another fractional reserve lending question

[Smaulgld]

Yes its like when the customer/depositor gives the bank 10K they can now lend out 100 grand

 

[TheGrinch]

Yes its like when the customer/depositor gives the bank 10K they can now lend out 100 grand

This is my understanding. Some of you are assuming that the bank must have at one point had 100% of the 90% they lend out.

I'm not sure this is the case. My understanding is that they are only required to take in 10% of what they lend out, not that they had to have had the 90% they lend out in the first place.

This means, as Smaulgld says above, that the bank can make 100 grand worth of loans just from a 10,000 dollar deposit. They need not have ever possessed that 100,000 that yes, they can just create out of thin air, and then make interest on, without ever having that 100,000 in the first place. It is as simple as clicking the button to put funds in someone's account that never previously existed (well, 10% did, but not that 10x that they lend out).

What enables them to so? Well, having a federal reserve with the power to print money out of nowhere certainly helps, and this same federal reserve is there should this Ponzi scheme fall apart via a "run". If it were actual gold* they were loaning out (or whatever tangible backed currency) and/or they had to have these deposits in the first place, then this would not be so possible, nor unacceptable if they were taking on risk on actual money that they'd taken in, rather than having the Fed to bail them out with more fake money.

(*Note that even when dollars were backed by gold, these "promisary notes" were still not gold they were giving out)

This is certainly even easier now that all banking is largely electronic, and very little done in cash, and virtually none in gold (thus meaning that even a gold standard would not be immune from this practice). When they make a loan, it doesn't have to mean anything more than a click of a button that enables their check or credit card.

 

[hazek]

This is my understanding.

You are mistaken.

Some of you are assuming that the bank must have at one point had 100% of the 90% they lend out.

I'm not sure this is the case.

It is.


The reason why some started to circulate the story that banks must take in only 10% of what they lend out is because that's where you end up at with 10% fractional reserve banking and they misunderstood that as a single step. If the bank takes in $100 in this case it can only lend out $90 however since most of the time those 90$ are also deposited at a bank (sometimes at the same bank) now $81 can be lent out and so on and so forth until the original $100 usually allows the banks to create $900 in debt but they had to each time lend out less than what someone deposited in order to meet their 10% reserve requirement.

 

[cbc58]

The former governor of the Bank of England says that banks create money:

http://www.positivemoney.org/how-money-works/how-banks-create-money/

Just sayin... he should probably know.

 

[hazek]

The former governor of the Bank of England says that banks create money:

http://www.positivemoney.org/how-money-works/how-banks-create-money/

Just sayin... he should probably know.

This is misleading and very inaccurate.

From the article:

Banks are able to create money through the accounting process they use when they make loans. The numbers that you see when you check your account balance are actually just accounting entries in the computer systems of the bank. These numbers are a ‘liability’ or IOU from your bank to you.

Clearly they don't create money. They create DEBT. Very very veeeeeery liquid debt. So much liquid that most people treat is as money. But that doesn't make it money, it's debt.

 

[cbc58]

This is misleading and very inaccurate.

From the article:



Clearly they don't create money. They create DEBT. Very very veeeeeery liquid debt. So much liquid that most people treat is as money. But that doesn't make it money, it's debt.

maybe its both.

 

[hazek]

maybe its both.

It's not.

 

[cbc58]

It's not.

I think money is whatever people think money is. I understand what you are saying but if people treat 0's and paper slips as money then that is what it is to them. Many will say that gold and silver is money - but hardly anyone will accept it as such in today's local economy. I offered two silver quarters valued at $11 for a $5 foot-long subway sandwich and they laughed at me. Have tried using silver elsewhere and same result. Some people value silver and gold by what they are told it's value is on kitco... but what if that reference wasn't available?

New show on TV called "Under the Dome" filmed here in NC and they were interviewing the actors and one said that after the dome came down - money (currency) was useless. People want food, water, the basics. Value is in the eye of the beholder at a time of transfer.

So if debt is created but people view it as money creation (currency of some form is associated with that debt) - it's money.

 

[BAllen]

The former governor of the Bank of England says that banks create money:

http://www.positivemoney.org/how-money-works/how-banks-create-money/

Just sayin... he should probably know.

Right. I like that he's honest about it. They should say that here instead of trying to hide it.

 

[helmuth_hubener]

You are mistaken.

Actually, he is not.

Here is a lucid article explaining how the fractional reserve banking system really works:

http://www.ronpaulforums.com/showth...xplanation-of-Fractional-Reserve-Banking-Ever!

If a bank takes in an additional ten thousand of cashy money, they now can -- and likely will! -- create checking account deposits of up to around one hundred thousand. Ten thousand of that will already be used up by the checking account of whoever deposited the cash (presuming that's what happened), but the other ninety thousand is free and clear to be used to fill up other checking accounts.

 

[Zippyjuan]

Thread is over a year old.