Banks create money. That's their main purpose. When a bank loans you $100,000 to buy a house, they don't actually have $100,000 sitting in a vault somewhere. In fact, at most, they have about $10,000 because the "liquidity ratio" in the U.S. is between 0 and 10% [[http://en.wikipedia.org/wiki/Reserve_requirement#United_States]]. (Watch Bailey try to explain this next Christmas while you're watching It's A Wonderful Life for umpteenth time) The other $90,000 is, effectively, a kind of credit... a promise to pay in the future. Yes, they will cut a check for $100,000 but they're only allowed by the government to do that as long as they have deposited no more than 10% of that amount with the Federal Reserve. Every dollar the government prints, is either in the bank or a promise to pay in the future... a bank or someone holding government bonds (i.e. Treasury bills, Savings Bonds, etc.). Thus, about 90% of the "wealth" in the U.S. is in these promises-to-pay. The more common name is "credit."
2014-01-24
This paper effectively refutes the accepted explanation of "fractional reserved banking" the "money multiplier"
http://www.thefreelibrary.com/Money,+credit+and+bank+behaviour%3A+need+for+a+new+approach.-a0250677146 and makes the case that it was this reversal of cause and effect that caused the actions taken in response to the 2008 financial crisis to be largely ineffective.
http://www.thefreelibrary.com/Money,+credit+and+bank+behaviour%3A+need+for+a+new+approach.-a0250677146 and makes the case that it was this reversal of cause and effect that caused the actions taken in response to the 2008 financial crisis to be largely ineffective.
