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2009.10.21 14:58:23
MrSimple
How is money REALLY created?

 

Hi community!

I read this paragraph from a pamphlet distributed by the Federal Reserve Bank of Chicago:

"Money is such a routine part of everyday living that its existence and acceptance ordinarily are taken for granted. A user may sense that money must come into being either automatically as a result of economic activity or as an outgrowth of some government operation. But just how this happens all too often remains a mystery." (Modern Money Mechanics, Federal Reserve Bank of Chicago, page 2)

Question 1: How can this be explained to the man on the street? 

Question 2: Are commercial banks loaning out more money than they have in assets (after usually borrowing $ from a central bank) thus not really having any money in the first place, to lend to the public? If Yes, who gives them to right to do so? 

Peace! 

 



   money creation | printing money | central bank
 


 
Permalink
 tycho
2009.10.22 14:10:20

Hi Mr Simple,

Quite a technical post I must say

Coming back to your questions, I am not sure what the Federal Reserve Bank of Chicago means and in which context this should be placed. Am I right to say that you are wondering what are the factors of economic growth and wealth distribution?

2. Commercial banks do indeed borrow money to be able to lend. The new minimum ration between own equity and loaned money is 8%. Banks borrow money from the Fed and from consumers (remember your savings account?) and pump that money back into the system by lending to consumers and / or businesses.

Since the differential between what the bank pays for borrowing money and the bank is paid for lending money is anything between 1% and as much as 10%, the margin for error (i.e. bad loans) is quite small.

When a bank carries too many bad loans on its books, it goes bankrupt. And guess what, this is exactly what happened with the mortgage crisis!

 
 


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