TheRealMafoo said:
most people don't own a home, so when a house sells, that $0.81 is used to pay back thee $0.90 that was borrowed in the first place. Counting it against the $0.90 that was used to buy the house, and then the $0.81 feels like your counting it twice. I mean if I loan you a dollar and you then pay me back, and then I loan someone else that dollar and they pay me back, it didn't act like two dollars, it still only had the purchase power of 1 dollar. |
I think the scenario HS lied out may be meant as a 'best case' scenario for the multiplication of money in the system. e.g. if I put $1 into savings, it may become $10 in mortgages, assuming that said banks all lend out perfectly. This may, or may not, be the case, depending on the state of the economy.
He is correct about it, though, because if you look at one of the causes of the great depression, when banks went under, so did their ability to lend, and the money supply was constrained by 33%, which caused massive problems when correlating with other things during the great depresion.
Here is good 'ol Milty Friedman on reserve banking, and the collapse of the banking system during the GD as being a primary cause of the GD:
http://www.youtube.com/watch?v=EY-HYUFlCPs
When you take away 33% of the banks, you took away 33% of the lending capacity, therefore 33% of the money supply.
Also, if you read the 'reserve requirement' entry on Wikipedia, it does explain how a $100 deposit can potentially become a maximum $1000 in borrowing.
Back from the dead, I'm afraid.