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Saturday, March 20, 2010

Banking Mechanics - Take 3

Believe me - it's not that I really enjoy talking about the mundane theoretical mechanics of the banking system -it's just that it's driving me crazy.  So I'll try to get my questions answered here.  Let's put aside reserves for a second - for the purposes of the questions in this post, let's simplify and pretend that reserve requirements do not exist - they are zero.

There are frequently repeated mantras from "those who understand."  The first of these mantras is "banks don't need deposits to make loans."  What I still haven't been able to get a good answer to, is, "If I open up the Bank of Kid Dynamite, how do I give my loan customers the money that I loan them if I don't have any deposits?"

I still have to give them (the borrower) the money.  So, does it come out of my equity - my startup capital?  OR, do I borrow (the loan amount - not reserves, remember) it from the Fed, using my equity as collateral? {my guess would be that it comes out of my equity} In essence, the Fed would become a depositor at my bank?  {my guess would be NO, but it seems like this is certainly possible at some point - WHEN is that point? I think the whole cycle is actually easier to understand if I DO borrow the money from the Fed, who lends to me based on my equity as collateral - I hope that's how it works!}  

If I find $100MM in the street and open up a bank, refusing to take in any customer deposits at first - how many loans can I make?  $100MM?   Some amount slightly less, like $90MM, due to regulatory capital requirements (NOT due to reserve requirements!)? {My guess would be $90MM, assuming RegCap requirements of 10%.  But wait - maybe it's $1,000,000,000 - the Fed will lend me $1billion, and my $100MM would be collateral - RegCap requirements?}. Would I be borrowing any money from the Fed or the interbank market in this scenario? {my guess would be NO, but it's quite clear that I don't know the answer!}   

Expanding the question, what if I had $100MM in equity, and I also took in $100MM in deposits?  How many loans can I make now, and would I be borrowing any money from the Fed/interbank market? {my guess would be that I can loan out the $100MM in deposits - remember, we have no reserve requirements - and I can also loan out $90MM of my equity capital - but I'm not super confident in that answer.}

The second mantra is "loans create deposits."  HOW?  Someone please explain this to me. Look - I certainly understand the theory that if the Bank of Kid Dynamite lends $100k to MikeMortgage so that MM can buy a house, and MM takes that $100k and buys a house from HarryHomeseller, then HH will hopefully deposit that money in the bank.  BUT - HH doesn't need to deposit that money at the Bank of Kid Dynamite - he might bring it to another bank.    So, how does making loans at the Bank of Kid Dynamite create deposits at the Bank of Kid Dynamite?

EDIT:  I think I may have just had a "loans create deposits" epiphany:  When the Bank of KD loans money to someone, like MikeMortgage, even if that money doesn't end up getting deposited back in my bank, it hopefully (theoretically) gets deposited SOMEWHERE, say Bank of Anonymous.  Then, Bank of Anon lends it's excess deposits back to me, Bank of KD... right?  Essentially, I get a deposit (aka: I borrow) from the Bank of Anon.


In an effort to keep it simple, I'll leave it there...
-KD

26 comments:

Andrew said...

You don't need deposits to make loans because you borrow the money for the loan in the interbank market from a bank that has excess deposits, not from the Fed.

Regarding loans creating deposits, the best example is a credit facility. On day 0, Company X has a $100 credit facility from Bank of KD with nothing drawn down. On day 1, they draw down $100. What happens? The Bank of KD now has a $100 loan on the asset side of the balance sheet, and (assuming Company X has an account at Bank of KD) also has a $100 deposit on the liability side.

Kid Dynamite said...

ok andrew - but i CAN borrow the money from the Fed too, if i need to, right?

and your second paragraph - what if Company X does NOT have an account at Bank of KD? and anyway, why on earth would they draw down a credit line just to deposit it back in my bank? that makes zero sense to me.

the way i interpret it is, CompanyX borrows $100 from my bank. I borrow $100 from the interbank market, say JPMorgan. Now i have $100 loan on the asset side (Vs CompanyX) and $100 deposit on the liability side (for JpMorgan)

Anonymous said...

Kid, I understand your confusion but looks like you jump between extremes.

Banks do not need deposits to issue loans because loans create deposits. Whether it is mantra or not but this is a fact of (accounting) life.

However, surprise-surprise :) banks do need money! Because if borrower comes and takes all his money then bank should get it from somewhere. So no rocket science so far. And no rocket science in what happens before that or after.

