I don’t get it. I don’t get it. I don’t get it. I don’t get it.
When a bank makes a $1,000 loan, that creates $1,000 in the recipient’s account, but I don’t get how the loan, the absence of money, is an asset on the lending bank’s books. If it’s because the money will be paid back, then isn’t it’s value based on a corresponding debit of the recipients account thus nullifying the created money?
Edit: I am not asking how banks make a profit. I get that. I am asking how NEW DOLLARS are created. There are more dollars in existence now than there were say 100 years ago. I want to understand how they came to be. The answer I’ve found so far is that NEW DOLLARS are created when a commercial bank makes a loan.
Second Edit: For those saying commercial loans don’t create new dollars, apparently they do, but I don’t get it. For reference:
https://positivemoney.org/how-money-works/proof-that-banks-create-money/
In: 23
Most of the “money” that runs through the economy is not dollars but bank debt.
The number you see in your bank account? Repeat out loud “This is how much my bank owes me.”
Banks are heavily regulated because they can literally create money out of thin air. Their liabilities (the money they owe to depositors) has to be balanced out by assets like a mortgage.
When someone takes out a 30yr mortgage say for 500K, the bank charges interest so they make 600K total at the end of 30years.
This mortgage becomes an asset of the bank and is worth 600K
At this point, the buyer has not even started paying a single cent yet the bank has magically created 500K out of thin air and sent it directly to the seller of the house who has 500K of new spending power to buy lambos or another house or whatever.
At this point, the bank has a 600K asset, basically a “wage slave contract” over the individual who took out the loan. This asset can even be sold to 3rd parties.
However, the asset is not worth the full 600K because there is a risk of default, the lendee may die, declare bankruptcy, etc… So if that’s an X% risk then someone may only be willing to value the asset at 550K.
TLDR; they make money out of thin air by changing numbers in a database. They take a small fee for creating “time contracts” that allow you to bring your future income into the present.
** If this time magic is irresponsibly used, then too much money is created and the banks can go bankrupt because their assets become worthless. Since most money is bank debt this means that the world’s money stops moving. Banks are like hearts, if they stop beating, the whole body stops.
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