Results 1 to 19 of 19

Thread: Fractional reserve banking ???

  1. #1

    Fractional reserve banking ???

    I don't really get how it's bad...
    I know the banks have 1000 dollars in reserve and wind up creating loans worth for 9000 dollars. But in the process they didn't gain 9000 dollars, they only gain interest on them (actually only the difference between the interest they pay on the money and the interest they get on the money)
    So i mean, they have to earn it from somewhere don't they?
    If it was full reserve banking, they would have to ask people interest to pay money to store their money. Right? They have to earn it somehow.

    Then i also don't know why central banks would profit of keeping the interest low. If the central banks mission is to serve the other banks, which is so according to Conspiracy Theorists i believe, then keeping the interest low would stimulate the people to lend, but they would earn less due to the low interests.

    I probably am way off, but still ... please explain.



  2. Remove this section of ads by registering.
  3. #2
    Well they still have nothing until it actually gets paid back. In a free market it's really not a "bad" thing, maybe not the wisest choice in some people's opinion, but if some people wanted to take the risk that would be fine. It becomes a problem when it is enforced on our entire country in the fact that it is a core part of how our currency functions, no one gets to choose if they want to take the inherent risk or not.

  4. #3
    Quote Originally Posted by fatjohn View Post
    I don't really get how it's bad...
    I know the banks have 1000 dollars in reserve and wind up creating loans worth for 9000 dollars. But in the process they didn't gain 9000 dollars, they only gain interest on them (actually only the difference between the interest they pay on the money and the interest they get on the money)
    So i mean, they have to earn it from somewhere don't they?
    If it was full reserve banking, they would have to ask people interest to pay money to store their money. Right? They have to earn it somehow.

    Then i also don't know why central banks would profit of keeping the interest low. If the central banks mission is to serve the other banks, which is so according to Conspiracy Theorists i believe, then keeping the interest low would stimulate the people to lend, but they would earn less due to the low interests.

    I probably am way off, but still ... please explain.

    I am still in the process of learning and forming a solid opinion on FRB, but so far some of the arguments against are the following:
    1. Banks should not be able to lend out more money then they bring in, this is fraud
    2. FRB gives the banks too much powers, if they can create money out of thin air they essentially control the control money supply.
    3. FRB creates misallocation of resources. Without FRB we would have a lot less bankers.
    4. Debt based monetary system is not sustainable, it requires a constant increase in the monetary supply as will as constant economic growth
    5. Since banks can create credit out of thin air and earn interest on that credit, wealth is transferred from savers to banks
    6. FRB increases economic instability caused by bank runs
    7. FRB is incapatible with gold standard. Banks creating money out of thin air will lead to more money then able to be redeemed for gold.

  5. #4
    Banned Troll - http://digg.com/users/silverlinkx2/history/comments/page2


    Posts
    301
    Join Date
    Jan 2008
    Quote Originally Posted by sam9657 View Post
    5. Since banks can create credit out of thin air and earn interest on that credit, wealth is transferred from savers to banks
    This is the biggest argument against it afaic. Also, prices will skyrocket on things like cars, houses, and other things you tend to finance, because with all the loose credit, banks know that people won't save to get them (because who would? interest rates on saving suck and the money supply is increasing constantly therefore causing inflation and devaluing your purchasing power even more) and therefore will be more likely to finance them. As you have seen with consumer electronics lately, Best Buy has seen a big drop off in the realm of people who are willing to finance a big screen TV. People are hoarding and saving cash and only spending what they can afford now or what they have already. Therefore, prices on consumer electronics have imploded. There's really no need for FRB whatsoever. It's dishonest, its usury, it devalues your dollar, creates little incentive to save and all the incentive in the world to go into debt and really is harmful to an economy as a whole. I think we can all see evidence of that now.

  6. #5
    But what's the alternative?

    Have full reserve banking and pay as a saver interest to the banks to be able to store your wealth? While you can also choose to lend your money to the market in order to earn interest on it. And let the same principle be applied for when you want to lend, namely get a loan from the market with interest rates determined by the market.

    But if this is the alternative, then wouldn't there be a flaw when people can't pay their interest on their loans? How would this be solved?

    Or more important, how do you guys see the alternative, keep in mind: banks have to earn money somehow, preferably honestly.

