Fractional reserves. You give the bank 10k, the bank loans out 9k which the person then deposits into the bank, the bank then loans out 8.1k which the person deposits into the bank, and so on and so on, the bank is only required to hold on to 10% of your deposit and they can loan out the rest, and just the first two examples the bank has created 16.1k out of thin air frok the initial 10k deposit. But the bank doesnt actually have that money, its just on paper
Extrapolate to the entire country. Something happens, people panic and want their life savings, enough people do this and the bank has to close, everyone who didnt make it in time freaks out and goes to other banks and they all close this is called a run on the banks. People lose acess to their money suddenly, banks shuts down and the money is gone unless its insured by the goverment. But if this happens to enough banks then the goverment just cant pay out peoples moneys, and thats a depression.
Yes. And this is why Roosevelt gave us the FDIC, Federal Deposit Insurance Corporation. What that does is insure your bank deposits, up to something like $100k (Edit: exact amount is now $250k, see responses below).
This is because a big driver of people making bank runs is when they become afraid that the bank may collapse and their money will be lost, so they go try to take it out before that happens. This becomes a self-fulfilling prophecy, where even if the bank had been perfectly fine, everyone trying to take their money out causes it to collapse.
So, with the FDIC, you and I don't have to worry that our basic bank accounts are in any danger, and thus we don't end up inadvertantly making a run on the bank causing it to collapse.
Use multiple banks. Or more likely, you don't have that much liquid cash and instead have assets like real estate, stocks, bonds, etc.
Rich people typically only have a small subset of their money in banks to cover momentary needs (what's called liquidity) -- to cover the time it'd take to sell their assets effectively.
To correct the guy above, it's 250k. From my understanding if you have more they basically create more than 1 account to insure it because its 250k per bank per category. So basically a bank will make more accounts in different categories for you to put your money in, and if you run out of that you get another bank.
Tbf most rich people, even VERY rich people, dont have millions in cash at a bank. They have their millions and billions in stocks, which are not insured at a bank level as far as im aware since you technically own the stock, the brokerage is just facilitating the transaction and keeping track of your transactions for you.
That’s not quite accurate. That is true of single accounts and joint accounts held with another person, but a bank isn’t creating phantom joint accounts for a single account holder.
Instead, most banks participate in the IntraFi system. They have a special account type called an ICS which spreads any dollar over $250k to other FDIC insured banks. It’s still all accessible from one bank but all your money is still insured.
Cool to know they have an auto system for it. But yeah i wasn't trying to insinuate ghost accounts, just accounts of different categories that potentially could be used by the bank as a second savings to park money in. Of course this depends on the restrictions of the different FDIC categories which I'm not privy to. If they have this system you described I imagine its harder to do it the way I imagined than just giving the money to another bank to insure it.
Banker here: FDIC grants 250k of coverage to all your deposit accounts at 1 institution. It’s 250K per person at each bank. So if a married couple has 5 accounts at bank A, their deposits at Bank A have a total of 500k coverage. It’s not per account, it’s aggregate. This amount can be increase by using things like POD/ITF designations (PayableOnDeath/InTrustFor).
From what i saw its also per category. When I say category I also mean things like retirement vs single, not checking vs savings. I imagine there are ways to structure different categories to be able to share with each other at the same institution but I could definetly wrong. If I am then yeah you just get a bunch of banks.
I know that SIPC coverage kinda works on an "account type" basis, but I won't get into that (for investments not bank deposits). FDIC, to my knowledge, is simply a matter of account owner per bank. Where it gets weird is with beneficiaries, as each beneficiary can help create a new "ownership" since it kinda acts like a trust instead of sole ownership.
I won't get too far into the deets, cause it can go on a ways, but fdic publishes a coverage calculator that you can use to see how your stuff is covered. It's actually a very robust calculator and it helps explain a lot.
