Puffer Fish wrote:It's more accurate to say that the bank needs collateral to make a loan, or that the bank can convert debt into money.
The bank can't just create money out of totally nothing and then lend that.
Do you agree with this?
From one perspective, one could say that the "money" the bank is loaning to one person actually represents the amount of debt-obligation that someone else owes.
Most commonly, this debt-obligation is secured by some form of collateral, so (in that case) we could say that the "money" the bank is loaning represents a stake of ownership equity in a house.
It still required something of value to exist for a loan to be made to someone else.
That is very different from a bank just entering numbers into a computer account and lending money that does not exist.
(Also I do not want to get into a semantic argument with you. It is difficult to precisely word everything in a way that is both literally correct and easily understandable. You should know what I am saying here, the meaning of what I am trying to convey through these words. If I actually was completely technically accurate with everything I was trying to say, it would be so long and complicated that very few people would be able to or want to take the time and mental effort to actually understand it)
No, I do not agree with that.
Why? Because it leads straight into the "loanable funds theory" of money. MMTrs totally reject this theory because it is false and is used to keep Gov. deficits low by claiming the Gov. bonds sold are sucking up money that banks need to make their loans.
OTOH, I can see your point about about the bank's loans being a representation of the assets it as as a result of other loans it has already made. But, the amount a bank can loan out is NOT constrained by anything, functionally. My MMTers are quite angry that many economists say that banks use the QE money the Fed. has been giving out for many years to make their loans. My MMTers say that banks don't loan out "reserves dollars" either, that they create dollars out of thin air as they loan it.
I'm not an expert, so have to rely on others who I believe are experts. This is why I keep saying "my MMTers".
All MMTers, who have PhDs and the other MMTer, Warren Mosler, who was a banker for many years, say that banks "create the money they loan out of thin air".
Some of them go on to say that, functionally, they are licensed by the Gov. to do this. Others point out that the "Land Banks" in the UK (I hope I remembered their name correctly) do *not* (or did not) have this license. I have never heard it said about US Savings and Loan "banks".
I explained how the system currently works above & below.
Many economists don't want the people to know this, so they lie about it.
Maybe, because their sugar daddies tell the to.
In 2014 an experiment was done in Germany.
Link ==> https://www.sciencedirect.com/science/a ... 1914001070
A Ger. bank lent 200,000 euros to a Pref. while his students watched all the bank's officers to see what they did. The Prof. wrote a check and deposited it in a different bank. Days later he repaid the loan in full.
. . . At no time did an banker check to see if the bank had "enough euros in any way to make that loan". When a pawnbroker makes a loan, he uses cash he has and gives it to the borrower. He reduces his cash on hand. It goes into his books that way. When a bank makes a loan the bookkeeping is different. There the bank enters a liability for the amount in the borrower's account and a corresponding asset for the note the borrower signed. What does *not
* happen is for the bank to move money it already has from some account to the account of the borrower.
Some days later, the bank has to meet its reserve requirement with the Fed. Res. Bank. This requires the bank to have on deposit 10% of the value of its outstanding loans. Yes, the bank has assets or initial investments [I ask the readers to cut this non-expert some slack, if I can't remember the actual name for these initial investments]. However, the bank loans out far more than the total of its deposits and initial investment. It only needs 10% of the total of its loans to meet the Fed's reserve requirement.
The Federal Reserve requires banks and other depository institutions to hold a minimum level of reserves against their liabilities. Currently, the marginal reserve requirement equals 10 percent of a bank's demand and checking deposits.
Are Reserve Requirements Still Binding? - FEDERAL ...
Link => https://www.google.com/search?rlz=1C1CH ... ent=psy-ab
My MMT Profs. explain that this is why all central banks gave up trying to control the "money supply" many years ago because they found it to be impossible because banks are also creating money with loans. ["Also", because the Gov. does it with every deficit spending check it writes.] Later, the Gov. sells a bond to cover the check it kited. Most MMTers don't want the Gov. to sell bonds at interest because they see this as giving free money to the rich, who they don't think need more free money. I disagree with them on this.