G Edward Griffin, wtf? Listened to a speech and he was wrong about fractional reserv

[tggroo7]

Fractional Reserve Banking means that a fixed fraction of deposits must be kept in reserves.

But G Edward Griffin says a sample scenario here at about minute 25 to 26. A guy deposits $100, and he says the banks can now lend $900?! Because 100 is 10% of 1000 and they can lend the difference? Isn't it just $90 the bank can lend?

Plus, he, an author, uses the word loan as a verb instead of lend! But I can live with that.

So I go to try to use his example, and as I'm explaining it, I'm thinking wait, wtf, I don't understand. Hell, he's probably right, I dont see how he could get so much praise from you guys and make a huge error, but anyway, someone please explain this to me!

If he is wrong, then that affects his whole argument doesn't it?? What is it the bankers get out of it? He said the government gets to spend money when it wants and plus it's pre-inflation (and all that remains true), but then his argument for why it's a win for the bankers is that "they get interest on nothing." Nothing? Someone deposits $100, you lend $90 and get interest when it's paid back. It's $90 the bank lends, not nothing. Help me out please!

 

[tonesforjonesbones]

got a link? tones

 

[tggroo7]

got a link? tones

http://video.google.com/videoplay?docid=-8484911570371055528

It's the link to the lecture he gives. He talks about it at 25:00.

 

[brandon]

Fractional Reserve Banking means that a fixed fraction of deposits must be kept in reserves.

But G Edward Griffin says a sample scenario here at about minute 25 to 26. A guy deposits $100, and he says the banks can now lend $900?! Because 100 is 10% of 1000 and they can lend the difference? Isn't it just $90 the bank can lend?

Plus, he, an author, uses the word loan as a verb instead of lend! But I can live with that.

So I go to try to use his example, and as I'm explaining it, I'm thinking wait, wtf, I don't understand. Hell, he's probably right, I dont see how he could get so much praise from you guys and make a huge error, but anyway, someone please explain this to me!

He is right and wrong. Well he didn't explain the middle part. Either he doesn't understand it or he just didn't feel like explaining it.

I tried to explain it in this post. I'm not the best at explaining things, but maybe u can make some sense of it. http://www.ronpaulforums.com/showpost.php?p=1861248&postcount=40

 

[tggroo7]

oooo, i think I understand the deal now.

I'm just going to write it by myself now and see if i understand.

Person A deposits $100, Person B takes out a loan for 90. Person C receives the 90 from B and he deposits it. The bank keeps 10% of that 90 and lends the other 90% of that deposit (now 81) to D.

After Person A deposit and B loan: Bank = $10 Reserves, $90 lent
C deposit, D loan: Bank = $19 reserves, $81 lent ($171 total)
E, F: Bank = $27.10 r, $72.9 lent ($243.90 total)
G, H: Bank = $34.39 r, $65.61 lent ($302.95 total)
...
Then eventually it comes out to be like $100 in reserves and $900 total lent though?

 

[brandon]

still not sure brandon, I thought I got it for a second there and then I didn't

I'll try again.

A bank has just opened and has no deposits and has not lent any money yet.

1. Person1 deposits 100$ in the bank.
   
2. The bank has 10% reserve ratio, so they lend $90 to Person2. This is the maximum allowable loan amount at this time.
   
3. Person2 has received his $90 loan, and for some reason he decides to deposit his entire loan into a checking account at the bank.
   
4. Again, the bank has a 10% reserve ratio, so they can now lend $81 to person3. This is the maximum allowable loan at this time.
   
5. The bank has now lent $90 for the first loan, and $81 for the second loan. They have loaned a total of 90+81 = $171.
   
6. Person3 has received his $81 loan, and for some reason he decides to deposit his entire loan into a checking account at the bank.
   
7. Again, the bank has a 10% reserve ratio, so they can now lend $72.90 to person4. This is the maximum allowable loan at this time.
   
   
8. The bank has now lent $90 for the first loan, $81 for the second loan, and $72.90 for the third loan. They have loaned a total of 90+81+72.90 = $243.90.

This process will continue several more times assuming the person who receives the loan deposits the entire loan back into the bank. Ultimately, the bank will be able to lend $900.

 

[smokey]

.​

Deposits are the effect of credit creation not the cause.

