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Comment by rtpg | Hacker News Reader

>Banks borrow money for less than they lend it effectively guaranteeing a profit if properly and concervatively managed

Sure, in a magical world where 100% of people pay back their loans. 2008 happened for a reason

Nope, not so. Banks don't borrow money from depositors and lend it to borrowers. They create the money they issue as a loan. Sadly, no one understands this: https://en.wikipedia.org/wiki/Money_creation

Everybody can create new money. Not just banks.

Let me give you an example. I'm worth $100. We agree I lend you $1,000,000. Sure, I don't physically have $1,000,000 but I can still make a loan to you and give you some piece of paper telling you you have $1,000,000 deposited with me. My assets have increased by $1,000,000 (loan amount) and my liabilities have increased also by $1,000,000 (what you have deposited with me). I'm still worth $100 but I created $1,000,000 of new money.

This is what commercial banks are essentially doing. It's not like they have some superpowers. Everybody can do this.

So I don't understand what's your point.

I'm pretty certain what you have described constitutes some form of fraud.

You're both wrong. Come on.

If you, private Bank Lubos, only have $100 on hand but have a customer who wants a $1,000,000 loan, you don't just write a piece of paper. You would go to the U.S. Fed Reserve (central bank) and take out a loan for $999,900 with interest..

The central bank creates the $999,000, and the private bank charges a premium on the interest rate.

What about the other $900?

Rounding error :)

The special thing that banks do is take deposits. This is tightly regulated in most countries.

Anyone can lend money, as you say.

>This is what commercial banks are essentially doing. It's not like they have some superpowers. Everybody can do this.

You can't create $1,000,000 in a spendable form. Banks can. What you have proposed is the creation of some sort of worthless security which, yes, anybody can do.

Some Bank of England economists published some interesting research exploring this earlier this year: http://www.bankofengland.co.uk/research/Documents/workingpap...

I'm not sure what you're point is here. There is no magical world 2008 or not, never do you see 100% of people paying back their loans.

Conservatively managing loans means minimising lending to people likely to default, and leveraging enough to cover those who do. You do not need 100% of people to pay back their loans to turn a profit, charging interest is what makes this manageable and guarantees a profit.

If you conservatively run a consulting business, you can 'guarantee' a profit too.

While I agree that bankers hold too much influence in politics, this line of thinking is obviously incorrect. First, bankers have margins and compete like any other entity. If they are too conservative they will not get enough borrowers to cover the cost of their staff and facilities. Furthermore, to just earn a profit is not enough, a banker needs to earn a profit consummate with its market capitalization. Most banks are publicly traded, after all.

Well, there's no guarantee of profit. You cannot predict 100% of the time who will pay you back. It's pedantic, but it means there is _no_ guarantee of profit

Of course, you can get pretty close to 100%, but it's a balance of risk and reward, like most things.

Proper and conservative management includes due diligence wrt the borrower's ability to pay.

right, but GP was implying that profit is guaranteed because of the interest rate differential. If you have any costs at all (even just operating costs), then that profit is not guaranteed

I'm not a fan of banks nor of the amount of money they get for their services, but there's no "guaranteed profit"

2008 wouldn't have happened if the banks did their due diligence, they got greedy and the rest of us had to pay for their mistakes.

They got greedy like everyone else, they couldn't have made subprime loans if consumers didn't ask for them.

You are going to find always consumers of cheap money. That's a fact. Specially if you going searching for them actively as the banks did before the crisis.

There is a reason because controls have to be in the side of the lender.

Banks, and everyone else, are always going to be greedy. The source of the problem was not greed (that is a constant) but deregulation, that have not been properly corrected.

> 2008 happened for a reason

2008 happened because some d-heads decided to throw in the same bucket loans with good ratings and loans with junk ratings. And also because borrowing money was cheap, making it easy for a lot of people to borrow money when they should not have been able to in the first place. A pretty good definition of a bubble. Oh, and thanks to the Fed.

Don't forget Uncle Sam. "Subprime" means lending money to people with a poor credit history. The government was cheerleading the whole way because it allowed poor people to buy houses... until interest rates went up and they could no longer afford their adjustable rate mortgage payments.

The sustainable way to get more lower income people into home ownership is to reduce housing prices (e.g. by increasing the supply of housing). Subsidizing and encouraging mortgages does the opposite of that -- instead of making housing cheaper it makes borrowing money cheaper, which makes housing prices go up. Which means existing home owners love it and new home owners like it... until all the people who couldn't get a loan in a normal market demonstrate why they couldn't get a loan in a normal market.

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