notes required in different locations or parts of the economy and when there are many defaults due to speculation. However it is simply to understand if there was an X initial amount of money and then the economy grows, more money is required firms and households go to the only source of money available to them (private banks) we belive it is other peoples deposits but since X remains constant most of the new money is credit created that has to be repaid with interests. X can probably grow when the money is not returned and banks get the collateral in physical assets and also with government expenditure for a while since that money will be paid on the long run by taxpayers. The percentage of savings is quite small in comparison to credit created
as an undergrad studying to enroll on a master's, this video is most welcome (although it won't be used for ANPEC, but it's still cool to learn about it before getting into a program). what model describes this idea? would you have any studying recs for it? I ask this because I'm never fully comfortable with a theory before learning its formalization. I tried going to your in-depth discussion, but the blog link is broken 😭
edit: I know there are other recs (besides the blog post) on the description, but what I'm excited about is to learn about a formal model, not necessarily the (informal) ideas that surround this theory
Hey, here is the blogpost.
www.moneymacro.rocks/2020-03-28-banks-make-money/
As far as I know, there is not a formal banking
model of this process specifically.
There are some macro models with endogeneous money though: see e.g. the textbook: amzn.to/3NkzIEy
@@MoneyMacro thank you so much for the reply! I was wondering, though, how can we test this theory if it's not formalized? I mean, test it against data? if we can't do this, how can we be sure that's how money creation works? and I hope I don't sound cringe, but isn't this book a tad too heterodox? I mean, I know science is conservative by default, but I don't see how these models would work better than mainstream ones and simultaneously not be widely adopted. my undergrad program was housed by a heterodox school and these problems were always very present
@@urieldaboamorte well, you don't need a formal model to test something empirically. The testable implications of bank money creation is that the money supply outside of CB money increases. That is what we see in the data.
Then Money multiplier versus just creation ... how can we test that. Well, I think that people telling you how it actually works in the field are a scientific way of testing things.
I would argue that making a formal model in itself is not scientific per sé. Testing theory predictions against empirical observations is.
@@MoneyMacro sure, of course not! I'm not claiming formal models are sufficient for scientific scrutinity. and also not entirely necessary, but it does help, right? I'm just saying it's easier to understand and generalize a theory if there's a formal model. and again, I'm just an undergrad. I don't know shit. but I understand what you're saying. I do hope though that a model will be developed because then we can more easily view this phenomenon in the broad context of decision theory, behavorial econ etc
@@urieldaboamorte I don’t know about you but there was a number of red flags in his response to writing off the importance of testable data driven equations
Thanks for explaining this! Much needed.
Thank you for pointing this out. Very informative video.
Thank you for the explanation. I learned about this through Jeff Snider. The majority of people still believe in the so called bank reserves.
Fractional reserve banking actually sounds much more complicated than how it goes in real life. I guess it is just hard to wrap you head around the concept that banks and their customers issue debt at the same time.
Yeah. Fractional reserve banking sounds compelling but.... Is actually an overcomplication.
ua-cam.com/video/iiKr-i022mY/v-deo.html The Progressive Growth of the Money Supply Principle (year 2013) tells us the exact quantity of new money the economy needs to works correctly, driving us to the Wicksell interest rate or natural interest. This principle will force central banks to change monetary policy.
There hasn't been fractional reserve banking in the USA since 1933 when Roosevelt confiscated all the citizen's gold and forced them to deposit it with the privately-owned Federal Reserve Corporation. Since then, all American money has been created out of thin air when privately-owned banks issue loans. "FICTIONAL Reserve Banking" is a better description of the current scam.
@@MoneyMacro Fractional reserve banking is IMPOSSIBLE if the actuaries/accountants get their banking software licenced (which they must do to get a bank licence), since it violates basic double-entry book-keeping rules.
Although a bit geeky, see: ua-cam.com/video/L9Pc23r_m6k/v-deo.html
@@herbertspencer8293 No it won't. The currency is a state monopoly (in the UK, USA, Canada, Australia, Japan,... most countries outside the eurozone) so the government chooses the interest rate. Natural rate of interest is ZERO. You are probably thinking of how a gold standard has to work (tightening of rates to protect the gold reserves) which is inapplicable for a fiat currency tax credit driven system. See, www.jstor.org/stable/pdfplus/4228167
or,
www.pragcap.com/wp-content/uploads/2011/02/WP37-MoslerForstater.pdf
So the limit to bank money or financial credit creation is not customer demand only but also customer credit worthiness.