Credit creation is determined by capital minus risk-weighted assets as determined by the Fed's version of the Basel I Accord. Capital is made up of assets minus liabilities. Assets are made up of equity, retained earnings and loans outstanding some of which are assigned a risk factor by the Accord.

The "money multiplier" seems accurate because with a 10% reserve requirement ratio, a new loan deposited in Bank A would allow that bank to loan 90% of the new deposit without falling short on reserves when payment was made for the new deposit at Bank B. The reason for the reserve requirement is to ensure that banks have enough cash to cover payments to customers and other banks.

The multiplier would appear to work as described by Griffin and others if we had a pure fractional reserve system. However a bank with good credit can borrow reserves in the Fed Funds market, the repo market or directly from the Fed at the Discount Window. Therefore the reserve requirement ratio does not limit the amount of new credit a bank can create. It is limited by adequate capital.

.​

 

[Chester Copperpot]

Fractional Reserve Banking means that a fixed fraction of deposits must be kept in reserves.

But G Edward Griffin says a sample scenario here at about minute 25 to 26. A guy deposits $100, and he says the banks can now lend $900?! Because 100 is 10% of 1000 and they can lend the difference? Isn't it just $90 the bank can lend?

Plus, he, an author, uses the word loan as a verb instead of lend! But I can live with that.

So I go to try to use his example, and as I'm explaining it, I'm thinking wait, wtf, I don't understand. Hell, he's probably right, I dont see how he could get so much praise from you guys and make a huge error, but anyway, someone please explain this to me!

If he is wrong, then that affects his whole argument doesn't it?? What is it the bankers get out of it? He said the government gets to spend money when it wants and plus it's pre-inflation (and all that remains true), but then his argument for why it's a win for the bankers is that "they get interest on nothing." Nothing? Someone deposits $100, you lend $90 and get interest when it's paid back. It's $90 the bank lends, not nothing. Help me out please!

You have to think like a banker would.. The way fractional reserve lending is explained in textbooks is likeyou say: A guy deposits $100 and the banks sets aside $10 in reserve and loans out the other $90.

BUT WHAT REALLY HAPPENS:

The bank takes that deposit of $100 and puts the ENTIRE AMOUNT in as a reserve. And now can lend out another $900. Because The $900 plus $100 = $1,000, and that $900 loan is reserved with the original $100 (10%) that the depositor put in.

This way the bank can make 9x the profit by loaning out 9x as much.

 

[FindLiberty]

The person with that new "loaned out" money does not need to deposit it right back into the bank... the bank already considers that amount an asset of theirs and they somehow include it accounting for their 10% reserve. Yes, they loan out $900 via the original $100 deposit.

BTW, the 10% is more like 3% and when they can't even account for that "reserve" the bank just "gets a new name" and the process starts again.

The bailouts are free additional gravy.

We need a new scam to replace the old one... or at least get back to real money (gold/silver) that should work fine until a huge solid gold meteor smashes into the planet and provides mountains of gold (thus debasing the currency like the fed does now).

 

[Deborah K]

You have to think like a banker would.. The way fractional reserve lending is explained in textbooks is likeyou say: A guy deposits $100 and the banks sets aside $10 in reserve and loans out the other $90.

BUT WHAT REALLY HAPPENS:

The bank takes that deposit of $100 and puts the ENTIRE AMOUNT in as a reserve. And now can lend out another $900. Because The $900 plus $100 = $1,000, and that $900 loan is reserved with the original $100 (10%) that the depositor put in.

This way the bank can make 9x the profit by loaning out 9x as much.

Yep. I tried explaining this on another thread....this is what really happens.

 

[tggroo7]

You have to think like a banker would.. The way fractional reserve lending is explained in textbooks is likeyou say: A guy deposits $100 and the banks sets aside $10 in reserve and loans out the other $90.

BUT WHAT REALLY HAPPENS:

The bank takes that deposit of $100 and puts the ENTIRE AMOUNT in as a reserve. And now can lend out another $900. Because The $900 plus $100 = $1,000, and that $900 loan is reserved with the original $100 (10%) that the depositor put in.

This way the bank can make 9x the profit by loaning out 9x as much.

I don't understand why you are saying $1000 like it is relevant. By definition, $1000 had to be deposited. The bank is required, by definition from the Fed, to keep on hand a fraction of the funds deposited with them. In what you are saying, the bank is not keeping any of it.

