Gambling with customers' funds works great for you when you win, and bad for your customers when you lose.
And if they do, they must have equity value to back it up - aka, the bank's share holders lose value _first_ when shit hits the fan, before customer deposits. Then lastly, the gov't has put up guarantees on the deposits in case bank equity cannot cover customer deposits when shit hits the fan.
Crypto has none of the above - so basically, it is exactly what happened in the early days of the US financial system - i'm talking in the 1800's!
Let's hope all those celebrities who made adds got paid in real cash!
At this point it looks like Tom Brady is going to be playing football well into his 50s.
What FTX did is much worse. They spent their customer’s money on stupid shit like the Miami Heat stadium, political donations, and charity work (which was legitimately really good but not their choice to make), and then replenished their own coffers by making their own crypto out of nothing and assigning it to themselves. They essentially stole their customer’s money.
While there's a ton of nuance here, in the general case it doesn't work how you've implied.
When you take out a mortgage, the bank doesn't take a bunch of money other people have deposited. It's literally created out of thin air and marked as a liability on their balance sheet. This is how the majority of money is created in a fractional reserve banking system.
When a bank lends money to you, it's net neutral. A $100,000 mortgage creates a -$100,000 position on the bank's liabilities list and a $100,000 deposit in your bank account. They create $100K in new money to fund this loan collateralized by both the reserves on deposit at the bank and by the property which you purchased. As you repay that balance, the money that was created to fund your loan blinks out of existence. It is the constant origination of new loans and the constant repayment of old debt which defines the supply of money in the economy - which is why interest rates matter. Neat huh.
I would argue that your balance is both an asset and a liability as defined by your bank's reserve requirements. Your mortgage is net neutral to the bank except for the interest paid on it, which is an annuity of sorts with a net present value offset by the difference between projected recovery rates and your risk of default. The value there is itself created in the origination and underwriting process.
We'll I'll just ask two: Suppose to buy my house the seller wants cash. I take out my cash and give it to the seller. Ok fine, but the bank is creating money out of thin air, where does the cash come from if lots of people do the same?
Follow up: more realistically, I wire money to the seller, what actually happens between the banks? It seems like bank A creates money from nothing and sends it to bank B, what is stopping bank A from sending out an infinite amount of money to other banks?
the cash comes from the gov't printing it. It's a mere fraction of all spendable money. Banks store some amount of it, just for such cases where you wish to withdraw it.
If everyone demands their deposit as cash, the bank would run out of physical notes very quickly. They would, in all likelihood, ask the central bank to print the cash (in exchange for the reserves they hold at the CB), in order to fulfill the withdrawal. This might take days, weeks even, depending on how many notes are to be printed. Note that this isn't printing new money - it's merely transforming digitally stored money into physical paper.
> I wire money to the seller
Bank A would have an account within Bank B, and vice versa. At the end of the day, these banks "settle" their accounts; aka, if there's more money in Account A (in Bank B), it means Bank A has sent more money to Bank B, and Bank B needs to owe Bank A. This is basically how international transfers work. For local banks, it's likely that the Central Bank would clear these transfers up (aka, Central Banks are the banks for banks).
> what is stopping bank A from sending out an infinite amount of money to other banks?
The same reason why a bank cannot just create infinite money and spend it on hookers and blow. They are creating money only via lending, and there are laws regarding how much they're allowed to lend out (called reserve requirements).
I thought "reserve" literally meant to set aside part of your assets.
If I have to set aside, X% of the money I create, how does that stop me from creating infinite money? I just create enough to reserve part of it.
but you cannot create enough, because before you created, you did not have enough reserve to legally create the loan. The newly created loan cannot be part of the reserve to which you count towards your original reserve requirement to qualify to make the new loans!
otherwise, this would just be a loophole in the reserve requirement laws.
And these monies are not cash - they are loans. If these loans default, and the bank somehow cannot collect the collateral for it, the bank will lose equity. Aka, the shareholders of the bank takes the loss. If this loss is great enough, the bank becomes insolvent. That's why banks do not lend to risky people, or takes a larger collateral.
On a financial statement of a real, 120 year old bank on sec.gov, loans are in the asset section of the "Consolidated Statements of Condition". The deposits are in the liabilities section, and there are no negative numbers in either part.
>and a $100,000 deposit in your bank account.
Is that what happened the last time you applied for a mortgage?
Only the central bank can create money out of thin air.
To take a very simplistic example, let's say we start with an empty economy, no money anywhere. The central bank creates 100 out of thin air and buys something from an individual. That individual places the money as deposit with bank A. Now bank A has 100 deposit liabilities, and 100 cash (deposit at central bank).
Now another individual can borrow from bank A and place the money with bank B, so now bank A has a 100 deposit liability and 100 loan asset. Bank B has a 100 deposit liability and 100 cash asset (deposit at central bank). This is the money multipler, m2 = 300, 100 in bank A, 100 in bank B and 100 at central bank, whereas the central bank only has created 100 of m1. However bank A cannot make a new loan out of thin air, it doesn't have cash anymore. The capacity to make loans is with bank B, where the cash is.
It is not the case that banks can make loans with no consideration for their funding and liquidity position, just by creating two accounting entries, only the central bank can do that.
Nope. This is the toy model of money and banking taught in high school.
