The Student Room Group

How the banks steal your money in the form of a loan

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Original post by collier888
The banking system gets the loan back twice, once in the form of repayments by the borrower, and once in the form of a cash deposit form the person selling the car. The liability that you are talking about only offsets one of these two payments. The cash deposit from the car seller increases the deposits held by the banking system as a whole, regardless of which bank they used.


And that cash deposit is going to turn into another liability and so on... The fallacy in all this is that there is a better system to keep people fed and in work, there isn't and for that reason alone we have this and not another system in place. It's what works, anyone can be theoretical about the inconvenience of debt cycles but in that case spell it out that we ought to have no credit culture.

Fair enough, we could rely solely on increased productivity to induce economic growth. Let's forget the 90 odd percent of funny money the banks pump out and live with the few crumbs left, is that the idea behind the criticism of 'banking'? The world would look nothing like this, forget the NHS and so much else.
Original post by zhog
And that cash deposit is going to turn into another liability and so on... The fallacy in all this is that there is a better system to keep people fed and in work, there isn't and for that reason alone we have this and not another system in place. It's what works, anyone can be theoretical about the inconvenience of debt cycles but in that case spell it out that we ought to have no credit culture.

Fair enough, we could rely solely on increased productivity to induce economic growth. Let's forget the 90 odd percent of funny money the banks pump out and live with the few crumbs left, is that the idea behind the criticism of 'banking'? The world would look nothing like this, forget the NHS and so much else.


If the banks are allowed to print funny money, why can't I?
Original post by collier888
If the banks are allowed to print funny money, why can't I?


Actually, banks don't print money but that was my wrong turn. Central bank does, of course. State a great customer, couldn't do without.

You can print money or go crypto, it's all based on faith by enough people.
Reply 63
Original post by akka444
Mr A takes out a bank loan to buy a car. The bank simply types the sum out of thin air into his bank account, despite the fact that they don't actually have the money in their reserves. Mr A then gives the cash from the loan to the person selling the car. The person selling the car then banks the cash. At this point the cash becomes real money. Mr A then pays back the loan. The original loan money disappears back into thin air again, but the interest is banked by the bank as real money that they now own. So the bank now owns both the interest and the cash that the person selling the car banked, neither of which they owned before giving the loan.


When the man selling the car places the money he receives in the bank the bank may hold the money but also has an equivalent liability to the depositor,

Dr Bank account of the bank(increase asset)
Cr Depositor account with liability to him by bank(increase liability)

The bank is restricted (based on its balance sheet) as to quantum of said loans it can make anyway, the bank cannot create limitless equity it is required to act within parameters set by its regulators. When the bank makes said loan it

Dr Debtor who owes the bank (increase asset)
Cr Demand Deposit re Central Bank (increase liability)

When debtor pays his loan instalments what happens is

Dr Bank account of the bank with the money(increase asset)
Cr interest received by bank (income)
Cr The Debtor who owes the bank (Reduce asset)

The bank accordingly merely gains the interest on the loan it made, when each instalment received.

If it were not so at year end the bank's trial balance could not possibly balance, the loan made by the bank merely gives rise to a Debtor to the bank (the party receiving the loan) and a Creditor, The B of E.

This little guide from the B of E maybe makes things clearer re a bank's balance sheet.

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/qb130302.pdf

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