Hacker News Reader

Comment by bubbleRefuge | Hacker News Reader

There is not a dependency on deposits in order create loans. This is false. Banks can make loans to the extend of demand for loans at the banks terms. Deposits have nothing to do with it in terms of funding. The bank must be in compliance with capital requirements and reserve requirement in order to be in the federal reserve system . As Mosler says (founder of MMT) The loan guy does not call the deposit guy at the bank before making a loan.

View on HN

I went in search of the capital requirements, just to get a feel for what limits do exist--since they're no longer directly connected to deposits. I found them: https://www.ecfr.gov/current/title-12/chapter-I/part-3/subpa...

But then my eyes glazed over and I remembered that I am not proficient in this language. Presumably the following requirements do place some limits on how much money they can have created?

> A common equity tier 1 capital ratio of 4.5 percent.

> A tier 1 capital ratio of 6 percent.

> A total capital ratio of 8 percent.

> A leverage ratio of 4 percent.

Every time a good loan is made. Thats an asset for the bank.

The loan guy absolutely does need to make sure the bank has the cash to make the loan. You can't loan more money than you have. What happens when B goes to withdraw it from the bank to buy a car or house if it isn't there?

If banks can loan more than they have by say borrowing the money at a lower rate than they lend it, that invalidates your basic premise of banks creating money. They wouldn't have created it, they would have borrowed it.

see my other reply on the balance sheet operations above.

There are many problems with your understanding, but the simplest total failure of your model is that if the bank did just get the money from somewhere else to lend, it is not creating it.

You are not describing the bank "creating" money, which they actually do as per how I described. You are describing the bank borrowing money.

I disagree . And language can get tricky here. You don't need deposit amounts in order to make loans. There is a bunch of gymnastics under the hood of the transaction I described but none of it requires consumer deposits.

You start a bank, I come to take out a loan and I want it in cash since I am buying a used car this afternoon. You have no cash since you said you don't need it, are just going to create it. Where does the cash come from? If you get it somewhere else, like the FED, you clearly aren't creating it, the FED is, right?

If you need to involve the FED (which you don't as per how I described) then the FED creates the money, not the banks. This invalidates your entire premise.

Moving the goal posts. Loans are contracts that create deposits. What you do with your deposit is a separate operation.

Additionally, if you take my example above and change bank B to bank A which is completely feasible in the real world, then it is thin air.

Weird, and I thought fractional reserve banking was a thing.

https://en.m.wikipedia.org/wiki/Fractional-reserve_banking

It is (was) a thing, the idea works exactly the same way. Person A deposits $100, bank lends $90 to B, $10 goes to reserve (if 10% reserve rate). System thinks there is $190 instead of $100, so money is "created".

As of 2020 in the US the reserve rate is 0%: https://www.federalreserve.gov/monetarypolicy/reservereq.htm

Person A does not need to make a deposit to fund load for Person B. If bank is in compliance they can make the loan.

Reply on news.ycombinator.com