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Comment by drieddust | Hacker News Reader

I don't have econonic background but I understood why banks are allowed to print the money and give it to businesses. If amount of money is fixed, then this problem will go away on its own. Human nature is not relible and if allowed humans will overspend and subsequent default.

As Taleb puts it, executives at these companies don't have "skin in the game". Increasing shareholder value short-term is lucrative especially when their own compensations are tied to short-term stock value gain.

Another part is lack of progress in executive education. While engineering as a discipline have constantly improved by introspection. No such thing have happenned in business management area. It's all about maintaining the status quo and appearing in controls even when they are nowhere near it.

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Banks don't print money. Federal Banks print the money, which basically means it's the government printing the money.

> If amount of money is fixed, then this problem will go away on its own.

There was a time when this in was in fact the case. It was known as The Gold Standard and it basically required governments to back up their currency with an equivalent amount of gold.

The Gold Standard ended when it was abandoned by the USA.

Basically the USA did start to print money and they didn't have the gold to backup that printing press.

Banks don't literally print money but they do create it when they issue loans.

they do not create money, they are lending you someone else savings or money created by the federal reserve.

That is incorrect, they only are required to own a fraction of the loans they give in assets. When a bank lends someone money, they create that money https://en.m.wikipedia.org/wiki/Money_creation.

The Central bank in your link is the Federal Bank.

Basically when retail banks need money they get it from the Central Bank through the Open Market Operation.

What happens is the retail banks offering up theirs bonds (which are assets), and the Central bank effectively buys (or sell) these bonds using a swap or repurchase agreement.

The retail banks then use that money to offer up loans to the public.

So the Central bank has the ability to print money by being prepared to buy up these bonds (using money that is effectively printed), but retail banks don't have that ability.

Retail banks and companies can do something similar by offering up their own bonds and selling them to investors, however should that organisation go broke the bonds take on junk status which basically means any investor that paid good money for them has lost the money.

For these transaction the money being used is real money.

That isn’t how fractional reserve lending works. An example will probably help.

You walk into Friendly Neighborhood Bank and ask for a loan, and since they’re friendly they make the loan. Now, what does that mean? From your perspective you now have a liability (the loan) and an asset (money in a bank account). From the bank’s perspective, they now have an asset (the loan), a liability (your bank account), and an income stream (the interest payments).

The bank didn’t have to move any money around from the Fed or other people’s savings accounts to make this happen. They just entered the debits and credits into their system and boom the money appears in your account, just as good as any other money. They literally created it out of thin air.

For every debit there has to be a matching credit so nothing comes out of thin air.

If you go to your Friendly Neighbourhood Bank for a loan they are giving you their money, so you can then give that money on to someone else.

Now the bank is not so friendly that it gives you their money, instead they offer to lend you their money, on the proviso you pay it back in full and with interest.

For example lets say you want to buy a new car, so you go to the bank to get the loan.

The bank transfers the money to pay for the new car to the car dealership and you end up with a new car and a whole lot of debt.

> they are giving you their money

They create that money by crediting your checking account (their liability) and debiting your loan account (their asset).

But you missing one step where they credit your loan account by debiting their loan book account.

Also your loan account is not a bank asset, it is a bank liability.

It is money the bank might not get back.

> That isn’t how fractional reserve lending works.

I'm not sure which part of the GP you're disagreeing with.

Fractional reserve is exactly that banks lend out a fraction of the deposits that they take in (the rest is kept in reserve).

The only reason it looks like money is created is because people (and economists) think of 'money in their account' as real money, when in fact it's just a IOU from the bank to you (possibly guaranteed by the government).

If you think of money-in-your-account as actually a debt the bank owes you, then it becomes quite clear that banks don't create money any more than lending money to a friend creates money. And there is a sense in which it does - lending money to a friend results in your friend having money and you having an asset (an IOU from your friend) that you expect to be able to use at some point in the future, so there is a sense in which the sum total of wealth has increased by the value of the IOU.

> Fractional reserve is exactly that banks lend out a fraction of the money that they take in

Isn't it a multiple instead of a fraction? Banks are required to keep in reserve a small percentage of the actual amount being lent, which means that they can lend a multiple of the money they take in.

Correct. In the US the required capital reserve is expressed in terms of daily net transaction amount. Wikipedia has a good breakdown[1], but for large banks the Fed requires 10% of NTA to be swept into the bank's Fed account overnight. There are also capitalization requirements for all banks, which are more stringent for nationally important "too big to fail" banks and bank-like entities.

What is “real money” in our current system?

According to wikipedia, Standard and Poors, and the Bank of England the view I give above is considered outdated and wrong. Oh well.

https://en.wikipedia.org/wiki/Money_creation#Credit_theory_o...

http://www.kreditordnung.info/docs/S_and_P__Repeat_After_Me_...

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

When a bank lends you money the money lands in your bank account which means the bank can lend it out again. Even if you spend it, the money is going to land in someone else's bank account again. If we assume that 100% of the money is in the banking system without any potential for a bank run then in theory the bank could lend out an infinite amount of money.

This is not how the banking system works.

Banks, just like all institutions have to account for their money, hence the reason they employ accountants.

Those accountants all use the same accounting rules, rules that were in fact invented many centuries earlier by the monk, Luca Pacioli.

Those rules form the basis of double entry book keeping, which boils done to a very simple rule that for every credit there must be an equal debit.

What you are describing does not follow that rule because you are saying one credit can result in many other many other credits.

What you describe reads more like a pyramid scheme than a banking system.

Banks don’t print physical money, that’s correct. But they do create new money when they lend money and I believe that’s what parent was referring to.

https://en.wikipedia.org/wiki/Fractional-reserve_banking - yes banks print money (figuratively). They make loans and the money people receive on their accounts is money just created out of thin air.

> Banks don't print money. Federal Banks print the money, which basically means it's the government printing the money.

You are confusing two things about money creation: which entity decides to create the money, and which one carries the book-keeping entry that creates it.

In the US system, it is member banks that decide to create a loan. The money that is loaned is some combination of their own deposits, and money lent them by the Federal Reserve. The details of how much money they need to keep on deposit, how much is "their own", and how much the Fed provides are governed by FR rules.

So, it is indeed banks that make the individual decision to create money by giving a loan. The FR is merely the book-keeper for that decision and the rule-maker for how the system at large works.

Oh, and last, it is the US Treasury that actually prints currency. But we're all talking about the more abstract concept "money".

Here's the best layman explanation by Bank of England of what is actually meant by "money" in the current economy[0]. Think it can be helpful for the discourse.

[0]: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

Well I must have hit some nerves. Getting up and down voted constantly.

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