How the working person has been ripped off.

Fractional reserve lending allows banks to create money out of thin air.
Say the bank has 1 millon in cash. FRL allows the bank to lend out 10 million dollars, the 1 million in cash is the reserve. It's as simple as that. If you did it, you would go to jail. Thats why a run on the banks will cause them to crash. They owe money they don't have. The lend out money they don't have. It's all on paper.

1 Reply

@rabel22,

rabel22 wrote:

I tried that and it lost 40% of its value. If your going to give financial advice make it good advice.

Boo-Hoo!

Has the little boy ever heard of hold and wait?

Has the little boy ever heard of dividends?

1 Reply

@rabel22,

You can't buy stock. No one can buy stock. It isn't a privately held company. Banks are required by law to own stock in order to be part of the system.

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@Deckland,

Quote:

Fractional reserve lending allows banks to create money out of thin air.
Say the bank has 1 millon in cash. FRL allows the bank to lend out 10 million dollars, the 1 million in cash is the reserve. It's as simple as that.

Yes fiat money is created but it doesn't allow a bank to loan more than it's deposits.

I'll simplify this -
Bank A -
Joe deposits $100,000
fractional reserve lets the bank loan $90,000 to Pete
Pete isn't ready to spend the money so he deposits it in Bank A
That means Bank A now has $190,000 in deposits even though it only has $100,000 cash.
Pete's deposit now lets the bank loan another $81,000 to Sally.
Sally deposits the money and the bank can now loan $72,900.
This continues on but eventually the money left to lend from the deposit of the loan is minimal. With a 90% fractional rule a bank could never loan more than 10 times it's initial cash deposit.

It certainly doesn't allow a bank to lend out 15 times it's deposits.

Quote:

If you did it, you would go to jail.

No. I wouldn't. The bank has liabilities and credits. It's credits of what people owe it are more than it's liabilities. It's not that different from a business running a 30 day payables account where they are owed more than they owe others. In business it's called cash flow and many businesses have cash flow crises.

1 Reply

@parados,

parados wrote:

I'll simplify this -
Bank A -
Joe deposits $100,000
fractional reserve lets the bank loan $90,000 to Pete
Pete isn't ready to spend the money so he deposits it in Bank A
That means Bank A now has $190,000 in deposits even though it only has $100,000 cash.
Pete's deposit now lets the bank loan another $81,000 to Sally.
Sally deposits the money and the bank can now loan $72,900.
This continues on but eventually the money left to lend from the deposit of the loan is minimal. With a 90% fractional rule a bank could never loan more than 10 times it's initial cash deposit.

parados, the problem I see with your explanation is you have people borrowing from the bank, but leaving their money in the bank. So these people like paying interest for nothing ? The fact is banks do create money out of thin air, in fact up to 10 times what is deposited with them. Even your explanation above shows that.

1 Reply

@Miller,

No, but he has heard of Miller the obnoxious who insults because he hasent the intelligence to make a rational arguement.

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Quote:

FRACTIONAL RESERVE LENDING
Money-changers in England, generally goldsmiths, started keeping other people's gold in their safe rooms. They gave receipts for the gold that were used to pay others and so became paper money. To simplify the process the receipts were made out to bearer. The goldsmiths found that only a small fraction demanded gold at any one time, so they started cheating by lending out some of the gold and keeping the interest earned by the lending. They found they could print more receipts as money than they had gold and collect interest on it.
This was the birth of "fractional reserve lending," lending out more money than the reserves held. It was fraud, often specifically outlawed once understood. This practice evolved into modern banking and is known as "fractional reserve banking."
It gives the power of money-making to private banks. This practice is their strength, the source of the rapidly-growing profits of banks, but also their inherent weakness, for banks live in fear of bad debts and bank runs when they hold only a small part of their obligations.
When the Bank of North America was set up in 1781 there was no clause prohibiting fractional reserve banking. Nowadays, banks in the USA are allowed to lend up to ten times more money than they actually have.

From this article
http://www.multiline.com.au/~johnm/bankcheats.htm

2 Replies

@Adanac,

I oversimplified it of course.
In reality Pete borrows the money buys stuff from Joe, Sally, xyz company etc. Those people and companies deposit the money from selling the products in Bank A, Bank B, Bank C . When you have thousands of people banking in a few banks in a community, money will transfer from bank to bank. It is basically the same thing as I layed out just with more steps and more complicated. Money is loaned, it is redeposited in the bank creating more deposits to loan money against. But it is not unlimited in its scope. It is limited by bank regulation which says how much cash has to be kept on hand compared to total deposits.

The bottom line is - a bank can't loan out $15,000 for every $1000 of deposits like was mentioned earlier in this thread.

Quote:

The fact is banks do create money out of thin air, in fact up to 10 times what is deposited with them.

They create fiat money which just means it isn't cold hard cash. It's on paper in the credit/debit columns.

2 Replies

@parados,

Okay so at least there are two types of banks. The one that cited as only lending out 79% of the deposits while the Wall Street banks could lend out 15 times what they have in cash deposits ( those who are in the stock market).

