Turgot’s Tetrapylectomy! Jonathan somehow manages to make more mistakes while trying to defend the hapless Amazon critic.
Actually, the original reviewer is completely correct. Vox was forgetting that in the multiplier effect, the “new” money becomes deposits at other banks. It is still thus true that at each and every bank, the profits stated by the reviewer are correct.
The original reviewer isn’t correct in any way, shape, or form. The reviewer completely leaves out the multiplier effect, which merely happened to be THE SUBJECT AT HAND, in favor of a trivial focus on the interest revenue – not profit – from a single loan, which he also manages to miscalculate. (He used the wrong interest rate.) It is demonstrably incorrect to say that “the ‘new’ money becomes deposits at other banks”, the most that can possibly be said is that it will USUALLY become deposits at other banks. I assumed for the sake of simplication that the revolving loans and deposits were all taking place at a single bank; this is hardly an unreasonable postulate in light of the fact that Bank of America presently holds 12.2% of total US deposits and 14.8% of total US loans and leases. (Now you know why they can’t be permitted to fail.) That third sentence only applies for each and every LOAN, not for each and every bank. And finally, since it seems everyone is determined to be pedantic about this, I note that the reviewer’s profit calculation could never have been correct since the example in the book was 5%, not the 6% cited in the review.
I’ve made it perfectly clear that I should have created a better example of the multiplier effect in a fractional-reserve system. Mea maxima culpa. I should have referred to “banking system” instead of “bank” and I should have left out the “maximum profit” altogether since it’s not possible to calculate the net profit of the loan multiplier without knowing how many times the loan cycle will occur in the course of a year. But the trivial errors in my poorly constructed example do not justify this absurd level of pedantic and error-filled nitpickery, especially since it doesn’t even begin to call either my point about the fractional-reserve banking system or my conclusions about the systemic risks of such a system into question.