Quote from: Cuenta Alternativa on Today at 04:57:33 AM

Quote from: stompix on May 15, 2023, 08:06:49 PM

Quote from: mocacinno on May 15, 2023, 10:37:28 AM

When a bank gives you a loan of 300.000 euro's, they don't have to have 300.000 on their books... They can just create "virtual money" which they loan out to you. IIRC, the percentage is actually a little less than 10%. So, a bank can have 30.000 on it's books, and still give out a 300.000 loan AND get 279.000 in intrest. They don't double their money, they actually multiply their investment by a factor >9...

Sorry, but this is completely inaccurate! Simple real-world personal example from 2017:

I've sold my house to a guy who took a mortgage to buy the old apartment, the price was 140 000E, he took that loan, the bank wired me the money, the full 140 000E, and I spend it like the next day buying my new apartment in which I live now.
So, where are the virtual money and how did the bank manage to pay me the entire amount when they deal only with 10%? Cheesy

You forget that it's not the bank that's selling you this, the bank needs to pay the actual owner of the house that can go the next day out to Las Vegas and gamble and whore all the sum in a day, and the last time I checked neither casino nor brothels take virtual money!

It is accurate, you have misunderstood. mocacinno is saying that banks create that money out of thin air, not that the money created does not exist.

There are two forms of fiat money creation, the first is done by central banks and the second by commercial banks. When commercial banks lend money by creating it out of thin air with a lower reserve ratio, in some cases 2.5% or even 0%, they are creating money out of thin air even though the money they send you is real. You can spend it on buying a house or take it out in notes and count them one by one.

The point is that it is created because it is not based on a previously existing deposit (or a deposit of at most 10% of what you borrowed).

The system is sustained because people don't run to take money out of the banks - if only 10% did, there would be bankruptcies.

^^ this ^^ explains it better

If my understanding of fractional reserve is correct, i might have explained it better....

I asked chatGPT for an ELI5 about fractional reserve banking in regards to the housing market, and this is what it came up with... To the best of my understanding, this is correct.
The bottom line is that, in this example, there was an initial deposit of $20.000 (for example, on somebody's saving account), and in the end the banks manage to lend out (and collect intrest on) $200.000 with only the $20.000 in the bank account to back up all those loans. The person with the saving account gets intrest on the $20.000 whilst all the borrowers have to pay the bank intrest on $200.000.

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Certainly! Let's reframe the example using bank accounts and electronic payments in the housing market:

Imagine you're buying a house and need a loan from the bank. You go to the bank and apply for a mortgage. The bank reviews your application and approves you for a $200,000 loan.

Now, let's consider the fractional reserve banking system at play. The bank is required to keep only a fraction of the deposited money as reserves, let's say 10%. So, when you make a down payment of $20,000, the bank keeps $2,000 (10% of $20,000) as reserves and loans you the remaining $18,000.

With the $18,000 loaned to you, you can pay the seller of the house. The seller receives the payment and deposits it into their bank account. Now, the seller's bank needs to maintain its reserve requirement, which is 10% of the deposit. So, the bank keeps $1,800 (10% of $18,000) as reserves and can lend out the remaining $16,200 to someone else who needs a loan.

The cycle continues as the money flows through the banking system. Each time money is deposited and loaned out, a fraction is held as reserves, and the rest is available for lending again.

This process of fractional reserve banking allows the bank to create more money than it actually has on hand. In our example, even though the initial deposit was only $20,000, a total of $200,000 ($20,000 + $18,000 + $16,200 + ...) can be created through loans in the housing market.

This system helps facilitate the housing market by increasing the availability of funds for borrowers. It allows individuals like you to purchase homes and stimulates economic activity. However, it's important for banks to manage their reserves carefully to ensure stability and meet customer demands for withdrawals.

Keep in mind that this is a simplified explanation, and the actual banking system is more complex. Nevertheless, I hope this example helps you understand how fractional reserve banking and electronic payments work in the housing market.