Lending to the bank
"This will happen automatically when you open an interest-bearing account with a bank.   You didn't think that banks just kept all that cash in a vault somewhere, did you?  That's not the way modern banking works.   Today (and for a long, long time) banks will keep only a small fraction of their deposits on hand (called the ""reserve"") to fund daily withdrawals and other operations.  The rest they routinely lend out to other customers, which is how they pay for their operations (someone has to pay all those tellers, branch managers, loan officers) and pay interest on your deposits, as well as a profit for their owners (it's not a charity service).  The fees charged for loan origination, as well as the difference between the loan interest rate and the deposit rate, make up the profit.   Banks rarely hold their own loans.  Instead, they will sell the loans in portfolios to investors, sometimes retaining servicing rights (they continue to collect the payments and pass them on) and sometimes not (the payments are now due to someone else).  This allows them to make more loans.   Banks may sometimes not have enough capital on hand.  In this case, they can make inter-bank loans to meet their short-term needs.  In some cases, they'll take those loans from a government central bank.  In the US, this is ""The Fed"", or the Federal Reserve Bank.   In the US, back around the late 1920's, and again in the 1980's some banks experienced a ""run"", or a situation where people lost confidence in the bank and wanted to withdraw their money.  This caused the bank to have insufficient funds to support the withdrawals, so not everyone got their money.  People panicked, and others wanted to take their money out, which caused the situation to snowball.  This is how many banks failed.  (In the '80s, it was savings-and-loans that failed - still a kind of ""bank"".)  Today, we have the FDIC (Federal Deposit Insurance Corporation) to protect depositors.  In the crashes in the early 2000's, many banks closed up one night and opened the next in a conservatorship, and then were literally doing business as a new bank without depositors (necessarily) even knowing.  This protected the consumers.  The bank (as a company) and its owners were not protected." The easiest way would be to set up a common savings account. Most of them pay some meager interest rate, and over one night it would be especially meager.  A Certificate of Deposit is another way, but you'd have to lock the funds in for an extended period of time.
So this method makes sense and is reasonable and possible.  The money multiplier effect ends up capped by the fact that the bank can only lend a percent of its 'cash'.    My issue understanding this is I've been told that banks actually don't hold 10% of the cash and lend the other 90% but instead hold the full 100% in cash and lend 900%.  Is this accurate?  The issue I see with it is that it becomes exponential growth that is uncapped.  If the bank lends 900%, it has created this money from nothing, which by itself isn't different that the bank loaning 90% and keeping 10%.  The issue comes because the next bank who gets that money deposited will treat that amount as cash as well, so they loan 900% of the 900%.  And so on and so forth.  How does the system prevent this from happening? "I invested a small amount of money with Prosper, and later with Lending Club. I don't know why there is such a discrepancy, but over half of my Prosper loans defaulted, while only 1 of my Lending Club loans has defaulted so far. I think that P2P lending is for ""early adopters"" right now. There are regulation issues, transparency issues, legal issues, etc. Once all of those issues get worked out, I think that P2P lending will eventually overtake conventional lending, and it will be more profitable for both the lender and the borrower. The Internet is simply eroding the value that banks are adding to the process (primarily aggregation of funds), and the system has to change." "Your argument is biased vastly in favor of the banks:  Doesn't the simultaneous growth of the residential and commercial real estate pricing bubbles undermines the case made by yourself that Fannie and Freddie were at the root of the problem?  Why does your explanation also leave out predatory lending? Or that during 2006, 22% of homes purchased (1.65 million units) were for investment purposes, with an additional 14% (1.07 million units) purchased as vacation homes. During 2005, these figures were 28% and 12%, respectively. In other words, a record level of nearly 40% of homes purchased were not intended as primary residences.   Or that housing prices nearly doubled between 2000 and 2006, a vastly different trend from the historical appreciation at roughly the rate of inflation.  Or that the proportion of subprime ARM loans made to people with credit scores high enough to qualify for conventional mortgages with better terms increased from 41% in 2000 to 61% by 2006.   From wikipedia: So why did lending standards decline? In a Peabody Award winning program, NPR correspondents argued that a ""Giant Pool of Money"" (represented by $70 trillion in worldwide fixed income investments) sought higher yields than those offered by U.S. Treasury bonds early in the decade. Further, this pool of money had roughly doubled in size from 2000 to 2007, yet the supply of relatively safe, income generating investments had not grown as fast. Investment banks on Wall Street answered this demand with financial innovation such as the mortgage-backed security (MBS) and collateralized debt obligation (CDO), which were assigned safe ratings by the credit rating agencies. In effect, Wall Street connected this pool of money to the mortgage market in the U.S., with enormous fees accruing to those throughout the mortgage supply chain, from the mortgage broker selling the loans, to small banks that funded the brokers, to the giant investment banks behind them. By approximately 2003, the supply of mortgages originated at traditional lending standards had been exhausted. However, continued strong demand for MBS and CDO began to drive down lending standards, as long as mortgages could still be sold along the supply chain. Eventually, this speculative bubble proved unsustainable." Your quote: There's about 10 trillion in gold  and about 2.8 trillion of US cash  in the world. Neither of these is anywhere large enough to be used for all the transactions in the world.  So how was it commercial banks could lend like crazy for home mortgages??  M1 remaind constant throughout the decade and years , if frac multiplier effect was the cause for m2, why wasn't it until the 2000s that m2 became exponential?   Commercial Banks able to create credit and lend out of thin air to customers thanks to deregulation that caused m2 to explode.  They didn't need no FED.  They didin't need no reserves.  They were able to act regardless of the FED.  The FED responded to them, instead of the other way around.    Before deregulation banks didn't bother creating too much credit loans coz it was too dangerous, they were mostly utilty banks.   After deregulation, creation of exotic derivatives, low interest rates, and high speed internet globalized digital trading,  they went crazy creating credit out of thin air coz it wasn't dangerous because they could sell the home loans. If glass steagall had minimal impact on bank behaviour, that means the great recession was unavoidable. What sort of legislation would it take to ensure shitfests like this *will* be avoidable in the future?  Outlaw predatory loans? Lynch all bankers and start over from scratch? Your basic assumption is incorrect. You don't normally go to a bank to borrow money to invest, but brokerages do it all the time. It is called trading on margin. If I'm not mistaken, using dairy cattle to buy more dairy cattle is already common practice in Kansas.  Why it is not widespread is more because the banks concerned don't have the necessary expertise to value / monitor / resell these assets when necessary. They are tricky to deal with because they grow / breed / die, unlike your house. Holmes, then Senior Vice-President of the New York Federal Reserve, noted that the key Monetarist policy prescription of regulating the economy by “a regular injection of reserves” was based on “a naïve assumption” about the nature of the money creation process:  The idea of a regular injection of reserves—in some approaches at least—also suffers from a naïve assumption that the banking system only expands loans after the System (or market factors) have put reserves in the banking system. **In the real world, banks extend credit, creating deposits in the process, and look for the reserves later**. (Alan R. Holmes, 1969, p. 73)  Holmes would turn in his grave at Krugman’s naïve assertion, half a century later, that banks need deposits before they can lend.   commercial banks can create money out of thin air:  http://www.youtube.com/watch?v=zc_fpGfyqGE&amp;feature=player_detailpage#t=509s  http://www.youtube.com/watch?list=UL327SJH0xcew&amp;v=327SJH0xcew&amp;feature=player_detailpage#t=597s