That sounds like a pointless nitpick to me "ackshually the fed doesn't print money because everything is done digitally and no printing is actually done". What you described can be pretty much summed as "the fed prints money which it then uses to buy assets".
Banks create money by accepting deposits and making loans. Here is a more detailed explanation of the process: http://www2.harpercollege.edu/mhealy/eco212i/lectures/ch13-1...
The uninformed school of internet libertarianism likes to conflate this process of credit creation with the practice of unstable governments realising they'll never be able to raise enough money from taxes or oil sales to pay for the mansions and five star generals they'd like to buy and so printing some more banknotes (not owed to anyone) to be a bit richer.
What’s important to understand to make any sense of this is that when the bank issues you a loan, that sits on their Balance Sheet as an asset, and on your balance sheet as a liability, so when the bank issues you say $50K in the form of a Loan so you can buy a car and it is deposited into your account, USD$50,000.00 was created as money, but that doesn’t mean $50K of notes was printed. What changed is the following: the Bank’s assets increased by $50K balanced against its liability accounts, and your liabilities increased by $50K balanced against your asset accounts until you pay the money back.
There’s a lot more money than there is currency in circulation, and currency represents one type of money. It’s not a difference of one being physical and one being digital because all of it is documented somewhere whether it’s a PDF of a loan agreement and resulting statements or the cocaine-coated bills and coins in your pocket; they’re subtly distinct concepts of put another way, money is intangible but can be created and bank notes and promissory notes are tangible forms of it documenting money and can be printed. Taking it back to the Fed, actual paper money in circulation is considered a liability against the Fed’s assets which are other people’s (well, institution’s really) debts to the Federal reserve, and I think this is the point where I have to stop because I’m already out of my depth and taking it much further will put me way out into the deep end. Corrections and expansions from others welcome.
Also note that somebody replied to me above with a link to the Bank of England talking about money creation. I haven’t had the chance to read it, but it’s probably worth checking out as well.
This is the process. From an actual central bank [0] [0]:https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
Accuse me of cherry picking or paraphrasing to miss the subtlety of the distinction, but the subtlety makes little overall difference, as far as my, admittedly limited, understanding goes. And that snippet just ... works so well.
Fed loans are collateralized. So the counterparty has to not return the money and the collateral has to lose more money than the bank has reserves. This would be a credit loss, and the law requires the Fed to avoid it. (It has.) This article is about something else.
Also, if banks go bankrupt and then the individuals and businesses which they made loans to go bankrupt (which is actually not that uncommon; see SVB), the Fed cannot get that money back, the average citizen is the loser again...
So as you can see, the money is not always paid back.
The Fed just prints money, that's a fact. The "it's just loans" narrative is false rhetoric.
If there was no such thing as bankruptcy and debts were always passed on to borrowers' children and the government couldn't just keep taking out bigger loans to pay back their old loans and give huge contracts to big corporations ad-infinitum, then we could talk. Anything other than that and we have money printing going on; paid for by regular, honest, hard-working citizens through inflation and taxes.
You're thinking of interest on excess reserves (IOER): interest paid to banks to encourage them to boost reserves at the Fed. Reverse repos are open-market operations; they're the Fed borrowing money against its collateral, thereby sucking liquidity from the system.
Let's not forget that some of these bankrupt startups were basically tossing suitcases of advertising money at big tech prior to their bankruptcies. This is the people's money they were tossing at Big Tech. Then if they avoid jail (common), the founders of these failed startups will go on to get more funding 'a second chance', then a 'third chance', etc.. from the big VCs as a thank you for propping up their corporate stocks with 'borrowed' money which was never repaid.
Because with IOER, the Fed creates the market. No Fed, no IOER. In reverse repos, the Fed participates in an existing market. There are plenty of people willing to make overnight loans against Treasuries. That's what a repo is.
The Fed is currently participating in that market to raise the cost of borrowing. If it's helping the rich one way, it's hurting them the other.
(I'm not arguing the Fed is an egalitarian institution. But it's inaccurate to describe its operations, particularly reverse repos, as "printing citizens' money and giving it to rich people just for being rich.")
> when the bank goes bankrupt and a bunch of shell startups which it loaned money to go bankrupt
This is a non sequitur. (Also, if you borrow money from a bank, they don't go away if the bank goes under.)
It misses the point of why Reverse Repos were created. IMO, it's to allow the biggest banks who cannot find a way to effectively and safely put their enormous pile of money to work in the economy to still get a return on it. A risk-free (and literally free) return paid for by citizens.