The source of money (I'd better call it funding) is subject to business model of the bank. So if your KD Bank is a retail bank then you attract retail deposits and work with them. A typical retail bank has typically excess liquidity, ie. loan to (real) deposit ratio is about 1 and can be even lower. It is a super safe business model because retail deposits are very stable and predictable BUT it is expensive because you have huge overhead aka branches.

Then you can get to a securitization type of bank like it was common just a couple of years ago. Those guys had to have some working capital to work with and this is it. They were crunching loans like there was no tomorrow and never bothered AT ALL about any real deposits.

Most banks fall somewhere in between. Banks normally have something like "funding" department which tries to arrange term funding depending on the maturity profile of asset side of balance sheet. They issue bonds (senior, subordinated, lower tier 2 and so on depending on local regulations).

Then banks do produce loans. These loans can be use as collateral in repo with central bank or interbank market. And so on.

The main point however is that in any bank loans department (function) is completely independent from funding function. Even worse due to market competition loans department is much more powerful then funding department.

And then, as you write in the end, you should not only consider your own bank, but look at the banking system in general. Excess reserves (and here I mean excess over required reserves and optimal settlement balances) are a cost for the bank. So they try to lend them out overnight at any possible rate. And there you will also have central bank with its interest rate policy providing or absorbing ANY amount of overnight funds required to balance the interbank market. You can remember how in 2008 libor rates shoot up because no bank wanted to lend money ON. It was a complete failure of central banks to supervise payment system. The problem was only solved when CBs stepped in with unlimited repo auctions. I remember when ECB "shocked" the market with 1 year about 450bn euro repo auction.

Andrew said...

You can borrow from the Fed at the discount window, but the Fed isn't normally in the business of lending to banks. That's why the discount rate has historically been at a 50-100bps premium to Fed funds (which is the interbank market rate). Of course during the financial crisis, the Fed was lending to banks like crazy through all different facilities with various acronyms.

On the second point, a company doesn't immediately spend the money it draws down on a facility, so it could sit in a deposit account temporarily. The claim that loans create deposits is more of a system-wide phenomenon than a single bank one. Once the money from the drawn down facility is spent, it ends up in someone else's bank (deposit) account.

Kid Dynamite said...

anon - i use extreme examples because for me, that's clearly the easiest way to understand it. also, i think that people who cannot explain the extreme cases really do not understand it.

you cannot just continue to say "Banks do not need deposits to issue loans because loans create deposits" without explaining how that happens. That is why people are totally confused about the way the banking system operates - because of claims like that which are totally nonsensical at face value. So we have to dig deeper and EXPLAIN!

the reason i think it's an accounting fact of life is what Andrew wrote in the second half of his most recent comment: "Once the money from the drawn down facility is spent, it ends up in someone else's bank (deposit) account."

that is pretty much the epiphany I had when I wrote the EDIT to the post. so i think i'm absolutely correct: if you are claiming that loans by my bank create deposits at my bank - i think you're wrong. they create deposits SOMEWHERE, which was the source of confusion. then, my bank has to borrow from the other banks.

of course, if anyone wants to answer the actual questions i asked in the blog post, i think they will vastly simplify and clarify matters.

also, anon, what did you mean by "The main point however is that in any bank loans department (function) is completely independent from funding function."

how can they be independent? the funding department funds the loan department! or did you simply mean that the loan department's function is to make good loans, and the funding department 'sfunction is to fund them?

getyourselfconnected said...

All,
fascinating stuff and I agree with KD that the comments here have been top notch, well except for my frustration rant yesterday!

What is funny is that I "get" what many are saying and I think I have figured ou what is bothering me about the whole thing;

To subscribe to how things are done (like I have a choice, it is in place already) I actually have to think like a book keeper and pretend many things. That is hard for a rational person like myself (I am a scientist).

In the end it seems the velocity of money is issue number one and now I think I understand why the big players pee themselves when the econmy slows down; any decceleration of debt creation causes a backfilling issue almost immediately. It is clear to me now. I always wondered why we could not have a recession for a bit and come out ok, I think we have a partial answer to that now.

Anyways, it is 70 degrees today, I just got a new grill to set up (big steel keg rules!), and it is time for some fun. I did want to say thanks to all for the past few posts and comments, I have learned a lot.

Kid Dynamite said...

anyone who wants to make it easier for me to understand would do well to answer the questions i posed in the post, with explanations. that is the best way to help ME, personally, understand.

like GYC, i will not be agonizing over this all day though - i have to try to squeeze out a few more pints of maple syrup today.