 

[smokey]

.​

Reserve requirements do not limit the amount a bank can lend because reserves can be borrowed.

Reserve requirements are enforced to ensure that banks have enough money to cover withdrawals and payment to other banks. There is no regulation that prevents banks from lending 100% or more of their deposits as long as they maintain adequate capital as determined by the Fed's version of the Basel I Accord.

Canada, UK, and New Zealand have no reserve requirements yet their banks function as well or better than US banks. Without reserves a bank can not cover withdrawals by customers nor payments drawn due other banks. Reserves are a necessary part of banking. Regulating them by requiring a 10% minimum is overkill.

Additionally, since the sweeps programs were instituted in 1994, US banks can make it appear that they have more required reserves by sweeping demand deposits overnight into other deposits which do not require reserves.

This "money multiplier" may make interesting conversation when discussing pure fractional reserve banking but in reality it is an illusion.

.​

 

[wizardwatson]

You have to think like a banker would.. The way fractional reserve lending is explained in textbooks is likeyou say: A guy deposits $100 and the banks sets aside $10 in reserve and loans out the other $90.

BUT WHAT REALLY HAPPENS:

The bank takes that deposit of $100 and puts the ENTIRE AMOUNT in as a reserve. And now can lend out another $900. Because The $900 plus $100 = $1,000, and that $900 loan is reserved with the original $100 (10%) that the depositor put in.

This way the bank can make 9x the profit by loaning out 9x as much.

If this were what really was happening, and lets assume $900 borrower was banking at a different bank, then whenever borrowers bank tried to clear $900 from loaning bank, loaning bank would be instantly insolvent. It happens in the way originally explained.

Let's say someone deposits $100, bank loans out $90. Depositor needs some cash for beer, so goes to ATM and withdrawals $20. Then borrower deposits $90 in his bank. His bank tries to clear the $90 but loaning bank only has $80. So loaning bank needs to use some kind of overnight lending facility to borrow the $10 until its reserves are back in line.

This may not be exactly right, but I'm pretty sure that these banks can't merely inflate the way the quoted post describes. This little trick is set aside for the all mightt Federal Reserve when it monetizes government bonds. That's where we get the hardcore inflation.

FRB inflation is real as well, but it's ubiquitous and constant and waxes and wanes based on Fed lending rates, and stipulated reserve ratios.

What's even more cool is to explain it in reverse. While the amount of money in the banking system remains relatively constant there is one hole in the model. When an unusually high number of people start actually taking out cash and keeping it under their mattress, you get serious deflation. because just as every dollar in the bank creates 9 more like it. Every dollar taken out of the banking system, destroys 9 more like it.

 

[wizardwatson]

.​

Reserve requirements do not limit the amount a bank can lend because reserves can be borrowed.

Reserve requirements are enforced to ensure that banks have enough money to cover withdrawals and payment to other banks. There is no regulation that prevents banks from lending 100% or more of their deposits as long as they maintain adequate capital as determined by the Fed's version of the Basel I Accord.

Canada, UK, and New Zealand have no reserve requirements yet their banks function as well or better than US banks. Without reserves a bank can not cover withdrawals by customers nor payments drawn due other banks. Reserves are a necessary part of banking. Regulating them by requiring a 10% minimum is overkill.

Additionally, since the sweeps programs were instituted in 1994, US banks can make it appear that they have more required reserves by sweeping demand deposits overnight into other deposits which do not require reserves.

This "money multiplier" may make interesting conversation when discussing pure fractional reserve banking but in reality it is an illusion.

.​

So what limits the amount a bank can loan. Isn't it the amount they can borrow as reserves?

 

[Chester Copperpot]

I don't understand why you are saying $1000 like it is relevant. By definition, $1000 had to be deposited. The bank is required, by definition from the Fed, to keep on hand a fraction of the funds deposited with them. In what you are saying, the bank is not keeping any of it.

Of course the bank is.. The bank makes the entire deposit a "reserve".. The "money" it creates is a ledger entry, commonly referred to as "checkbook money" if you will.

Im using $1,000 so people can understand and follow the example.

