Fractional Reserve Banking

[12DrinkMore]

Q: I've just deposited with the bank $100 in Greenbacks what has happened to it?

A: We lent out $1,000 to somebody else.

Q: Eh? So where does all THAT extra money come from?

A: Nowhere really, it simply didn't exist before you deposited $100 cash.

Q: WOW! So how much interest do I get for enabling this wonderful process?

A: About 1%

Q: What? Well how much does the bank charge for the $1,000?

A: About 5%.

Q: So they pay me $1 and then they make $50 on this! This seems very unfair, I want to withdraw my $100?

A: Sorry, but you can't do that.

Q: OH! Why not?

A: Because then the Bank won't have any cash left and we have to keep 10% cash physically in our safe.

Q: But what about the $50 they have just earned on my $100?

A: Sorry but we have just paid our bonuses of $50.

Q: And what about the $1,000 that you have lent to someone else? I only want my 100$ back?

A: Hmm, well that's a bit difficult at the moment because they aren't paying the bills and have given us their house back.

Q: Oh dear, but surely you can sell the house, recover your money and even make a profit?

A: Ah, well houses aren't doing to well and it seems that it are only worth $500 now anyway.

Q: But what happened to the $1,000 that was spent on the house?

A: The seller paid that into his account here.

Q: Wonderful, so how about a piece of that to pay me $100?

A: Sorry, but as I said, we need to keep 10% in physical cash here. He did not deposit cash, otherwise we would have lent out another $10,000 based on his deposit. You see, there are banking regulations to keep us in order and for your security, of course, we have to obey them. so for an absolute guarantee of all your money we can only lend out 10 times the actual physical cash we have.

Q: But hang on, At the moment you owe me $100, you owe the seller $1,000 totalling $1,100 but only have $500 in a house which you can't sell. Bit of a difference, eh? What's the plan to fix the $600 deficit?

A: Hmm, yes we are having a bit of a difficulty here. But no problem, we are saved! The government is going to print some nice new money and give it to us so we are back to square one again. This is such a relief as I was worried I might not get a bonus.

Q: But don't you then owe this money to the government?

A: Not anymore! We are nationalised and the government can't owe money to itself! And I might get a State pension too, whippee!

Q: Hold on there. This is getting confusing. So the government can actually create more money than you have lost. WOW! What is this wonderful generous government that has come to save my $100? Who owns it? Who pays for it?

A: Ahh, nobody actually owns it, it is a mysterious expanding blob that is able to send out bills in the name of tax to pay for its actions.

Q: Good grief, that's sounds positively awful! But please, tell me, I need to know two things, who defines what's in the blob and who receives the bill for the $600 deficit, so I can get my money back?

A: Well, hmm, sorry about this but here is your name on this thing called a "voting slip" and well, cough cough, here is the bill for $600 with your name on it too!

Q: Come on, your kidding me? It's just a joke, right? I deposit $100 and suddenly I am liable for $600?

A: Sorry, that's just it. You have voted for the blob and given it the absolute power.

Q: Jesus O'<deleted> Reily, what have I done, what have I done?????? (stutter, collapse, heart attack)

(And it's my copyright, all my own private effort.... so go on flame me!)

Edited January 24, 2009 by 12DrinkMore

[AlexLah]

12, please be a bit more positive.

It will all be over soon you know.

They will save us, yes they promise that so we have to believe in it.

If we not believe the whole system will go down.

We will just borrow money from the children of our children and their children and the childern of their childern and all will be fine.

Don't worry so much, gives you headache.

[plachon]

In a nicely explained nutshell, I think that's just about the sum of the mess we're in. When the bankers start being prosecuted for criminal fraud and the regulators for criminal negligence, then there might be a chance that this sorry state of affairs doesn't repeat itself, but I think the regular politicians are the least culpable (or no more to blame than you or I for voting them in!) at this particular juncture. The Bush's, Blairs and Browns are guilty of far more heinous crimes in allowing the Iraq War to occur and should be held accountable for that fiasco before we start worrying too much about their role in allowing the financial system to splutter and stall. Of course, the two phenomena are not entirely disconnected.

[eggomaniac]

When organised crime does what the credit cards companies do, it is called 'loan sharking' and 'usury'.

Just wait until mastercard and visa line up for bail outs!!!

ANY lending above twice of prime should be illegal!

If everybody in the world lived within their income, everybody in the world would have a job, with the caveat that executive salaries were based on performance.

[Khun Jean]

Nice piece, but

A: Hmm, yes we are having a bit of a difficulty here. But no problem, we are saved! The government is going to print some nice new money and give it to us so we are back to square one again. This is such a relief as I was worried I might not get a bonus.

Q: But don't you then owe this money to the government?

A: Not anymore! We are nationalised and the government can't owe money to itself! And I might get a State pension too, whippee!