Anonymous said...

Kid, I meant that they do not talk to each other. Yes, you are right that the proper way is to look not just your bank but at the whole system simply because banking reserves is the issue of the whole system including central bank.

However extreme cases are not the best approach to tackle understanding problems. For example people need food. Take two extreme cases and your example will die pretty early which does not explain our civilisation. The moderate example is the only relevant in this world

Anonymous said...

re your questions in red:

1. You should distinguish between cash and loans. In case of loans, i.e. electronic records, only the net amount is relevant for the daily settlement between banks. If you want cash then it should be matched 1-to-1 with reserves but not many borrowers do actually take out cash and if they do it is normally a tiny fraction of loan portfolio. Banks do have liquidity buffers in terms of liquid instruments, i.e. gov bonds. But in the extreme case you have capital buffer however such extreme case would normally mean that this bank is bust

2. If you find 100m you can make technically unlimited volume of loans. You ability to make loans is constrained by your capital which is subject to regulation.

3. Again, deposits are irrelevant for you ability to make loans. So the answer to this question is the same.

Kid Dynamite said...

anon at 12:00pm wrote:

"2. If you find 100m you can make technically unlimited volume of loans. You ability to make loans is constrained by your capital which is subject to regulation. "

huh? isn't the $100m my capital?

and to anon @ 11:31am: i can assure you that once i understand the extremes then the other cases are easier... you have to apply your rationale to all situations - including the boundary problems. maybe you don't learn best like this, but i do.

Anonymous said...

sure, 100mm is your capital if that is what you put into your bank

To give an example of amount of "loans" and effects of regulation. Domestic government bonds are typically 0% risk weight. So your total balance sheet size will be 100mm / haircut on gov. bonds. If this haircut (from your CB) is 2% then your "loan" portfolio (balance sheet size) can be up to 50bn. And in this process you attracted ZERO real deposits

Kid Dynamite said...

got it. grazi... and what kind of risk weight do other assets carry? like, say, mortgages? or home equity loans? or auto loans?

Anonymous said...

If I open up the Bank of Kid Dynamite, how do I give my loan customers the money that I loan them if I don't have any deposits?

I still have to give them (the borrower) the money.


"The process by which banks create money
is so simple that the mind is repelled." -John Kenneth Galbraith


See that word in that quote? Create. They are not transferring existing money. They are not borrowing in the interbank market. They are not borrowing from the FED. They are not taking from their equity.

They are creating.

Let that sink in. Visualize a printing press in the vault of the bank. New credit.

New. It can now chase goods. New.

Yes that's how it works.

The capital structure tells each bank how many new loans they can issue. It is new money. New.

Its like having 10,000 little individual government printing presses out there in the nation, and the FED has its eyes on the money supply.

Don't quit on this. It's very important because everything out there on our banking system is not incorrect, but outdated. The prevalence of the entire money multiplier system, when taken to its logical end, produces this system. The text book says when 100 dollars is redeposited and lent 5 times, it yields 400 dollars or so in deposits. So in that case 300 new dollars are chasing good in the economy that were not before. So you would see that NEW money has been created.

The current system is just the hyper-evolution of the old system, whereby the bank who lend out 90 out the 100 dollar deposit, and the second bank who lends out 81/90, the third bank who lends out 72/81 - all get merged.

Its why reserve requirements don't matter, and don't exist in actuality. They are creating new money on the borrowers promise to pay.

The banks EQUITY - is the deductible, if you will, on this transaction. But the outstanding loans are far in excess of this amount.

Scharfy

This is not conspiracy theory nut job BS. Its how money supply is expanded and contracted in our economy.

New.

New.

New.

scharfy said...

If I find $100MM in the street and open up a bank, refusing to take in any customer deposits at first - how many loans can I make?

The short answer is, much more than you have in Equity.

The amount depends on capital requirements etc,etc. The ceiling of one billion in loans, which would put you at 10 to 1, as a rough guide.

Remember - you are not lending your equity. Or borrowing from the Fed yet.

You are expanding your balance sheet by issuing loans.

Creating.

New money.

The Fed has an eye on how many loans you issue - but they are issued from scratch, not borrowed from the Fed - in the sense that you do not owe them any interest. Again - the FED marks your loans down to keep a tally, but does not charge you anything to issue.

