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this post was submitted on 20 Aug 2023
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Asklemmy
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Because it doesn’t matter the company. A bank creates money if you apply for credit. It just have to have a fraction - say 3% - real money to store at a central bank account. Then they literally type the numbers on your account. Money created!
So, for a bank, it doesn’t matter if you apply for 5.10.20 years. They get the interests anyway. May be there is some weird financial acrobatic behind the 5 years target. However, here in Germany it’s pretty common to get a 20 years credit.
No retail banks create money while they grant a loan - it’s called book money creation https://www.geld-und-geldpolitik.de/en/banks-and-book-money-chapter-3.html#nav-vier If you wanna get rich, start a bank
What they mean by that is if there is a newly created bank with no money in it, and you deposit 100 of whatever currency, then I come in and withdraw 80, which I will use to pay for the creation of a bakery. Then I give those money to you, after you have built the bakery for me. Then you go back and deposit those 80 back to the bank. Then the cycle continues: I take out another 80, for example, to pay for initial products, I pay them to Person 3, who deposits them in the bank. The bank just turned 180 into 260. If, at that moment, I, as the bakery owner, decide to refinance my loan, I can get 60 from the bank. If then we get you, with a balance of 160, and Person 3, with a balance of 80, to withdraw their deposits, what do we get? Think about it: the bank only had 100 in its reserves from the initial deposit, and all the other deposits were money that the bank had loaned out, so while you had 100 deposited, then 80, you technically have 180 in your bank account, but there's only 100 actual money in the system.
You know what? Let me simplify if for you:
Person A deposits $100 to the Bank
Person A's account is worth $100. The Bank has $100 in its reserves.
Person B takes out a loan of $80 from the Bank.
The Bank now has only $20 in its reserves.
Person B pays the $80 to Person A for a service
Person A deposits the $80 to the Bank.
Person A's account is worth $180.
The Bank now has $100 ($80 deposit + $20 left from earlier) in its reserves.
2 days later, nothing's changed, except Person A needs some extra money quickly, so they go and try to withdraw the $180 in their account. The Bank only has $100 in its reserves.