| > create credit to finance existing asset purchases (as opposed to financing new investment) the seller of that purchase transaction will have received the financing credit as cash. This cash is, in most cases, invested. If the seller had a loan, they might've repaid the loan - but then this repayment would in part, cancel out the credit creation the buyer's bank did. The net outcome, if it was positive, is the profit that the seller obtained, and this is real wealth created. This wealth is often reinvested somewhere - either to purchase existing assets (in which case, this cycle repeats), or to finance a new asset/investment (like a startup). However, the purchasing of existing assets is required for this system to work - like an exit strategy for the initial investors of that asset. Banks doing lending _could_ cause a bubble, if the rate of interest is too low compared to the growth in the economy (the assumption is that there's a limit to how fast you can grow new assets). Whether the past decade since the GFC had too low an interest rate, is up for debate. |