(Think loan origination - is its deepest sense - here)

Now, you wouldn't need to hit the interbank market for any reason -EXCEPT current law requires reserves to be held. So you would be forced to borrow in the interbank market or pay depositors more yield to acquire 10% of your balance sheet in reserves to satisfy this law. (funding)

As you can see, these are the distortions that Bernanke is talking about regarding reserve requirements. They don't materially affect the quality of the loan, solvency of the bank, the ability to meet withdrawal demands or ability to make additional loans.


Expanding the question, what if I had $100MM in equity, and I also took in $100MM in deposits? How many loans can I make now, and would I be borrowing any money from the Fed/interbank market?


The ceiling would be exactly the same, determined by your equity. Say one billion at 10 to 1, per the previous question.

The addition of deposits has not improved your loan ceiling. It may have improved one aspect though.

With the addition of the 100MM in deposits, now you have your legal reserve requirements exactly satisfied(assuming you maxed out and lent a billion) - so you would neither lend nor borrow in the interbank market.

(You WOULD be paying your depositors some interest on their deposits - instead of borrowing from the interbank market, which is the distortions that Bernanke is talking about regarding reserve requirement distortions.)

This 100MM in deposits has no significant material bearing on your ability to lend, only slight ones in terms of the funding costs, etc etc...


So, how does making loans at the Bank of Kid Dynamite create deposits at the Bank of Kid Dynamite?


If you authorized a mortgage to be issued at Bank of Kid D - before that money is paid to the home seller, the amount of the loan is

created

in a brand spanking new checking account that did not previously exist

at the bank of Kid Dynamite.

And then a check can be written at closing to whmoever.

The person that took the mortgage at Bank of Kid Dynamite has promised to pay the bank back, and you have "written" the loan, and X amount of new money is now flowing through the system.

When the mortgage gets paid back (or refinanced from another bank) you the banker - don't get to "keep" the principal - Bank of Kid's balance sheet will be reduced, any interest less costs will be your profits, and you can make more loans.

As you can see. Most money enters the new system in the form of debt. It is not "minted" like in the old days. (only 3% is in cash)

So - if people don't want loans, and the GOV wants economic activity , we are at an impasse.

Hello? make work projects are coming big-time.

Kid Dynamite said...

scharfy - good comment. but fyi, this is not quite correct:

"Now, you wouldn't need to hit the interbank market for any reason -EXCEPT current law requires reserves to be held. So you would be forced to borrow in the interbank market or pay depositors more yield to acquire 10% of your balance sheet in reserves to satisfy this law. (funding)"

if i make loans of $1B, and my borrowers withdraw the money (which i certainly expect them to, even if initially the loans go into a checking account at MY bank, i need to borrow on the interbank market to fund the withdrawals.

scharfy said...

If i make loans of $1B, and my borrowers withdraw the money (which i certainly expect them to, even if initially the loans go into a checking account at MY bank, i need to borrow on the interbank market to fund the withdrawals.

Yes, they want to go to vegas or buy a company - thats why they went to you for a loan.

You analyzed their creditworthiness, and upon securing their promise to pay it back - issued the loan.

Full stop.

The money exists now.

It didn't before.

Now it does. You coined it. Electronically.


It doesn't have to be borrowed on the Interbank market. You have it.

The Bank of Kid D created it.

New money.



Coach me up if I am wrong. If i am - I'll send double my last donation to you. So you're free-rolling. Keep up the good blog.

Kid Dynamite said...

scharfy - no need to send another donation - but yes, i believe you are wrong.

as another commenter mentioned a few posts ago, my bank is making a market in money. by making loans, i kinda end up "short" money - that new money that i've created. i do have to "cover" that position at some point - when my borrowers withdraw the money.

i can either attract more depositors, or i can borrow from the interbank market. but if my bank has $100mm in cash, and has made $500mm in loans, i absolutely need to borrow on the interbank market.

that doesn't mean i didn't create money - in fact, this is where the sick ponzi comes in: my borrowers take the money from my bank, and spend it, and it eventually gets deposited, say at Bank of Scharfy. now, your bank has extra cash lying around, which you are willing to lend back to my bank!

everything is peachy until people start making bad loans, and then, you have USA: 2008/2009.

Taylor said...

Here is a bank co-op that's been in business since the early 1900s and doesn't take deposits...

http://www.agsouthfc.com/ag.asp

Anonymous said...