  7. #6
    Quote Originally Posted by fatjohn View Post
    But what's the alternative?

    Have full reserve banking and pay as a saver interest to the banks to be able to store your wealth? While you can also choose to lend your money to the market in order to earn interest on it. And let the same principle be applied for when you want to lend, namely get a loan from the market with interest rates determined by the market.

    But if this is the alternative, then wouldn't there be a flaw when people can't pay their interest on their loans? How would this be solved?

    Or more important, how do you guys see the alternative, keep in mind: banks have to earn money somehow, preferably honestly.
    In full reserve banking, you pay to store your money if it is an on demand deposit. People with little money generally do not need to use banks in commodity money because it is a lot easier to store on your person without risk. There are also time deposits (CDs, retirement accounts, etc.) which banks would pay you interest so that they could lend out the money (generally short term business loans).
    http://www.ronpaul2012.com/
    Quote Originally Posted by GK Chesterton
    It is often supposed that when people stop believing in God, they believe in nothing. Alas, it is worse than that. When they stop believing in God, they believe in anything.
    Quote Originally Posted by Rt. Hon. Edmund Burke
    Nothing is so fatal to religion as indifference.

  8. #7
    Quote Originally Posted by sam9657 View Post
    5. Since banks can create credit out of thin air and earn interest on that credit, wealth is transferred from savers to banks
    Savings accounts pay interest rate.


    Quote Originally Posted by nate895 View Post
    In full reserve banking, you pay to store your money if it is an on demand deposit. People with little money generally do not need to use banks in commodity money because it is a lot easier to store on your person without risk. There are also time deposits (CDs, retirement accounts, etc.) which banks would pay you interest so that they could lend out the money (generally short term business loans).
    My only problem with full-reserve is that it would seriously dry up credit. Also, Islamic banks are supposed to be full-reserves, but even they supposedly don't really practice it. It's not really practical or perhaps even feasible.

    With that said, our lender of last resort system is reckless under a fractional-reserve system.

  9. #8
    Quote Originally Posted by Ilhaguru View Post
    Savings accounts pay interest rate.




    My only problem with full-reserve is that it would seriously dry up credit. Also, Islamic banks are supposed to be full-reserves, but even they supposedly don't really practice it. It's not really practical or perhaps even feasible.

    With that said, our lender of last resort system is reckless under a fractional-reserve system.
    Yes, it dries up credit, but it means we don't need to use as much of it. I shouldn't have to go into debt to pay for a house, a car, or any number of things that you nearly have to go into debt to afford in a fractional reserve banking system. I want to live free of a mortgage and a car payment of I merely save for a couple of extra years, not have to wait decades to afford a home, while neglecting my retirement funds.
    http://www.ronpaul2012.com/
    Quote Originally Posted by GK Chesterton
    It is often supposed that when people stop believing in God, they believe in nothing. Alas, it is worse than that. When they stop believing in God, they believe in anything.
    Quote Originally Posted by Rt. Hon. Edmund Burke
    Nothing is so fatal to religion as indifference.



  10. Remove this section of ads by registering.
  11. #9
    Banned Troll - http://digg.com/users/silverlinkx2/history/comments/page2


    Posts
    301
    Join Date
    Jan 2008
    Quote Originally Posted by nate895 View Post
    Yes, it dries up credit, but it means we don't need to use as much of it. I shouldn't have to go into debt to pay for a house, a car, or any number of things that you nearly have to go into debt to afford in a fractional reserve banking system. I want to live free of a mortgage and a car payment of I merely save for a couple of extra years, not have to wait decades to afford a home, while neglecting my retirement funds.
    Amen buddy

  12. #10
    A bank does not actually create money out of thin air. They transfer money from somebody who does not want to spend their money today to somebody who does want to and they take a cut off the top for their efforts.

    Suppose I have some money I do not want to spend rigth now. I put it in a bank because they tell me they will offer me more money in exchange for letting them have it for a while. Let's say I put in $1000. That is $1000 I could have spent on goods and services now but choose not to. The bank has to get the money they are paying me from somewhere so they loan out part of my money to someone else and charge them interest. But to try to insure that the bank has enough money on hand to meet the demands of some depositors like myself, they are not allowed to loan out all of their deposits. That portion they keep is their reserves and the minimum they are supposed to have is called the Reserve Requirement.