And it is preferable (for the bank) if that money reminds as banking figures rather than turning it into cash by borrowers because if the loans become cash and it surpasses the reserves then the bank has to ask the central bank for more printed money. But this system should be called different to avoid the confusion with the historical fractional reserve system
Coming here to hear "Bank run still take place" right after the SVB falling due to a bank run is just incredible. 😂
Hey Joeri, thanks for explaining so well. However, isnt there another dimension of multiplying?
The koney banks lend to a company is paid out as wages or saleries or as income for suppliers which in turn spend the money on other companies goods or workers.
So each Euro or Dollar can be used several times if not saved or taxed away too early.
Shouldn't this determine how much or little circulating money we need to run all required transactions of our economy.
Is this a multiplyer effect?
Thanks for any response! 🙏
Isn’t the hard limit the credit worthiness of the customers themselves and the competition for them.
If I’m a bank and I’m worried you’ll default on your loan, then I’m not going to do the a loan because there’s a good chance I’ll have to write it off and eat the bad debt expense.
NB I am just a layman, but I believe the real limit is the repo market's appetite for mortgage backed securities.
I’m not sure about this,but if the bank doesn’t have to have any reserve and can go to the central bank to ask for money,why should the Silicon Valley collapse because of lack of reserve,can anyone answer this?
Profesor Richard Werner proved this empirically. As long as the bank is large enough.
I would like to see you make videos about full reserve banking and currency boards.
My next one will cover some of the full reserve banks that preceded modern central banks
Great explanation !
Thank you!
But, one issue is that liquidity depends on the circumstances. Lets say a bank holds real estate for example as an asset, or debt linked to those assets and the floor falls out, then there really isn’t any liquidity is there? Almost all liquid assets only really function as such when they are not volatile, if everyone tries to sell their stonks the same day we all pretty much die.
Really interesting to see this video in 2022 with this hyperinflationary environment. I don't get something, in Romania banks are now giving a better rate on your deposit, than they receive on a credit for housing purposes. This contradicts what this video states
Central banks are the necessary condition for long term inflation because their existence creates an incentive structure that leads to banks not worrying about how many deposits they create; they can create lots of money because the central bank is always there to bail them out. With no central bank, all banks who loan out more money than they actually have would cause bank runs and be thrown out of business; the system would tend towards 100% reserve banking where the banks function purely as either paid security for money or merely as a financial intermediary.
Doesn’t the central bank give money but that comes in the cost of over night interest rates for reserve requirements in the deposit window. So the fed is not giving money as much as loaning the money overnight so they have a place to sleep for the night
Neither MMT nor Austrian Economics have
The walking promissory note
A gold certificate is a promissory
The promissory note quagmire
A person signs a mortgage promissory
The asset is the promissory note it
MMT and Austrian Economics both believe in the Money Multiplier Myth.
@@widehotep9257 absolutely false, MMT rejects the money multiplier theory
Can and/or does a bank create new money to pay their own employees?
One thing I'd like to clear up is if you have deposits at a bank but no loan, does this count as a loan to the bank or not? If not, what does the bank do with the 'money'? I understand that your deposits are technically the property of the bank, although you can call on it at any time.
@@Vroomfondle1066 Right. So they're a liability on the bank's asset balance, used to cover demands when people call on their 'cash' which they have a right to do at any time. I can also claim my cash at any time. This explains the concept of a bank run then. Technically it's the bank's property but I can reclaim it as my property at any moment no questions asked (or transfer it to another bank). A slightly strange phenomenon. Thanks for replying.
So its just fractional reserve banking but the reserve requirement is 0%.😂😂😂😂
I don't understand how there can be a myth, and needing "research" to disprove something like this?
Either the banks loan money they don't have, or they don't.
So all this time economists and bankers have thought banks loan money they don't have, but in reality they've had the money all the time?
