The middle class just needs to draw on its sizable reserves of capital to purchase homes at a fire-sale prices.

This is only partially true. It ignores the job losses that result from the fall in capital available to firms. Additionally, anyone owning equities, which should be most of the middle class although I'm aware this isn't the case, will see their wealth decrease. I'd argue that the only people who benefit from crashes are those with large amounts of cash assets, which is generally not how you should be holding your wealth. Holding cash, after all, is just withholding wealth from being productive.

> Holding cash, after all, is just withholding wealth from being productive.

Not true. Cash in hand or cash in the bank is actually an asset not a liability. Every diversified portfolio should have cash in it. Some say as much as 30% of your wealth should be in cash or in assets that can be quickly converted into cash. If all of your wealth is tied to real estate or illiquid assets than that is a problem.

> Holding cash, after all, is just withholding wealth from being productive.

Unless you're literally storing notes under your bed, your bank is lending out your money to someone.

"Unless you're literally storing notes under your bed, your bank is lending out your money to someone."

Banks don't lend deposits. It seems that it's one of those fallacies that never die. Maybe, because it's in the textbooks.

"[..]reserve requirement does not act as a binding constraint on banks’ ability to lend and consequently their ability to create money. The reality is that banks first extend loans and then look for the required reserves later."

From: http://www.investopedia.com/articles/investing/022416/why-ba...

From your quote: "..and then look for the required reserves later."

Banks are required to have certain reserves. It's true that they can already lend money while they are still looking for the required money to refill their reserve. But they will have to fill up their reserve at some point, and for that they need money, otherwise they will have to stop lending.

So it is not a fallacy that banks are lending deposits and it's not so strange that this is in the textbooks.

Banks can get reserves three ways:

-From deposits. -In the interbank market, where banks with excess reserves lean to bank that need reserves. -From the Central Bank.

The Central Bank always lend the necessary reserves. A different issue is if that would be a good business for the bank.

The point is that the quantity a bank can lend it's not limited by deposits as the normal narrative imply.

That might have been true long ago but with fractional reserve lending this linkage is effectively severed. The bank usually isn't lending out your money. The total amount a bank can lend out is constrained more by regulatory requirements and its invested capital than by the balance of customer savings/checking/CD accounts.

It's true that the lending amount of a bank is heavily constrained by regulatory requirements. But that doesn't mean that banks are not lending your deposited money to someone else.

Consider two banks in the same country, so having to comply with the same reserve requirements. The reserve requirements are defined as a percentage of the amount on the banks's deposit account at the central bank. So the bank which can transfer an extra deposit to this acount is the one which is able to lend more money.

And what, would you say, is the current legally mandated "reserve requirement" in the US?

Even putting your money under the mattress doesn't make a difference: as long it's a stable amount economy-wide, the central bank can just print enough cash to make up for that amount under mattresses. Cash is free to make.

Sure, the bank benefits, but with near zero interest rates on saving accounts (in the US at least) the wealth isn’t productive for you. You are actually losing money to inflationso it’s not a good idea to keep all of your wealth in cash.

True in the larger economic sense. But on an individual level, even the best savings accounts which typically get a bit above 1% interest will not keep up with the 2-3% inflation that we see (and the fed targets).

Nah, for an individual cash is an asset, but from an economy-wide perspective cash is free: the government literally prints the stuff for pennies on the hundred-dollar.

Any stable demand for cash by the general public can be accommodated without any real economic costs.

(But there are real economic costs for when that demand is changing, and the central bank don't adjust properly. Interestingly, that's mostly a problem of monopolized note issue. Free banking systems with competing note issuers adapt easier to changes in demand for notes.)

> Crashes are actually great for the middle class

In perhaps one narrow sense. The middle class people who lose their jobs and savings, or whose welfare depends on economic activity (i.e., almost everyone) such as others buying, selling and investing in things don't do so well.

Perhaps there is some data on how well the middle class did in 1929, 1988, 2008, etc.

It's also ignoring the amount of middle-class savings that are destroyed during the crash...

The ONLY middle class individuals that benefit from a crash are those with the cash to buy in at the depreciated prices.

> It's also ignoring the amount of middle-class savings that are destroyed during the crash

Cash savings actually increase in value during crashes. Crashes provide the middle class with opportunities to purchase assets that they otherwise would not be able to afford.

> Cash savings actually increase in value during crashes.

I get that, but you have to have cash savings before you can purchase assets. MOST middle class individuals can't afford to keep their savings in cash. MAYBE they keep 6 months of salary in cash in the event of a lose of work, but every other saved dollar is put to work.

You'd have to destroy their life savings to give them a decent opportunity to buy assets on the cheap.

I don't see how they're great for the "middle class". A crash is generally bad for anyone who's invested. I could only see it being good for people who have cash on hand after the crash.

> A crash is generally bad for anyone who's invested

You are forgetting that cash in hand or in a bank is an asset/investment. Cash should be 20-30% of any investment portfolio.

Fair enough... I'm not much of an experienced investor. I had always heard you should invest, invest, invest, and forget about what the market is doing or will do.