another fractional reserve lending question

[cbc58]

Just want to confirm a point about fractional reserve lending if possible: my understanding is that a bank can lend up to 90% of it's reserves under fractional reserve lending. So if they have 100k in deposits, they can create a loan for 90k.

Does this mean that they actually loan out 90k of the money they have... or do they keep the 100k on deposit and create 90k out of thin air? ... Is that accurate?

[cubical]

They actually loan it out, but it probably goes no where and just sits in someone else's checking account.

Before 100k deposit.

Assets - 0 Liabilities - 0


After 100k deposit

Assets - 100k liabilities - 100k


After making 90k loan

Assets - 190k Liabilities - 190k

The assets the bank now holds are 100k in cash and the 90k loan. They also now are responsible for giving 90k to the guy who has the loan and 100k to the original depositor. Since the cash is never taken all at once, this is fine. And when the bank needs emergency cash, they have the fed who will loan them money temporarily.

[Carson]

Just want to confirm a point about fractional reserve lending if possible: my understanding is that a bank can lend up to 90% of it's reserves under fractional reserve lending. So if they have 100k in deposits, they can create a loan for 90k.

Does this mean that they actually loan out 90k of the money they have... or do they keep the 100k on deposit and create 90k out of thin air? ... Is that accurate?

The first time I heard the term fractional reserve banking it was explaining a way that they had come up with to try and deal with runs on banks. The theory was that if a bank kept 10% of its deposits in reserve, ten banks banding together could save a bank if all of its depositors showed up for a run on the bank.

Some how that seemed to morph in peoples minds over time. It also seems to have morphed in this pretend reality the banks live in. Never the less I'm thinking a bank can't loan something it doesn't have. I think that is where the central banks come in as a sort of clearing house for the cash that is pulled out of somewhere. Trust me. It isn't their pockets!

Anyway I'm thinking they are the clearing house and some sort of collateral may need to be presented. Since they put out nothing perhaps for some it wouldn't be much. Perhaps they may lead on what they wanted was just a formality.

While we are on the topic some wonder if there is any gold in Fort Knox, and if there is, do we own it? How about the other natural reserves held in public trust? The National Forest anyone?

The Brooklyn Bridge?

Have you ever wondered if they own all of the resources and are opening the borders to move the cheapest labor they can find to exploit them with, GLOBALLY?

They've had a hundred years of watching the till. Most of it with unabated counterfeiting. Remember when they counterfeit the money supply they don't add anything to our pile of stuff. They just shift the property lines. And in the case of our government borrowing, stiff us with the bill.


Jed Clampett went out shooting for some food and up through the ground came the bubbling crude. They traded him for it for cash. Where's ours?

[hazek]

The bank actually loans it out which means that the person receiving the loan has the actual money and it's the person who holds a demand deposit account and thinks he has access to his entire balance at any time that is being fooled.

[Carson]

Something came to mind that we still do seem to own and it seems it is being set up for sale. That is the United States Post office. Some sort of law was passed a while back that forces the government to way over fund the retirement plans. I'm thinking not only will it force the hand for selling it off but also fatten up the sow for sale.

[Seraphim]

This is pretty accurate.

They actually loan it out, but it probably goes no where and just sits in someone else's checking account.

Before 100k deposit.

Assets - 0 Liabilities - 0


After 100k deposit

Assets - 100k liabilities - 100k


After making 90k loan

Assets - 190k Liabilities - 190k

The assets the bank now holds are 100k in cash and the 90k loan. They also now are responsible for giving 90k to the guy who has the loan and 100k to the original depositor. Since the cash is never taken all at once, this is fine. And when the bank needs emergency cash, they have the fed who will loan them money temporarily.

Fractional reserve banking creates assets and liabilities all at once. What destroys these banks and it's depositors is mispriced time preferences (interest) in relation to risk.

There is nothing wrong with fractional reserve banking.

There is something profoundly wrong with gov't/central bank insured risk.

Organic growth is VERY correlated with fractional reserve banking when it is left to free market standards. Private interests take risks and reap the benefits and suffer the consequences on their own. There is no direct negative/authoritarian component involved.

Central banks kill and corrupt all.

It comes down to moral hazard.

If a bank wants to extend it's loan base and expand upon it's reserves and deposits to a hyper degree - that's fine. As long as the depositors sign up for that and they acknowledge the risk.


It's not really accurate to frame fractional reserve banking in the simplistic fasion Zitgeist puts it.

Technically, yes, that can happen. It does not necessarily work that way. It tends to get that sort of crazy leveraged way when the GOVT gets involved. Like NOW.