Q: Hold on there. This is getting confusing. So the government can actually create more money than you have lost. WOW! What is this wonderful generous government that has come to save my $100? Who owns it? Who pays for it?

This bit needs revising.

It states the government prints/creates money and that is incorrect.

Money is created by the Federal Reserve Bank and the government is borrowing it to bailout the banks who can then use it to (un)balance their books. The government then has to pay interest to the Federal reserve bank. That means your tax money which is from your salary which comes from your employer who probably borrowed the money and has to pay interest.

Note that the Federal Reserve Bank is not Federal but privately owned, and it does not have reserves only a computer terminal where they can input numbers for creating money. No printing required.

[flying]

It states the government prints/creates money and that is incorrect.

Money is created by the Federal Reserve Bank and the government is borrowing it to bailout the banks who can then use it to (un)balance their books. The government then has to pay interest to the Federal reserve bank. That means your tax money which is from your salary which comes from your employer who probably borrowed the money and has to pay interest.

Note that the Federal Reserve Bank is not Federal but privately owned, and it does not have reserves only a computer terminal where they can input numbers for creating money. No printing required.

Good Work 12Drink I have said many times if nothing else many have learned more than they ever knew before about how screwed this system is/was

KuhnJean you know that is the most infuriating part of this whole mess.

They screwed everyone for years now they went too far with their greed & caused a meltdown.

So the first course of action is help them? So they may return to twisting the screwdriver?

Somebody please point out the exit.

[Naam]

the fractional reserve banking as described by its opponents is a myth. and myths are most (not all!) of the fairy tales created about the FED. i will however not participate in discussing this topic in details. it is completely useless to discuss any topic with participants who are not willing to use their own brains, do some logical thinking and use a bit of maths but swallow anything biased what third parties serve, be it Wikipedia or blogs.

[LivinLOS]

the fractional reserve banking as described by its opponents is a myth. and myths are most (not all!) of the fairy tales created about the FED. i will however not participate in discussing this topic in details. it is completely useless to discuss any topic with participants who are not willing to use their own brains, do some logical thinking and use a bit of maths but swallow anything biased what third parties serve, be it Wikipedia or blogs.

If you want to talk about myths associated with the FED go get a superb book called the 'Creature from Jekyll Island' how they can take such a dry subject and make it read for so many 100s of pages like a thriller is astounding.. How the fed was born in secrecy, how the banking dynasties that control it brought the US into the 2nd world war, how it funded both sides of that war, how it has actively created the busts and has been used as a tool to transfer wealth from the population to elites repeatedly and then (as now) passing the bill for its bail outs back to the people.

I am sure your aware of many of these events, but this book places them into tight coherent chronology detailing the histories and careers of those that performed these actions behind the scenes. A real eye opener for a young pup like me only starting out with his cynicism and tin foil !!

[mel2surf]

In a nicely explained nutshell, I think that's just about the sum of the mess we're in. When the bankers start being prosecuted for criminal fraud and the regulators for criminal negligence, then there might be a chance that this sorry state of affairs doesn't repeat itself, but I think the regular politicians are the least culpable (or no more to blame than you or I for voting them in!) at this particular juncture. The Bush's, Blairs and Browns are guilty of far more heinous crimes in allowing the Iraq War to occur and should be held accountable for that fiasco before we start worrying too much about their role in allowing the financial system to splutter and stall. Of course, the two phenomena are not entirely disconnected.

Spot on!!!

[Naam]

the fractional reserve banking as described by its opponents is a myth. and myths are most (not all!) of the fairy tales created about the FED. i will however not participate in discussing this topic in details. it is completely useless to discuss any topic with participants who are not willing to use their own brains, do some logical thinking and use a bit of maths but swallow anything biased what third parties serve, be it Wikipedia or blogs.

If you want to talk about myths...

see above

[12DrinkMore]

Maybe I should have used GBP and not USD, so then the FED would not have been brought up. The Bank of England is owned by the UK government, although some would have us believe otherwise.

And Fractional Reserve Banking is the system we have and it works pretty much as above.

http://en.wikipedia.org/wiki/Fractional-reserve_banking

[flying]

i will however not participate in discussing this topic in details.

Isnt that a bit redundant to post?

[teatree]

the fractional reserve banking as described by its opponents is a myth. and myths are most (not all!) of the fairy tales created about the FED. i will however not participate in discussing this topic in details. it is completely useless to discuss any topic with participants who are not willing to use their own brains, do some logical thinking and use a bit of maths but swallow anything biased what third parties serve, be it Wikipedia or blogs.

If you want to talk about myths...

see above

You claim that its a myth..so enlighten us on how it does work then.

Or could it be that the real reason you won't comment against it is that you really have no knowledge on the subject?

[OxfordWill]

I also want to make it clear, as Naam did, that I will not be discussing this topic with you.