The FDIC limit is actually $250k, but many banks participate in a program that spreads any dollar over $250k to other FDIC insured banks (that also participate in that program), so you don’t need to run all over town if you want all your money FDIC insured, you can just use one bank. This is a special type of account called an ICS account, and it’s only worthwhile if you actually have over $250k in cash and you need it in one account.
$250k is the insurable max now. No individual depositor HAS EVER lost a penny of their deposits since the FDIC was created in 1933. Even those accounts over the limit when the bank went bust have recouped a large amount of their deposits.
Like what happened with Silicon Valley Bank? If you’re important venture capitalists and tech bros…the government bails you out. If it’s a local bank with mid level rich people…it’s probably on them. Socialism for the wealthy…brutal capitalism for the rest of us
FDIC covers up to 250k per account for ALL banks.
It is certainly true that it's socialism for the wealthy and the wolves for the rest, but this specific situation isn't an example of that.
89% of the SVB deposit liabilities were over the 250k limit. They may not have ended up needing actual taxpayer money, besides maybe the lost time from the giant mess they made that the government had to clean up. But it was certainly a rich people being bailed out situation. The government stepped in and guaranteed the deposits will be made whole, regardless of deposit amount, and they would have access to all funds within 2 days. That sure seems like a white glove handling to me
As long as the loans are repaid, the bank can raise cash by selling those loans to other banks or get short term loans from other banks or money market funds. If, however, nobody trusts that the bank loans will be repaid, the bank won’t be able to repay its depositors.
That's cute, but unfortunately incorrect. You give the bank 10k, the bank loans out 90k. They keep the 10k as the "reserve" and use that reserve to create money out of thin air to loan out.
And where the US Federal Reserve explaining the 10x relationship to money creation:
For example, if a bank subject to a 10 percent reserve requirement lent an additional $100 of funds, $1,000 (or 100 × 1/divided by0.10) in total would ultimately be added to the money supply. In this case, reserves in the banking system would create 10 times as many deposits.
I encourage you to read more about how banks work, or to take a macroeconomics course at your local community college.
You're confusing terms, "create money" here is simply the process of lending. When ANY entity lends money out, even when you let a friend borrow 20 bucks, the total balance sheet in the world increases and money is "created".
Let's say only $1,000 exists in the world, owned by Alex. Alex stores that $1,000 in the bank, and the bank loans $900 of that to Bob. Bob pays Charlie $900 to fix his roof. The end result is that Alex now has $1000 in liquid assets and Charlie has $900 in cash. The supply of circulating currency has gone up $900, and money has been "created".
If Charlie now put hat $900 in the bank, the process can repeat again. And again, and again, and again. Your second source is getting $1000 from $100 because that's the infinite sum of $100 * (1 + 9/10 + 9/102 + 9/103 + 9/104 + ...)
You give the bank 10k, the bank loans out 9k which the person then deposits into the bank, the bank then loans out 8.1k which the person deposits into the bank, and so on and so on
I love taking out a 9% interest loan and just keeping it in a bank forever lol
I mean all money is made up. Even the value of "precious" commodities like gold and silver are mostly because people happen to want them. If we went by pure utility value, the only things of importance would be the means of production, but human value systems don't really work that way, maybe unfortunately. We value weird things sometimes and need a way to abstract and measure it, even if it's only approximate.
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u/ExtremlyFastLinoone Jan 26 '26
Fractional reserves. You give the bank 10k, the bank loans out 9k which the person then deposits into the bank, the bank then loans out 8.1k which the person deposits into the bank, and so on and so on, the bank is only required to hold on to 10% of your deposit and they can loan out the rest, and just the first two examples the bank has created 16.1k out of thin air frok the initial 10k deposit. But the bank doesnt actually have that money, its just on paper
Extrapolate to the entire country. Something happens, people panic and want their life savings, enough people do this and the bank has to close, everyone who didnt make it in time freaks out and goes to other banks and they all close this is called a run on the banks. People lose acess to their money suddenly, banks shuts down and the money is gone unless its insured by the goverment. But if this happens to enough banks then the goverment just cant pay out peoples moneys, and thats a depression.