    If the reserve requirement is 10%, of that $1000 I choose not to spend, up to $900 of that money loaned out to someone else at interest. They in turn can decide to spend that money if they want or they can put it into the same or another bank. Now there is actually $100 LESS available in the economy to be spent than if I decided to spend it all myself. If this person decides not to spend right now, they can put it into another account. Of that $900, another loan of $810 dollars can be made. My $1000 which could have been spent is now down to $810 which can be spent. The money circulating in the economy is actually going DOWN from what would have happened if nobody saved anything. Money in the bank is not being speng on goods and services.

    Now suppose I decide to spend my money and take out my $1000. I have my money (plus interest) but the others have their deposits of money. Doesn't that mean that there is actually MORE money in the economy? For a brief moment, yes. But what happened at the bank? Their deposits were reduced by $1000 so to keep their reserve requirements, they now have to reduce their loans by $900 or find another deposit to replace mine and keep their loans at the present level. Things go back to where they were when we started.

    When one of the borrowers pays off their loan, then the bank has money they can loan out again (asuming deposits do not change). The person paying off their loan is taking money they could have spent now and replacing money they already spent. They traded future consumption for current consumption. I traded present consumption for future consumption.

  13. #11
    Banned Troll - http://digg.com/users/silverlinkx2/history/comments/page2


    Posts
    301
    Join Date
    Jan 2008
    Quote Originally Posted by Zippyjuan View Post
    A bank does not actually create money out of thin air. They transfer money from somebody who does not want to spend their money today to somebody who does want to and they take a cut off the top for their efforts.

    Suppose I have some money I do not want to spend rigth now. I put it in a bank because they tell me they will offer me more money in exchange for letting them have it for a while. Let's say I put in $1000. That is $1000 I could have spent on goods and services now but choose not to. The bank has to get the money they are paying me from somewhere so they loan out part of my money to someone else and charge them interest. But to try to insure that the bank has enough money on hand to meet the demands of some depositors like myself, they are not allowed to loan out all of their deposits. That portion they keep is their reserves and the minimum they are supposed to have is called the Reserve Requirement.

    If the reserve requirement is 10%, of that $1000 I choose not to spend, up to $900 of that money loaned out to someone else at interest. They in turn can decide to spend that money if they want or they can put it into the same or another bank. Now there is actually $100 LESS available in the economy to be spent than if I decided to spend it all myself. If this person decides not to spend right now, they can put it into another account. Of that $900, another loan of $810 dollars can be made. My $1000 which could have been spent is now down to $810 which can be spent. The money circulating in the economy is actually going DOWN from what would have happened if nobody saved anything. Money in the bank is not being speng on goods and services.

    Now suppose I decide to spend my money and take out my $1000. I have my money (plus interest) but the others have their deposits of money. Doesn't that mean that there is actually MORE money in the economy? For a brief moment, yes. But what happened at the bank? Their deposits were reduced by $1000 so to keep their reserve requirements, they now have to reduce their loans by $900 or find another deposit to replace mine and keep their loans at the present level. Things go back to where they were when we started.

    When one of the borrowers pays off their loan, then the bank has money they can loan out again (asuming deposits do not change). The person paying off their loan is taking money they could have spent now and replacing money they already spent. They traded future consumption for current consumption. I traded present consumption for future consumption.
    Ok. So what happens if you take out your 1000 but 900 is still lent out? Where does the bank get that money from? Suppose all the people all at the same time want their money back (maybe there's a big sale on, or a natural disaster, or a bunch of people got laid off). But the bank "loaned" all that money out. Where does it get the money to repay it?

  14. #12
    Quote Originally Posted by silverlinkx2 View Post
    Ok. So what happens if you take out your 1000 but 900 is still lent out? Where does the bank get that money from? Suppose all the people all at the same time want their money back (maybe there's a big sale on, or a natural disaster, or a bunch of people got laid off). But the bank "loaned" all that money out. Where does it get the money to repay it?
    You could just call it a bank run. They happened whenever people found out that their bank didn't have enough money to pay back their deposits.
    http://www.ronpaul2012.com/
    Quote Originally Posted by GK Chesterton
    It is often supposed that when people stop believing in God, they believe in nothing. Alas, it is worse than that. When they stop believing in God, they believe in anything.
    Quote Originally Posted by Rt. Hon. Edmund Burke
    Nothing is so fatal to religion as indifference.

