Ban All The Banks: The Wild Idea That People Are Starting To Take SeriouslySubmitted by Diamond Dog on Mon, 04/28/2014 - 22:14
BUSINESS INSIDER: Economists have begun seriously discussing the idea of banning banks. That seems ridiculous and far-fetched, but the idea might not be as crazy as it sounds.
But before we get to the idea, there's something important that needs to be addressed, which is that people tend to have a gross misconception about what a bank does.
The typical person probably thinks about a bank the way it's depicted in the movie "It's A Wonderful Life."
In the scene below, George Bailey's savings and loan is being caught up in a run on the banks. Bailey is forced to explain to the depositors their money isn't in the vaults because it's been loaned out. He then points to some people in the crowd who have taken out mortgages from the bank, explaining how that's where people's deposits have gone.
But actually that's not how banks work.
How Do Banks Work?
The reality is that banks don't make loans out of existing deposits. When a bank gives you a mortgage (or any other loan) it doesn't go into its vaults to see if there's cash available that someone else has deposited. Instead, the bank digitally (almost like magic) credits your account with the amount you need to pay for the home.