When a bank makes a loan, it creates money. The fact that there are stabilising deposits is a fortunate convenience. This is why leveraged finance is inherently unstable. The BoE had a good paper about this.
Everyone always brings up the fact that banks create money out of thin air when issuing loans. Nobody ever mentions that the inverse happens again at the other side.
I'm not sure how much it's because everyone just parrots the factoid that "banks create money" without understanding it, or they are deliberately trying to mislead people into distrusting the banking system.
The bank must reach some level of capital requirement to make this loan. In other words, if the bank does not have enough reserves, they cannot make this loan.
The bank can use customer deposits as part of their reserves. They can also borrow from another bank (presumably, paying them interest). Lastly, i think central banks also have a reserve borrowing method (but not sure about this).
No, they don’t. We force them to through fiat. But credit isn’t created from money—credit is money. Left to their own devices, financial systems create as much credit as the market will bear, then the market shifts, money vanishes and voila, a panic.
"we force them through fiat", is just the same as "we force everybody to not murder and steal".
But - what stops banks from creating infinite money? There is a byzantine system of rules laid out by the Basel Accords and national regulators within that. That system limits the activities a bank can conduct, lays out rules for the way it must go about business it can conduct, and sets capital requirements.
There is nothing close to a full reserve and the system is not defined in those terms. Rather, there are ratios. If you have so many AAA rated treasuries posted with your central bank, then you can grow your balance sheet by X. But for B rated investments, you can only grow your balance sheet by Y. When a commercial bank issues a loan, it literally creates money.
The fact that a bank takes an illiquid asset - your promise to pay them back - and turns it into a liquid claim on themselves is not creating money out of "thin air". Your promise to pay the bank is not "thin air" as you will quickly find out if you break your promise.
I assume they would know.
I wouldn't exactly call a residential mortgage a gamble.
Not the loan for my car either, the bank has first priority in both and demands I insurance them for the full value and for all eventualities.
The original comment that I answered is technically false if there exist a single mortgage that isn't a gamble.
Now, if only a single such mortgage existed you’d still have a point, but the fact is millions of loans are given and paid back every year without any complications at all: there is plenty of income and plenty of security for very many loans.
IIRC, what Lehman did was to deliberately trade in bundles of sub prime loans.
“There’s no risk here” is what causes financial crises and bank runs, which is the larger point.
It means the bank can be sure to recover their money and their costs.
That isn't a gamble.
Just because the odds are currently in their favour, doesn't make it not a gamble.
During the subprime crisis, the entire US market went down by 30% and in some places sales basically halted for months. Many thousands of people lost homes, and almost all of them had equity on paper before the bubble popped.
Individual actions also matter. Maybe the reason you can’t pay your bank is because you developed a mental illness or drug problem, and they now need to replace a large amount of damage before anyone will pay what you paid.
Those aren’t constant high risks but they are why smart bankers calculate the odds and plan for what they’ll do when something inevitably goes wrong.
If you loan someone money to buy a house, you are betting that either they will be able to pay or that the market will appreciate enough that all of the costs of foreclosure and resale will be less than the sale price of the house.
Both things being false at the same time in 2008 ruined Lehman brothers because they had the same thought you’re expressing here. Their gamble didn’t pay off.
Cryptocurrencies were meant to put an end to such things. Ironic how corporations ended up reinventing it all on top of crypto. Exchanges are everything that's wrong with this space.
Exchanges have provided the necessary convenience for mass adoption, providing a way to get your magic beans in exchange for real money without much hassle. Decentralized systems are inherently more complicated than centralized ones and have a harder time gaining traction in the general population (see Mastodon's adoption in the wake of Twitter's turmoil).
Exchanges are the space. Without them, there's no way for people to buy into the system with real money in the first place!
Of course there is: mining. It's a very simple proceds: fiat => energy => processor => cryptocurrency.
Yet another thing that failed. Everyone was supposed to be able to mine cryptocurrency using their own computers. Instead things got so competitive that massive centralized operations using specialized hardware became the norm.
Exchanges are popular because it's easy, and also it allows you to trade _fast_. And then the exchanges figured out that they could be holding onto your cash and/or crypto, rather than, you know, actually be _just_ a location for which exchanges happen.
Yeah, well, Communism was meant to put an end to poverty and class injustice. Brexit was meant to restore glory to Britain. The Catholic Church was mean to put an end to vice. Things don't always do what they say on the tin.
As the Bible puts it: "For every tree is known by its own fruit".
Specifically, if the fruit seems consist of nothing but speculative bubbles and billion dollar frauds then that may be the true nature of the tree.
Crypto is Gentoo. Centralized exchanges are macOS. There's a reason about 10 people use Gentoo. Most people couldn't care less about recompiling their kernel by hand every 10 business days even if when you squint at it from across the room it could be better. They just want to use their computer. Ditto people wanting to etch their recovery phrase onto aluminum and hide it under their birdbath. Blaming the user will only get you so far.
> Cryptocurrencies were meant to put an end to such things.
There's a boatload of very good reasons they didn't and won't. I'm not saying they'll disappear, I've been around this space for like 7 years. I know better than to plant the flag. With that said, there's no reason more people will proportionally use crypto in real life - in the fullness of time - than use Gentoo in real life. What that translates to in price, who knows, and frankly who cares?