  15. #13
    Banned Troll - http://digg.com/users/silverlinkx2/history/comments/page2


    Posts
    301
    Join Date
    Jan 2008
    Quote Originally Posted by nate895 View Post
    You could just call it a bank run. They happened whenever people found out that their bank didn't have enough money to pay back their deposits.
    Yes, that's exactly what it's called. A bank run. Central banks were created to address this. That's why there's 10 central banks across the U.S., their job is to insure bank deposits in the case of a bank run...but how do they pay for it? Where did all that money come from in the event of a bank run?

    And I'm looking for an answer here that's not equivalent to "they print it," which is what my answer would be.

  16. #14

    Exclamation

    Quote Originally Posted by Ilhaguru View Post
    My only problem with full-reserve is that it would seriously dry up credit. Also, Islamic banks are supposed to be full-reserves, but even they supposedly don't really practice it. It's not really practical or perhaps even feasible.
    that's what banks want you to think; they've been making this argument successfully for literally thousands of years; that they help "communities grow" and help people "Realize their dreams", and other such similar statements.

    The truth of the matter is, if credit is gone, or dried up (or say, all consumption loans are banned), prices will fall across the board, especially for education, medical care, automobiles, homes, and big-ticket household items (high-end TVs, furniture, remodeling, etc...stuff usually purchased on credit). Without credit, fewer people will buy, which will cause companies to cut unneeded jobs, figure out ways to lower the cost, and also lower some wages; that said, the end result will be (after the eventual price cuts) a system in which more people could end up affording the things I listed above as before the credit dried up/consumption loans were banned.



    Also, Zippy, you're incorrect in stating banks do not create money out of thin air.

    When there's $1000 in the bank, and they loan out $900 (assuming 10% reserve ratio here), they do not take $900 of the $1000, leaving them with $100--they create $900 in new money...therefore, by the time the loan is made, they've expanded the money supply to $1900. If the system really did progress without any new money created, then the only argument against FRB would be the possibility of a run on the bank; however, this is not the case--FRB has two problems; runs on banks, and expansion of the money supply.

  17. #15
    When there's $1000 in the bank, and they loan out $900 (assuming 10% reserve ratio here), they do not take $900 of the $1000, leaving them with $100--they create $900 in new money...therefore, by the time the loan is made, they've expanded the money supply to $1900.
    They can only make loans based on their deposits. They cannot loan out more than they have hence they cannot create money out of thin air. I took my $1000 out of the money supply by putting it in the bank. They put $900 back into the money supply. The money being spent did not increase to $1900, it was reduced from $1000 to $900.

    Taken to the nth degree- with nobody spending the money or paying off their loans, yes, you can "create" up to $9000 from the $1000, but that is only in the banks. That $9000 is not out there being spent in the economy. Once you start spending it, the money in the banks goes down and they are no longer able to make new loans. No deposits- no loans possible.

    Reserve requirements are designed to try to minimize runs on banks. They consider the average rate of depositors wanting their money back in trying to set the reserve requirements. If people seek to redeem their deposits at a greater rate, like today, then banks have to scramble to aquire enough money to support their outstanding loans. One way to do that is to borrow- either from the Fed or from other banks- to boost their reserves to the required amount since they cannot quickly recall the loans. Their ability to write new loans is reduced or halted until they can get the reserves back up to the minimum level.
    Last edited by Zippyjuan; 12-15-2008 at 04:13 PM.

  18. #16
    Quote Originally Posted by Zippyjuan View Post
    They can only make loans based on their deposits. They cannot loan out more than they have hence they cannot create money out of thin air.

    Taken to the nth degree- with nobody spending the money or paying off their loans, yes, you can "create" up to $9000 from the $1000, but that is only in the banks. That $9000 is not out there being spent in the economy. Once you start spending it, the money in the banks goes down and they are no longer able to make new loans. No deposits- no loans possible.

