Delete comment from: Captain Capitalism
"Where will they get the capital to make loans?"
Venture capital to get started, then the profits of their previous work.
"When banks lend money in a fractional reserve banking system, they CREATE money. This is not a drain but rather a source of growth."
Creating money from nothing doesn't create wealth, and it doesn't create sustainable growth. Increases in the amount of paper flying around can fool people who didn't expect the increase in cash into thinking that resources are more plentiful than they really are, but the increase in spending that follows this misinformation is neither sustainable nor desirable. Prices communicate information about the supply and demand of goods and resources, and increasing the money supply will distort that information so that real prices drop below the market clearing level in the short run before nominal prices adjust. If you want to argue that the price of capital defaults to a level above the market clearing price then maybe you could try to make a case for trying to fiddle with real prices by increasing the money supply based on that, but prices adjusting to a market clearing level in the long run is a pretty consistent feature of most markets.
"Banks serve a much more important service than you think they do Ryan.
They don't merely lend money for houses, cars, and credit card purchase. They also provide loans for construction and development, up-front payments of workers comp and health insurance premiums for small businesses, and purchases of inventory."
You say that like it's something I don't already know or agree with.
"If businesses, farms, people, etc. all waited until they saved enough money for big ticket items, economic growth would grind to a halt. Borrowing provides the initial capital for production which creates jobs and profits."
Banks creating money doesn't create capital, and like I already said, banks can make loans from their own capital and previous profits. Creating more money from nowhere just drives up prices and transfers purchasing power into the hands of the bank at the expense of everyone else who has a positive cash balance.
"Loans are intertemporal transfers of income and without them we have incomplete markets - a form of market failure. They can certainly be risky or abused, but that's what underwriting, due diligence, and credit ratings are all about.
Banks are indispensible, particularly in our sophisticated economy. "
Yeah, I know; loans are important. That's why companies are willing to pay a premium for liquidity now. That's also why banks can actually earn money and keep themselves in business without having to create money from nothing.
Jan 11, 2009, 2:02:00 AM
Posted to The Pie Chart of Blame