[Kharzi]

Regulated fractional reserve banking works albeit with concomitant boom/bust cycles. Unregulated FRB leads to foolishness such as we are experiencing now and has precipitated a boom/bust cycle unprecedented since the 20s.

Even Doctor " my pool is bigger than yours " Naam couldn't argue with that.

[AlexLah]

Here a document that you could read and understand a bit more in depth.

ModernMoneyMechanics.pdf

Enjoy reading.

[12DrinkMore]

Here a document that you could read and understand a bit more in depth.

ModernMoneyMechanics.pdf

Enjoy reading.

Thanks, it didn't give me anymore information though. Just a repeat.

If you have something interesting on the mega casino Credit Default Swaps which, with an estimated 40,000,000,000,000 (40 Trillion) Dollars in volume of unregulated bets, is another major catalyst in all this and has brought down major institutions, then please let us know.

[Khun Jean]

the fractional reserve banking as described by its opponents is a myth. and myths are most (not all!) of the fairy tales created about the FED. i will however not participate in discussing this topic in details. it is completely useless to discuss any topic with participants who are not willing to use their own brains, do some logical thinking and use a bit of maths but swallow anything biased what third parties serve, be it Wikipedia or blogs.

If you want to talk about myths...

see above

Attacking everyones thinking without telling your version of the 'truth' is acting like a coward. You are the one calling it a myth, tell us why!

[JimsKnight]

Naam's just trying to get the last word in (as always)

[gregb]

Regulated fractional reserve banking works albeit with concomitant boom/bust cycles. Unregulated FRB leads to foolishness such as we are experiencing now and has precipitated a boom/bust cycle unprecedented since the 20s.

Actually, if you are going to admit fractional reserve banking works at all, then it doesn't matter whether it is regulated or not. All that would change is the size of the bust cycle.

The fundamental problem with fractional reserve banking is loaning money at interest. All types of fractional reserve banking create the principal on the loan through the banking system. It then relies on further money creation through more loans to create the interest paid back on the original loan. It is, for lack of a better word, a legal ponzi scheme. It requires exponentially increasing debt to service interest on the previous debt.

Busts are necessary in a fractional reserve system to keep this debt load from becoming infinite. During a bust, loans simply get written off, expected future interest is thrown away, and the system is reset. Fractional reserve banking is like Windoze, and busts are the blue screen and reboot. A very necessary and integral part of the functioning of the system. If the banking system is unregulated, the bust will just be that much larger to reset the debt bubble to something manageable.

Personally, I think there are better ways of running an economy than fractional reserve banking. The best thing for humanity would simply be to outlaw the practice, although I don't believe for an instant that the bankers will ever allow this. The best you can hope for is to recognize that bankers who practice in the fractional reserve system are a parasite on the real economy, and select one of two choices. Don't feed them, and accept you will never have their money or be a part of their cabal, or join them and add your toxins to society along with the rest.

Just be aware if you want to get rich by playing their game, their game includes a reset button that will wipe you out if you aren't careful. It sucks to be involved with fractional reserve banking during the bust. Guess what stage we're at now? This time around however, the bankers have figured out how to transfer the costs of the bust onto the taxpayers. Gotta give them credit. They've built a really good scam.

[misterman21]

the fractional reserve banking as described by its opponents is a myth. and myths are most (not all!) of the fairy tales created about the FED. i will however not participate in discussing this topic in details. it is completely useless to discuss any topic with participants who are not willing to use their own brains, do some logical thinking and use a bit of maths but swallow anything biased what third parties serve, be it Wikipedia or blogs.

There are many very informative factual sources of information which describe the FED as it is. The OP has a very good understanding, and spent time to put it simply for the less informed. However, you seem to defend all that is wrong> You will not participate in this discussion (which you have!!) as you have absoulutely nothing to counter the truth. The more I read your posts the more I am convinced that you are some sponsered spook.

Instead of assuming you know so much about so much - do some open minded research yourself. I could give you many links but what use would that serve a closed mind

Edited January 26, 2009 by misterman21

[gregb]

the fractional reserve banking as described by its opponents is a myth. and myths are most (not all!) of the fairy tales created about the FED.

If anyone wants to understand modern myths, I highly recommend John Michael Greer. (http://thearchdruidreport.blogspot.com/) He is a self confessed bookworm, and extremely knowledgeable on historical crisis and the human condition. If you spend several weeks reading his works and thinking through their implications, you'll come to a much clearer understanding of what our current society really is, and where we're necessarily headed. He is a druid, so he is able to draw some extremely intriguing parallels between how societies rise and fall, and natural cycles. One of his most prescient analysis explains how a wasteful industrial society like ours has parallels in the natural world, and is a necessary and intricate part of the path to a stable, old growth forest. But the process of getting to the old growth forest is not linear, and the fast growing, invasive species necessarily must die after completing its function. He's quite a fascinating read because he understands things from a perspective that most of us simply have never considered.

