Re:Sorry to burst your bubble
by philwelch on Monday July 20, 2015 @01:53AM
(#9914210)
You're thinking fractional reserve means, for a 1/4 fraction, I put $1000 in my savings account and the bank can lend you $4000. That's not true. In reality, I put $1000 in my bank account. But the bank only needs $250 cash in reserve backing that account, and can lend out the other $750. Of the bank's $1000 in assets, 1/4 must be hard cash and the rest can be debts payable to the bank. The bank charges interest to borrowers, and pays interest to depositors, and makes its profit off the margin.
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It seems this is not how it really works.
http://www.economonitor.com/lrwray/2013/08/15/banks-dont-len...
This is one of these things that made me think what else of what I believe is not true.
The link you posted seems to fundamentally fail to contradict the OP. The link states "banks do not lend out their reserves" - which is true. They lend from their deposits, which is exactly what the OP was saying.
If that's not it, then someone needs to explain it more clearly.
Banks don't lean from deposits even in the "official" narrative.
A bank that needs to lend money that doesn’t have it's going to use the interbank system in order to get "reserves" from others banks.
The idea is that the causality is inverted. Banks lend and then search for reserves. If you see it this way, you realize that there is not constrains in how much money they can lend (except how expensive is to find reserves).
Try this (maybe more clear than the other): http://bilbo.economicoutlook.net/blog/?p=14620