The Fed doesn’t create most of the money. Banks do.
When a bank approves a mortgage, it generally does not take money from one customer’s account and hand it to another. It creates a loan on one side of its balance sheet and a matching deposit in the borrower’s account. New deposit money has entered the economy. As the principal is repaid, that money is destroyed. Banks cannot do this without limits. They need capital, funding, and creditworthy borrowers. They face regulation, and central banks influence credit conditions. But the important point remains. Most money is born when someone goes into debt. Central banks create a different form of money. During quantitative easing, the Federal Reserve buys bonds and pays by creating bank reserves. When it buys from a non-bank investor, the transaction can also create a commercial bank deposit. Those reserves are not stacks of currency that banks mechanically lend to households ten times over. Banks do not lend reserves to consumers. Their lending depends on capital, funding, borrower demand, risk, and profitability.
#Macro #Banking
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