Thursday, May 23, 2013

Fundamental error in banking

Megan McArdle, who I am fond of, is smart and understands economics and data well. And she illustrates the pervasive misunderstanding of how banking works in a throwaway line about Obamacare:
A bank account with $500 in it costs just as much to services as a bank account with $50,000 in it, in terms of ATMs and teller time and account statements mailed.  But the bank account with $50,000 turns a lot more profit for the bank when it's loaned out
Emphasis mine.

Banks do not loan out deposits, whether they are $500 or $50,000. Banks create loans out of thin air, expanding the asset and liability side of their balance sheets simultaneously, constrained by the amount of capital they hold and the capital requirements enforced by the regulatory regime. Loans create deposits.

2 Comments:

Blogger nworeporter said...

so you are saying she got it wrong?

12:55 PM  
Blogger winterspeak said...

yes, but in a common way

1:17 PM  

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