Stupid question about fractional reserve banking, please help!

[brandon]

Most likely the reserve ratio will be decreased once some form of this bailout legislation passes....possibly to 0%

 

[Original_Intent]

You deposit 1000, and they lend 900.

That 900 goes in the bank of whoever got paid from the loan.

That bank can loan 810 based on the 900 deposit.

That 810 gets deposited, etc, etc etc.

eventually something like $8000 in loans can be generated based on your 1,000 deposit.

 

[Original_Intent]

The scary thing is if they really went to 0 percent reserves.

You deposit 1000, the bank can loan 1000 based on your deposit.

That 1000 that got paid out gets deposited, and another bank can make a 1,000 loan

etc ad infinitum. A measly 10% reserve still limits the loans to 8 or 9 times the amount of the deposit. 0 reserve = no limit = $100 loaf of bread

 

[JosephTheLibertarian]

source please. we've all heard 1/10, but it differs and obviously somebody broke some rules this year.

who is we? you don't know how to do research?

 

[Josh_LA]

who is we? you don't know how to do research?

obviously I'm an idiot that's asking the stupid question, so please point me to source.

 

[Josh_LA]

The scary thing is if they really went to 0 percent reserves.

You deposit 1000, the bank can loan 1000 based on your deposit.

That 1000 that got paid out gets deposited, and another bank can make a 1,000 loan

etc ad infinitum. A measly 10% reserve still limits the loans to 8 or 9 times the amount of the deposit. 0 reserve = no limit = $100 loaf of bread

I seriously thought that was already the case.

 

[Josh_LA]

It's the latter.

but why should they keep any on reserve? unless they need to lend it again, or promised you it's available any time.

If you put in $10, they lend out $10
They can just tell the next person there's nothing more to lend.
What difference does it make whether they lend $9 and leave $1 or lend $10 and leave nothing?


The only difference here would be, if you put in $10, they lend out $9.
You go back and cash out, they either say it's not there, or they have to create new money.
If they can create new money, why wait and lend only $9 based on $10?
Couldn't they just lend $90 and keep $10?

 

[nate895]

but why should they keep any on reserve? unless they need to lend it again.

If you put in $10, they lend out $10
They can just tell the next person there's nothing more to lend.
What difference does it make whether they lend $9 and leave $1 or lend $10 and leave nothing?

The Fed says they can't, and most likely you will want at least one dollar before they can recoup it. Having 0 reserves is the definition of bank failure, so they'd fail unless they were lucky enough for you to wait to withdraw any money until the first payment of the loan.

 

[Bradley in DC]

Most likely the reserve ratio will be decreased once some form of this bailout legislation passes....possibly to 0%

Reserve requirements--under the current structures--are an anachronism with the "sweeps" software technology. They have been effectively zero for a long time. The bailout legislation will not change anything. Don't worry.

And this is a good thing with the current structures--it is one less "tool" for Fed monetary policy. No, no one here is arguing for the current Fed structure.

 

[Josh_LA]

The Fed says they can't, and most likely you will want at least one dollar before they can recoup it. Having 0 reserves is the definition of bank failure, so they'd fail unless they were lucky enough for you to wait to withdraw any money until the first payment of the loan.

But really, the problem with fractional reserve isn't fractional reserve itself. If a bank actually TELLS PEOPLE THEIR MONEY WON'T BE THERE, people would chose not to deposit there, and business will be concentrated towards banks that have higher reserves.

 

[nate4ron]

Murray Rothbard explains it magnificently well:

http://www.lewrockwell.com/rothbard/frb.html