    Reserve requirements are designed to try to minimize runs on banks. They consider the average rate of depositors wanting their money back in trying to set the reserve requirements. If people seek to redeem their deposits at a greater rate, like today, then banks have to scramble to aquire enough money to support their outstanding loans. One way to do that is to borrow- either from the Fed or from other banks- to boost their reserves to the required amount since they cannot quickly recall the loans. Their ability to write new loans is reduced or halted until they can get the reserves back up to the minimum level.
    Yes, those are in the economy. They have already been spent, that is why they are in bank accounts. Since credit is more loose, prices will rise, especially on big ticket items as Fox rightly points out.
    http://www.ronpaul2012.com/
    Quote Originally Posted by GK Chesterton
    It is often supposed that when people stop believing in God, they believe in nothing. Alas, it is worse than that. When they stop believing in God, they believe in anything.
    Quote Originally Posted by Rt. Hon. Edmund Burke
    Nothing is so fatal to religion as indifference.



  19. Remove this section of ads by registering.
  20. #17
    Quote Originally Posted by Zippyjuan View Post
    They can only make loans based on their deposits. They cannot loan out more than they have hence they cannot create money out of thin air. I took my $1000 out of the money supply by putting it in the bank. They put $900 back into the money supply. The money being spent did not increase to $1900, it was reduced from $1000 to $900.
    Hmmm...It seems to me, the $1000 you deposited into the bank is not removed from the money supply. You can spend that deposited money by writing checks or using your check card at any time. Yet... supposedly the banks are also lending out $900 of the $1000 you deposited to someone else. hmmmmm

    So its a double claim on the same money. You and the borrower can, and do, spend the same money at the same time. This can only be accomplished in one way it seems to me.

    The bank is actually creating new money through double entry accounting allowing both the depositer and the borrower to have access to funds. Money being spent by you in your account=$1000. Money spend by the borrower= $900. $1000+900=$1900 thus the money supply is expanded by 90% of the deposit amount.

    Quote:

    "Of course, they do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. -Modern Money Mechanics bottom of page 6, speaking of the money muliplier effect of bank deposits.

    http://www.truthsetsusfree.com/ModernMoneyMechanics.pdf


    However.....What would happen if you and the borrower both went to the bank and asked for your "cold hard cash" that shows up in your checking account ledgers at the same time? (assuming the bank in this example exists in a vacaum) The bank who simply created money in a checkbook ledger... would not be able to supply both you $1,000 and the borrower $900 in hard cash, since only $1,000 in cash was initially deposited by you. The $900 was expanded on checkbook form only...not in actual physical currency. The bank can't meet its obligation. Thus... this is an example of a run on the bank.
    Last edited by shocker315; 12-15-2008 at 05:31 PM.

  21. #18
    Quote Originally Posted by Ilhaguru View Post
    Savings accounts pay interest rate.




    My only problem with full-reserve is that it would seriously dry up credit. Also, Islamic banks are supposed to be full-reserves, but even they supposedly don't really practice it. It's not really practical or perhaps even feasible.

    With that said, our lender of last resort system is reckless under a fractional-reserve system.
    Saving rates would be ALOT higher without FRB.

  22. #19

    Exclamation

    Quote Originally Posted by sam9657 View Post
    Saving rates would be ALOT higher without FRB.
    also, to earn money money via investment, it'd force direct-investment in companies, which could give a big boost to the national and international companies out there.



Similar Threads

  1. Yes, Fractional Reserve Banking Again
    By hazek in forum Economy & Markets
    Replies: 36
    Last Post: 03-17-2013, 03:02 PM
  2. So, fractional reserve banking.
    By georgiaboy in forum Economy & Markets
    Replies: 43
    Last Post: 12-14-2012, 10:41 PM
  3. Replies: 0
    Last Post: 12-08-2010, 07:45 AM
  4. FED: Why Fractional Reserve Banking is Dangerous (American Banking News)
    By bobbyw24 in forum Economy & Markets
    Replies: 6
    Last Post: 09-04-2009, 09:11 AM
  5. FED: What's wrong with Fractional reserve banking?
    By BKV in forum Economy & Markets
    Replies: 16
    Last Post: 04-22-2009, 02:25 AM

Select a tag for more discussion on that topic

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •