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[VIDEO] Where does money come from?

Apparently banks pull money out of thin air then lend it to borrowers for home loans. Here is what TVNZ reported.

Wednesday, April 9th 2014, 11:31AM

Whenever you apply for a loan or a mortgage the bank you applied ot creates the money out of nothing. It is not lent to you from the banks' holdings, it is not borrowed from other accounts. It simply is entered into a bank account digitally and from that day forth you are contractually responsible for paying back the created money plus all the interest that accrues.

Here's what Seven Sharp reported. What do you think?

Comments from our readers

On 10 April 2014 at 9:27 am Patrick said:

Google "John Ruiz Dempsey" whom took the banks to court over this and won as the court agreed that there was no legal basis enshrined in law that allowed the banks to create money, and that no actual real goods were exchanged as per contract law

On 11 April 2014 at 8:54 am Paul M said:

Putting aside the rather breathless and dramatic presentation in this snippet, I am surprised that their 'revelation' is a surprise to anyone; such leverage is the essence of how the banking system works globally. If the level of surprise in this article is a reflection of the general public's reaction, then the state of our financial literacy is even more dire than I had thought.

On 11 April 2014 at 9:41 am The Editor said:

Thanks @Paul M. That is why we put it on the site. We were surprised with the way it was presented and the content of the piece. Especially as it was on prime time telly. So it was pleasing to see this today

On 12 April 2014 at 12:13 am Andrew m said:

The fact that money is created by debt is hopefully understood by all financial advisors. The consequence of this might not be as obvious. For debt to be repaid plus interest it requires constant economic growth. So money created by debt is a claim on future resources. If we have more claims on future wealth than the earth can cash what happens then?

On 12 April 2014 at 11:06 am Neil said:

Almost as unbelievable as the rubbish coming out of the presenters mouths. Have they never heard of bank "leverage". If they don't believe its real money then try not repaying it! Then that asset they you love so much will soon be gone and turned back into "real cash". Plus not a mention in the item that the sellers of the property just might get something "real" too with which they can repay their own mortgage and keep the balance as their "real" profit.

On 14 April 2014 at 11:07 am Rainmaker said:

This is a common misconception Money is not created out of thin air. Banks have to fight for both customer and corporate deposits which they can lend out. The assets have to be greater than liability for prudential purposes. Commercial banks do not have the right or the resources to lend more than what they have. What happens is that the banks only have to maintain a small % of the deposits they collect as liquid assets whilst the rest can be used for lending purposes. At a company level this does not create money. The banks do this because the interest earned on lending exceeds the interest paid to depositor. The profit of a bank comes from the interest spread between deposits and loans. However at all times the banks have to maintain liquid assets to meet cash demands. At a macro level the money which is borrowed is consumed or saved and new loans are created on those savings. This creates a multiplier effect which gives the impression of money creation. The actual money creators are Central Banks that have the right to print money. This is done through the outright purchase of government securities. If you look at the balance sheet of the Central Banks, you will notice there is an item with regards to T-bill and T-bond holdings. These are securities that have been purchased from the market by printing money. During the Asian Financial crisis, when foreign funds disposed of their securities, the central banks stepped in to purchase them. This resulted in a mass printing of money that destroyed the FX rate of a number of countries. Hope this helps

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