A bank cannot loan out reserves like that unless there is demand and confidence in future capacity to service the debt.

Fractional reserve banking serves as a great way to navigate risk and create wealth in a free market.

Gov't insured systems predicated on continuous debt growth (through commercial banks) is destructive and FASCISM.



There is no Liberty without fractional reserve banking.

There is no Liberty when the gun says these same banks MUST be made whole at your expense.

[Carson]

Perhaps our models on this topic should take into account the money supply constantly expanding beyond any ability to loan out actual assets.

They expansion has been so great so fast those resources were depleted and they are pulling every new loan out of somewhere. And as I mentioned before, it isn't their pocket.

At least if you look at it in the grand scale of the situation.

[cbc58]

The assets the bank now holds are 100k in cash and the 90k loan.

This is what I meant - the 100k is still there and they have created a 90k loan so that 90k is new "bank money". I understand the credit and debit features but that 90k has to be newly created money since it can then again be deposited somewhere else. Yes?

So if the original depositor came in and took back their 100k, there would still be the 90k loan out there.

Now if that person who took out the 90k loan used it to buy a house and then defaulted - the bank would get the asset even though the loan was created using money fabricated out of thin air. What a racket.

[Seraphim]

That is largely my point in the above post.

This over expansion of base money supply is the direct result of the GOVT insuring deposits/bonds/equities as the Cental bank prints up the liquidity (currency) when "required".

That's effectively done by the barrel of a gun and not productive at all.

This mass scale hyper leverage all around the world is the direct result of GOVT meddling in profoundly complex realities. The meddling is done by insuring capital with tax payer money (STOLEN money).

Get rid of the Central bank and gov't insurance on deposits etc. and you will see Fractional Reserve Banks acting as they should. HONESTLY.

Risk is no one's business to police. If a bank wants to hyper leverage itself - have at it. But when/if you lose - the loses are yours and to only those explicitly acting together.

Central banks eliminate all honesty. First from the politicians and then the people follow.

It permeates every transaction.

Get rid of that and 90% of the problems dissolve, and in quick order.

Perhaps our models on this topic should take into account the money supply constantly expanding beyond any ability to loan out actual assets.

They expansion has been so great so fast those resources were depleted and they are pulling every new loan out of somewhere. And as I mentioned before, it isn't their pocket.

At least if you look at it in the grand scale of the situation.

[cubical]

This is what I meant - the 100k is still there and they have created a 90k loan so that 90k is new "bank money". I understand the credit and debit features but that 90k has to be newly created money since it can then again be deposited somewhere else. Yes?

So if the original depositor came in and took back their 100k, there would still be the 90k loan out there.

Now if that person who took out the 90k loan used it to buy a house and then defaulted - the bank would get the asset even though the loan was created using money fabricated out of thin air. What a racket.

If the guy with the 100k came in to get his money and the bank gave it to him, the bank would need to get a short term loan from the fed. Since they have 90k in assets(the loan) the fed can give them money. The specifics how much much based on what kind of asset, I am not sure. Some deposits are on a 0% reserve requirement, so that makes things much different.

[Bohner]

This is what I meant - the 100k is still there and they have created a 90k loan so that 90k is new "bank money". I understand the credit and debit features but that 90k has to be newly created money since it can then again be deposited somewhere else. Yes?

So if the original depositor came in and took back their 100k, there would still be the 90k loan out there.

Now if that person who took out the 90k loan used it to buy a house and then defaulted - the bank would get the asset even though the loan was created using money fabricated out of thin air. What a racket.

This is wrong. I think the guy you quoted was assuming the person who received the 90K loan deposited it back in the same bank. If the person who took out the loan deposits the money in a different bank, then the Bank's balance sheet is 100K/100K. Assets = 90K loan + the 10K in reserve, Liabilities = The 100K owed to the initial depositor. Obviously in this case, if the original depositor wants his money back, he wouldn't be able to get it due 90K of his 100K having been loaned out and deposited elsewhere.

[cubical]

This is wrong. I think the guy you quoted was assuming the person who received the 90K loan deposited it back in the same bank. If the person who took out the loan deposits the money in a different bank, then the Bank's balance sheet is 100K/100K. Assets = 90K loan + the 10K in reserve, Liabilities = The 100K owed to the initial depositor. Obviously in this case, if the original depositor wants his money back, he wouldn't be able to get it due 90K of his 100K having been loaned out and deposited elsewhere.

Well the bank could still give the guy his money, he would just get a loan from the fed. He has a 90k asset on the books and can use it for leverage.

Obviously this is an extreme case, but you get the idea.