How can thousands of banks exist, who's main mission and expertise are loans, money, and ledger, been surviving without even knowing how much money they have and how mush they have lended out?
If I Gonnaga Bank have 1 million, and I loan out 2 million, I've done the Money Multiplier trick. But I haven't? I've actually earned my money by loaning 1 million and getting 1,2 back over the course of 20 years.
HOW has this NOT been common knowledge if that's the case? HOW can you run a company that only needs to know plus and minus, and not knowing basic plus and minus? HOW can tens of thousands of companies whos only criteria is knowing plus and minus not knowing plus and minus, at the same time??
So comercial banks borrow money from the central bank, but are these loans ever paid back? Does that even matter? Doesn't the central bank have to constantly lend more money than calls back?
omg money multiplier theory sounds so much more complicated and also if the money multiplier theory was correct, then the money supply and demand circles would be much less controllable. no wonder there are groups of people who are so worried about "unstoppable money printing"..
Hasn’t QE put enough money in the system ? So banks don’t look for funding after the loans most big banks have the reserves to meet payment obligations. How does Fed add more reserves ?
I have watched your video a few times, you do not discredit that banks create money. You just explain some extra steps involved in the money creation, but they do create money still
Absolutely
loving these videos. Thank you!
🎯 Key Takeaways for quick navigation:
00:00 💰 Understanding Money Creation
02:04 💵 How Banks Create Money
05:26 🕒 Timing and Money Creation
07:15 💳 Constraints on Money Creation
11:20 📚 Further Reading and Recap
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Seems to me that reserve requirements and capital requirements are synonymous. Captial requirement ratio is a bit broader and includes other assets than just reserves, but wouldn't banks still overcome this stop by requesting more reserves from the central bank?
Do you mean liquidity requirements and reserve requirements? If so... Yes liquidity requirements are just a bit broader and can theoretically be overcome like that.
I have a question, what stops people of starting their own bank and doing dumb loans to their friends if the money doesn't exist at the beginning? Or simply starting your own bank to finance yourself?
There's a ton of regulations. No country is going to allow you to just create as much of its cash as you want. And a ton of capital is required.
I would be interested in knowing how all this process of lending and money creation works in an country that uses another currency, like Panama. Can an local banks in such countries create new usd money in the form of bank deposits by making a loan?
I agree that the fractional reserve theory of banking is ridiculous. However, the financial intermediary theory of banking is also bunk. Banks create money out of nothing when they issue a loan. 97% of the money supply is bank credit denominated in the common unit of account. Base money, federally issued money, is created whenever the federal government spends into the private sector. Federal taxes are how base money is destroyed. Federal revenue is not a funding mechanism for the federal government and reserves never leave the reserve banking system. The neoliberal order believes that all money aught to be bank credit and push for balanced budget laws and fiscal surpluses. This is the hight of economic stupidity. Public sector debt is the only way for the private sector to net save.
Great video.
I agree that the fractional reserve theory of banking is ridiculous.
The "fraction" was reduced to zero in 2020.
All this lines up 100% with MMT
What is the difference with a full reserve or let's say 90% reserve system?
Fantastic content! What a weird concept.
Thanks for this explanation
My pleasure
magine a dollar as an inch on a ruler. A foot of lumber cost 12 inches. Today that equates to $12 dollars.
We counterfeit a couple trillion dollars to add to existing supply. Now back to our lumber. A foot of lumber still costs 12 inches. However, the dollar no longer equates to an inch, but instead because of the added units, equates to 1/3rd of an inch. 12 inches now equates to $36 dollars.
focusing on the fractional reserve element hoodwinks people to not see the elephant in the room, which is private entity's having the extreme privilege of money creation and receiving the interest payments on that newly created money which of course is the primary cause of inequality and poverty on a global scale..
I do not understand how the topics you mentioned limit money creation. Wouldn't this mean that the cost of capital creation / cost of capital for the bank is at 0?
1. Demand for loans - can't banks just create money to lend to themselves (or subsidiaries) and use it to acquire a bunch of real assets? Later they could forgive the loans and have the real assets?
