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Comment by mrkeen | Hacker News Reader

> When you have literally a license to create money out of thin air

Well, you can loan out some amount of money that you don't have, hopefully get it returned to you with some interest.

That's not how it works. When a bank makes a loan, the customer will use it to buy something (say, a house), and probably the money will be put in a different bank. So the money definitely needs to be there, to pay the other bank.

There's a deposit in the other bank, along with the payment. Both of which are "money."

So, a bank can create money from thin air by making a loan, but typically not for themselves. It happens in a different bank.

I want to make it a point that EVERYONE CAN DO THIS. Everyone can make a loan, everyone can count their un-returned loans as money if they want to, and everyone can accept transfers of other people's un-returned loans as payment if they want to. The only special power banks have is that most people accept them doing this. If your whole friend circle accepts un-returned loans from each other as payment, then you're all doing fractional reserve.

The special power is the banking license they get from the government. Try to do it without and you'll find yourself in prison quite soon. Especially if you do it in official currency.

No, I don't need a banking license to loan my friend $10.

The difference is that licensed and regulated banks can scale it. Retail customers can trust them due to their long-standing reputation, their banking licence and linked to that, the FDIC insurance.

Yes, but this only grants the ability to scale it, not the ability to do it.

We don't say that only licensed restaurants can cook food.

If enough doesn't get returned, the gov/centeral bank gives it to you as a bailout. And for many loans you automatically get it from the gov if the debtor can't pay.

> If enough doesn't get returned, the gov/centeral bank gives it to you as a bailout.

No, the gov/central bank will give it to the people you borrowed money from as a bailout.

Your equity will be zeroed out, your executives will all be fired, and your customer accounts will be fed to another bank.

Citibank was bailed out, the stock rose over 50% overnight and the CEO got paid hundreds of millions.

You realize bailouts are loans, right? They aren't just free money.

There were many forms of bailout for Citibank (and others). Some were (extremely favorably termed) loans, some government backing of their bad assets and some were buying stock that the market didn't want to touch.

May or may not be technically free money, but for sure Citibank doesn't hand out loans to bankrupt customers on such terms.

The gov could have e.g. let Citibank go bankrupt and just take it for free. Like banks do to their customers.

Citibank shareholders got diluted, and Citibank paid back for that bailout, with the taxpayers profiting ~12 billion in total.

If the money couldn't have been paid back, the shareholders wouldn't have been diluted.

They would have been wiped out.

If the gov wouldn't have bailed out Citibank the shareholders would have been wiped out in the first place. And gov would have gotten it for essentially free if wanted. It was not like they saw that here's a great investment opportunity to make profit for taxpayers.

> If the gov wouldn't have bailed out Citibank the shareholders would have been wiped out in the first place.

And also the entire economy would have collapsed, and we'd all be trading ammunition for bottlecaps, instead of merely living through a nasty recession.

Which is why they backstopped it. Yes, it would have been cheaper to let Citi fail and nationalize it, but it wouldn't have been cheaper to then have to deal with all the contagion and all the other businesses that would have exploded because of it.

No, that's not how it works. They did this a few times, even a few high-profile cases, but the vast majority of times they just gave money to the struggling bank.

That money comes from the FDIC insurance fund, which comes from other banks. It's not printed or coming from taxpayers.

Anyway, a "bailout" is when you give money to equityholders. They often lose money in situations people call "bailouts" even though they're literally the opposite.

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