[Bohner]

Well the bank could still give the guy his money, he would just get a loan from the fed. He has a 90k asset on the books and can use it for leverage.

Obviously this is an extreme case, but you get the idea.

Sure, the bank could also borrow the money from a neighboring bank. I was speaking purely about FRB in it's simplest form though. It doesn't change the fact that what the guy wrote was wrong.

The 100K isn't still there if 90K was loaned out, only 10K would be there unless the guy who took out the loan put it back in the same bank. And the money loaned was not fabricated out of thin air.

[cbc58]

Obviously in this case, if the original depositor wants his money back, he wouldn't be able to get it due 90K of his 100K having been loaned out and deposited elsewhere.

don't think so.

And the money loaned was not fabricated out of thin air.

I think I was wrong about this - but still think the money is created out of thin air - either on the front-end or back-end. All money is loaned into existence and a single 100k deposit can result in 900k of loans throughout the banking system. That does not happen from a just straight loaning out of the original 90% of funds on deposit.

If the depositor wants their money back the bank has to tap it's reserves, or get a loan from the fed who whips up a few 0's on a computer. Almost the same thing in the end as the deposit money never left.

[BAllen]

The bottom line is the bank has the authority to create money when a loan is made.

[Bohner]

I think I was wrong about this - but still think the money is created out of thin air - either on the front-end or back-end. All money is loaned into existence and a single 100k deposit can result in 900k of loans throughout the banking system. That does not happen from a just straight loaning out of the original 90% of funds on deposit.

Well... The money being loaned out is real. It's just that when money gets loaned out and then redeposited it can then be loaned out again. There's nothing inherently wrong with FRB on it's own. In fact, it's been greatly beneficial overall because it gives people access to capital that they could not have otherwise had access to.

If the depositor wants their money back the bank has to tap it's reserves, or get a loan from the fed who whips up a few 0's on a computer. Almost the same thing in the end as the deposit money never left.

Now you're getting into central banking and that's a whole other monster.

[BAllen]

Well... The money being loaned out is real. It's just that when money gets loaned out and then redeposited it can then be loaned out again. There's nothing inherently wrong with FRB on it's own. In fact, it's been greatly beneficial overall because it gives people access to capital that they could not have otherwise had access to.

Now you're getting into central banking and that's a whole other monster.

Right. The British began frb in the 1600's in order to expand economic growth.

[matt0611]

FRB tries to pretend that unit of currency can be used by more than one entity at the same time. This makes it inherently immoral and unstable.

[Zippyjuan]

Let me try. I loan the bank $100k by making a deposit. They give me an IOU for that $100k. If their reserve requirement is ten percent, they must keep ten percent of my deposit on hand but are allowed to loan out up to 90% of my deposit or $90k to another person. The money is as follows:

I have no money (but an IOU for $100k).
The bank has $10k (and an IOY for $90k from the borrower)
and the borrower has the remaining $90k.

Let's go another round. The borower doesn't need the money right away. He puts it into an account temporarily. The bank has an additional $90k in deposits and is back up to having $100k on hand. I have zero plus an IOU for $100k, the bank has $100k and an IOU for $90k and the borrrower now has zero plus an IOU from the bank for $90k. The IOUs are stacking up, but the actual money is the same.

From that $90k, the bank can issue up to $81k in loans.

Now the bank has $11k in deposits and $179k in IOUs.
I have zero dollars plus an IOU for $100k.
Borower 1 has zero money and $90k in IOUs.
Borrower 2 has $89k. $89k plus $11k is our original amount.

What if I take my money out- the money which started all of this? This is where things get trickier. Now the bank has to borrow money from someplace else to be able to give me my money. They have $11k so they need to borrow $89k more. They can try to attract new depositors or they can borrow from another bank or the Federal Reserve. They also have a problem now with having too many loans for the amount of deposits they have (they still have a record of the $90k borrower 1 put in which allows them to have $89k in loans but they don't have enough permit the loan to #1 now though they do have enough for loan #2). So the have to either call in loan #! or attract more deposits to cover it.

Under normal circumstances, banks have plenty of money coming in in new deposits to cover withdrawls. If not, that could possibly lead to a bank run and the bank runs out of money to pay people. Without a reserve requirement (without fractional reserve banking), banks could theoretically loan out each dollar they receive in deposits. The other alternative would be full reserve banking where 100% of all deposits must be kept on reserve and no loans made against them.

[hazek]

Zippyjuan explained it perfectly.

Fractional reserve banking does not create money. It creates debt that is so liquid and flows with such a low friction that most regard it as money.

