Hacker News Reader

Comment by kzrdude | Hacker News Reader

Doesn't the same apply to domestic banks? Most units of any currency is created by commercial banks, not by the central bank.

View on HN

Yes. The banks are the ones that ultimately are creating money through giving out loans. The fed, as far as I understand, can only influence this indirectly.

Interest rate setting is supposed to throttle the demand for loans. Lower interest rates, higher loan demand. Therefore, more money enters the economy.

However, the other side of the equation is the banks' appetite for giving loans. There are times when banks (due to regulation or market risk they perceive) that they'll be more or less likely to make loans regardless of the demand side.

The fed seems to be only controlling the demand and not the supply. They cannot force banks to make loans more willingly directly.

Another aspect is the appetite for the sorts of loans banks want to give. There's an argument that too many loans are now given for speculation (housing, asset purchase) and not for things that grow the economic pie like small businesses. Small business are more risky for the banks than speculation so we end up in this sort of undead economy.

For a long time, dollars were almost exclusively created by banks.

The only other way is for The Fed to monetize the Federal Government's deficit spending.

This didn't regularly happen until 2008 - but I'm skeptical that the genie will ever be put back in the bottle.

The scale is notable.

> The results are as shown below as of end-2018: USD57 trillion, nearly three times the size of the US economy before it was hit by the COVID-19 virus. Even if this measure is not complete, it underlines the scale of the market.

Sure but these are regulated and insured by these bank's said central banks. That does not apply for Eurodollars.

Eurodollars are dollars held in non-US banks, which are nonetheless banks and therefore subject to the banking regulations of their respective jurisdictions.

Yea but the central governments can’t insure the deposits because they lack the ability to print dollars.

I don't think it matters. Deposit insurance is independent from the ability to print dollars. It's an insurance fund that gets contributions from banks.

And a 100 billion dollar line of credit from the treasury. The FDIC describes itself as being “ backed by the full faith and credit of the United States government.” If there was a systemic issue, the government would likely need to intervene.

The Fed currently has about $9 Trillion in assets (and corresponding liabilities). $100 billion from the Treasury for the FDIC is a rounding error. In 2008, the Fed doubled their balance sheet practically overnight from $1T to $2T.

The Fed can do that any time they want by buying bank debt with newly created dollars, which effectively socializes the risk in the banking system, so it doesn't fail, hopefully at something resembling market rates. The Fed then runs the risk that they don't get paid back instead of an individual bank, but the modern Fed cannot fail, that sort of thing can only affect the currency as a whole, by weakening it generally speaking.

Yes, but the US is not unique in this respect. Other countries also have governments and central banks that would intervene in the event of a systemic crash.

Last I checked the FDIC had about $50B in assets to back $2T in bank deposits. In other words, they could hardly scratch the surface of a systematic problem.

If all banks go bankrupt at once, sure, the insurance will also go bankrupt.

The problem is that the banking system carries a large systematic risk of going bankrupt all at once, and deposit insurance is not adequate to deal with that. The real guarantor of your deposits is the Fed not the FDIC, and fortunately they did a bang up job of it last time around.

Reply on news.ycombinator.com