Worthwhile: Currency, Interest, and Redeemability
Money as Debt (video)
Gilligan's Corner: Canada’s Private Banks have no Reserve Requirements (read the comments too)
Steve Keen: The Roving Cavaliers of Credit
MacroMania: Fractional Reserve Banking
When trying to get information on the basic functions of the banking system and currencies, I am reminded that the web has a few disagreements, and can make things seem rather complicated.
2 comments:
The Central Bank can print actual currency notes, or they can print money by simply buying something and paying for it with dollars they created out of thin air.
Regular banks can't (not these days anyway) print currency notes, nor can they simply buy something by creating money out of thin air to pay for it, but when they lend, the money they lend is also created out of thin air. i.e. if I go down to the bank and borrow $5,000, they simply put $5,000 in my bank account, and create an offsetting entry to reflect that I owe them $5,000 (plus interest of course). They don't lend me someone else's deposit, they lend me my own deposit which they just created.
I can move my deposit somewhere else, but it will still end up in a bank, and the central bank makes sure that each individual bank is able to balance it's deposits and loans.
Banks (non-central) are constrained in their lending by capital requirements (reserve requirements are irrelevant) which require them to have a certain amount of their own money on hand for each dollar they lend (how much depends on how risky the loan is). So if banks are lending to someone not considered very risky (e.g. mortgages backed by CMHC) they can create a lot of loans against a small amount of capital (the lower this risk, the greater the leverage that is permitted).
I think the Steve Keen piece on the roving cavaliers of credit is a great explanation of how money works if you take the time to read it through carefully.
Declan,
You could say that when an ordinary bank buys a security, it is creating money out of thin air to buy that security. So when a bank purchases a corporate bond, it does so with a new deposit. Of course, this is still lending, but in a very indirect sense. A bank might buy a collateralised debt security from customers about which they know basically nothing...
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