[Smaulgld]

Yes its like when the customer/depositor gives the bank 10K they can now lend out 100 grand

[TheGrinch]

Yes its like when the customer/depositor gives the bank 10K they can now lend out 100 grand

This is my understanding. Some of you are assuming that the bank must have at one point had 100% of the 90% they lend out.

I'm not sure this is the case. My understanding is that they are only required to take in 10% of what they lend out, not that they had to have had the 90% they lend out in the first place.

This means, as Smaulgld says above, that the bank can make 100 grand worth of loans just from a 10,000 dollar deposit. They need not have ever possessed that 100,000 that yes, they can just create out of thin air, and then make interest on, without ever having that 100,000 in the first place. It is as simple as clicking the button to put funds in someone's account that never previously existed (well, 10% did, but not that 10x that they lend out).

What enables them to so? Well, having a federal reserve with the power to print money out of nowhere certainly helps, and this same federal reserve is there should this Ponzi scheme fall apart via a "run". If it were actual gold* they were loaning out (or whatever tangible backed currency) and/or they had to have these deposits in the first place, then this would not be so possible, nor unacceptable if they were taking on risk on actual money that they'd taken in, rather than having the Fed to bail them out with more fake money.

(*Note that even when dollars were backed by gold, these "promisary notes" were still not gold they were giving out)

This is certainly even easier now that all banking is largely electronic, and very little done in cash, and virtually none in gold (thus meaning that even a gold standard would not be immune from this practice). When they make a loan, it doesn't have to mean anything more than a click of a button that enables their check or credit card.

[hazek]

This is my understanding.

You are mistaken.

Some of you are assuming that the bank must have at one point had 100% of the 90% they lend out.

I'm not sure this is the case.

It is.


The reason why some started to circulate the story that banks must take in only 10% of what they lend out is because that's where you end up at with 10% fractional reserve banking and they misunderstood that as a single step. If the bank takes in $100 in this case it can only lend out $90 however since most of the time those 90$ are also deposited at a bank (sometimes at the same bank) now $81 can be lent out and so on and so forth until the original $100 usually allows the banks to create $900 in debt but they had to each time lend out less than what someone deposited in order to meet their 10% reserve requirement.

[cbc58]

The former governor of the Bank of England says that banks create money:

http://www.positivemoney.org/how-mon...-create-money/

Just sayin... he should probably know.

[hazek]

The former governor of the Bank of England says that banks create money:

http://www.positivemoney.org/how-mon...-create-money/

Just sayin... he should probably know.

This is misleading and very inaccurate.

From the article:

Banks are able to create money through the accounting process they use when they make loans. The numbers that you see when you check your account balance are actually just accounting entries in the computer systems of the bank. These numbers are a ‘liability’ or IOU from your bank to you.

Clearly they don't create money. They create DEBT. Very very veeeeeery liquid debt. So much liquid that most people treat is as money. But that doesn't make it money, it's debt.

[cbc58]

This is misleading and very inaccurate.

From the article:



Clearly they don't create money. They create DEBT. Very very veeeeeery liquid debt. So much liquid that most people treat is as money. But that doesn't make it money, it's debt.

maybe its both.

[hazek]

maybe its both.

It's not.

[cbc58]

It's not.

I think money is whatever people think money is. I understand what you are saying but if people treat 0's and paper slips as money then that is what it is to them. Many will say that gold and silver is money - but hardly anyone will accept it as such in today's local economy. I offered two silver quarters valued at $11 for a $5 foot-long subway sandwich and they laughed at me. Have tried using silver elsewhere and same result. Some people value silver and gold by what they are told it's value is on kitco... but what if that reference wasn't available?

New show on TV called "Under the Dome" filmed here in NC and they were interviewing the actors and one said that after the dome came down - money (currency) was useless. People want food, water, the basics. Value is in the eye of the beholder at a time of transfer.

So if debt is created but people view it as money creation (currency of some form is associated with that debt) - it's money.

[BAllen]

The former governor of the Bank of England says that banks create money:

http://www.positivemoney.org/how-mon...-create-money/

Just sayin... he should probably know.

Right. I like that he's honest about it. They should say that here instead of trying to hide it.

[helmuth_hubener]

You are mistaken.

Actually, he is not.

Here is a lucid article explaining how the fractional reserve banking system really works:

http://www.ronpaulforums.com/showthr...e-Banking-Ever!

If a bank takes in an additional ten thousand of cashy money, they now can -- and likely will! -- create checking account deposits of up to around one hundred thousand. Ten thousand of that will already be used up by the checking account of whoever deposited the cash (presuming that's what happened), but the other ninety thousand is free and clear to be used to fill up other checking accounts.