No this is wrong and why everybody starts talking about banks creating money from thin air.

Let's assume the way it works is this to keep it simple (it's not the way it works): if you deposit 100, the bank must reserve 10 and thus can lend 90.

So deposits = 100, lending = 90, reserves = 10.

Nothing really wrong with that. Some FRB tin foil hatters will then talk about multiplication, but it always boils down to them counting lending but not corresponding deposits.

Try constructing an example where close to 10x the multiplier is in effect and you'll see reserves should always be >10% of the deposits - if not, you've gone wrong somewhere.

Let's start simple with a bank that is newly founded with zero capital and no deposits. The bank policy is that it will only lend a maximum of 90% of money deposited in it. Now let's say someone deposits 100. Explain to me how the bank manages to lend 1000 from this.

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That´s the first time I´ve ever heard my home country being described as ´not expensive´.....

I guess it depends on what you compare it with!

My argument is not against capitalism or that we should trade in leeks and goats it's that banks should not be bailed out.

That the Icelandic people should not pay for a private firms mistakes. No taxpayer should ever bail a bank out.

Banks should be far more controlled in what they can and cannot do and people need to be more aware of how the money supply works.

Why has nobody mentioned babe Bjork ?

Surely better than Cod ?

dunno. never eaten cod.

Err, seriously? I really do hope that you're either a) joking or b) don't work in any area even remotely related to finance

Seriously. Happy to be proven wrong. I guess step 1 is they can lend out 90 of this, that still leaves 910 to go...

Try here, perhaps

seems to support my position

If all banks could do was lend out 90% of their deposits and collect the interest differential on that amount, bankers would be barely able to afford the train ticket to get to work.

I think what everybody's trying to explain to you is that banks don't just lend out deposits. They also borrow from central banks and each other (the interbank market) and on-lend those funds at a higher interest rate to their customers. Using borrowings over and above capital to increase their loan book is called leveraging. In the past, most commercial banks have been leveraged over 10:1.

"Highlights of the museum's collection include a 170-centimeter (67-inch) sperm whale penis preserved in formaldehyde, lampshades made from bull testicles and what the museum described as an "unusually big" penis bone from a Canadian walrus."

Now I understand Islandic people better!

Tom

A bank lends out money it borrows. Whether you call it a deposit or borrowings is just semantics.

What I'm arguing against is the assertion that when a bank borrows 100 from a depositor, it magically creates another 1000 to lend.

No. It doesn't. It lends out a multiplier of that. It is, by governmental fiat, allowed to create money to a certain ratio to the physical deposits it holds.

Not really. Banks don't treat the two the same.

It depends how many times it lends out a hard cash deposit and how many times that is then re-deposited.

1. Phil deposits 100 with Bank.
= Bank Deposits 100; Reserves 0; Loans 0
2. Bank lends 90% of Phil's deposit to Nev
= Bank deposits 100; Reserves 10, Loans 90
3. Nev deposits his 90 cash with Bank
Phil's original 100 hard cash has now "magically" turned into deposits of 190
4. Bank can now lend 90% of Nev's new deposit (ie new loan of 81)
= Bank deposits 190; Reserves 19 (10 +9), Loans 171 (90 +81)
Phil's original 100 hard cash has now "magically" created loans of 171

Repeat until Phil's hard cash deposit of 100 creates loans of 1000. Maybe a 1000x is excessive just from deposits alone but as I said, remember banks can borrow to cover reserves.

Notice no new hard cash has entered the bank.

Multiply this across the whole of the global banking system.........

why would anybody redeposit their loan? interest on deposits is like .5% while the bank is charging you 5%+ on loaned amounts.

You wouldn't. It was just that's where I stopped the example. And the example was simple using Phil's model.
In your low interest rate scenario you'd make sure most of the funds were used.
So let's work on.
Having deposited the loan in his account Nev withdraws the 90 in cash next day and buys himself a new computer. Computer Store Guy takes Nev's cash at the end of the day and puts it in his bank account (assume for this example he banks with Nev's bank). The result's the same. The Bank's customer deposits have gone up by 90. The bank doesn't care how that 90 gets back to them, or from who, as long as it does. And when it does it can re-lend it.

I know you're going to say but that's a big assumption that Computer Store Guy banks at the same bank as Nev. May be he does, may be he doesn't. If he doesn't may be some of it comes back in time further along the spending chain. It doesn't really matter. In the real world you can't look at this just on a single bank level. You can be sure Nev's bank also be will be taking in "magic" (ie non physical) money from other commercial transactions using proceeds of loans backed by multiple deposit creation at other banks. It all the same when aggregated and netted across the system.

Given the fact that finance expats drive Swiss banks, does this argument in that thread mean that you do the same at work with my money too?
Just a question. Open to all kind of answers, even mean ones.

I'm not sure if this is true Faltrad. I'm sure someone who works at UBS or CS can answer better but I believe the top guys are mostly Swiss.

Ah ok. I believe anything you professionals say. I take your word for it, it was just the impression I got from reading EF for months.