2. Capital - can't they loan money to themselves and put them as reserves/buy short term debt in other banks?
3. liquidity? - when a bank gives out a loan, and the recipient goes and spends that loan (typically with bank transfers, credit cards etc) - doesn't that mean that the liquidity risk gets spread out to the whole economy - not just the bank itself, thus not stopping the bank to keep increasing its share of money creation?
In other words, why would banks even care whether they have deposits or whether loans get repaid if they can always just create more money for free and purchase real assets with it?
1. yes banks could acquire real estate by issuing liabilities on themselves (money indeed). But, real estate is a very risky asset to hold (much more so than a mortgage) so this has been regulated and is typically less in their economic interest (BASEL 2-3) since then it would just implode with real estate downturn.
2. loan what money to themselves...? reserves? to acquire reserves...? It is important to realise here that debt money creation is a swap of debt... you cannot do that on your own.
3. liquidity is about the asset side of the bank balance sheet not the liability side. In other words if a customer wants to withdraw their deposit a bank needs reserves / cash to fulfill that demand or if customer wants to transfer money to other bank a bank needs another depositor to fill that gap (or borrow from other bank).
Banks create money ... rephrased is that that banks monetize our debts.... This way of thinking I've explored in my video on how credit money tranformed medieval Europe I recommend checking that one out (it is complementary).
@@MoneyMacro Thanks for the reply! My confusion stemmed from misunderstanding the concept of reserves and intra-bank settlements which I saw in a different video you had. I conflated the bank receivables with bank reserves.
I think it's a bit too easy to call it a myth, that 7-8% reserve the banks keep is linked to this multiplicator, it's not imaginary...
It would be a myth if the textbooks would make it sound like that's why a run on the bank is so dangerous, because from you 100 euro, there's only 8 euro that still exists and all the rest is gone up in debt-smoke...
I guess reality of the danger of a bankrun is that the loans are long term contracts and the deposits that immediately follow the loan when the borrower pays his bills and this money gets saved by other people, and this happens with short(er) term contracts, which makes for a dangerous balancing act.
I'd still say that the multiplication increases the risk and makes the entire system basically a joyride towards the next crash.
Banks is not stealing money you see because when you deposit or sign .(your)money by your (signature) you transfer title of that money over to the bank ....you become an unsecured creditor ??
We the People is securities! You must explain that to plus all other assets in the land!
Money is created with debts. You go at the bank for a mortgage etc… They will lend you money that doesn’t even exist but it will when you will be done paying it. That’s how they create money. Simple as that.
Many thanks you have been added to "My UA-cam channel Playlist" Frank Melbourne Australia
F yeah! Me too! Excellent channel! I hope you attack the MMT crowd. The foundation of their philosophy includes the belief that ONLY governments create new money, and that banks increase the money supply using the Money Multiplier Effect.
Good video title Joeri. 😮
Svb failed cuz it couldnt fund customer deposit demand What did they do with that deposit money ? use to buy securities that lost value with interest rate rising?
Great video!
Given this information, could you help me clarify these two questions?
1) What motivates banks to attract deposits? I think I understand that when a client moves deposits from bank A to bank B, it corresponds to an increase of B's reserves at the expense of A's reserves, which makes B overall less likely to need to borrow reserves from the central bank (or B can repay some of its current reserve loans). Is there anything else that makes it advantageous to attract deposits?
2) I read elsewhere that banks also create money when they buy bonds (in a similar way as when they make loans). Is that correct? Could you roughly characterize the types of money operations when banks actually create new money, and when they only transfer money?
Yes, banks attract deposits because they are way cheaper than borrowing from central bank or other banks
What motivates banks to attract deposits?
Deposits can be used to purchased fixed-income securities. Remember that bank accounting is ass-backwards. Deposits are liabilities. Loans are assets. Fixed income securities are also assets.
banks also create money when they buy bonds
Banks buy bonds with cash. Its a trade-off. No money is created.
Deposits are a liability for the bank, so when deposits flows are imbalanced, more goes from A to B than B to A, the bank A must give the bank B a compensation, in the form of central bank money, a special kind of currency used only by banks.
Loans however are assets, they yield interests, and they can also sell them (through securitization). The point of getting deposits is to gain clients to sell loans or financial products to. It also allows the banks to sell payment terminals and take transaction fees each time their clients use their payment card.