I made this video as a starting point in explaining the how banks creates money (or more accurately credit) and correct some misconceptions in the video “Money as debt”. I would like to have feedback and proposals on how to improve it The voice in the video is made by a “text to speech” engine and should be replaced by a more pleasant voice (is there anyone that wants to do it voluntarily? When the text is finally edited?)
Most of this is based on a blogg written by “Sunda pengar” and in particular his excellent blogg dealing with Basel 2:
Here’s the “text to speech” text and I should very much appreciate corrections in grammar and other issues concerning the language – since English is not my native language. Feel free to come with pedagogical remarks as well – where I’ve been to vague and so on. This is meant as an outline so I’m opened for suggestions.
Please refer to the number you think should be altered. It will be an easy thing to correct and replace it in the “text to speech” engine and put it back into the video.
Let’s say Paul is buying a house from Kate for 500000 dollar.
The banks then use a portion of their reserves and in order to expand their balance sheet. Note that the proportions are grossly exaggerated : in reality a very small portion of the banks reserves are needed in order to create the loan.
The banks then expand their balance sheet on both sides with 500000 dollar. Paul will get a 500000 dollar loan, which the bank register as an asset and Kates will get 500000 on her deposit on the other side of the balance sheet, which the bank will register as an liability. Note that no deposits are used in the process. The bank just expand the balance sheet on both sides based on a portion of their bank reserves.
Now let’s say Paul and Kate fall in love and get married. Kate pays off Paul’s loan with her 500000 dollar and the money, or more accurately credit, will cease to exist.
Both the banks liabilities and assets will then shrink simultaneously on both side on the banks balance sheet.
This will also free up the portion the bank used of it’s reserves, which then can be reused.
Note again that no deposits are used in the process.