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Comment by wonnage | Hacker News Reader

That's a misunderstanding - when a bank originates a loan:

- the bank records an asset (the loan) and a liability (the deposit in the borrower's account) - the borrower records an asset (the loan money now deposited at the bank) and a liability (the loan)

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

At this point the money literally came out of thin air, there's more total currency in the system then there was before.

It might seem like an irrelevant nuance but it's pretty important to understanding how the money supply works

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But is it real? It’s more like an IOU, right? They don’t reduce the amount of money in the depositor’s account, but if the loan defaults would they be able to return the money to the depositor? My guess is no, not really (assuming no other outside cash sources).

So even though the amount of currency looks like it has increased, it hasn’t really… unless I’m misunderstanding still. But my impression is this is pretty much what happened yesterday with SVB.

Money is not "real" so you can consider this IOU is actually money. And if everyone agrees then it is.

Your misunderstanding is around what money really is: it's just an accounting unit. It's literally a number in a database somewhere.

It's very hard for people to accept this because of how most people basically trade 1/3 of their lives to get some. It just doesn't "feel right"

Currency is just a physical representation of that unit.

Am I wrong though that if the loan were to default and the depositor tried to withdraw all 1000, the bank wouldn’t be able to return it?

Perhaps because of the insurance from central banks this problem is avoided.

That's wrong. The loan amount was never anything but a number that someone at the bank punched into a database. It doesn't have anything directly to do with someone else withdrawing their own money.

If the bank is giving cash to the withdrawer, that would come out of their capital reserve I guess. If they didn't have that, they FDIC insurance would kick in.

You’re wrong. If someone took out a loan and withdrew all the money before defaulting the bank would not be able to pay deposits. Insured deposits would be paid by the government and uninsured deposits would go poof.

You can say the loan is a number in a database, but once it’s withdrawn from the bank the bank can’t just go into the database and undo the loan.

Your understanding of banks taking in deposits then lending them out hasn't been true for decades. A bank with no deposits can make loans just fine. They can just borrow at a lower rate than they loan if they actually need to hand out cash.

Your example doesn't make much since because any bank has many good loans and a capital reserve to deal with the few bad loans.

This was basically what I was asking. Okay so, because the bank has access to an external supply of “money”, they can loan out more than they have in reserve. Thanks!

Yes, BUT they do not need to get 1000 USD from anywhere to put 1000 USD in your account. They literally just say you have 1000 USD. You can then electronically transfer that to anyone else's bank. The banks then borrow government money overnight to settle accounts. That's the only place government money comes into it.

Economists actually refer to the USD in your account as bank money because it did not come from the government. You could just as easily think of that money in your account as a bank issued stablecoin pegged to the dollar that's convertible to dollars.

> The banks then borrow government money overnight to settle accounts.

Maybe that’s already implied in your description but they don’t need to borrow from anyone if they had enough reserves to start with.

This is expensive. Banks can do this, but it's more of a last resort than the main plan.

> But is it real?

Yes. Money isn't 'real' in the sense people typically mean. It's an accounting unit, so it's exactly as real as a liter or a kilometer.

except people withdraw money and the bank needs to give those people actual cash. That's deposits. Of course they could take overnight loans or whatnot but deposits are cheaper.

The vast majority of money is not withdrawn. It's all transfers. And that is a major point and difference.

Also, if it was all withdrawn it's a bank run, which has not been a problem in the US for quite a while.

Overall it cancels out for the large banks, of course people transfer money they just borrowed from the bank away, but that bank also has customers that are recipients of money. That, and other mechanisms between banks and banks and central bank(s) to balance such things within all the banks in the overall economy. Money withdrawn from one bank goes to another one, and everybody is not just sender but also recipient from someone else.

I am responding to a post that said

> Bank lending always creates new money. They don’t (and can’t) “lend deposits”.

It's just not true. The banks do transfer literal cash from deposits out of the system through loans. The cash in banks didn't come from thin air.

Well, even reserve balances are created out of thin air… it’s all just accounting

> The cash in banks

Why do you keep insisting on the "cash"? The by far least important kind of money? First of all everything is just virtual, electronic. Only a tiny fraction - and only temporary! It's not stocked at home, but used to buy something and that means deposited again in another bank - is "cash".

And yes, the bank deposits are "out of thin air" -- https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

Yes banks need some reserves, but this is waayyyy more complicated than them using the deposits. Which, for the most part, are not cash. That's only that tiny fraction of paper money use din circulation, which also is a lot less than it used to be with all the card-money.

https://www.bankofengland.co.uk/explainers/what-is-money

In the UK, as an example:

> 96% is electronic

> 4% is cash

USD is different because that currency is used for far more than just regular circulation, and world-wide. But even then estimates are ca. 8% cash maximum, for the world, which includes a lot less sophisticated economies. A bit more for the USD for obvious reasons, but most of that is not circulating in the US economy.

In any case, even in the US, with all its cards and card payments, money is mostly electronic and not cash and is transferred from bank to bank and hardly leaves the banking system.

ABOUT THAT TERM "OUT OF THIN AIR"

I've seen articles arguing money is not create out of thin air, e.g. https://cepr.org/voxeu/columns/banks-do-not-create-money-out...

> commercial banks create private money by transforming an illiquid asset (the borrower’s future ability to repay) into a liquid one (bank deposits); they would quickly be insolvent otherwise

Uhm.. yes, exactly. They can't do it at will, they need a borrower to sign. I mean, now we start arguing definitions, always a bad sign, especially when both sides actually are in perfect agreement and it's about the words used. This article to me is just weird, arguing it's not out of thin air, while everything being described says just that, only that their understanding of "out of thin air" is subjectively different than that of many other people. But there is no difference in knowledge and opinion about the underlying mechanism, only disagreement about some fuzzy term that some like to use and some apparently hate for whatever reason.

For arguments about definitions I would like to point to "Disputing Definitions" (6 min read) https://www.lesswrong.com/posts/7X2j8HAkWdmMoS8PE/disputing-...

I’m not reading that, but I’m using “cash” because that’s what I’m talking about. Yes most of the loan money isn’t cash, but the cash has to be available for withdrawal so “it’s just numbers on a screen” doesn’t actually work all the way down.

Refusing to read about the thing you don't understand is pretty silly

Banks don't hold substantial cash. They send whatever cash they collect to the local federal reserve to be recycled and get fresh cash to hand out to people every morning from the same federal reserve. I don't think I've gotten a "used" bill from a bank in over a decade.

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