Banks are allowed to lend much more than the liquidity or capital at their disposal. That’s a net creation of money.
The borrower's promise to pay, assuming s/he is creditworthy, is always in balance with the reserves (obligation) of the lending bank. Once the convertibility of reserves to gold or silver was ended the limiting factor became the value of the borrower's contract.
Should the lending bank fall short of its reserve to asset balance it must borrow reserves itself, either from other banks with excess reserves or from the Fed, and pay interest on that. This is why banks offer incentives for deposit accounts, as they reduce the amount of reserves needed to cover loans.
The bet at the heart of the game is that loans will allow debtors to create enough value in due time to pay them back, through their hard work or the rise in value of their property or investments.
This is where the distinction between "money" and "net money" becomes important to banks at the macro level. They have no use for the reserves created by their lending beyond interbank transfers. If they did, they would simply create reserves for themselves or loan to each other a zero interest and not take on the risk of consumer lending.
Their goal is always to gain "net monetary assets" denominated in the government's unit of account (in the US that is the US dollar). Those net assets can only be created by Congress when it spends into the private sector more than it removes in taxation/fees, which are defined as deficits.
Bank-created credit cannot "net" retire itself or be net saved. This is why paying off a loan reduces the net money supply. This mirrors the accounting system used by Treasury and our government that prevents any "revenue" from being a true "funding" source for spending since it can only reduce the debt that it was created from. From the perspective of the currency-issuing government, dollars are tax credits used to provision itself and pay for programs.
When one delves a bit deeper into the macro it becomes obvious that the government's "debt" is simply an accounting of the dollars it created that haven't yet been used to pay a tax obligation. It functions as our money supply and represents net payments made to the private sector for the resources and labor it has used since the nation and its banking system were founded.
The bet is off in this case, quite obviously, since the debtors cannot create value out of thin air, be it called dot com or sub-primes.
Even rock-solid investments cannot provide the "value" banks desire if the currency-issuing government doesn't provide for sufficient deficit spending to net retire private debt promptly and satisfy the people's desire to net save. This can be masked, for a time, by a constantly increasing GDP, but doing so creates a bubble economy that is fragile and tends to fail at any hiccup in the business cycle.
When such inevitable failure occurs the government must cover its failure by "bailing out" the banking sector with massive injections of its currency and by protecting critical supply chains with safety nets. This reactionary approach to managing the economy is very lucrative to business and banking and it is given a stamp of approval by "conservative" politicians who should know better and a majority of their constituents who shouldn't have to, but can only relate the finances of their currency-issuing government with their own relationship with the currency as "users".
Those who don't understand econ at the macro level blame this reaction for much of the problem, but the "real" issue is the lack of political will and econ literacy among our legislators to maintain a steady-state economy with institutional wealth for the citizens. Requiring tax payments from the private sector should mandate that the government also provide a realistic means to make those payments without creating hardship.
