[itsdsmurrell]

The real problem is how much the bank earns off the interest it charges you throughout your life while it had to do what?... create new money from nothing into the money supply with special permissions given to it by the government. This is why housing is so expensive to begin with. This bullshit needs to stop.

[imtringued]

Well, I personally think that the banks profit margins are way too high but let me explain why they deserve to charge a profit in the first place.

We can make promises to each other. Essentially write debt contracts to each other at no fee. The problem is that we trust each other but if we want a more complex economy than a barter system allows, then we need to make it possible for a third party to trust the debt contract. Through the introduction of banks as middlemen they use their resources to check how trustworthy the debt contract you offer to the bank is. In exchange you get money, which is a liquid claim on your debt contract and thousands or even millions of other debt contracts. Thus the bank is primarily in the business of managing risk and the management of risk demands a net interest margin. If the bank didn't make money off of loans then any bad loan would lose the bank money and it would go bankrupt over the long term. In other words, the surplus profit that the bank made off your loan is its reward for correctly managing risk.

>This is why housing is so expensive to begin with.

Or it could be that housing is in high demand and banks offer financing so people have more money but since location is a monopoly, supply never catches up with demand in popular areas. Speculators themselves simply predict that there is sufficient demand for you to be willing to bay $400k for a house. Speculators didn't create that profit margin, it is the monopoly of land that created it and they merely exploit it.

[dan-robertson]

Banks don’t get to create money. Quantitive Easing isn’t something banks can call up on demand and it isn’t banks getting loads of free money. Instead they sell certain slightly risky assets to the government at a slightly higher price than they would be worth without QE. This small price difference is the free money but the bigger difference is that the banks have more liquid cash to use for e.g. making loans.

I think mortgages are pretty competitive, especially for reasonably well-paid people and there isn’t really that much profit made by the banks (your interest corresponds to inflation and the risk that you default on your loan with the house price having fallen.

Money today is worth more than money in 25 years and you have to pay the difference.

[eurasiantiger]

> Banks don’t get to create money

Literally every loan a bank gives out is mostly made up on the spot, everywhere in the world.

In some countries, banks are subject to reserve requirements — typically from fractions of a percent to some percents of their liabilities to depositors. Basically: banks need to cover the savings of people.

In the UK (and many other countries), this is not the case; banks are not required to have cash on hand in relation to their liabilities to depositors.

Instead, they are subject to capital requirements, which means they need to have sufficient equities (cash, securities, other financial instruments) with sufficient liquidity in relation to their risk-weighted assets (credit and loans). In effect: banks need to cover the investments of the investors.

[mkr-hn]

The term for the type with reserve requirements is fractional-reserve banking: https://en.wikipedia.org/wiki/Fractional-reserve_banking

[samsquire]

Commercial banks create money when lending money.

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

[Yaa101]

"Banks don’t get to create money." nope, they create debt, which is the same in practice.

[imtringued]

Well, if we want to use correctish terminology then banks grant credit (the number on your bank account) when debtors offer a promise to pay (the debt contract).

[eloff]

I've wondered lately, since the government backstops both banks and mortgages, shouldn't it just cut out the middleman? It could either give cheaper mortgages or use the difference as tax revenue.

[mkr-hn]

There's this weird brain worm from the 1980s in a lot of western democracies where everything government does has to be bid out to companies and driven by profit motive under the theory that it produces better outcomes. It doesn't seem to be working after decades of this experiment, but people keep trying.

[refurb]

The bank is collect money in the future that is worth less than what they leant out today - time value of money.

Charging 0% interest means the bank is losing money.

[kingludite]

I don't get how people can keep saying this. Is it that people are told banks lend out money from depositors in school?

Anyway, if you sign a contract that says you shall pay me every month for 30 years OR ELSE I get to sell your house (and whatever else you own, seize your income etc) then the document with your signature IS the value created and I can sell that document for what it is worth.

So the bank creates money not entirely out of thin air but against this contract.

This is a fantastic deal for them as there is almost no risk.

The seemingly few percent interest per year over 30 years quickly ads up to 2 or 3 times the initial sum.

I suppose this would be a reasonable amount roughly around the point where 3 out of 4 houses and the ground under them would just vanish in thin air with their owner stopping all payments after about 5 years on average.

The reality was that some people still had to pay rent for their flooded home.

So we are all suckers for putting up with the scheme, welcome to the club.

[imtringued]

The system makes some sense because your fiat isn't completely worthless paper as many people think but there is something missing. It's that promises inherently have a tendency to lapse so we artificially introduce inflation. Well, the problem with inflation is that it requires you to borrow more money so you replace the lapsed promise with an empty promise that is bound to lapse as well. If we were truly serious about letting promises lapse then we would consider having negative interest rates rather than inflation.

Rather than have 0% interest and 2% inflation there would be -2% interest and 0% inflation. Less need for endless debt growth and government stimulus.

[gruez]

>>Charging 0% interest means the bank is losing money.

> I don't get how people can keep saying this. Is it that people are told banks lend out money from depositors in school?

They don't? Where is the money from? Due to complicated reasons (ie. bundling mortgages into mortgage backed securities and selling them), it might not be the case that the mortgage issued by Bank A is funded by Bank A's depositors, but it is the case that it's funded by depositors/investors somewhere.

[imtringued]

From a technical perspective you need deposits but from a practical perspective deposits never leave the system except in the case of a bank run where everyone tries to withdraw their money. If we assume a cashless system then banks can never run out of deposits and deposits never limit loan creation. Saving doesn't increase the number of deposits, it just shifts them around. Borrowing money increases the number of deposits.

https://www.investopedia.com/articles/investing/022416/why-b...

However, saving does have one important function. It creates a hole in the economy and that hole can then be used for investment spending (motivated by a borrower taking on a loan) without causing inflation.

[gruez]

>If we assume a cashless system then banks can never run out of deposits and deposits never limit loan creation

...except for reserve/capital requirements, right?

>However, saving does have one important function. It creates a hole in the economy and that hole can then be used for investment spending (motivated by a borrower taking on a loan) without causing inflation.

In other words, capital isn't free as the parent poster suggests.

[dragonwriter]

> Where is the money from?

It is created ex nihilo, limited by reserve concerns (which include hard requirements for some banks)

Note that the most of the money never exists in the form of currency, it is just accounting entries in the banking system.

[6510]

> Where is the money from?

https://youtu.be/b6_SLwReMqo

[iso1210]

It's not a lot to be fair, and interest rates are below inflation.

[himlion]

That's a concern after more pressing issues are solved.