FED: Fractional Reserve Banking in Pictures

[bobbyw24]

http://towneforcongress.com/economy/fractional-reserve-banking-in-pictures-part-12

Excellent pictorial explanation by Jake Towne, who is running for Congress in PA

 

[Zippyjuan]

Citizen earns $100 at his job. He decides he does not need to spend it right now so he puts it into a bank. The money in circulation (money supply) has just shrank by $100 from what it would have been if the person would have spent it instead. The bank loans out 90% of that- obeying the 10% reserve requirement rule. Now instead of $100 in the economy, there is only $90 ($10 is still in the bank).

The second person does not need the money this second and he puts it in the same or another bank. Available money drops by the $90 it increased by when he borrowed it. Bank can take that new $90 deposit and loan out $81 of it. The $100 we once had available to spend is now down to $81. The supply of money is shrinking- not growing. There is less money out there being spent than there would have been if the original person had just spent the money.

Person #2 (who borrowed $90) takes his money out of his account to finally spend it. Now the bank has too much money out for the size of their deposits- they have $171 in loans out ($90 plus $81). The money out there able to be spent is now up to that $171- an increase of $71 from where we started with no deposits or loans. Since the bank has a shortfall, they have to borrow money which will reduce the money supply again. They had to borrow part of the $90 to give to #2 (since they did not have the $90 on hand in the first place) as well as to increase their reserves by enough to maintain their 10% reserve requirement.

This borrowing by the bank once again reduces the money in circulation and available for spending. Thus the money supply is not growing under fractional reserve lending.

He also does not quite understand the Federal Reserve. When the Open Market Committee decides to purchase Treasuries on the open market, they usually do so with funds they already have- not out of thin air. Where does the Fed get its money? From many sources. Member banks pay fees. Banks pay interest to the Fed when they need to borrow money from them. They collect payments for processing payments like check processing. They collect interest on Treasuries and other securities they already own.

It is true that their purchase of securities does put more money into circulation. It takes money that a company or investment firm did not want to spend but desired to invest in securities (transfering the spending from themselves to the Federal Government) and puts the money back into the company's hands. This will also happen if the company or investment firm sold them to another buyer instead of the Fed.

 

[echebota]

He also does not quite understand the Federal Reserve. When the Open Market Committee decides to purchase Treasuries on the open market, they usually do so with funds they already have- not out of thin air. Where does the Fed get its money? From many sources. Member banks pay fees. Banks pay interest to the Fed when they need to borrow money from them. They collect payments for processing payments like check processing. They collect interest on Treasuries and other securities they already own.

True, but still aug-2008 to aug 2009 FED monetised $76,3 Bil. If you look at the junk that FED accumulated in its assets over this year, much more monetizing is still to come:

From Consolidated Statement of Condition of All Federal Reserve Banks Aug 5,2009: http://www.federalreserve.gov/releases/h41/Current/

In Asset section (in $ MIl)
- U.S. Treasury securities $705,331, increase from Aug 2008 +$226,001
- Federal agency debt securities $108,066, +$108,066
- Mortgage-backed securities, $542,885, +$542,885 !!!!!
- Other loans $105,737, +88,233
- Net portfolio holdings of Funding Facility LLC $61,163, +$61,163
- Net portfolio holdings of Maiden Lane II LLC $15,147, + $15,147
- Net portfolio holdings of Maiden Lane III LLC $21,304 , +$21,304
...


+ we have a $2T hole in just Federal budget .... which has to be financed with debt and I doubt China would eat it all.


I mean it's not that simple as the guy put it on his slides, but the situation is dare any way

 

[fatjohn]

So why doesn't this guy has any support on RPF in the 2010 planning section? He is from CFL isn't he?