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Is fractional reserve lending ridiculous?


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2015 Mar 30, 7:46pm   40,830 views  100 comments

by Blurtman   ➕follow (2)   💰tip   ignore  

You have $2,000 in your checking account, you write a check for $20,000, you re in big trouble.

The Bank of America writes a check that it can only back with 10% of the check's amount, and no problema.

Should criminal organizations be able to create money?

Is fractional reserve lending a negative contributor to economic stability?

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37   anonymous   2015 Mar 31, 9:55am  

Because it gives an unfair advantage to investors, and the corollary to wage slaves.

Also the dept is eroded in this manner, since TARP a trillion dollars has been taken away from the 4 trillion in Fed spending during that time just by inflation.

Huh?

38   Blurtman   2015 Mar 31, 9:59am  

So should Buddy, the child pornography dealer, be allowed to create money to fund child porn movies that he then resells at great profit?

Should Ratso the swindler be allowed to create money to fund the creation of bogus securities which he then resells at great profit?

39   MisdemeanorRebel   2015 Mar 31, 10:06am  

Blurtman says

I am not saying fractional reserve lending is a crime, but that it is money printing. And criminals should not be allowed the privilege of creating money.

The alternative is the government could simply print the money. When you consider what you've written, then the economy is really on the banks, therefore we know who to blame.

I personally fail to see the difference between a few hundred bureaucrats in DC controlling the money supply, and a few hundred bank execs in NYC controlling the money supply, except the former is subject to democratic pressure and the latter is unelected and unaccountable.

40   tatupu70   2015 Mar 31, 10:11am  

Blurtman says

You have 10 $200 gold pieces, or $2,000. You write your nephew a check for $2,000, and keep one of the gold pieces, and pass the remaining 9 to your nephew. Your nephew writes a check to his friend Bobo for $2,000, keeps one of the gold pieces, and passes the remaining 8 to his sweetie, Tootsie. Tootsie writes her aunt Mildred a check for $2,000, keeps one of the gold pieces, and passes the remaining 7 to pastor Phil, who then writes a check for $2,0000,.....etc.until the last check writer has the last gold piece. On the basis of the original $2,000, $20,000 in checks have been written, but yet each check writer has only one $200 gold piece. So no, each check writer does not have $2,000, but only $200.

That's a poor analogy. A better one would be you get $2000 from the lottery. You keep $200 and loan $1800 to your nephew. He keeps $180 and loans $1620 to his girlfriend. She keeps $162 and loans $1458 to her out of work Dad. He keeps $146 and loans $1312 to his son. And so on.... Each person who took out the loan only has 10% of the loan value.

In effect, when you deposit in a bank, you are loaning them the money at a specified interest rate for any term you choose.

41   tatupu70   2015 Mar 31, 10:13am  

HydroCabron says

When I deposit $2K, it's still my money: I can withdraw it at any time.

That's the crux. It's a demand deposit, but is it really your money?

42   tatupu70   2015 Mar 31, 10:14am  

jvolstad says

Can you imagine if banks could only lend out actual deposits on-hand? Wonder what that would do to inflation and prices of goods?

How would that even work? The bank is only loaning money it physically has. But once it loans the money, it no longer has it. If you argue for a 100% reserve requirement, there would be NO loans. Ever.

43   anonymous   2015 Mar 31, 10:16am  

It seems the case is being made that without clawbacks, ours is an economy that wasn't worth saving.

Especially not at the expense of further devalued labor, and increasing and cementing inequality

I mean, whatever would we do without hair and nail salons, big box staging areas for landfills, restaurants that serve up crappy food substitutes, the war machine, and all the financial institutions utilized by the politically privileged to tenderize the meat of the politically disprivileged before marching them off for slaughter.

Drink some more alcohol while we beat you to a pulp, your meat will taste better! And more importantly, it just feels so good!

44   anonymous   2015 Mar 31, 10:22am  

personally fail to see the difference between a few hundred bureaucrats in DC controlling the money supply, and a few hundred bank execs in NYC controlling the money supply, except the former is subject to democratic pressure and the latter is unelected and unaccountable.

If only those were the choices. Sadly, they are in cahoots, and their partnership allows them to use the currency for their intended use; a method to control and exert their political privilege over the disprivileged masses

45   MisdemeanorRebel   2015 Mar 31, 10:29am  

Banking is legalized fraud: It began as fraud, when goldsmiths lent out more money in paper receipts than they took in as gold - other people's gold they were holding in their safes and charging fees to hold on to. Basically, lending out other people's property stored with them and then issuing paper receipts to others. They usually collapsed when people tried to collect all at once. Then they began paying interest as hush money when people deposited their wealth with them (Interest on bank accounts).

