Delete comment from: Captain Capitalism
Ryan, I really don't understand what you're trying to say. It's contradictory.
Banks create money BY lending. They take in deposits, lend out almost all of it, and collect interest from the spread between the interest rate of money borrowed and money lent. The money multiplier is 1 divided by the required reserve ratio. if the RRR is 100%, they create no money.
Yes, banks creating money DOES create capital. Capital consists of the finished products used in production. For a pizza parlor, that would be the building, ovens, utensils, chairs, tables, refrigerators, sinks, pizza ingredients, etc.
When a bank lends money to an entrepreneur to start a business, they "create" capital by providing the funds to purchase it. This gets the ball rolling.
Lending does create capital. It does create wealth. It does create economic growth. It is sustainable. That's how we became the wealthiest nation on the planet.
But this is also inherently risky, which is why their lending practices must be regulated and confidence in the system must be maintained to prevent bank runs. As long as risks are diversifiable, there is no problem.
Banks HAVE NO previous profits under your system. They have no way to make money. A bank cannot accumulate assets for non-interest income if they don't make money from loans. And if they have a 100% RRR, they cannot make loans. Without interest, banks are bust.
Venture capital does not exist in sufficient quantities to keep the engine of our economy going. Sure, a group of 10 Chinese families might band together to help 1 person get started on their restaurant, but that doesn't happen often enough for economic growth.
Venture capital is also highly RISKY. Banks can mitigate that risk by spreading their interests over many different types of loans. VC cannot.
Jan 12, 2009, 3:16:00 AM
Posted to The Pie Chart of Blame