Mortgage Loans: The Greatest Scam on Earth?

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cr1t (July 10, 2012, 13:21:54 PM):
Yes, but lets say seller A with another bank has no bond and sell his house to buyer B and B borrows the money from bank C.
C transfers the money into A bank account. So C was debited and A credited. So that money had to come from some place?
and C must make a note of the debit transaction?
Mefiante (July 10, 2012, 13:54:12 PM):
So that money had to come from some place?
Apart from the fact that the “money” is really just a bunch of electronic ledger entries, the value to cover the seller’s price came ultimately from a group of investors, as described here in the part about securitisation. The point is that banks simply do not lend you money in the way that they would like people to think they do.

'Luthon64
The Vulcan (July 10, 2012, 15:54:20 PM):
Meh I'm still trying to understand it, it's probably not that difficult to understand, think my mind just refuse to wrap all the way around it.

So this has really got to do banks being the only institutions being able to actually create money and it has something to do with something called the credit multiplier. The way it works is that banks are required by law to keep 2.5% of all their demand deposits at SARB, and the rest they can use for lending at higher rates. So one bank can take R1000 in demand deposit and of that R25 must go to SARB resserve and the other 975 he is free to lend out, so the guy borrows that money and pays a gal - the gal takes the money and deposits it and bank 2 now has to keep 2.5% of the 975 at SARB and lend the rest out, and so the cycle continues - in comes the credit multiplier which explains this:
R=2.5%D R is the Resserves and D is the demand deposits annd the 2.5% is the amount of all deposits that needs
Rx1/0.025=D go to SARB
40xR=(delta)D

so that means that the total deposits reflected in banks accross the country can be 40x higher than the actual cash resserves held at SARB

That's from some old notes from my 1st year economics, and I've already forgotten a sizeable chunk of economics, but I nevver really did feel quite comfortable with the whole thing, still don't, just can't see that the whole thing will ever feel right to me, even if I do eventually understand it, I don't think I will ever feel like I do |-O
BoogieMonster (July 10, 2012, 16:32:25 PM):
Quote
So this has really got to do banks being the only institutions being able to actually create money and it has something to do with something called the credit multiplier. The way it works is that banks are required by law to keep 2.5% of all their demand deposits at SARB, and the rest they can use for lending at higher rates. So one bank can take R1000 in demand deposit and of that R25 must go to SARB resserve and the other 975 he is free to lend out,

I am no expert, but I feel I've read about this enough to say no, that's not how it works at all. How I understand it is:

At your percentage of 2.5%: Instead of R1000, the bank can take just R25 and keep it in reserve. It can then "create" R975 with it, by borrowing it to you, then undo the "creation event" by selling that debt on the market. Of course, you borrow the money to pay someone. So they go deposit that money straight into an account somewhere. Bam, the bank has just freed enough reserves/gained enough new reserves to extend even more credit, and that's how you get into that debt-creation cycle, where each R1 in reserve is used to create many times as much debt.
The Vulcan (July 10, 2012, 16:58:28 PM):
Quote
So this has really got to do banks being the only institutions being able to actually create money and it has something to do with something called the credit multiplier. The way it works is that banks are required by law to keep 2.5% of all their demand deposits at SARB, and the rest they can use for lending at higher rates. So one bank can take R1000 in demand deposit and of that R25 must go to SARB resserve and the other 975 he is free to lend out,

I am no expert, but I feel I've read about this enough to say no, that's not how it works at all. How I understand it is:

At your percentage of 2.5%: Instead of R1000, the bank can take just R25 and keep it in reserve. It can then "create" R975 with it, by borrowing it to you, then undo the "creation event" by selling that debt on the market. Of course, you borrow the money to pay someone. So they go deposit that money straight into an account somewhere. Bam, the bank has just freed enough reserves/gained enough new reserves to extend even more credit, and that's how you get into that debt-creation cycle, where each R1 in reserve is used to create many times as much debt.

I think we're both saying the same thing, and with all the mumbo jumbo, I think I've failed to make my point, you see out of that initial R1000 deposit and with the standard cash resserve requirement of 2.5% banks can create that "bam" R40 000 seemingly out of thin air and so put more money in the economy. I'm definitely no expert too and this makes no sense, or if does, I just don't know if it'll ever feel right to me

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