But people couldn't live without all the extra money floating around so this was legalized. IMHO, since precious, rare metal specie is no longer the currency, we do not need this. The Government can simply print the money. Indeed this happens anyway via the Fed buying bonds from the Treasury. The only difference would be accountability.

Banks do not want reasonable inflation, they want their loans to be paid back with expensive money. Banks control the Fed, have a strong say in the Government, and are dedicated to keeping the Fed "Independent."

Another word for independent is "Unaccountable": The Fed can do what it wants without government interference, and therefore does not need to respond to Public Pressure.

All banks - all of them - survive only because of FDIC government guarantees. Otherwise bank failures would be as routine as traffic jams, as they always have been before it. And as I pointed out to Indigenous, you had to have your bank notes discounted if they came from another bank, which is why a private system doesn't work without government guarantees.

The Fed's real desire is to encourage limited inflation or deflation whenever possible, at whatever cost to Employment. It's official goal is 100% employment, but that's quite secondary, as the Fed is controlled by Banks, who own shares in it, and the pastiche of Government Control - the appointment of the Board of Governors - is always staffed by the former head of the private NY Fed. You will NEVER see Ralph Nader or Warren or anybody else like them as Fed Chair - only somebody pre-approved by the Banking Industry..

Banks need to be reduced to a supporting role in the Economy, instead of the Leadership role they've taken. FIRE isn't real productivity, and if too powerful, it becomes a Tax on Productivity.

46   control point   2015 Mar 31, 10:33am  

indigenous says

Because it gives an unfair advantage to investors, and the corollary to wage slaves.

Also the dept is eroded in this manner, since TARP a trillion dollars has been taken away from the 4 trillion in Fed spending during that time just by inflation.

The exact oppposite of the first statement is the truth, and the evidence is the second statement.

47   MisdemeanorRebel   2015 Mar 31, 10:35am  

We got into Fractional Reserve Banking by accident: We legalized a Fraudulent Process.

With the huge amount of capital and intellect we have, we can certainly think of a more manageable alternative.

48   anonymous   2015 Mar 31, 10:37am  

Right on. There's no reason why we couldn't bring banking into the 21st century with an exchange based marketplace comprised of peer to peer lending.

49   indigenous   2015 Mar 31, 10:42am  

errc says

Huh?

I'm surprised to hear a honest question.

50   Blurtman   2015 Mar 31, 10:45am  

tatupu70 says

That's a poor analogy

In your analogy, about $17,995 is created from the original $2,000, when only $2,000 actually exists.

51   MisdemeanorRebel   2015 Mar 31, 10:45am  

One more thing: Yes, the Fed might have gotten us out of the Bubble.

However, they caused it in the first place by continuously lowering reserve requirements to absurdly low levels, well beyond the thinnest shred of caution.

As for expecting the Independent Fed to fend off Wall St. demands for continuous high growth at all costs, remember the reaction Greenspan got when he warned of "Irrational Exuberance"

52   tatupu70   2015 Mar 31, 10:47am  

Blurtman says

In your analogy, about $17,995 is created from the original $2,000, when only $2,000 actually exists.

Exactly. And no money was "created" by anyone. What's illustrated is the velocity of money--not its creation.

53   anonymous   2015 Mar 31, 10:50am  

In your analogy, about $17,995 is created from the original $2,000, when only $2,000 actually exists.

On both sides of the balance sheet. Eventually, the loans are repaid and the circle is closed. What remains is the $2000 + the interest

54   MisdemeanorRebel   2015 Mar 31, 10:51am  

tatupu70 says

Exactly. And no money was "created" by anyone. What's illustrated is the velocity of money--not its creation.

You lost me somewhere. There was only $2,000. Where did the other ~$18,000 come from?

Velocity of money would be how quickly $2,000 rolls around the economy between actors, no?

55   tatupu70   2015 Mar 31, 10:52am  

thunderlips11 says

Banks need to be reduced to a supporting role in the Economy, instead of the Leadership role they've taken. FIRE isn't real productivity, and if too powerful, it becomes a Tax on Productivity.

This I agree with--there is very little that finance produces. Why not have a national bank?

56   tatupu70   2015 Mar 31, 10:53am  

errc says

On both sides of the balance sheet. Eventually, the loans are repaid and the circle is closed. What remains is the $2000 + the intere

And the same is true of banks and fractional reserve.

57   anonymous   2015 Mar 31, 11:16am  

Right, I was pretty much agreeing with you. It seems most aren't familiar with how an accounting ledger works

If I deposit $2,000 into a bank, and they in turn loan out $1,800, there isn't $3,800 now

There's the $2,000 (+ interest)that the bank owes me, they sit on $200 of that as reserves, and loan out $1,800 to one of their customers. The only money that exists here still is my $2,000. It's just scattered amongst both sides of a couple balance sheets (bank owes me the $2,000, $1,800 of which they've lent to someone else, who will repay that same $1,800 to the bank, plus interest)

Once the banks customer has repaid the$1,800 + interest, they can take my $200 that they held in reserve, add it to the $1,800 their customer repaid in principal, and give me back my $2,000 that I loaned them, plus my 0.01% interest, which they take from the 11.9% they charged their customer on the loan.