As I pointed out the the Wall Street banks with that power and involvement of stocks and bonds can affect the ownership and the whole culture corporate culture. They have a larger base or financial territory i.e. 15 times the $1,000 customer deposits With this large base it can charge low interest and make more money than the normal banl which is limited to 79% of their customer deposits. Even if they charge 6% for their loans they fare poorly. Wall Street only got into trouble when it went into the 33.5:1 ratio or above. This shows that the 15:1 ratio is a good ratio and it works as it does not stress the companies getting the loans at such low rates while the normal banks with their higher interest rates could drive off their customers seeking low interest rate loans. This is unfair to local banks.

There is another factor working. This favorable situation create wall street as king makers in the corporate world. They could charge slightly more for companies or owners they don't like say 1% more while for their favored companies they charge 1% lower thus allowing their ethnic, political or religious group to thrive. I am sure people do notice a warlike atmosphere created by the Wall Street banks as they promote cut-throat companies and their CEOS. The proliferation of hedge funds, private funds could all be creations of Wall Street banks as the extra funds that come when the principals are being paid back. All the previous calculations were for interest payments. The principals (money) could be used to create separate funds run by their executives or ex-executives with ties to the bank like the case of Goldman Saks.

1 Reply

@talk72000,

Quote:

while the Wall Street banks could lend out 15 times what they have in cash deposits

No, that isn't right since the Wall Street banks don't accept deposits in savings accounts that they turn around and lend out. They can have a separate entity that acts as a bank but that entity is subject to the same rules as any other bank and they can't turn the deposits over to the Wall street bank.

Please provide a source for what you are talking about because I don't think it is true and can find nothing to confirm it. What your are saying is nonsense as it is written.

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@Adanac,

Thanks for the article. You could see that the ratio makes all the difference. a 15:1 ratio works well and has proven to be workable . In the calculation just from the interest the goldsmith (bank) made 15 X $1,000 x 1% = $150 but when the principal was paid back they made $15,000 from the $1,000 of customers deposits. That is how the goldsmiths (bankers) made so much money. The $15,0000 was siphoned away some how either in special funds. 15000/1000 x100 = 150% profit on the loans not including the interest they earned. They still had the $1,000 deposit so another round of $15,000 could be lent out with another huge haul of $15,000 at maturity not including interest.

1 Reply

@parados,

The bank reference seems to represent mortgage banks.

The Bank of America, Citibank are banks that take deposit and they were involved with wall Street. I know about Bank of America as I did deposit money in it.

Also how come all the banks bought Securities which caused the collapse if all the banks did were lending money out of deposits?

Lehman Bros. was financing huge condominium projects before the collapse. They seemed to operate as a bank.

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@Adanac,

My point is to open up the commercial banks to allow competition to Wall Street banks and allow the local banks to lend out maybe 10:1 ratio as it is a safe ratio. These banks will charge their corporate customers less interest and provide more capital while workers will be safer with their deposits covered by FDIC. Their savings will not be gouged by the Wall Street sharks nor taken for a ride by corporations who use stock purchased as cheap or free money.

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@talk72000,

Quote:

15000/1000 x100 = 150% profit

You might want to check your math. If you are going to be off by a factor of 10, there isn't much use talking about bank profits.

1 Reply

@parados,

Thanks. I remebered that when I logged off and was planning to change it. It should be 1,500%.

1 Reply

@talk72000,

If you are going to argue that banks make 1500% profit on deposits then you clearly are out of touch with reality.

1 Reply

@parados,

The early goldsmiths became rich and their descendants are probably in the banking business I would assume and would know all the tricks and ways to circumvent the regulations. All those in Wall street though not strictly in the banking business know about leveraging and using it to the hilt. All those in the financial industry take home $200,000 per annum or more. The leveraging allows that and to avoid he government share they give their empoyees handsome salaries and executives even higher bonuses. The CEO of Lehman Bros. took home $300 million the year before it filed for bankruptcy.

I think it is better to openly allow banks the 10:1 ratio and taxed accordingly rather than the behind-the-scenes tax dodge these financial institutions caryout. The government this way gets the money needed in tax revenues. It collects many times the deposits of the workers savings.

1 Reply

Quote:

All those in the financial industry take home $200,000 per annum or more. The leveraging allows that and to avoid he government share they give their empoyees handsome salaries and executives even higher bonuses. The CEO of Lehman Bros. took home $300 million the year before it filed for bankruptcy.

Well that certainly confirms the topic of this discussion.... viz ..

How the working person has been ripped off.

1 Reply

@Deckland,

The open system of having the banks he 10:1 ratio and taxed accordingly would help the working person. His savings will be his to use and not in taken by a government in Social Security which could be vandalized by any administration feeling the need to cut down on the deficit or putting it in the stock market like GWB proposed. When the working person feels his financial situation is stable then the country's finances are stable. When the worker's financial situation is destabilized the whole finacial system is unstable as shown by recent history.

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@talk72000,

You say that the government is taxing savings accounts. This is important news to me. Would you please explain how the government does this, so the people can rise up against this. Being a cash-basis taxpayer, I thought I would be taxed only when I take out earnings. Are you an economist of some sort, a supply-sider, or whatever?

1 Reply

How the working person has been ripped off.

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