No, if you put 50k in the bank, and the bank loans out 49,500, and the person they loan it to spends it, and deposits it in another bank (or maybe the same bank), and then 49,450 is loaned out from those reserves, and so on.
It could be different banks doing the loaning overall, but the money creation is the same, and far, far larger than the deposits which started the ball rolling.
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Fun Predictions for 2007-2012
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Why this doesn't really happen.
by rose-colored-coolaid » Tue Jun 26, 2007 3:06 pm
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by rose-colored-coolaid » Tue Jun 26, 2007 3:23 pm
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by finance » Thu Jun 28, 2007 4:40 pm
perplexd is correct on this issue about Banking, as I used to work for a bank and was amazed at how the ponzi scheme worked!
Banks only have to keep ~5% of deposits in reserves (mandated by the FED). However most keep an additional 1%-2% for liquidity issues so they dont have bank runs or have to deal with credibility issues.
This allows banks to lend out ~93% of your money you deposit. So of the $50K in your bank account the bank gives you 1% in your checking account and lends it out for mortgages at 6.5% (damn cheap money for them, which is why banks fight for deposits...cheapest money known to bank kind). Which means they only have to keep $3.5K "in the bank", allowing them to lend the rest. This is why banking is so profitable!!!
The kicker is that with the mulitpication factor this essentially creates a 14.3 (1/7%) times the money supply in the market, or $714K in additonal money in the economy to be loaned out...which is a main source of how banks "find" money to lend. [My math is approximated, yet the concept is 100% correct.]
This is why when the FED increases the Money Supply by a small percentage it causes such large waves throughout the financial market. Thus the reason a 0.01% (1 basis point) change in the market has a large impact (epecially with hedge funds that operate like a bank, double the 14.3 times leverage with LBO's).
Which is when the credit markets fall it wont be pretty...which is why I locked my refi rate in today (got a killer deal due to my 40% raise at work that reduced my DTI ratio, even though rates have recently gone up).
Banks only have to keep ~5% of deposits in reserves (mandated by the FED). However most keep an additional 1%-2% for liquidity issues so they dont have bank runs or have to deal with credibility issues.
This allows banks to lend out ~93% of your money you deposit. So of the $50K in your bank account the bank gives you 1% in your checking account and lends it out for mortgages at 6.5% (damn cheap money for them, which is why banks fight for deposits...cheapest money known to bank kind). Which means they only have to keep $3.5K "in the bank", allowing them to lend the rest. This is why banking is so profitable!!!
The kicker is that with the mulitpication factor this essentially creates a 14.3 (1/7%) times the money supply in the market, or $714K in additonal money in the economy to be loaned out...which is a main source of how banks "find" money to lend. [My math is approximated, yet the concept is 100% correct.]
This is why when the FED increases the Money Supply by a small percentage it causes such large waves throughout the financial market. Thus the reason a 0.01% (1 basis point) change in the market has a large impact (epecially with hedge funds that operate like a bank, double the 14.3 times leverage with LBO's).
Which is when the credit markets fall it wont be pretty...which is why I locked my refi rate in today (got a killer deal due to my 40% raise at work that reduced my DTI ratio, even though rates have recently gone up).
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