$18,254.38 -0.34%
BTC · 23h

Reminder: banks create money

We all know the federal reserve and central banks create money, but that's not who I'm talking about. Your everyday banks, the bank on the corner, the place you have your checking account, the people who gave you a mortgage, the guys who provided financing for your car. Those banks are creating new money. When you get a loan, that money is created out of thin air. There is no vault holding cash. The banks don't decide between lending to you or Joe from down the street. They "lend" money to everyone because they aren't actually lending you anything. The money is created from nothing. There is no reserve limit. The bank doesn't have to hold 10%. That's why you can get a mortgage for 3%. That's why you see promotions to buy a new car at 0% interest. The interest is almost irrelevant. If you take out a loan for $250k, that is entirely new money to the bank. They never had it before, but now they are collecting payments from you. It's money that never existed. This might be obvious to some of you, but it took me a while to grasp. Even now when I try to explain this to someone, they'll fight me on it. We have a long way to go.
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