Where I live in Scandinavia and across Europe, interest rates are very low.

More and more people are using the rising value of their home to draw out money. I would almost call it "free" money when the interest rate is near 2%.

Case in point: I just saved over 2 years the money to renovate my kitchen.

In contrast, my neighbour borrowed 30,000 euro against his house (whose value keeps going up) to renovate his bathroom. He borrowed another 70,000 euro for a new car. He telephoned the bank and easily got the money.

When we talked about it, his point was that he got the new bathroom 2 years earlier than if he had saved up the money. He doesn't seem concerned about pushing out the end date of his mortgage or possibly never owning 100% equity in his home.

Perhaps I'm overlooking something. I can't see any economic benefit to borrowing against their houses to buy new Teslas, bathrooms, kitchens and sailboats. Mostly "toys" and "luxuries", if you will - all financed by the national central bank.

I wonder, where does all this money come from? His bank gets loans from the national central bank but where do they get the money from? Can central banks just "make up" loans from nothing?

  • Thanks Daniel I edited to just have one question and removed the last part Sep 25, 2018 at 12:25
  • QE from ECB, where else !!
    – DumbCoder
    Sep 25, 2018 at 12:38
  • 2
    Read up about the 2008 housing bubble in the US. That's how it ends. Until then, yes, it's free money. You just need to get out soon enough so you are not caught holding the bag at the end.
    – Aganju
    Sep 25, 2018 at 16:00
  • 1
    This question seems to be all over the place. Is your question about your difference of opinion with your neighbour, or about central bank policy, or about the origin of money in a fiat system, or what? Can you make this question more precise? Sep 25, 2018 at 20:27
  • 1
    @vikingsteve: Yes, basically you've figured out how modern fiat money works: bankers set the money supply in an attempt to meet their goals. My point is that your question would be stronger if you eliminated everything in there about how your neighbour may or may not be as prudent with their money as you are. It's irrelevant and distracts from the question; if the question is about central banking and money supply then just ask that question! Sep 26, 2018 at 13:34

4 Answers 4


Yes the central bank can make money out of thin air. However that isn't what is happening. For the past 10 years or so countries have been participating in Quantitative Easing (QE). This basically gives regular banks lots of money to allow for the type of behavior you mentioned. Basically the government goes into debt to "create" easy money, so it stimulates the economy. Eventually they will have to stop doing this and debt will not be so easy to get. Ending the process is called Quantitative Tightening.

The intended purpose is it gets people out there spending money, and stimulating the economy. This exact method is relatively new so no one really knows how it will end exactly, but I don't see it ending well.

I tend to agree with you that it is a dumb policy that allows people to buy things they usually wouldn't be able to afford. The people who will really get the short end of the stick are people with long term variable rate loans. As interest rates go up so will these loans, and more people (not all) will eventually default on them.

  • 1
    Unfortunately I live in a country where people expect the government to bail them out, and a high percentage (more than 85%) chose variable rate over fixed rate loans. So it seems the people that lose out on this are the silly ones that didn't borrow up to the hilt (and then get bailed out for free). Sep 25, 2018 at 20:36
  • 3
    @vikingsteve Only time will tell. All I know is that someone will pay for it (or lose money) one way or another. Maybe housing values end up plummeting and in the end the people who took out loans that were to big end up in debt even after they sell their house.
    – user75979
    Sep 25, 2018 at 20:47
  • @vikingsteve To be fair, we have not had a case where the people themselves get bailed out of their excessive debt. You would never run into the circumstance where a bank holds a bunch of liens, and people are paying on it, and the bank needs to ask the government for a bailout. The bailout would only be instigated by too many of those liens defaulting on their obligation and not paying the bank, then the bank needs to ask for a bailout because it has a bunch of toxic assets it cant shift off its books. Only banks get bailed out. The people who overborrowed and defaulted are criminalized.
    – Shorlan
    Aug 22, 2019 at 22:44
  • @Shorlan "never have a case", really? Im pretty sure this already happened once in Sweden. Aug 23, 2019 at 8:11
  • @Shorlan Hi! It's 30th September 2022 and UK banks just got bailed out on government bonds that the government was paying on.
    – user253751
    Sep 30, 2022 at 21:30

Is the part of Scandinavia you are talking about part of the EU?

In case it is, the EU Mortage Credit Directive which came into effect around 2016 should put pretty strong limits to that practice.

To put it in as short and simple as possibly words: It's nice if you get a loan to buy yourself something nice, but after all, you will have to pay it back. And an extremely stupid thing is to finance a toy (car, boat) with a load that lasts way longer than the asset you bought with it.

