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RE: Bounty 10 Steem: Who creates the fiat money
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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