That spread between what they paid me to deposit my cash (give them a loan), and the rate they charged their customer to loan them 90% of my deposit, is where they make their profit.

The onus of money creation is left up to the banks customer, who presumably, in theory, has put my capital to productive use in order to make their loan payments (principal + interest).

I profit a whopping two cents, and the bank keeps the rest of the spread between what they paid me to use my capital, and what they charged their customer to take on the loan.

The real problem here is Zero Interest Rate Policy

Back on 07/07/07, a local bank ran a special to attract deposits, where they paid 7.77%. For money they were loaning out for about 11.9%. That's an order of magnitude more reasonable spread for facilitating the transaction between me and the guy that took the loan

Today's environment where banks pay depositors literally zero interest, and turn around and mark the cost up 100 fold, is why we all rightfully hate banks.

A peer to peer online lending exchange could facilitate the deal for the smallest of rakes. That leaves the biggest of all problems still standing in the way, the opaque and corrupt credit ratings system currently in place

58   Blurtman   2015 Mar 31, 11:30am  

tatupu70 says

Exactly. And no money was "created" by anyone. What's illustrated is the velocity of money--not its creation.

$2,000 becoming about $18,000 is creation of money. If everyone who now has the created money sits on it there is no velocity, but the money has still been created.

59   Blurtman   2015 Mar 31, 11:35am  

errc says

There's the $2,000 (+ interest)that the bank owes me, they sit on $200 of that as reserves, and loan out $1,800 to one of their customers. The only money that exists here still is my $2,000

It might seem that way, but starting with $2,000, plug a series of loans at 10% capital requirements into your spreadsheet. There is quite a lot more more than the original $2,000 now created. That is the magic of fractional reserve lending. If you are asked to accept a check for $2000 in trade for your motorcycle, and know the lender has only $200 in his bank account, would you accept it?

60   tatupu70   2015 Mar 31, 11:36am  

Blurtman says

$2,000 becoming about $18,000 is creation of money. If everyone who now has the created money sits on it there is no velocity, but the money has still been created

You're not following. Add up the actual money left at the end. It's most definitely NOT $18,000. Once I've loaned out 90% of the money I once had, I no longer have it. I can't spend it anymore.

61   tatupu70   2015 Mar 31, 11:39am  

errc says

Right on. There's no reason why we couldn't bring banking into the 21st century with an exchange based marketplace comprised of peer to peer lending.

I agree too--the only hardship will be quantifying the risk. Banks can make lots of loans thereby spreading out the risk over those many, many transactions. Default %s can be calculated/estimated over the pool and risk (hopefully) understood.

With peer to peer, it's much more difficult to mitigate that risk.

62   MisdemeanorRebel   2015 Mar 31, 12:05pm  

tatupu70 says

This I agree with--there is very little that finance produces. Why not have a national bank?

Yup, like the State Bank of (North?) Dakota. Great idea, no reason to pay a premium when you can have your own institution at cost. Oh how the Investment Banks in particular will fight that trend. Socialist Ownership of Banks!!! Obamacommie!!!

63   anotheraccount   2015 Mar 31, 12:08pm  

tatupu70 says

With peer to peer, it's much more difficult to mitigate that risk.

Agree. Doing peer to peer is much harder than it seems. I bet right now the risk is way underestimated.

64   anotheraccount   2015 Mar 31, 12:09pm  

thunderlips11 says

Yup, like the State Bank of (North?) Dakota

The only issue is put limits and transparency on how much people could borrow. With student loans they took the banks of out it but left the greedy colleges in it. The entire system needs to be transparent.

65   Blurtman   2015 Mar 31, 12:09pm  

tatupu70 says

You're not following. Add up the actual money left at the end. It's most definitely NOT $18,000.

Sure, there is a limit to fractional reserve lending. But I did a quick series on my trusty Excel spreadsheet, and I stopped at $1, and around $18,000 is created from the original $2,000. You can also use these formulas if you'd like: http://en.wikipedia.org/wiki/Fractional-reserve_banking

Or:

http://en.wikipedia.org/wiki/Fractional-reserve_banking#/media/File:Fractional-reserve_banking_with_varying_reserve_requirements.gif

66   anonymous   2015 Mar 31, 12:15pm  

I agree too--the only hardship will be quantifying the risk. Banks can make lots of loans thereby spreading out the risk over those many, many transactions. Default %s can be calculated/estimated over the pool and risk (hopefully) understood.

