If a bank creates a loan, both the bank and the borrower now claim to have new assets they did not have before. The bank has eliminated a deposit - a liability - and added an asset - the loan.
Assuming the borrower puts up sufficient collateral, the use of that collateral is limited, so the actual loan balance is an asset swap between the bank and the borrower. The bank also "borrows" the reserves, either from depositors or banks who have excess reserves on the overnight market, to enable the borrower to spend the loan proceeds, so there is considerable liability to the bank.
Similarly, if a bank creates some new derivative, it also claims it is an asset, worth say a hundred million dollars (when all it is is an email attachment). An insurance company purchases the derivative, and both now claim to have new assets: the bank has nonrefundable cash, and the insurance company has a triple A-rated investment.
I agree this is a problem that hasn't yet been fixed. However, the purpose of banking is not to profit in the credit money it can create at will, but to capture high power money that only Congress can create when it deficit spends, which is our "real" net money supply.
In the end accounting, only that high power money and Treasury guaranteed bonds are of any use to banks. They get that from interest paid by borrowers, and as they do the reserves that the borrower was paid in are deleted from the system.
The money supply tends not to shrink anymore- now that we are off the gold standard.
Both the economy and the population have grown considerably since WWII. The gold standard would not have allowed for such expansion, especially after we became a net importer. Our economic problems are the result of too little control of business and banking allowed to the people, the rightful owners of "all" currency.
It just keeps ballooning in the financial sector and among the rich.
When the people don't have sufficient assets to fund the economy with sales the financial sector turns to rent seeking for its profits. This was discouraged at one time by extreme taxation on such profits but the wealthy found they could purchase Congress cheaper than it would cost to pay people properly and so they did.
That is why you have to multiply by 15 to get the current dollar feel of prices from just the 1960s, or 50 times if looking at the 1940s.
Much of that "feel" would not be an issue if wages had kept up with productivity increases. CEOs and shareholders have not been forced to pay for their profit taking and even the tax code that once punished them for extreme profit was reversed and is now extremely regressive, keeping the working class dependent upon capital and subservient to employers.
Banks inflate away the balance sheet you claim will shrink back by itself.
I'm not defending the banking industry. I simply meant to correct a common error that deflects away from the responsibility Congress has to provide for the public purpose and common welfare with its power to create money on demand.
If the banks weren't assured they will be bailed out they would be screaming for more federal spending and stimulus to enable the retirement of private debt in a timely manner.
In the end accounting, only that money created by Congress in excess of what it collects from the people in taxation reflects the "real" net worth of America as measured by "net" monetary assets in the private sector. The rest is smoke and mirrors.
