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Suppose you prohibit "usury", in the sense that the interest rate must be zero. If the return on lending is zero, no one would lend in a capitalist system. You are deprived of the capital while someone else is using it, and afterwards, you get exactly the same amount of money (or, in less draconian systems, you'd get a "minimal" interest rate that made you ...


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At the end of this answer there is an explication of the fractional reserve system. It is taken from another question that was closed as duplicate: The problem I have with this concept is the following: A bank give a Merry loan of 100,000$. Merry buys a house with this money. For a period of 1 year, Merry has paid back 10,000 to the bank. Afterward ...


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Very good question. Let's break it down: A bank give a Merry loan of 100,000$ Concretely, the bank records an asset of 100,000 (the loan) and a liability of 100,000$ (the amount recorded in Merry's deposit account). Note that at this point, the liability is what appears on your internet banking statements as 'money' and those liabilities to you from ...


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Fantastic question! Fractional Reserve Banking is a fascinating topic :) So, the bank never created the money out of thin air. To be clear, the loan money DOES come ENTIRELY from the depositor. This below example should be clear: If I put $100k into a bank...what do I get back? I get back a checking account...I effectively get an "IOU" back from the bank....


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Fantastic questions! I might only take 1-2 of them on, though. Paraphrased below. 1. How could a bank fail from just one bad product (MBS), shouldn't they be more diversified? So: substantively, one way this could happens is if you don't have a lot of equity in your business. I.e. you've financed a lot of your business with debt. At the end of 2007, ...


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As noted in a comment, the difference is between gross and net debt. If the only debt instrument in the world is A owing B \$100, the gross debt is \$100, and the net debt is possibly 0 - if we are willing to count B’s financial asset as a “negative debt.” (It’s not entirely clear that is reasonable, but that will depend on how one wants to define things.)


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Economically, they are both loans against financial instruments. The difference is the collateral posted - repos by the Fed are generally against Treasury securities. This is not a small difference: it makes it much easier for a bank to access liquidity, since not all of its assets are Treasury securities. There’s a mechanical difference: a discount window ...


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If we talk about a run on one bank, I think it's the other way around. Back then, people need to stand in line and wait for their queue to take their money out of the bank (and deposit it to another bank). Now they can transfer their money from anywhere and anytime. So I think the risk of a run is greatly increased.


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A great starting point is "Fundamentals of Corporate Finance", Ross, Westerfield & Jordan. This book will give you a good overview of key concepts in finance. This book is widely used in introductory courses for non-finance majors, to both teach some fundamental ideas, and give a panoramic view of the field. "Trading" will probably be the topic that ...


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