Heres another example.. You need a $90,000 mortgage from a bank.. You put down $10,000 as a down payment.. Bank issues you your $90,000 mortgage. Your downpayment of $10,000 has allowed the bank to issue you the extra $90,000 so you can buy your house (or whatever).

You have effectively financed yourself. The money you provided the bank allowed the bank to create $90,000 in new money out of thin air and now they get to earn interest from YOU on your $90,000 mortgage.

 

[Deborah K]

If this were what really was happening, and lets assume $900 borrower was banking at a different bank, then whenever borrowers bank tried to clear $900 from loaning bank, loaning bank would be instantly insolvent. It happens in the way originally explained.

Let's say someone deposits $100, bank loans out $90. Depositor needs some cash for beer, so goes to ATM and withdrawals $20. Then borrower deposits $90 in his bank. His bank tries to clear the $90 but loaning bank only has $80. So loaning bank needs to use some kind of overnight lending facility to borrow the $10 until its reserves are back in line.

This may not be exactly right, but I'm pretty sure that these banks can't merely inflate the way the quoted post describes. This little trick is set aside for the all mightt Federal Reserve when it monetizes government bonds. That's where we get the hardcore inflation.

FRB inflation is real as well, but it's ubiquitous and constant and waxes and wanes based on Fed lending rates, and stipulated reserve ratios.

What's even more cool is to explain it in reverse. While the amount of money in the banking system remains relatively constant there is one hole in the model. When an unusually high number of people start actually taking out cash and keeping it under their mattress, you get serious deflation. because just as every dollar in the bank creates 9 more like it. Every dollar taken out of the banking system, destroys 9 more like it.

//

 

[Chester Copperpot]

If this were what really was happening, and lets assume $900 borrower was banking at a different bank, then whenever borrowers bank tried to clear $900 from loaning bank, loaning bank would be instantly insolvent. It happens in the way originally explained.

Let's say someone deposits $100, bank loans out $90. Depositor needs some cash for beer, so goes to ATM and withdrawals $20. Then borrower deposits $90 in his bank. His bank tries to clear the $90 but loaning bank only has $80. So loaning bank needs to use some kind of overnight lending facility to borrow the $10 until its reserves are back in line.

This may not be exactly right, but I'm pretty sure that these banks can't merely inflate the way the quoted post describes. This little trick is set aside for the all mightt Federal Reserve when it monetizes government bonds. That's where we get the hardcore inflation.

FRB inflation is real as well, but it's ubiquitous and constant and waxes and wanes based on Fed lending rates, and stipulated reserve ratios.

What's even more cool is to explain it in reverse. While the amount of money in the banking system remains relatively constant there is one hole in the model. When an unusually high number of people start actually taking out cash and keeping it under their mattress, you get serious deflation. because just as every dollar in the bank creates 9 more like it. Every dollar taken out of the banking system, destroys 9 more like it.

Thats why the banks can order whatever physical currency they need from the federal reserve.. All they have to do is stay within their reserve requirement.

While the federal reserve creates the high powered money, the individual banks do indeed create the money out of thin air just the same. and the deflation does indeed happen when it gets thrown into reverse at times.. This is why you can still have a depression under a gold standard... because while the actual high powered money is backed by gold, the checkbook money IS NOT backed by gold. It never is. And the checkbook money component is the largest component of the money supply.

What do you think derivatives are?

 

[tggroo7]

So is there even anything true about what G Edward Griffin said in his example? If banks can just borrow from the Fed whenever they want to lend, then the only limit is the bankers' judgement.

 

[Chester Copperpot]

So what limits the amount a bank can loan. Isn't it the amount they can borrow as reserves?

Its the amount they can earmark as reserves.. They can borrow "Reserves" from the fed as well.

Right now the entire banking system is bankrupt. If all the banks had to pay back all the reserve loans theyve gotten from the fed, they would be negative.. I think its negative $262 BIllion or so right now.. It was as high as -$363 billion back in October or so,.

 

[Chester Copperpot]

So is there even anything true about what G Edward Griffin said in his example? If banks can just borrow from the Fed whenever they want to lend, then the only limit is the bankers' judgement.

Everything Griffin has said is true.. Its just worse than that. because over time, they relax requirements and there are types of accounts that have NO reserve requirements and such.

His example of 10% reserve requirements is very applicable so people can understand the charade that is going on.