Money Crisis – If banks create money out of thin air when they loan people money- why did the sub-prime crisis matter?
By admin in Crisis FAQ | 17 comments
Money Crisis Question by BritishMale: If banks create money out of thin air when they loan people money- why did the sub-prime crisis matter?
If all money is debt, and it is created as and when they feel/can- surely it would be no loss when sub-prime mortgages cannot be paid back?
Banks get original deposits from the fed and Government, but as stated in the Federal Reserve publication “Modern Money Mechanics” it is explained that the deposits put in banks by Government and the Federal Reserve “Of course banks do not actually use this money to create loans,”. Electric money (which accounts for 97% of the money in circulation in the USA) is deposited into their respective accounts and in reality is very very rarely withdrawn.
The contracts alone act as sufficient money for trading, as banks are 99% of the time going to get their money back, and so the conversion of these contracts to legal tender is enough to increase the money supply.
Don’t correct people on a system you don’t understand yourselves.
http://www.rayservers.com/images/ModernMoneyMechanics.pdf
Best answer:
Answer by Steve D
Banks do not create money out of thin air – the money lent out is based upon the amount of deposits a bank has less the required reserve. For example…Bank A has $ 1 million in savings deposits from customers and the Fed requires a 10% reserve…the bank deposits $ 100K with the Fed in its reserve account and can lend out the other $ 900K. The bank makes money on the interest spread, which is the interest made on the $ 900K in loans less the interest paid on the $ 1 million in deposits and overhead (bank buildings, salaries, etc.).
Let’s say that in our example, someone with a $ 100,000 sub-prime mortgage defaults…The bank now has assets of $ 900K (800K in remaining “good” loans plus $ 100K in reserves) to cover the $ 1 million in deposits. Not a good situation if everyone showed up one day and withdrew their money.
What do you think? Answer below!
Money Crisis
Niall Ferguson, MA, D.Phil., is Laurence A. Tisch Professor of History at Harvard University and William Ziegler Professor of Business Administration at Harvard Business School. He is also a Senior Research Fellow at Jesus College, Oxford University, and a Senior Fellow at the Hoover Institution, Stanford University. www.niallferguson.com
Video Rating: 4 / 5
Related posts:
- Money creation – banks create money counterfeiters create money but when banks discovers this they arrest the frauds?
- Money Crisis – Will The Financial Crisis Make People Take Money Out Of Banks?
- European crisis – Where does the money come from when Central Banks throw money into the Banking/Sub Prime Crisis?
- Money – Can China create money out of thin air and lend it to another country to make money?
- Money Crisis – why do lenders lend money to sub prime borrowers?
email this | tag this | digg this | trackback | comment RSS feed
Dan B | Dec 29, 2011 | Reply
Banks don’t create money when they loan money, they create debt. Money is just a medium we use to measure the value of the debt and to repay that debt. Other economies use cattle, chickens or other livestock to repay debt.
At one time many, many centuries ago, SALT was used as money because of its value. That’s where we get the saying when we refer to someone who is “worth their salt”. Crap has no value, so we also refer to someone or something that is worthless as a piece of crap. The way this economy is going, it’s possible that crap will have value. I’m working on a comedy routine.
Caveat Emptor | Dec 29, 2011 | Reply
The “if” part of your statement is in error.
Doctor Deth | Dec 29, 2011 | Reply
BANKS don’t “create” money
– only the Federal Reserve and Govt can do that
and that has nothing to do with the sub prime mortgage collapse anyway – people got loans they shouldn’t have been given – with low teaser int rates and when those adjustable rates increased after 2-3 yrs, their monthly payments went up $ 200-300/mo – they couldn’t afford the payments and that started the whole real estate/banking collapse
kraskata2012 | Dec 29, 2011 | Reply
he talks like mr been
soakthisup | Dec 29, 2011 | Reply
So what distinguishes banking from lone sharking is that banking collects commissions based on the level of risk they’re taking on each loan? Don’t banks still generate tremendous revenue from interest from money lent? I realize banks bundle and sell loans as well as do many things that are over my head to make money, but interest paid above the principle amount lent comes to mind first for me.
NgcTombs | Dec 29, 2011 | Reply
@TimothyADonaghue You should read The Banking Mystery by Rothbar (theres a free economics e-library at mises dot org / books) he really details the origins and specific uses of money and lays out the blueprints of commodity backed currency.
kraigthorne | Dec 29, 2011 | Reply
@TimothyADonaghue THERE IS NO DISTINCTION! Also governments back up their money with guns.
cZiebenhaus | Dec 29, 2011 | Reply
FUCK DERIVATIVES
JpassTheTime | Dec 29, 2011 | Reply
@0bs3n3 i guess we agree then. misunderstanding. i think i meant to message TimothyADonaghue. he was the one confusing Niall’s points with why we invest in gold today.
0bs3n3 | Dec 29, 2011 | Reply
@JpassTheTime Yes, he was referring to that, but making the broader point that the medium of exchange itself (be it gold or paper) has no intrinsic value. It’s only value is what it can be traded for. The Spanish mining extra gold and the Zimbabweans printing money (with a lot less work) has the same effect.
JpassTheTime | Dec 29, 2011 | Reply
@0bs3n3 i think he was just referring to the Spanish empire valuing gold. but im sure he realizes that in present day gold is only increasing in about 1% every year which doesn’t effect the inflation of gold much, so its value is only changed by fiat currencies rather than the supply of gold.
0bs3n3 | Dec 29, 2011 | Reply
@TimothyADonaghue He explained in the video that if you back your currency with metals (such as silver) then that silver becomes as worthless as your paper currency.
bozzeed | Dec 29, 2011 | Reply
@TimothyADonaghue do you mean the dollar? which is not a commodity based money?
TimothyADonaghue | Dec 29, 2011 | Reply
I enjoy the work, but the problem is that Niall does not distinguish between REAL MONEY, which is commodity-based and valuable beyond just “trust”… and the inherently worthless fiat paper governments sponsor. Tsk tsk tsk.
equsnarnd | Dec 29, 2011 | Reply
What an exceedingly interesting story and Ferguson is a master story teller. This is how history should be taught. For those who wish to dig deeper, go for it. But this gives such a wonderful architectural structure to the whole story.
1classx | Dec 29, 2011 | Reply
Excellent. Very easy for even a beginner to understand. He doesn’t try to rush through his topics. If you have a short attention span then skip the first 10 minutes, but I would definitely watch this series if you want to understand how modern economies work and how they came about. He is a professor at Harvard btw.
Juvenal4668 | Dec 29, 2011 | Reply
Entertaining and complete introduction to the history of money – if you can tolerate the gushing, sound-bite style of delivery.