In our current system, **money creation** and money destruction is mainly done through private banks. New money is created when these banks create credit, and through fractional-reserve banking they only keep a small fraction of deposits in reserves.
The financial system then becomes hopelessly intertwined - if too many borrowers default on their loans, the **entire system** will fail – even for customers who never agreed to have their deposits invested in risky schemes.
This intertwining creates **terrible incentives** through a severe disconnect between risk and reward for the financial sector.
The government becomes obliged to bail out banks once they get into trouble from risky lending, which drives banks to take even more risk knowing that their potential losses are capped, but their upside is not.
- an excerpt from the 2-minute version of An Honest Account of Fiat Money (2018) posted in https://www.2minutebitcoin.org/blog/an-honest-account-of-fiat-money-2018
2minutebitcoin
npub1p6…9ej3v
2023-04-30 11:17:34
Author Public Key
npub1p63d4vekvuql9zltpp4dezzfk2xxfgjsfqyglf4ju4syalekn4csn9ej3vPublished at
2023-04-30 11:17:34Event JSON
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"content": "In our current system, **money creation** and money destruction is mainly done through private banks. New money is created when these banks create credit, and through fractional-reserve banking they only keep a small fraction of deposits in reserves.\n\nThe financial system then becomes hopelessly intertwined - if too many borrowers default on their loans, the **entire system** will fail – even for customers who never agreed to have their deposits invested in risky schemes.\n\nThis intertwining creates **terrible incentives** through a severe disconnect between risk and reward for the financial sector.\n\nThe government becomes obliged to bail out banks once they get into trouble from risky lending, which drives banks to take even more risk knowing that their potential losses are capped, but their upside is not.\n\n- an excerpt from the 2-minute version of An Honest Account of Fiat Money (2018) posted in https://www.2minutebitcoin.org/blog/an-honest-account-of-fiat-money-2018",
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