  • To live would be boring if you don't spend money on yourself, the neighbour still own most off the house so he have plenty of values backing up his "toys". I don't know him directly but i am nearly 100% sure, that his house is bigger then necessary and not planned to sell - so he already had a loan to finance his luxory. Many people have there pension and pay a rent, so you still can pay off a bit for your mortage in my eyes.
    – chris
    Sep 25, 2018 at 14:15
  • 1
    Its Norway, so we are outside the EU, with own currency, although there is an agreement with the EOS. Sep 25, 2018 at 16:25
  • 1
    Regarding paying it back - many people consider that they never have to. They just keep a loan on the house until they retire, and then they will downside. Sep 25, 2018 at 16:26
  • Do you life ascetic till you pay your mortage off? Holidays have no economical values, instead you could pay more money back etc. He still have values, else he wouldn't get that credit, a houser is maybe the better investion, but dont you think it is his worry and especially his expertise? And people pay rent with there pension too without downside, a mortage could be considered the same.
    – chris
    Sep 26, 2018 at 5:49

The money comes from the ECB.

It's an explicit policy of the ECB to drive up inflation. The ECB believes the inflation should be higher, ideally close to 2%. It's currently low. Conventional wisdom is that the inflation is low because people aren't spending. Another conventional wisdom is that low interest rates increase spending.

Well, at least the latter theory seems to be confirmed by your neighbour. The lack of inflation is probably because the assumed interest-inflation correlation doesn't actually exist anymore. A likely culprit is that the correlation was caused by a third variable, namely wages. Recent wage increases seem to be in line with inflation, i.e. near zero. Shops simply cannot raise prices as consumers don't have more to spend each month.

  • The money does not come from the ecb. The money is created by the commercial bank where you take your loan.
    – Daniel
    Sep 26, 2018 at 9:36

where does all this money come from?

This is a common confusion: When you borrow money from a commercial bank it is not actual money from other people/sources you get. Instead the money is created via a booking trick. You get, say $100 credit to your account but at the same time you get a $-100 as debit to your loan account. So in sum there is zero money. This money is called bank money or demand deposit. This money exists only as long as the demand exists and is "destroyed" once you pay it back or default on you loan.

To limit the inflation of the money supply, the Banks are required to hold a certain fraction of the money as securities in real money (assets, deposits, central bank loans, etc.).

This is called fractional reserve banking.

Can (central) banks just "make up" loans from nothing?

Yes, hence it is called FIAT-Money. The term fiat derives from the Latin fiat ("let it be done") used in the sense of an order, decree or resolution. In contrast to hard currency like Gold (or Bitcoin, as a concept), which have to be mined, so the Supply is limited.

This has its advantages and disadvantages. For example, In a FIAT Money system, supply of money can be expanded with the growth of the economy. On the other hand, if people loose trust in the money politics, it can essentially become worthless over night.

Is it wise to loan if its "free"?

As the money market is largely influenced by the prime rate and the reserve requirements, which are subject to change depending on politics, it is generally advisable to have as little debt as possible from a security perspective. So it all depends on you personal risk appetite.

It is also important to distinguish between spending and investment. The things your neighbors buy, seem to fall mostly in the spending category, which makes them a loss even at zero interest rate.

Whereas a house which saves you rent, could be considered an investment. More of, once you paid that off you can start to invest and earn interest yourself.

So in the end, you neighbors will have to work more for their luxuries than you with your frugality, even if all goes well. So a matter of personal taste if you are willing to work for luxuries or value your free time more.

  • 1
    Thanks for the answer. Regarding having little debt as possible - my neighbour would just say: "why?". He has a new bathroom and a new car. He probably wont worry about paying the money back until he retires and downsizes his house. If the economy goes pear shaped he will rely on the govenment to bail him out. So, whats the downside to having this debt? My neighbour doesnt see any downside. Sep 25, 2018 at 16:30
  • 3
    I can't upvote an answer which contains the phrase "In contrast to hard currency like Gold or Bitcoin, which have to be mined, so the Supply is limited." This is a very controversial statement. As a simple counter example on the 'hardness' of bitcoin, a hard fork at any time could effectively double the monetary supply (See 'bitcoin core' vs 'bitcoin cash'). Sep 25, 2018 at 16:45
  • You are answering the question "where does money come from?" which is different from the one that was asked, "where does THIS money come from?"
    – user253751
    Sep 26, 2018 at 5:35
  • @not_a_comcast_employee: Maybe you should reread. OP wonders where all the loaned money come from, which is what I am answering: It is created the moment the loan is granted!
    – Daniel
    Sep 26, 2018 at 7:25
  • 1
    @vikingsteve: The downside is, chances are he won´t be bailed out, he will loose his Boat, his House and probably a lot of his friends. Also, he as to work a lot more in his live for other peoples wealth, than one who saves more. You don´t only loose the interest on you loan, you loose the opportunity cost of having your money work for you.
    – Daniel
    Sep 26, 2018 at 7:36

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .