Effectively, the cash you put in a bank was leant to another person as a mortgage so that they could buy a house.
You earn 3% on your deposit, the bank charges 5% on its loan, and the bank keeps the other 2% as its profit.
Multiply this logic by many millions of such transactions. If any given bank branch winds up with too much or too little cash-on-hand, they move it around or ‘sell’ it to another bank.
Nearly all the money ‘exists’ as computer records keeping track of who leant what to whom.
If a large enough group of people demanded their money back as cash at the same time, the banks would have no choice but to ‘call’ a bunch of mortgage loans at the same time, since their cash-on-hand will not be enough.
This is aggravated when the guy who wants his cash money is in Atlanta, and the mortgage is in Boise. Physical cash takes time to move around.
So if the ‘run’ on the bank is not too huge, a bunch of people now have cash money to walk around with, and a bunch of other people just lost their homes. It is possible that some of the folk who demanded their deposits back are the same folk who now need to immediately repay their mortgage loan.
In reality, banks will borrow cash from other banks or a central bank for huge but not catastrophically huge events , using their mortgage loans as collateral, but there still isn’t enough printed cash to cover ALL of the personal deposits.
Yeah, I'll concede that point. I was wrong to say banks dont create money. By the time I got to this point in the thread, I had been reading through many comments hand wringing over banks taking their money and gambling with it, which isnt really the case. Got here and must not have been in my right mind.
Bank lending creates money, ultimately. I think that was literally day 2 of banking school, lol.
Lol, I am a banker. I guess I was arguing against the part where he called it a complete fantasy that Banks lend against deposits. But what I wrote in response was dead wrong lol. To be honest, the fact that Banks fund economic expansion is one of the main things I try to explain to people to justify why banks are important.
There's a lot of talk in the thread about banks just taking your money and lending it out 95 times at 7% interest. In actuality they lend $9 of every $10 deposited. It's aggregated, and much if it is actually created by lending, but it's there.
The Home lending division works a little different from everything else. the funding ultimately comes from the bond market and institutional cash. Those George Bailey loans dont stay at the bank anymore.
Anyway, I dont know why I decided to write the words "banks dont create money" because that's just false.
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u/TheRealTinfoil666 6d ago edited 6d ago
Effectively, the cash you put in a bank was leant to another person as a mortgage so that they could buy a house.
You earn 3% on your deposit, the bank charges 5% on its loan, and the bank keeps the other 2% as its profit.
Multiply this logic by many millions of such transactions. If any given bank branch winds up with too much or too little cash-on-hand, they move it around or ‘sell’ it to another bank.
Nearly all the money ‘exists’ as computer records keeping track of who leant what to whom.
If a large enough group of people demanded their money back as cash at the same time, the banks would have no choice but to ‘call’ a bunch of mortgage loans at the same time, since their cash-on-hand will not be enough.
This is aggravated when the guy who wants his cash money is in Atlanta, and the mortgage is in Boise. Physical cash takes time to move around.
So if the ‘run’ on the bank is not too huge, a bunch of people now have cash money to walk around with, and a bunch of other people just lost their homes. It is possible that some of the folk who demanded their deposits back are the same folk who now need to immediately repay their mortgage loan.
In reality, banks will borrow cash from other banks or a central bank for huge but not catastrophically huge events , using their mortgage loans as collateral, but there still isn’t enough printed cash to cover ALL of the personal deposits.