this post was submitted on 20 Jan 2025
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A somewhat political fact, but one that made some of my friends dumbfounded:
When a bank issues a loan, it generates that money literally out of thin air and credits that money to the loan account rather than using deposits they already had. For example, if you want to borrow $100,000, the banker approves the loan and doesn't hand over cash or move existing money around - instead, they just go on their system and credit your account with the sum, that's it.
As of March 2020 the reserve requirement for banks in the US is 0%.
What the fuck, who changed that? Seems like a horrible idea.
The Fed Board, apparently: https://www.federalreserve.gov/monetarypolicy/reservereq.htm
After reading through that page and the FAQ, I think it's because the banks should now be compelled to held reserves because Fed pays them a reasonable interest (close to what they would get if they give a very low-risk loan) on them, rather than it being a strict requirement. I don't know enough about economics to have an opinion on whether it's a good idea, but I feel like it's not too horrible? Like, maybe it makes some shitty banks even more susceptible to bank runs, but that's the reality of fractional reserve banking in general.