It artificially props up the entire system and all of its zombie companies. Not to mention the anti-competitive forces it creates.
>> Also, if you borrow money from a bank, they don't go away if the bank goes under
They do if you go bankrupt. Why do banks go bankrupt? Well often it's because a lot of their borrowers went bankrupt. That's literally what 'subprime mortgages' entail. They literally assume that some percentage of the loans will never be repaid.
But in any case, the main issue I have is that the flaws of the system are hidden under layer upon layer of complexity; seemingly designed precisely to avoid scrutiny.
I read into the SVB as fundamentally different from the traditional borrowers bankrupt issue.
> But the root of its demise goes back several years. Like many other banks, SVB ploughed billions into US government bonds during the era of near-zero interest rates. What seemed like a safe bet quickly came unstuck, as the Federal Reserve hiked interest rates aggressively to tame inflation. When interest rates rise, bond prices fall, so the jump in rates eroded the value of SVB’s bond portfolio. The portfolio was yielding an average 1.79% return last week, far below the 10-year Treasury yield of around 3.9%, Reuters reported.
> At the same time, the Fed’s hiking spree sent borrowing costs higher, meaning tech startups had to channel more cash towards repaying debt. At the same time, they were struggling to raise new venture capital funding. That forced companies to draw down on deposits held by SVB to fund their operations and growth....While SVB’s problems can be traced back to its earlier investment decisions, the run on the bank was triggered Wednesday when the lender announced that it had sold a bunch of securities at a loss and would sell $2.25 billion in new shares to plug the hole in its finances. That set off panic among customers, who withdrew their money in large numbers.
From [1]
Instead, lock in $ at extremely low rates on bonds improperly laddered, then firesales turned theoretical losses into actual losses, which then triggered a loss of faith and a liquidity crisis simultaneous to startup cash withdrawals just for payroll. The bank run on it meant there was no way to make customers whole.
[1] https://www.cnn.com/2023/03/13/investing/silicon-valley-bank...
Most banks would have a variety of bonds, long and short term, with varying yeilds. Esp. given the rise of inflation took a little while and it wasn’t unlikely rates would rise.
SVB putting so much into long-term, low-yield treasuries was a major failure of its risk management.
The history is more complicated [1]. Modern repos are also all about finding non-bank channels through which the Fed can influence the economy. (When done with banks, it's to induce them to not lend their reserves to each other.)
Again, your complaint is much more apt for interest on reserves. Repos aren't unique to the Fed. IOER pays banks for parking money in an account at the Fed.
> seemingly designed precisely to avoid scrutiny
I'd argue it's more about competing interests and anachronisms. (The Fed is, almost to a fault, tremendously transparent.) Why does the Fed have private bank shareholders? Because of irrelevant details from a hundred years ago. Is it confusing? Yes. Is it a priority to fix? No.
[1] https://www.richmondfed.org/publications/research/economic_b...
Saylor just got a nice 22% discount on repaying his loan when his bank went away...
Reserves are assets of banks that can only be held by banks. They can't get rid of them in aggregate.
Loans are also assets of banks, and are created against supplied collateral along with the corresponding advance. The amount of reserves a bank has is irrelevant to that operation.
And in any case, didn't they lower the reserve requirement to 0 at the start of the pandemic?
Reassigning that advance to another person is how we pay for things with borrowed money.
Once it has been reassigned it called a deposit.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
The more important limits to lending are regulatory capital controls which measure both the asset to liabilities mix but also the credit and interest rate risk of the asset mix and loan to deposit ratio.
The latter is a commonly tracked metric by bank investors and they typically view a ratio of higher than 0.8 with suspicion (down from 0.9 post 2008).
The US banking industry ratio is about .63 right now which is up from a pandemic low of .57 but still down from the pre-pandemic ratio of .75.
That banks were not lending enough was the reason the fed removed the reserve requirement.
This is quite wrong.
https://www.federalreserve.gov/monetarypolicy/discountrate.h... https://www.federalreserve.gov/monetarypolicy/standing-overn... https://www.federalreserve.gov/monetarypolicy/bank-term-fund...
In addition, the Fed also borrows money.
https://www.federalreserve.gov/monetarypolicy/overnight-reve...
This keeps getting repeated all over the internet... but the FED doesn't just "print" money. It creates money, loan it to some counter-party, and that counter-party has to return it. If the counter-party doesn't return the money, the FED losses money. They can print money to themselves, but that doesn't offset the losses.