Bounty 10 Steem: Who creates the fiat money
I have a question about money. I understand money is created via loans and every fiat money in existence is the result of a loan.
Many fiat critics as such are saying money can be created "out of thin air" by banks, since they can issue loans.
I see that banks are creating money via loans, however is it really the bank that is creating the new money or is it the fed.
Who is the actual entity that "creates" the currency?
I cannot imagine that the banks them-self have such power as this would give them the ability to create infinite amounts of money without any risk even with the reserve requirements:
Imagine this use case:
- Bank has a 10% reserve requirement
- I want to a 100k loan.
- Bank asks me to give them 10k so they can create the 100k loan. They take the 10k as reserve and simply create additional 90K by putting 100k into my account.
- I go broke after having paid back 50k of the loan, plus 5%
If in the above example, the bank were to create the money out of thin air, the bank would have made 2.5k in profit and could just write off the rest of the loan.
However if they had to loan the money from the fed and the fed would create it out of thin air, then the bank would have an issue if I failed to pay back the loan because it would still have to pay back the loan to the fed.
As such I would like to understand the process of actually creating the money itself. I.e. who is allowed to actually create the new money.
I would appreciate a:
- description of the process
- reference to where this is defined by the fed
Thank you for enlightening me
There is a thing called the FED funds rate - this is the rate at which the FED is willing to lend to commercial banks. All the QE's we saw in the past 10 years is exactly the decrasing of this federal funds rate.
So the bank is getting the money from the bank at the funds rate? And will have to pay it back?
So all money essentially is created by the fed?
Ok, everything is pretty simple, who is making money and how, fed or bank?
Answer is: both, how?
Well, example:
2.Commercial bank do not have it and it sends request to fed
3.fed runs printer and makes $$$
4.fed gives 100$ to commercial bank at 5%interest
6.I agree with it and it means I Promise return 110 $ (100 +10$ created by my Promise) and it also means bank can not create 10$ if you just give them your 1$, because they are created from your Promise you will return them with interest,in other way 1$ still peace of paper (I mean without your Promise) so $ created by fed is only your promise (and nothing more) which turns in dollar only after you return them with interest, literally fed is making $ by you (not for you)
This was my assumption and also make sense. As now the bank owes all of the money to the fed. So now if i default the bank still owes the money to the fed. If I pay it off the bank earns the interest.
So now the bank is responsible. This will assure that the system does not get abused.
exactly, also dont forget that fed is printing theyr green paper only because that there is demand from commercial bank (which is only backed by your promise) and it means fed is allowed create $$$ from air + interest and then commercial bank multiplies it (interest), whih also increases quantity of ''money'' from air
This video from Mike Maloney’s Hidden Secrets of Money series is the best explanation I have ever found. He has multiple Fed references where they explain their reasoning for the current system.
Yes I am aware of this and have watched it. However he does imply that the banks are creating the money. And again this does not add up for me.
So in a way this is actually the reason why I have this question.
This part in particular explains how banks create new currency with the reserve requirements. However if they just create the out of thin air, why is a problem from them if loans default?
To my understanding, the defaults hurt the banks because the consumer income is what holds up the derivative bets they make. The Big Short talks about this with the mortgage bonds that banks invest in with their “new money.”
The way they do it is with "fractional reserve banking". They are obliged to have let's say 10% of the loans they give in deposit. So If they have 1$, they can lend 10$ to the public and charge interest for it.
Bank A has 1$ and is lending 10$ but has only 1$ thus creates additional 9$. They are also charging interest on the 9 $ they have lent. So Bank A lends 9$ to John at 10% interest a year.
Once John pays back the 9$ the money disappers in the same way it appeared - out of thin air. The difference is that now the bank has 0.9$ in interest and the 0.9$ is REAL money. Now the bank can lend even more money because it has 10.90$ in its reserves. That is a neverending cycle of money creation.
I hope this helps.
Yes this all makes sense and I have read this many times. However if the bank really just creates the money itself, why can I not go to the bank, give them $1 to get a $10 loan? They would then have the reserve requirements met. And could create money risk free. I should be able to create infinite amounts of money for myself this way.
I cannot imagine that the bank does not have to get that loan from the FED. My question is essentially is Fiat a Ponzi scheme or a pyramid scheme. I.e. with one head or many?
The bank gets its capital from various places. In order to be a bank one should be eligible for it. For example in my country it is 5 million euro. Also one commerciL bank can lend money to another commercial bank.
The FED comes in when banks dont want to loan to other banks, because there is a risk of failing to pay them back.