Anyway, the word "myth" used here made me think of him, because it was through reading his site that I learned a myth historically is a story that explains an aspect of society, and only our culture has distorted the meaning to imply something that is false. This is a direct result of one of our biggest cultural myths, the myth of progress.

So I would argue, that fractional reserve banking and the Fed, is only a small part of the bigger myth of credit based finance. And a myth is not a fairy tale. And most stories have elements of truth in them if you are willing to look.

[H2oDunc]

12 I thought you might like this. An actual call to the Fed reserve bank in San Fransisco

http://www.rense.com/general29/ringring.htm

[12DrinkMore]

To come back to the FED. There is a load of conspiracy theory about who owns it and where the money goes.

http://www.federalreserve.gov/pf/pdf/pf_1.pdf

"The income of the Federal Reserve System is derived primarily from the interest on U.S. government securities that it has acquired through open market operations. Other major sources of income are the interest on foreign currency investments held by the System; interest on loans to depository institutions; and fees received for services provided to depository institutions, such as check clearing, funds transfers, and automated clearinghouse operations.

After it pays its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury. About 95 percent of the Reserve Banks’ net earnings have been paid into the Treasury since the Federal Reserve System began operations in 1914. (Income and expenses of the Federal Reserve Banks from 1914 to the present are included in the Annual Report of the Board of Governors.) In 2003, the Federal Reserve paid approximately

$22 billion to the Treasury."

[AlexLah]

Hi gregb, thanks for the link but I think a lot of peeps will place this guy under the tree huggers catagory.

I do not mind reading his stuff as it will allow (if you have open mind) yourself to look at "problems" in different way's.

And to allow yourself to accept that different scenario's are possibilitys that cannot be ruled out and that the thruth as you were told to believe is not the thruth after all.

This thread is one of the very good examples of how whe have been fooled for a long time, now more and more people have a bit more understanding about reality or what we percieve as reality. What the consequences of that newly learned reality will be, is another question as it is unfolding in front of our eyes.

But people could start thinking of alternative scenarios that could affect their personal situation incase they loose their job and home.

What if indeed most of banks collapse and we are not able to withdraw any money which is a realistic scenario as pointed out by 12 from the articles.

In another thread there is a link to a fascinating Blog of a guy in Argentine who deals with this.

So I think it would not hurt if us people think of a bad case scenario and write down the actions they would have to take, just incase.

I think we are lucky we can still share our thoughts and feelings here on the net as it will help to get us through this mess, and I would like to say, please do not be discouraged to share your view and thoughts by negative comments made by some.

We are here to share information so that we can try to understand and come up with possible solutions to survive this so called crisis.

[flying]

12 I thought you might like this. An actual call to the Fed reserve bank in San Fransisco

http://www.rense.com/general29/ringring.htm

That was quite good wasn't it?

[geriatrickid]

Ok, so you folks don't like the current banking system. Fair enough. I don't like looking at the topless elderly ladies on patong beach, but I don't have an alternative solution short of giving the old gals some duct tape. Sure there are weaknesses in the current system, sure it has an ability to make a sharp adjustment, but what's the alternative? Is it tested? Is it viable? Would you like to go back to the barter system? It will certainly be interesting to see the collective genius of those that rely on Lyndon Larouche and others for their ideas. I'm just one of those workers that pays the taxes and has watched my retirement savings evaporate, so I am disposed to hearing something more attractive.

[flying]

but what's the alternative? Is it tested? Is it viable? Would you like to go back to the barter system?

Hey I have no alternative but then again I dont get hundreds of thousands a year to supposedly keep this thing afloat

Barter? I would give it a shot & always wondered but then again I am a dreamer.

[teatree]

Ok, so you folks don't like the current banking system. Fair enough. I don't like looking at the topless elderly ladies on patong beach, but I don't have an alternative solution short of giving the old gals some duct tape. Sure there are weaknesses in the current system, sure it has an ability to make a sharp adjustment, but what's the alternative? Is it tested? Is it viable? Would you like to go back to the barter system? It will certainly be interesting to see the collective genius of those that rely on Lyndon Larouche and others for their ideas. I'm just one of those workers that pays the taxes and has watched my retirement savings evaporate, so I am disposed to hearing something more attractive.

The alternative is to have a money system where money isn't created out of DEBT. Where the government issues its own money without having to get a third party to issue it for them and then pay interest.

[Khun Jean]

For Americans it is easy, just follow the constitution. Base it on gold and/or silver. If you don't own the gold or silver you will not be able to create money out of thin air. If you want more, start mining or working.

It will keep human greed in control. No human should be allowed to be able to make money out of nothing.