We can make promises to each other. Essentially write debt contracts to each other at no fee. The problem is that we trust each other but if we want a more complex economy than a barter system allows, then we need to make it possible for a third party to trust the debt contract. Through the introduction of banks as middlemen they use their resources to check how trustworthy the debt contract you offer to the bank is. In exchange you get money, which is a liquid claim on your debt contract and thousands or even millions of other debt contracts. Thus the bank is primarily in the business of managing risk and the management of risk demands a net interest margin. If the bank didn't make money off of loans then any bad loan would lose the bank money and it would go bankrupt over the long term. In other words, the surplus profit that the bank made off your loan is its reward for correctly managing risk.
>This is why housing is so expensive to begin with.
Or it could be that housing is in high demand and banks offer financing so people have more money but since location is a monopoly, supply never catches up with demand in popular areas. Speculators themselves simply predict that there is sufficient demand for you to be willing to bay $400k for a house. Speculators didn't create that profit margin, it is the monopoly of land that created it and they merely exploit it.
I think mortgages are pretty competitive, especially for reasonably well-paid people and there isn’t really that much profit made by the banks (your interest corresponds to inflation and the risk that you default on your loan with the house price having fallen.
Money today is worth more than money in 25 years and you have to pay the difference.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
Literally every loan a bank gives out is mostly made up on the spot, everywhere in the world.
In some countries, banks are subject to reserve requirements — typically from fractions of a percent to some percents of their liabilities to depositors. Basically: banks need to cover the savings of people.
In the UK (and many other countries), this is not the case; banks are not required to have cash on hand in relation to their liabilities to depositors.
Instead, they are subject to capital requirements, which means they need to have sufficient equities (cash, securities, other financial instruments) with sufficient liquidity in relation to their risk-weighted assets (credit and loans). In effect: banks need to cover the investments of the investors.
Charging 0% interest means the bank is losing money.
Anyway, if you sign a contract that says you shall pay me every month for 30 years OR ELSE I get to sell your house (and whatever else you own, seize your income etc) then the document with your signature IS the value created and I can sell that document for what it is worth.
So the bank creates money not entirely out of thin air but against this contract.
This is a fantastic deal for them as there is almost no risk.
The seemingly few percent interest per year over 30 years quickly ads up to 2 or 3 times the initial sum.
I suppose this would be a reasonable amount roughly around the point where 3 out of 4 houses and the ground under them would just vanish in thin air with their owner stopping all payments after about 5 years on average.
The reality was that some people still had to pay rent for their flooded home.
So we are all suckers for putting up with the scheme, welcome to the club.
> I don't get how people can keep saying this. Is it that people are told banks lend out money from depositors in school?
They don't? Where is the money from? Due to complicated reasons (ie. bundling mortgages into mortgage backed securities and selling them), it might not be the case that the mortgage issued by Bank A is funded by Bank A's depositors, but it is the case that it's funded by depositors/investors somewhere.
https://www.investopedia.com/articles/investing/022416/why-b...
However, saving does have one important function. It creates a hole in the economy and that hole can then be used for investment spending (motivated by a borrower taking on a loan) without causing inflation.
...except for reserve/capital requirements, right?
>However, saving does have one important function. It creates a hole in the economy and that hole can then be used for investment spending (motivated by a borrower taking on a loan) without causing inflation.
In other words, capital isn't free as the parent poster suggests.
It is created ex nihilo, limited by reserve concerns (which include hard requirements for some banks)
Note that the most of the money never exists in the form of currency, it is just accounting entries in the banking system.
Rather than have 0% interest and 2% inflation there would be -2% interest and 0% inflation. Less need for endless debt growth and government stimulus.