What I love about Nick Rowe? His analogies. This is from Bank runs, keynesian multipliers, monetarist cold potatoes at Worthwhile Canadian Iniative:
Car banks. Suppose the Jalopnik devil waved a wand and made cars a fungible asset. All cars are suddenly identical, and will always be identical. Car banks spring up. You give your car to the car bank. In return, the car bank pays you rent/interest, and promises to pay you one car on demand. Since most of the time most people don't need a car, car banks become fractional reserve car banks. There's no profit in having cars sit idle. Owning the bank's promise to pay you one car on demand is as good as owning a car, provided the bank can always deliver on that promise.
I read that, I know we're talking about money and banking. But it helps to think of it in terms of cars. It's like seeing with fresh eyes. But here's something:
Since most of the time most people don't need a car, car banks become fractional reserve car banks. There's no profit in having cars sit idle.
That's the "loanable funds" thing. The car bank gets to loan out the cars to other drivers because it *has* the cars, because we deposited them in the car bank.
Yeah, it works with cars. It works with cars, because a bank cannot create a new car simply by lending it out. It has to actually have a car before it can lend it. That's not true for money. Banks create money by lending it out. (Actually I'm starting to mull that one over. But I'm not ready to talk about it yet.)
Banks create money by lending it out, so they don't need to get our deposits in order to lend. I understand that.
So I have to ask, again: Why do banks want our deposits?