Hi Kid, I am the "make a market" anon. Sorry, haven't looked at your blog for a while, don't have time for all questions now. Just a few points:

1. You are correct and Scharfy is mistaken: double-entry accounting is still required at banks. A bank can't just "create" money whenever it feels like it - otherwise banks could never go bankrupt.

2. However, there are settlement lags - this is one reason I brought up the equity market analogy. If that seems scary, let me just say from experience that there are a lot fewer failed money "trades" than failed equity trades. You have to cover your shorts long before your customers withdraw their money. Settlement lags vary depending on the type of transaction - you can transfer cash by wire intraday - but are usually less than T+3 despite those annoying holds.

3. How much can you lever $100 mn at a bank? There is no short answer to this because it depends on many factors: What kind of bank are you? Who is your regulator? Do Basel rules apply to you, and if so which models and how does your regulator interpret them? Are there some more local rules tacked on? The regulatory trend has been to risk-weighted capital charges. The idea is to avoid incentivizing banks to take more risk. But the snag is that risk can be hard to measure: e.g. AAA sub-prime super senior far riskier than claimed. Also, some captive regulators have allowed legalistic gaming of the rules (I'm so naive, I thought booking repo as a true sale would be illegal.) Finally, note that capital is mostly levied on assets but is actually needed to repay liabilities - that can be viewed as a conceptual discrepancy.

4. "everything is peachy until people start making bad loans" - more leverage is more fragile, less is more robust, but a banking system without leverage is neither efficient nor effective nor even prudent, once costs are accounted for. There will always be some bad loans and some bank failures (e.g. it is not reasonable to expect Podunk Bank & Jug Milk to refuse a commercial mortgage to a local retail development on the grounds that the tenants who seem so healthy now will in a few years be bankrupt because nobody will be spending any money because they are unemployed because of a national recession caused by a residential real-estate meltdown caused by sub-prime securitisation.)

You can't bank with no leverage and no risky assets, or even no asset/liability mismatch - the best you can do is to limit this in some way. Perhaps it can all be done with nothing more than the right set of incentives. Empirically, though, regulators with more discretionary powers performed better: Soviet Canuckistan worked better than the "Live Free or Die" model.

zanon said...

Kid:

Imagine there is just 1 bank, KD bank.

You make loan to a buyer, who then gives money to seller. KD bank creates receivable (asset) for buyer and deposit (liability) for seller. You do this by creating IOU for buyer (in spreadsheet) and by creating deposit account for seller (in spreadsheet). You have created new money, but not NET new money as asset/liability always match.

Reserve accounts only enter the picture if there are multiple banks, because then the deposit may be created in a different part of the system than the receivable.

But note you do not draw down your initial equity to make the loan. Equity is still there, you just leverage on top of it.

In multi-bank environment, banks usually just trade between themselves with no Fed involvement. Fed just becomes involved at discount window is system as a whole is short reserves (which is possible for technical reasons).

scharfy is correct. A bigger balance sheet means new money is created. There are new assets, and new liabilities. Those are new money.

When depositors want to withdraw their money you just debit their account, and whichever bank they move money to credits an account.

""make a market" anon" is incorrect. Bank lending is restricted by capital requirements only, so how big can balance sheet get on equity base. A bank with access to reserve market and a regulator who ignores capital requirements can continue indefinitely no matter what it does.

Kid Dynamite said...

zanon - money is indeed created, but it has to come back to me too.

it gets back to the "loans create deposits" meme. it's a systemwide phenomenon. my loan, when withdrawn from my bank (I'm a bank) eventually creates a deposit somewhere else - which gets lent back to me (HOPEFULLY)... if it doesn't eventually get lent back to me, I'm insolvent.

this isn't hard to conceptualize: with 10% capital requirements i can loan you $900MM against my $100MM equity - which creates matching assets and liabilities, as you said. but if you want to withdraw the $900MM, i don't have it. i can't give it to you. my balance sheet looks like this:

cash: $100MM Shareholder eq: $100MM
Loans: $900MM Deposits: $900MM

i don't have $900MM to give you. fact. i need to borrow it. This was my point to Scharfy, and it's correct. I would hope to borrow it by pledging my loans as collateral in the interbank market.

we aren't talking about reserves at all, by the way.

and i'm not sure what your point was in your last sentence. yeah - if we ignore all the regulations, there are no limits. that's why we have regulations.

scharfy said...

Not sure if anyones's reading this thread, but I see where our differences are.

Not as far off as it seems.

I see where you are going with the "market making" analogy. I totally agree.

