Re: Why do banks give loans?
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What are you guys talking about? Wells Fargo has $374B in loans but a net $380B in deposits and debt (subtracting out cash & securities owned).
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Just one bank. Banks are a closed loop backed up by the central bank, when you look at a system as a whole loans far out strip deposits. This is not conjecture. Watch the video I linked it explains it very well. (though the normative judgments it makes I am ambivalent about)
For example for each 1000K deposited (from the central bank) the banking system as whole can create 100,000K of loans.
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Fractional-reserve banking works by each bank lending x% (less than 100) of their deposits, and this creating a maximum money supply of (initial deposit) * 100 / (100 - x). This is greater than x, but in this scenario, the total amount of deposits is still always greater than the total amount of loans outstanding. Otherwise, the money supply growth would be unbounded.
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Yea, but most people dont conceptualize/understand how this works in practice. You end up with debt backed by debt backed by debt backed by debt. Let me give an example.
Say someone takes a car loan of 10K, they buy a car and someone deposits that 10K at a bank.
Bank A 10000 Lends 9000 Then someone spends that 9K and it is deposited at bank B
Bank A 10000, Lends 9000
Bank B 9000 Lends 8100
Now let us see what would happen if that process is repeated 10 times.
10000> 9000
9000 > 8100
8100 > 7290
7290 > 6561
6561 > 5904
5904 > 5314
5314 > 4782
4682 > 4304
4304 > 3874
3874 > 3486
As you can see each bank can show that its assets outweigh its liabilities, but we can see that from an initial debt of 10K another 58,616 worth of debt has been created in just 10 transactions.
This is also just from standard consumer deposits. Banks can lend at much greater ratios from deposits secured against the central bank.
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