To be fair, the power of credit creation is with the people, and there's nothing that says it needs to be backed hard. Those are assumptions we make about what an ideal situation looks like. To be backed is just a way of saying there should be some limitation on how new currency is created, backed hard is often just describing some external factor that limits the ability to expand money.
Since most people assume $1 is $1 whether it's in a Paypal account, bank account, cash or a check, it muddles this all a bit but still holds true that debt is acting as currency, and the issuance of debt or even IOUs are in fact inflationary. Traditional banking has a basic double entry accounting for issuing loans, new loans issued actually have an equivalent liability for a bank.
Actually the article I read does touch on this.
The limiting force then becomes the reliability of the borrower to repay a loan, the number of borrowers, reserve ratios, sizes of loans etc. But there's also some tricky stuff like repackaging and selling of loans or even derivatives of the loan which muddle the double accounting further. If a bank makes money on issuing loans, fees, and the creation of derivative produces (all valid methods of revenue) it does create an incentive to issue more loans and offload those loans as soon as possible. Many banks are no longer looking to hold 30 year mortgages because it's riskier than consolidating thousands of mortgages into a security where risk is (presumably) spread, it's also more profitable and frees up capital to issue more loans.
Congratulations @manjaro! You have completed the following achievement on the Hive blockchain and have been rewarded with new badge(s):
Your next target is to reach 1750 upvotes.
You can view your badges on your board and compare yourself to others in the Ranking
If you no longer want to receive notifications, reply to this comment with the word
STOPSupport the HiveBuzz project. Vote for our proposal!