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Comment by 20240519 | Hacker News Reader

20240519

I thought the weird thing about mortgages is it is new money that expands the money supply.

Not necessarily, that's only if it's financed by bank accounts that continue being money themselves. If they're financed by large investors, it's not new money.

(it's money if its extremely liquid - the bank account holders can still do things with their invested money)

That's not correct: cash that is not in circulation is not part of "broad money" in the same way, so it is still right to say that money is created when a mortgage is issued if that mortgage is backed by large investors. At least as I understand it, investments in financial instruments are not usefully regarded as money.

> it is still right to say that money is created when a mortgage is issued if that mortgage is backed by large investors.

Is it? Since the house seller wants to have cold, hard cash (or, these days, an incoming wire transfer, which still counts as M1), the large investors need to cough up that much money to make the transaction happen.

Houses are bought in a chain, though. In a chain there might be only 1/10 people taking the cash out.

First, ~10-20% of residential home sales are new (the proportion swings widely year-to-year), with a non-trivial fraction of their costs going to materials and labor.

Second, 5-6% of the typical sale go toward the agents and closing costs. Again, this is money that leave the system.

Third, if some of the sale proceeds are applied to repaying an existing mortgage or to finance a home purchase, this is neutral as far as the "investor-backed mortgages create money" argument goes.

I think actually your assumption that someone needs to cough up the cash for a mortgage to happen is wrong? Why do you think that? The banks control the ledger. They just create money. If they go under, they get bailed out by the tax payers. A large part of the money in the economy is the difference between mortgages issued and mortgages paid back. So that cash "leaving the system" is the money being created. As long as people still haven't paid back their mortgages, the money remains in the economy. I've heard it described like a bathtub. The tap is new mortgages being issued, the drain is people paying them back. The tap has been running faster than it drains for a long time now.

Every interest loan does this.

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