Furthermore, all this “brand new money” being conjured “directly out of thin air” every time someone takes out a loan would have the same economic effect as the government printing large sums of money: runaway inflation.

How loans actually work is that the bank is loaning out the money that is being deposited with them by people with savings accounts. But there’s a limit: the bank can’t loan out more money than they actually have, minus a certain percentage that they keep in reserve (the “fractional reserve” of Fractional Reserve Banking). If the bank loans money to someone who defaults on their loan, they have actually lost money.

What you may be talking about is the “money creation” effect of repeated loans (see http://en.wikipedia.org/wiki/Money_creation for a chart that explains it pretty well), but that doesn’t create any actual money, it just makes that money circulate more widely. And each bank is limited in what they can loan out to the amount they actually have. So it’s in the bank’s best interest to loan money to people who will actually repay it, and that’s why Wachovia’s offer is foolish: the only people foolish enough to take a loan at 50% interest are the kinds of people who will never repay their loan.

When a bank makes a loan it conjures brand new money, directly out of thin air, in to your loan account. This is the magic of Fractional Reserve Banking.

So, a bank is not actually risking any of its capital… it is only
considering the Opportunity Costs between the different loan possibilities that the loan sharks can think up.

The Mortgage or Loan Application becomes a BRAND NEW asset on the Bank’s Balance Sheet.

It is good to be king.