Hello guys I am concerned to post on this discussion as you guys have 'bought' a load of bull circulating the WWW on this issue IMO. I know, I know I am a gold investor / editor / writer (not supposed to talk like this) but I have researched this beyond a Google search and now have no idea why this myth persists.
Most of my colleagues have bought it so the myth gets perpetuated and quite frankly misinformation and fanaticism does gold no good in the mainstream investment world.
I will post anyway as I believe you deserve the truth always so here goes: Timber is right and I don't think he meant to be that insulting.
Banks do borrow short and lend long but they have to roll over that debt as it matures. Now if they created money out of thin air on new loans as you and the theory suggest then why would they ever bother borrowing anything at all? Does that make sense - think about that carefully.
Money costs them money. The reserves don't cost them additional funds as they are allowed to allocate cash deposits toward the reserve position I am told (?). Timber could articulate this with greater accuracy than I could. My information is from trusted yet high levels - but second hand not first hand like Timber, possibly a different area of banking as well.
Later my contact was in Fund management and very successful so no loyalty to banks - he left the industry when the risk model no longer made sense and they increasingly expected him to lie - couldn't do it. Show Timber respect and he might be willing to educate you more it throws up all sorts off opportunity besides being vital to understand how money works.
The game is rigged for them to be able to use depositors funds as 'assets' in the reserve position on the balance sheet as they 'hold' them. I am told this is so at least to some degree and put it to Timber for rebuttal or confirmation if he would be so kind.
Now imagine the no doc loans and no deposit loans were able to be issued as you state and as the video indicates. Think about it. The no deposit loans would be 'optimum lending' model for banks as this would mean a 100% 'creation' of bank asset against your asset in the form of the mortgage.
Here is the kicker - why would the bank tighten deposit requirements when their own risk increased? If anything they should love no deposit loans because they would get to issue more money from thin air. Not so unfortunately they have to borrow the money in the wholesale money markets at a fee. Even the deposits cost them money as they have to pay interest. Wholesale money markets are critical to their activities. Bad loans also hurt a great deal as they are paying interest on that money - so they need the cash flow to offset that cost.
The commercial banks would never go under - never have anything but astronomical profits if they could issue Fiat. Issue unlimited loans - wow! Issue $100B in loans and make $6B (6%) a year on no investment. Issue more to business and charge for all services for more free money. And the credit card charges would be worth a squillion to them at a 20% return on cash created out of thin air.
I would estimate off the bat that the CBA would be making over $50B a year profit at least if this 'creation' myth were true. No banks in America or Europe would need to be bailed out or propped up would they? Because they never owe money to anybody all money free and charge interest on fiat created out of thin air - how could they ever lose? Certainly never if they had the power to issue money from thin air.
It took a while to disbelieve this myth myself as I too had initially bought the lie back several years ago. Gold will still fly it does not alter the fundamentals for gold if anything it means there is greater risk in the banking system and therefore more to go wrong.
Central Banks issue money out of thin air and it dilutes the currency. This is the simple truth.
