| mrstickball said: Oh, and I'd note one other thing, Mafoo: You erroneously assume that money will be loaned out, and paid back before more money is lent out again. That is not the case. Mortgage notes typically last 10-30 years. That is quite a long time in which to give the opportunity for the monetary base to inflate. I'd be interesting to see if there is any analysis on what typical cash reserve ratios are, after a given amount of time the money has been deposited. |
This may be exactly what your saying... but i'm pretty sure this is what HS is saying, and this is how it works.
If you put 100 dollars in the bank.
They can loan up to 90 dollar due to the capital reserve requirment.
Of the 90 dollars loaned out, they can loan out up to an additional 81 dollars using those loan as the "base". Though it will be less then 81 dollars since you need to divide the capital 90 dollars by the percentage of risk that said loan will default.
So say that 90 dollar loan was judged to have a 25% chance to default... that leaves me with a theoretical $67.5 i've made. So i can loan out an additional 60.75.
That 60.75 goes to a guy with a 33.3% chane to default. So that leaves me with 40.50 as a capital base and $36.45 I can loan out.
Etc. Etc.
Part of the problem with the collapse was, that a lot of HIGH percentage risks of default were being brought down in "percentage" by bundling it with one or two stone cold locks on paying it back.
