[gamegoblin]

See the part of my comment about the Fed and other entities regulating that the bank has claims on assets of sufficient quality. So the banks can’t just totally create loans willy nilly. They liabilities must be matched by assets of sufficient quality.

This does not preclude, however, asset bubbles as we saw in Japan in 1991 and globally in 2008. The banks create loans which drives up the price of assets. Those assets, now appearing to be worth more, enable the banks to create bigger loans, because hey, the asset is worth more! This is a positive feedback loop and a major failure mode of this system. Regulation tries to tamp it down but does not always succeed.