Also there is a thing called the FED funds rate - this is the rate at which the FED is willing to lend to commercial banks. All the QE's we saw in the past 10 years is exactly the decrasing of this federal funds rate.
The FED has multiple insteuments to influence the economy, for example the Open Market Operations (purchasing bonds). This is obviously very stimulative for the economy. Currently the fed is unwinding their balance sheet, which caused the 10y yields to spike :)
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In March 2014, the Bank of England release a report called “Money Creation in the Modern Economy”, where they stated that:
“Commercial [i.e. high-street] banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created
Sir Mervyn King, the Governor of the Bank of England from 2003-2013, recently explained this point to a conference of businesspeople
“When banks extend loans to their customers, they create money by crediting their customers’ accounts.”
By Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate.
Topical articles Money creation in the modern economy
In the modern economy, most money takes the form of bank
deposits. But how those bank deposits are created is often
misunderstood: the principal way is through commercial
banks making loans. Whenever a bank makes a loan, it
simultaneously creates a matching deposit in the
borrower’s bank account, thereby creating new money
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I'm afraid you might be right . Check this out:
Click image to see source
Here's another mind blowing paragraph :
Click image to see source
Now I'm not a financial expert I only have a degree from Google University and as far as I can tell this information appears to be fairly accurate.
So to answer your question very simply I would say the BANKS.
Thank you. This has always been my impression. But then again i think, if it were this easy for a bank to create a loan, why cant I go there with 10k and ask for 100k loan. I could do this a few times and would then have billions. I'd buy all the bitcoins and leave the county.
Lol
You will be in debt i think for you to transfer to another country i think you need to show your scores or sokething like that
sure, but thats not the point. What I am trying to say is: if the bank could just create money out of thin air, there would be no risk to create a loan.
Why is lending for a bank risky?
I am no financial expert, but I would think at least part of the the reason banks would not give out loans solely based on being given 10% down would be because of the possible risk to their profit margin/ profitability as well as their reputation with investors if too many loans of that sort were defaulted on. They would need some level of proof of your ability to pay back the money in order to be worthwhile to the bank long-term.
I dont understand this reasoning. If the money is created out of thin air, the bank has no risk. And profit margin would be infinite even when the loan is defaulted on.
Only if they themselves have to borrow the money from the central bank do they carry a risk.
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OK we are in my wheelhouse, ex Financial Controller and Financial Planner here. This is all about understanding the balance sheet of a bank.
First things first, your deposits are actually recorded as a liability to the bank. Why? Simple because they owe you that much money. Really you have loaned the bank your money.
A loan is an asset to a bank, but a liability to the person who took the loan.
I was about to type out a lot of info and realized that I'd be here all night so went looking for something that had good details. If you really want to understand it take a look here:
http://positivemoney.org/how-money-works/how-banks-create-money/
You will need to dig into the site a little bit as there are sections covering different topics including understanding the banks balance sheet, what money is (it's not just cash), and much more.
This one was written about the Bank of England, but in reality it covers any country with Central and Commercial Banks. At least every Country I know of.
To answer your question directly yes your bank is creating money out of thin air.
This is one reason that crypto scares the hell out of them. If the world goes onto a system without the ability to just create money at will the fat cats won't be able to create an asset with a few key strokes (your loan) and then collect interest on that asset they created. They would have to actually have real currency to lend out and means they become a Hard Money Lender not a Bank.
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Both governments and banks can create money. Their favorite denomination is debt. The process and FED's role is actually pretty well described here:
https://en.m.wikipedia.org/wiki/Fractional-reserve_banking?wprov=sfla1
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I think that is why a Central Bank is present in every country, there must be some centralized organization that oversees the creation of money, or else banks would just be creating out of thin air all the money its customers needed, ultimately rendering money useless. With central banks in all countries there is an organization that controls money, therefore I think banks no longer issue money, in your cast the FED does, and in other countries it's the national central bank. Have you heard the conspiracy theory about all wars currently being fought because certain countries didn't have central banks? Well I have checked and that is a lie all the countries in the world have a central bank, and if they don't another countries central bank takes care of this business for them. Better said the controllers are already controlling everything.
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So the way it works is the more money you print out the lees valuble it is. Its called inflation thats why the gov. Only prints out a certain amout per year
This is just my basic understanding im not sure if this is what your looking for
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Is it a dilemma ,money creating machine ,brain can get it all done we just need to think...
I have my cousin working in banks i will ask him about the same ,lets see what answer he comes up with.
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