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Comment by tamimio | Hacker News Reader

> . I can’t understand why banks keep lending money for deals like that

Because that's literally the only way banks make money. Cars, houses, whatever -banks are after the interest money. The loan is a fake number that gets transferred from your account (as debt) to theirs, as digital numbers too, all under the "trust" that you can withdraw all of it one day. The real money in this is the interest that the bank will take. This is why if all people decided to withdraw all their money, banks would refuse, aka a bank run. In fact, this issue -the credit creation with fake digital numbers in accounts for the purpose of making profits out of the interest- is the reason why house prices are going insane beyond their actual value, it’s never demand and supply.

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I'd say the problem with house prices is that unlike with other assets, a regular person can go absolutely insane with the leverage on Real Estate because it can be used as collateral that is expected to hold value, thus interest is low and you can only put in a small down payment

so mix in the "house prices always go up" and you've got a whole nation (world?) who are using housing as the ultimate get rich quick scheme

all while leveraged quite a lot because hey, the prices will never go down so why not, it's a profit multiplier!

And you pay the rent via the tenants who will always be out there to rent any property no matter what.. it's not like the economy will somehow suffer and people will be unable to pay that ever increasing rent right?

> Because that's literally the only way banks make money. Cars, houses, whatever -banks are after the interest money.

Lending for bad investments isn't a way to make money. It can work for the banks if they resell the loan, but in that case one thing they definitely aren't after is the interest money on the loan they no longer hold.

> The loan is a fake number that gets transferred from your account (as debt) to theirs, as digital numbers too, all under the "trust" that you can withdraw all of it one day. The real money in this is the interest that the bank will take. This is why if all people decided to withdraw all their money, banks would refuse, aka a bank run.

The reason banks "refuse" to redeem all of their deposits at once isn't that this would stop them from earning interest on their loans. (This sounds like nonsense, but I don't see another way to interpret your sentences...?) It's that they can't, because they are never holding enough money to cover all deposits at once.

> The loan is a fake number that gets transferred from your account (as debt) to theirs, as digital numbers too, all under the "trust" that you can withdraw all of it one day.

Also, this sounds like you're describing a loan from the customer to the bank. A deposit can indeed be modeled that way, but in context you appear to be talking about loans from the bank to the customer. Can you clarify this?

> because they are never holding enough money to cover all deposits at once.

Yep, that's the reason (not the other one you mentioned), which means banks are creating money without actual assets backing it up. It's fake numbers basically created out of thin air, but that's not an issue as long as it will make money, real money, from the interest. The concept of modern banks when it was created was that this money is the receipt of actual gold you own, or the bank owns, so when you give these receipts to someone instead of actual gold (which is safer and easier) they can go and withdraw the gold using those receipts. Later, people started using these receipts instead of taking the gold and redepositing it again. Till here things are fair. Later the banks got greedy and started giving receipts for loans without having enough gold, and if someone ever decided to take the actual gold and the bank didn't have enough of it, they would borrow it from another bank, which kept banks in check because they couldn't go crazy with loans (to maximize their interest aka profit) until gold was no longer backing up those receipts (1), and banks are creating credit just because they can, resulting in an overinflated assets, especially the ones that are seen as investments with speculated values not real cost, rendering the housing market a legal state-sponsored Ponzi scheme. And the government is happy too because even after "owning" the house you still have to pay a perpetual rent aka property taxes that will increase when the house value increases as well, so everyone is winning except the home "owner", in fact, the attack on work from home was because the taxes the government collected from commercial property and residential ones are getting lower, it was good for the people to live in cheap locations, but bad for whoever is collecting the taxes.

For the last point, your deposit as a customer is in fact a loan to the bank, and the bank is your customer, but I was talking about bank loans to the account owners that they take to purchase/invest/etc., with added interest.

(1) https://wtfhappenedin1971.com

> which means banks are creating money without actual assets backing it up

It means they're creating money. That money is backed by actual assets; that is, for example, what's going on when someone forecloses on your house.

> I was talking about bank loans to the account owners that they take to purchase/invest/etc., with added interest.

How does this work with the comment "The loan is a fake number that gets transferred from your account (as debt) to theirs, as digital numbers too, all under the 'trust' that you can withdraw all of it one day"?

A loan from the bank to you is generally withdrawn in full, immediately, because you need to use it to pay for something else. A loan that isn't withdrawn in full isn't called a loan, it's called a line of credit.

I think what they mean to imply is that banks create new money out of thin air and the actual value of the assets would be lower if these new loans were curtailed.

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