How Do Banks Create Money from Nothing? The Basics of the Economic Crisis in 5 Minutes

[Satarack]

This is why a good banking system restricts itself to lending only to those who have a good credit history, and a good chance of repaying their loans. As long as only a minority of borrowers default on their loans, and the majority repay them, the system is stable. As such, a degree of regulation is necessary to monitor and control how such loans are made; since the bank is lending money owned by their depositors, not by themselves.

[tothemax01]

@Satarack The bank owns the money, not the depositors. The depositors retain neither possession nor ownership of the money, and instead establish a debt contract (repayable on demand). A banking deposit is a loan, not a bailment, as far as common law is concerned.

[Satarack]

@tothemax01 Red herring. You're equivocating a technical legal meaning for the word ownership; with a common usage meaning of ownership. The majority of a bank's money is from loans; all of which is owed back to customers; their legal ownership is irrelevant to their contractual obligation to return that money if and when the customer demands it back.

[tothemax01]

@Satarack No, just a correction (you said the money is owned by the depositors). There is a difference between owed and own. The significance is that if the money was owned by the customers (as is cash in a safe deposit box), any usage of the money by the bank would be illegal (in the same way that if you park your car in a carpark, the owner of that car park cannot lend the car to other people). Regarding failing to return, the difference is instead of bankruptcy it is theft.

[misterfunnybones]

Mr. Hat took his $90 and scuttled off to the tax-free Bahamas, never to be seen again. The money's gone...

[iansummerell]

great video, NOW let me see if I have this right, if Mr Shoe is ME and Mr Hat is J P Morgan or Goldman sachs. Mr Hat has my money, I've used some of it to pay my taxes and Mr Hat bets on the hedge funds market with my money, looses and asks the government for a loan. The government uses my money to loan to Mr Hat. Is that how it works?

[PositiveMoneyUK]

A biggest public campaign has started to abolish fractional reserve system. Visit POSITIVE MONEY website and support the campaign.

[AirLewis1988]

isn't this assuming there is only one bank in the economy, because in real life customers may withdraw cash from one bank and transfer the cash into another

[jespsoh]

But more actual money is created when Mr. Hat and Mr. Shoe pass go right?

[elektron2kim]

Because of interests, the mentioned system goes on forever and the inflation balloons explode all over, these days, because we reached a limit. Having millions and trillions in debts is just too overwhelming. The elite in the top skimmed the cream of other peoples wealth and hard work. It's very obvious, that the central banks in the top paid out profit to their owners, if not, they could save themselves.

[pcgamesolution]

i got lost when you introduced mr hat... next time ZOOM the notes and give normal names,like alex,michael,ect

[teddybear35]

best video

thank u

[xiiiill2]

Great video - thanks man.

[mister6828]

very well explained.. thanks

[cjgan80]

I lost where i was at when you introduced Mr.Hat xD 

[ZakusDM]

regardless of all the previous comments, I find the vid is generally a very good and affordable explanation of banks' multiplicative effect.

[kingofthepaupers]

Jct: Makes his first mistake in his first minute. The bank does not set aside $10 and lend out the other $90 like a piggy bank would. The bank sets aside $10 as reserve, leaves the other $90 in the depositor's account, and lends out a new $90 in new chips just like a casino issues chips. Why bother with the rest. See my video "How banks create money" for a blueprint of the flows.

[ElDukerino1]

You're on the right track about banks making money out of nothing, however it is usually the central bank who is able to do this like the Federal Reserve Bank in U.S. who is given privilege to start out with a 9:1 loan:deposit ratio. They can put in $10 and loan out $90 to commercial banks. Therefore the central bank made the money out of nothing by being able to turn $10 into $90 of loans to commercial banks.

[ElDukerino1]

This is kind of wrong..commercial banks don't make money from nothing..your example doesn't show that bank would have $90 collateral from Mr.

Hat..Mr. Hat is just mistaken if he thinks he has $90..he gave up something worth $90 to get it.

Mr. shoe should know that his bank has claim to collateral/assets that would ensure him getting his $100 back...If Mr. Shoe demands his money, then bank has to try and sell the collateral and/or get bailout from govt. to satisfy depositors.

[Zombiesforever101]

Mr. Hat! xD

[boundtogetdown]

good job mr garrison

but what if mr hat lands on mr shoes boardwalk with 14 hotels

[newculture]

In later videos I was going to pull out the properties, but I was looking at Baltic, since it is "worth" only 70 but sells for 90...

Who is Mr. Garrison?

[boundtogetdown]

south park

[newculture]

Oh, I don't watch TV, so I didn't get that one.

[boundtogetdown]

thats smart; you be surprised at how good at guitar youd get in a day without tv or internet and stuff

[Bernd1964]

Are you really sure we know everything about banking and the creation and flow of (virtual) money? I believe there is a largely unknown privileged elite that gets money from the banks without creating any debt and without paying any interests. They are the kings and queens of the modern age, they own the world and the creation of wealth by working slaves. We live today in a latent kind of feudalism not very different from the middle age. Money has become too complex and virtual to be rational.

[PesiCool]

@Bernd1964 Fuck the monetary system.

[airborneinfantry888]

@Bernd1964 I must respectfully disagree with you. It's true that wealth is created. When we use our minds rationally, we invent,build,discover, and create. Technological progres,innovation, and free enterprise create wealth. We are not slaves. In the middle ages, a peasant worked 14 hours a day for a bowl of soup. Today you probably work 40 hours a week and you live in a house, drive a car, own a color TV, an iPod, and a computer. You are wealthier then the kings of the middle ages. :)

[mds0014]

@airborneinfantry888 actually, not true. the kings of the middle ages owned castles (ie mansions in today's terms), where we own houses (ie huts in medieval terms). also, many kings owned land equal in size to some of the states, i don't know of an average person owning land the size of the state of new york. there are still people working very hard for said bowl of soup. don't believe me, go to SOUP KITCHENS. i know, homeless, but some aren't able to get jobs (others just dont want to work)

[mds0014]

@airborneinfantry888 now in the medieval period, there was a middle class that enjoyed a decent lifestyle. hey funny thing, there's still a middle class with a decent lifestyle. the more things change, the more they stay the same. now, we don't have to worry about slavery....well unless you're a slave being pimped out in america (there are hundreds of thousands on the low estimate). oh yea, the kings actually owned several castles (ie mansions).

[mds0014]

@airborneinfantry888 having said all that, the one thing that makes america great is that there is the possibility to work your way up. it was possible in ages past, but much harder than it is in todays time. although i feel that its getting harder and harder to work your way up now. tech/innovation doesn't create wealth. it simply causes a transfer of wealth, ie people pay the company to get say an ipad. so now people transfer their wealth to apple, some of which goes to the workers.

[mds0014]

@airborneinfantry888 sorry for the long posts, just my two cents. :)