CHART of banking system collapse, Fed says "Nothing to see here, folks. Move along."

[kyleAF]

This is the kind of misinformation that hurts this site. The fractional reserve system is 1/9, not 9x. For $100 in reserves, the bank can create $90 in loans, not $900.

Now, that $90 does go to another bank, who can create another $81 in loans if it chooses, but that's a whole new bet.

You are correct, thank you for clarifying that for me.

A bank must hold 10% of its overall liabilities as reserves. This means it can only loan out 90% of its deposits.

But actually, the number is as low as 3% ratio depending on the overall size of the bank's deposits (I think the changeover is around 40 million now...).

Edit: 0% for up to 9.3 million dollars in total liabilities.

This does not change the problem, though.

Example: Bank 1 gets 1000.00 from Fed. Bank 1 lends out 90% of it, or 900.00.
Bank 2 gets this 900.00 from Bank 1's borrower. Bank 2 lends out 90% of it, or 810.00.
Bank 3 gets this 810.00 from Bank 2's borrower. Bank 3 lends out 90% of it, or 729.00.

The total money (liabilities) now in circulation is 1000+900+810+729, or 3439.00, which is a 344% increase after just 3 loans assuming 10% reserves. This is fine assuming all the loans will work their way back to the originators through payments and "disappear" from the balance sheets. Unfortunately, if one of the later loans defaults, all of them are ultimately baseless...especially if the underlying assets have been overvalued (housing). This is the risk of leverage, and the biggest risk of a fractional reserve system. That's where the danger in our economy's financial structure partially lies. Our debts have been leveraged out in some cases as many as dozens of times by hedge funds and CDS / CDO papers!!!!!!!

All of the debt-backed paper and loans out there are tied together in such a way that market values aren't even known. Some have been liquidated at only 10% of their modeled value (a 90% loss). Investors don't even know who owns what! We're potentially facing an accelerated, systemic default.

 

[AceNZ]

This is the kind of misinformation that hurts this site. The fractional reserve system is 1/9, not 9x. For $100 in reserves, the bank can create $90 in loans, not $900.

Now, that $90 does go to another bank, who can create another $81 in loans if it chooses, but that's a whole new bet.

Technically, new money for loans can be created up to the amount of excess reserves. For $100 in reserves, the first loan would be up to the amount of excess reserves, which is $90 as you said. Creating that loan "consumes" $9 of the excess reserves (10% of the amount of the loan). After that, there would be $81 in excess reserves, which would then support a loan for $81. That loan would consume $8.10 in excess reserves, and the process repeats. It ends when the minimum reserve ratio is reached. The result is a multiplicative effect on the amount of money in circulation.

If you don't believe me that the result is multiplicative and not fractional, then perhaps you will believe the Federal Reserve Bank of Chicago, who describe the process in the following document, "Modern Money Mechanics":

http://landru.i-link-2.net/monques/mmm2.html

Carried through to theoretical limits, the initial $10,000 of reserves distributed within the banking system gives rise to an expansion of $90,000 in bank credit (loans and investments) and supports a total of $100,000 in new deposits under a 10 percent reserve requirement. The deposit expansion factor for a given amount of new reserves is thus the reciprocal of the required reserve percentage (1/.10 = 10). Loan expansion will be less by the amount of the initial injection. The multiple expansion is possible because the banks as a group are like one large bank in which checks drawn against borrowers' deposits result in credits to accounts of other depositors, with no net change in the total reserves.

 

[kyleAF]

Arggg...thanks scooter and AceNZ

Confusing. I've learned quite a bit about all of this over the past few weeks. I'm glad there's a forum that people are discussing this in.

So, scooter is correct, but it's a "difference without a distinction"?

The quote from the Chicago Fed explains it the way that I understand it.

The multiple expansion is possible because the banks as a group are like one large bank in which checks drawn against borrowers' deposits result in credits to accounts of other depositors, with no net change in the total reserves

I think the clarification is that for the reserves to end up being only 1/10th of the total created, or for 100.00 to translate into 900.00, rather than only the initial 90.00 loan, the loans must be deposited in separate banks... Otherwise the original loan would just be "paid off" on the balance sheets if it were deposited in the originating bank. This is what the Chicago Fed is basically saying... that one loan acts as a deposit in another bank without increasing the required reserves in either bank.

Is that about right?

 

[AceNZ]

So, scooter is correct, but it's a "difference without a distinction"?

I guess you could put it that way.

I think the clarification is that for the reserves to end up being only 1/10th of the total created, or for 100.00 to translate into 900.00, rather than only the initial 90.00 loan, the loans must be deposited in separate banks... Otherwise the original loan would just be "paid off" on the balance sheets if it were deposited in the originating bank. This is what the Chicago Fed is basically saying... that one loan acts as a deposit in another bank without increasing the required reserves in either bank.

Is that about right?

Not quite. The way the banking system works is that the whole system behaves as though it were a single bank -- so it doesn't really matter which banks receive the deposits from the loan proceeds. The key point is that those deposits will remain within the banking system.

If the deposits went back to the same bank that they were borrowed from, then they are present in that bank as a liability, and it's perfectly OK for that liability to co-exist with the corresponding asset (the loan), as I demonstrated in my video.

A key concept here is that loans don't change the amount of reserves in the banking system as a whole. Loans can be used as a mechanism to move reserves from one bank to another, but they don't impact the total amount of reserves.

Reserves must be kept on deposit with a bank's local branch of the Fed. When a check drawn on a particular bank is cashed, the funds are withdrawn from that's bank's reserve account and deposited in the destination bank's reserve account. So let's say a bank with $1,000 in total reserves makes a loan for $900, which is the amount of its excess reserves. The $900 is newly-created money. The $1,000 would be on deposit with the Fed.

Now the borrower writes a check against their account, which is deposited into another bank. What would happen is that the first bank's reserve account would be debited by the amount of the check. After payment, it would only have $100 left in its reserve account, and the second bank would have $900 in reserves (and would then be able to make a loan for 90% of that). Using this mechanism at the Fed, reserves move from one bank to another.

 

[kyleAF]

Do banks currently exist who are not part of the "superbank" of the Fed system?

I understand the incentive for profit would encourage small banks to join the Fed banking system (if it isn't mandatory) because they only require a 0% reserve ratio for up to 9.3 million dollars and just 3% for up to 43 million dollars. If the small bank didn't have the Fed to back it, I imagine it would need significantly more funds in reserve to remain in business... thereby limiting the amount of loans and profit it could make?

The giant bank makes sense, and I suppose it does contradict the point I tried to make. The loan can be granted, redeposited, granted again, redeposited again, etc. and the overall money in existence will be up to 9 times the original amount deposited?

Now, correct me if I'm wrong, but the cap on the 9 times leverage applies only to bank loans and bank-created money??

I've been reading that the credit derivatives market and CDOs and other Wall Street created financial packages aren't monitored and regulated as closely by these sorts of policies. Essentially, they are using debt leveraging to "create" money in the system, but at a breakneck pace... banking on the hope that the credit won't default en masse. The created value from leveraging wouldn't be actual money, but the promise of money from interest. It's like they're using a credit card to pay off a credit card in a vicious circle, but can no longer get more credit cards...

Clarification appreciated, of course.

 

[AceNZ]

However, witht he TAF and banks able to borrow money at 1% or 1.5%, they don't have much incentive to offer decent rates on CDs (why would they pay consumers even 2%, when they can get it for less thru the TAF?)

I'm not sure where you got the 1% or 1.5% numbers. The Fed sets a minimum bid on TAF auctions that's based on the level of the overnight index swap rate (that's basically where the market thinks the fed funds rate will be). The auctions in January come in at something a little over 4%.

 

[Original_Intent]

Article on this in WorldNetDaily by Jerome Corsi - give 'er a digg! and let's edumucate people!

http://www.worldnetdaily.com/index.php?fa=PAGE.view&pageId=56728

 

[QWE]

Article on this in WorldNetDaily by Jerome Corsi - give 'er a digg! and let's edumucate people!

http://www.worldnetdaily.com/index.php?fa=PAGE.view&pageId=56728

That's a good article.


Does anyone here have a subscription to ShadowStats.com? I've been looking at that site for a long time now, and I'm extremely interested in their newsletters, but it costs so damn much!

 

[AceNZ]

Do banks currently exist who are not part of the "superbank" of the Fed system?

Yes. Membership in the Federal Reserve System only mandatory for "national" banks (which includes all banks with the words "National Bank" in their name). Some state-chartered banks are not members.

I understand the incentive for profit would encourage small banks to join the Fed banking system (if it isn't mandatory) because they only require a 0% reserve ratio for up to 9.3 million dollars and just 3% for up to 43 million dollars. If the small bank didn't have the Fed to back it, I imagine it would need significantly more funds in reserve to remain in business... thereby limiting the amount of loans and profit it could make?

As of 1980, I think, the Fed has had the ability to set reserve requirements for all banks, even those who are not members of the Fed System.

The giant bank makes sense, and I suppose it does contradict the point I tried to make. The loan can be granted, redeposited, granted again, redeposited again, etc. and the overall money in existence will be up to 9 times the original amount deposited?

Yes.

Now, correct me if I'm wrong, but the cap on the 9 times leverage applies only to bank loans and bank-created money??

Yes.

Clarification appreciated, of course.

Deposits with reserves behind them -- transaction accounts (M1) -- are actually the most conservative case. In reality it isn't actually quite that simple. Savings accounts and time deposits have no reserve requirements. If a bank accepts a $1000 deposit in the form of a CD, for example, it can then create another $1000 in money for new loans. If all borrowers/depositors kept their money in CDs, there would be no limit to how much money the banking system could create (other than the risk of loss that banks were willing to accept). Banks can also add new reserves to the system, by borrowing them from from the Fed's Discount Window.

But I think I'll leave the details for another day....

 

[scooter]

Yes. Membership in the Federal Reserve System only mandatory for "national" banks (which includes all banks with the words "National Bank" in their name). Some state-chartered banks are not members.

This is true, but also note that most of those small local and state banks are actively involved in the Fed Funds market. They are buying and selling Fed Funds rates just like the big banks. Just sometimes they will have an account through a larger bank that they deal through.

What I said before about the fractional reserves was to make sure people don't believe the myth that banks just multiply their reserves out of thin air. However, you are very much correct in pointing out that it is a multiplier effect when seen on the banking system as a whole. The asset of one bank is the liability of another.

The original depositors do get their money back when the loans are repaid. If the loans aren't repaid, the banks sell the assets to try to replace the required reserves.

The problem with the system is the very low fractional reserves. It allows too much debt-based money to enter the system and that money far outweighs the future real growth that we could possibly sustain. The Fed holds reserve rates too low and maintains low interest rates for too long. This gives the banks acccess to easy money and allows them to loan more of their assets out to people... who are also getting access to too much easy money.

 

[jonahtrainer]

The problem with the system is the very low fractional reserves.

What do you consider 'very low' .... negative?

 

[cbc58]

"Gold, buy on the dips.

They need to crash this system so the sheep will accept the new amero currency."


you think this is why things are the way they are.... makes sense in a way

 

[lastnymleft]

So this is not some kind of bank run as some have suggested. It's a symptom of the fact that banks are losing money (and reserves) due to loan defaults, and the Fed has stepped in to avoid massive bank failures.

That's a shell game. There is no less risk in the system. All they are doing is moving it around. Those losses will have to be realized at some point.

If money can be thought of as blood, what we have here is a case of blood clots in a couple of fingers and toes being flushed out, to ultimately form a blood clot in the heart. We all know how THAT's going to end, so the only question left is, will it be fatal, or will life support pull the victim through to carry on for a while yet? That's the question everyone's betting on. It won't be done with MY money though.

 

[kyleAF]

That's a shell game. There is no less risk in the system. All they are doing is moving it around. Those losses will have to be realized at some point.

If money can be thought of as blood, what we have here is a case of blood clots in a couple of fingers and toes being flushed out, to ultimately form a blood clot in the heart. We all know how THAT's going to end, so the only question left is, will it be fatal, or will life support pull the victim through to carry on for a while yet? That's the question everyone's betting on. It won't be done with MY money though.

EDIT: I agree ^^^^

I don't personally see a way out of this one.

The Fed's policies have been to lower interest rates to stop the recessions, which they started by increasing the rates when they thought the boom was getting too big.... in the past that is.

Then Greenspan came along and just kept lowering... Their worst nightmare is an inability to jumpstart the economy with a rate reduction. That's happened already, even taking into account a delay factor for the rates to take effect.

The banks under the BIS have to maintain capital reserves for loans internationally at about 10%. That's at risk now, so no one's loaning. The crunch is in part because of distrust of other institutions' balance sheets, but ALSO in part because they aren't allowed to extend beyond 10% reserve capital.

This is hurting other countries, too. German banks are being bailed out left and right, and the Brits just had to nationalize a big one. Singapore's getting more pissed at its sovereign wealth fund investors. This bad credit dealio isn't just an American problem anymore.

The crunch is set in, and the TAF and FOMC windows are only filling in the debts (at measly rates by comparison), not boosting the economy.

I don't personally see a way out of this one, but I'm not an expert (yet ).

 

[jonahtrainer]

Here are some more videos from a guy I've been communicating about the H.3 report.

Video 1

Video 2

Video 3

 

[lastnymleft]

Here are some more videos from a guy I've been communicating about the H.3 report.

Video 1

Video 2

Video 3

Wow.

I'm good for gold. Getting out of cash. Still need more silver, but am correcting that. Trying to wake up family and friends to get them positioned, as well. Batten down the hatches, folks, it's going to get stormy from here on out!

Much as they would want to delay it till after Nov 4, I don't see how they can stop it, at this point.

 

[jonahtrainer]

Wow.

I'm good for gold. Getting out of cash. Still need more silver, but am correcting that. Trying to wake up family and friends to get them positioned, as well. Batten down the hatches, folks, it's going to get stormy from here on out!

Much as they would want to delay it till after Nov 4, I don't see how they can stop it, at this point.

You are partially correct. I saw the storm clouds gather and even a light snow back in August. But the Kondratieff Winter's blizzard is in full action now. It is impossible to stop. The snow is beginning to pile up and so few have more than a swimsuit on. As he said in the video 'this is largely hidden from the view of the public.'

Just in the last 10 days we've seen Auction Rate Securities, yet another asset class, get demolished. Hundreds of billions of dollars of capital will be destroyed as it migrates down the pyramid. Better cover yer ARS!

Godzilla has broken out of the zoo and is wrecking havoc all over the place! So exciting as I've positioned myself already. For this Winter my 'cave' is nice and toasty, has plenty of food, fuel, etc. and I'll do just fine. The first rule of panic is to do it first and I almost completely retreated into my 'cave' back in July.

Anyway, you may want to visit RunToGold.com to see more of where we are headed.

 

[CurtisLow]

They need to crash this system so the sheep will accept the new amero currency.

That was my thought all along... I so much hate the bullshit..

 

[pickdog]

Converting FRNs into land as we speak.

 

[wgadget]

bump