00:01
So first of all, let's just talk about how banks work.
00:05
So banks take deposits from customers, and then banks do basically two things with those deposits.
00:12
One, they keep some as cash, because people are going to come to the bank every day and want money.
00:16
So the bank has to keep some stuff in cash, which we call reserves, and then the bank makes loans.
00:21
Now, loans here is sort of just a catch -all term for loans, investments, and other stuff like that.
00:28
But loans is the important thing, right? this is most of what banks do.
00:33
And the issue is that when banks make loans, however, a lot of that cash gets redeposited back into the banking system, right? imagine that you loan a construction company $10 million to go build a new subdivision.
00:49
That's construction company does not keep $10 million in cash, right? so the banks make more loans, make more loans, and the redeposits keep coming.
00:58
And each time the bank takes more deposits, it has to keep more reserves.
01:04
So what's going to happen here, right? the increasing in the reserve ratio, which means that every time a deposit comes into the bank, the bank has to hold more of that as cash.
01:17
So you can see that this is going to weaken this cycle, right? this cycle of loan creation, right? or what we call in economics money creation...