When a loan is created, yes there is double account book keeping that records the creation.

Yes you get short money!

But when I create the loan, I don't reduce the existing stock of money from somewhere else in the banking system, right then and there.

It's like a naked short, in that sense.

So my loan is not unaccounted for, just new.

I was just arguing that banks creating a loan, expands the money supply by injecting new money into the system that can chase goods right then and there.

But given that money in more like a scoreboard entry than a commodity, my customers can have their money if they want if, I'll just mark it on the ledger. As long as they make good on the loan, we are fine.

Thus when my customers want their money, they have it. I have temporarily expanded the money supply, with interest, to my borrower, in the form of a loan.

But, yes the existing loans in the system , if they all got cleared, would revert us down toward a much smaller, "hard money" base.

I've been quite the banking dork lately, so here's the beset link i've found explaining modern banking, in my view.

long but easy read.

Roving Cavaliers of Credit

So yes, you are correct. I wasn't disputing that the scoreboard was balanced, only that it can be expanded and contracted as the banks see fit, within the rules.

Thanks for the effort and I'm sorry if I at all came off an expert, just trying to wrap my brain around our insane banking system.

Kid Dynamite said...

scharfy - yeah - pretty much. when you take your loan (From my bank) and spend it, it gets put back into SOMEONE's bank, SOMEWHERE, and indirectly lent back to my bank to cover the funds I just created and gave to you. don't think about that too much, or you'll realize that it's all just another insane ponzi scheme.

zanon said...

kid:

OK, this is how the bank gets back the money. There are, in fact, multiple ways, and it depends on business model of bank and other technical factors on how it happens in any specific case.

1. Some banks try to be big and have lots of deposits. This way, the odds are in their favor that the seller has an account with them and they capture the created deposit. This means their strategy focuses on them having excess reserves, but they also bear the operational cost of attracting and maintaining large depositor base. Call this the low capital cost, high operational cost strategy.

2. Banks have reserve managers that look at the state of reserve account and try compete for reserves with other banks and sometimes corporations as principals. So, they may offer attractive rates on CDs, or do other activities to get medium-long term deposits. "Brokered deposits" are an example of this. This has higher capital cost, but lower operational cost. Canadian banking system has a lot of this activity and a very small over night market as a result, I believe.

3. Banks lend and borrow reserves from each other in overnight interbank market. Repos are mechanism for this. Note that this overnight market is normal and typical, in fact, it is how the Fed sets the Federal Funds Rate and they are very active in this market, draining reserves, forcing banks to need to borrow them, and engaging in all manner of manipulation so they can hit their target. This has the high capital cost, but very lower operating cost.

4. If system is short on reserves for technical reasons, then Fed must either lend to banks directly at discount window, or see the FFR spike way above target. This is what term auction loan facilities Fed has set up are about. Traditionally, this mode is stigmatized so is not used often.

So, clear? Banks get money back by trying to attract retail deposits, trying to attract wholesale deposits, borrowing overnight at interbank market, and borrowing at discount window from Fed in increasing order of cost of capital, and decreasing order of operational expense.

Note that the credits and debits were are talking here are being transmitted via reserve accounts, and that primary purpose of reserve accounts is to settle payment balances. Even in world with no bank credit at all, you would still need reserve accounts and banks would still need to attract deposits, lend to one another, have overnight interbank market, and discount window, just to ensure that checks clear.

My final point on capital requirements was this: if banks has functional reserve account, then only regulatory action can shut it down as its equity is immaterial to its being able to function. The liability side of banking is not a good home for market discipline.

Finally, let me say that I am not big fan of Steve Keen. He is a dangerous source for you to get your Chartalism from. But that is advanced topic, right now you ask good question about basics of reserve system.

Kid Dynamite said...

thanks zanon - i think we are in agreement.

i'm not sure why you threw the steve keen comment in there - i have heard his name, but to my knowledge i've never even read his work or quoted him.

zanon said...

kid:

glad i could help. So now you understand how bank lending works, how loans create deposits, and how the lending back "gets the money back". This puts you ahead of 99.99% of population, including the people running this clown show.

it is not in and of itself complicated, but it was hard for me to learn because i needed to unlearn everything else first.

I mention steve keen because scharfy points to his work "roving cavaliers of credit". If you have not read him, that is not a bad position to be in. He is right on some things, but very wrong in others. To understand finance, you have to look at it via balance sheets. steve does not do this, so he gets things very wrong.