[Toddsterpatriot]

So if a banks deposits equal $500 and they loan on a house valued at $400,they have liabilities at $500, assets at $400 plus $100 in reserves.

So far so good.

The loan defaults and the house is devalued to $100. Now they only have assets at $100 (the house) and $100 in reserves.

Okay.

The depositors demand their money back, all $500. How much can they give them? Only $100, and if they manage to sell the house it will cover some of their losses.

You bet.

So they did loan out more money than they have for demand deposits.

No. You said deposits were $500 and they loaned out $400.

[Rusty0604]

They loaned out more than what needed to cover demand deposits. The semantics is not worth quibbling over. I was only putting in my two cents worth on a discussion on deflation, as my degree is in finance/accounting and I worked as management in various industries including banking.

Have a good evening!