With peer to peer, it's much more difficult to mitigate that risk.

Everything is relative

Peer to peer lending already exists, and allows me to loan out my potential $2000 bank deposit as one hundred different $20 loans, if one feels safer spreading it around more.

Furthermore, we already have a system in place that determines creditworthiness, your FICO score. People with shitty credit scores, are supposedly a greater danger to default, so they pay a premium because the lender is supposedly taking more risk.

Quantifying the risk puts the ism in capitalism. It's the crux of what we're supposedly doing here. There should certainly be a risk of total loss, and quantifying said risk is what allows a capitalist to call themselves a capitalist, and earn their interest by loaning out their capital.

Claiming that the hardship that impedes us from ditching banks, for online lending exchanges, is quantifying risk, blows up in the face of reality. Banks, with all their expertise in quantifying risk, all their layers of insurances and hedges, and their government assistance and backing, still blew up to high hell and only government bailout could save them. Here today, they're running the same scam with the same wordless credit rating agencies that improperly quantified the risks in the first place.

Relatively speaking, replacing their model with something new and better doesn't sound like such a hardship

67   anonymous   2015 Mar 31, 12:20pm  

Agree. Doing peer to peer is much harder than it seems. I bet right now the risk is way underestimated.

Relative to what we just lived through this past decade?

Remember indymac?

It's the sissification of America, nobody wants to be a capitalist anymore

68   HEY YOU   2015 Mar 31, 12:50pm  

There's nothing better than illusional money.

69   marcus   2015 Mar 31, 2:53pm  

Blurtman says

Is fractional reserve lending ridiculous?

No.

Certainly it's way less risky than trading conservative securities, real estate or commodities with 90% leverage. The risk is that there is some kind of crazy event, where everyone is simultaneously defaulting on their loans. Even then though, most loans are secured with assets,

I do have to acknowledge though, that banking does seem like a pretty awesome business.

70   Bellingham Bill   2015 Mar 31, 3:21pm  

marcus says

banking does seem like a pretty awesome business

Why screw around trying to create actual wealth for trade when you can just focus on working and controlling the monetary mechanisms of commerce instead.

Money is power, even in a democracy. Actually especially in a democracy, given how bone-stupid half or more of the electorate really is.

71   indigenous   2015 Mar 31, 4:24pm  

control point says

indigenous says

Because it gives an unfair advantage to investors, and the corollary to wage slaves.

Also the debt is eroded in this manner, since TARP a trillion dollars has been taken away from the 4 trillion in Fed spending during that time just by inflation.

The exact oppposite of the first statement is the truth, and the evidence is the second statement.

Say what, nope once again you is wrong

72   Robert Sproul   2015 Mar 31, 5:16pm  

HydroCabron says

When I deposit $2K, it's still my money

When you deposit money in a bank you surrender legal title to it. It becomes an asset of the bank.
What you own now is an IOU from the bank.
But don't worry, FDIC's Deposit Insurance Fund will return to the statutory minimum level required of them (maybe) in 2017.

73   mell   2015 Mar 31, 6:14pm  

thunderlips11 says

tatupu70 says

This I agree with--there is very little that finance produces. Why not have a national bank?

Yup, like the State Bank of (North?) Dakota. Great idea, no reason to pay a premium when you can have your own institution at cost. Oh how the Investment Banks in particular will fight that trend. Socialist Ownership of Banks!!! Obamacommie!!!

There's nothing wrong with private banks as long as you let them fail and don't bail them out. They are essentially government (sponsored) entities at this point, that doesn't mean though they are owned by the people. State banks or even smaller community banks are great and aren't mutually exclusive wrt fully private banks.

74   mell   2015 Mar 31, 6:16pm  

Oh and fractional reserve lending = printing/creating money (by it's very definition), there's no need to dispute mathematical facts. Math just is.

75   tatupu70   2015 Mar 31, 6:22pm  

mell says

Oh and fractional reserve lending = printing/creating money (by it's very definition), there's no need to dispute mathematical facts. Math just is.

OK boss. Whatever you say.

mell says

There's nothing wrong with private banks as long as you let them fail and don't bail them out. They are essentially government (sponsored) entities at this point, that doesn't mean though they are owned by the people. State banks or even smaller community banks are great and aren't mutually exclusive wrt fully private banks.

Yes, actually there is. The finance industry adds almost nothing of value to society-their profits are skimmed from productive members of society. It has absolutely nothing to do with bailouts.

76   indigenous   2015 Mar 31, 6:37pm  

tatupu70 says

The finance industry adds almost nothing of value to society-their profits are skimmed from productive members of society.

Sure it does, they loans money to small business, home mortgages, et.al, it literally helps to create jobs and the economy.

The only problem is when they get bailed out.

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