Fractional Reserve Banking 101
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A lot of people on this forum talk about the financial system without understanding how it actually works, so here's another quick lesson from someone who's spent too much time in the industry... --- Prior to the 1800s, banks were basically nothing but safe deposit boxes. People stored their gold in the bank, and paid a fee for that storage. Instead of keeping everyone's gold in its own little box, the bank would issue "notes" (Later known as "bank notes") that were redeemable as actual gold. When this became common practice, those bank notes began to be used as actual currency. If you wanted to take out a loan, you had to find an individual or company who was willing to lend you his money, as there was no central place to borrow from. Consequently, getting loans was quite a bit more difficult than it is today. Yes, this leads to more careful lending, but it also hampers growth. Remember, the true spirit of capitalism is that anyone with a great idea can market that idea for profit. That generally requires significant investment, and loans make that MUCH more feasible. Well, the banks realized that on any given day, their customers wouldn't withdraw their entire accounts, so the banks started to use their reserves to make loans. In essence, they owed more to their customers (Who could bring the notes in and claim their gold) than they actually kept in storage... That is pretty much the definition of fractional reserve banking. They kept a fraction of their deposits in reserve, and used the rest to generate income. --- So what are the ramifications of this? First, it means you can open a savings account for free. Instead of you paying the bank for storage, the bank pays you for the right to lend out your deposit. Loan interest rates are necessarily higher than savings account interest rates, and the bank makes their profits on the difference. This is good for the consumer, as you can make a small profit on your savings. The problem, of course, is that if everyone tries to withdraw their money at the same time, the bank will not be able to handle it. This is what's known as a "Bank Run." Why would they do this? Well, if people lost faith in the ability of a bank to keep their money safe, they would take it out. That could be due to financial problems, bank robberies, or any number of things. This is, of course, a self-reinforcing problem. The more people withdraw their money, the worse shape that bank is in, and that's all she wrote. Any economic downturn can quickly turn into
Here is a better lesson from people who have way more experience and education than the above crapper. Millennium Money[^]
Invisible Empire: A New World Order Defined (High Quality 2:14:01)[^] Watch the Fall of the Republic (High Quality 2:24:19)[^] The Truthbox[^]
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Here is a better lesson from people who have way more experience and education than the above crapper. Millennium Money[^]
Invisible Empire: A New World Order Defined (High Quality 2:14:01)[^] Watch the Fall of the Republic (High Quality 2:24:19)[^] The Truthbox[^]
It's a video, so it must be good, right ? Did you know that studies of brain activity have proven you learn far more from reading than from watching video ? Well, people capable of learning do, YMMV.
Christian Graus Driven to the arms of OSX by Vista. Read my blog to find out how I've worked around bugs in Microsoft tools and frameworks.
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A lot of people on this forum talk about the financial system without understanding how it actually works, so here's another quick lesson from someone who's spent too much time in the industry... --- Prior to the 1800s, banks were basically nothing but safe deposit boxes. People stored their gold in the bank, and paid a fee for that storage. Instead of keeping everyone's gold in its own little box, the bank would issue "notes" (Later known as "bank notes") that were redeemable as actual gold. When this became common practice, those bank notes began to be used as actual currency. If you wanted to take out a loan, you had to find an individual or company who was willing to lend you his money, as there was no central place to borrow from. Consequently, getting loans was quite a bit more difficult than it is today. Yes, this leads to more careful lending, but it also hampers growth. Remember, the true spirit of capitalism is that anyone with a great idea can market that idea for profit. That generally requires significant investment, and loans make that MUCH more feasible. Well, the banks realized that on any given day, their customers wouldn't withdraw their entire accounts, so the banks started to use their reserves to make loans. In essence, they owed more to their customers (Who could bring the notes in and claim their gold) than they actually kept in storage... That is pretty much the definition of fractional reserve banking. They kept a fraction of their deposits in reserve, and used the rest to generate income. --- So what are the ramifications of this? First, it means you can open a savings account for free. Instead of you paying the bank for storage, the bank pays you for the right to lend out your deposit. Loan interest rates are necessarily higher than savings account interest rates, and the bank makes their profits on the difference. This is good for the consumer, as you can make a small profit on your savings. The problem, of course, is that if everyone tries to withdraw their money at the same time, the bank will not be able to handle it. This is what's known as a "Bank Run." Why would they do this? Well, if people lost faith in the ability of a bank to keep their money safe, they would take it out. That could be due to financial problems, bank robberies, or any number of things. This is, of course, a self-reinforcing problem. The more people withdraw their money, the worse shape that bank is in, and that's all she wrote. Any economic downturn can quickly turn into
You post some of the longest things of coherent thought I've ever seen back here. ;P
That's called seagull management (or sometimes pigeon management)... Fly in, flap your arms and squawk a lot, crap all over everything and fly out again... by _Damian S_
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Here is a better lesson from people who have way more experience and education than the above crapper. Millennium Money[^]
Invisible Empire: A New World Order Defined (High Quality 2:14:01)[^] Watch the Fall of the Republic (High Quality 2:24:19)[^] The Truthbox[^]
Blink text? Really? All that's needed now is varying colors and a comic sans font and you'll have graduated to living stereotype.
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It's a video, so it must be good, right ? Did you know that studies of brain activity have proven you learn far more from reading than from watching video ? Well, people capable of learning do, YMMV.
Christian Graus Driven to the arms of OSX by Vista. Read my blog to find out how I've worked around bugs in Microsoft tools and frameworks.
That's because it requires you to think. We watch so much video now because there so much information to absorb these days. Not to confuse information with facts and analyze it yourself has become so much more difficult now. It can take a lot of time to go through a lot of different sources to find the facts of the matter instead of talking head talking points. X| Its a bit of beef of mine ;P .
That's called seagull management (or sometimes pigeon management)... Fly in, flap your arms and squawk a lot, crap all over everything and fly out again... by _Damian S_
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You post some of the longest things of coherent thought I've ever seen back here. ;P
That's called seagull management (or sometimes pigeon management)... Fly in, flap your arms and squawk a lot, crap all over everything and fly out again... by _Damian S_
I get tired of seeing people try to discuss these things without knowing what they actually are :)
Proud to have finally moved to the A-Ark. Which one are you in?
Author of the Guardians Saga (Sci-Fi/Fantasy novels) -
I get tired of seeing people try to discuss these things without knowing what they actually are :)
Proud to have finally moved to the A-Ark. Which one are you in?
Author of the Guardians Saga (Sci-Fi/Fantasy novels)Well most people here, at least, are too already set in there opinions to find anything you say or anyone else for that matter to change their minds. Most people just seem to want to find information that supports their current views of the world or how it works. Needless to say, that makes for very stagnant thought.
That's called seagull management (or sometimes pigeon management)... Fly in, flap your arms and squawk a lot, crap all over everything and fly out again... by _Damian S_
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A lot of people on this forum talk about the financial system without understanding how it actually works, so here's another quick lesson from someone who's spent too much time in the industry... --- Prior to the 1800s, banks were basically nothing but safe deposit boxes. People stored their gold in the bank, and paid a fee for that storage. Instead of keeping everyone's gold in its own little box, the bank would issue "notes" (Later known as "bank notes") that were redeemable as actual gold. When this became common practice, those bank notes began to be used as actual currency. If you wanted to take out a loan, you had to find an individual or company who was willing to lend you his money, as there was no central place to borrow from. Consequently, getting loans was quite a bit more difficult than it is today. Yes, this leads to more careful lending, but it also hampers growth. Remember, the true spirit of capitalism is that anyone with a great idea can market that idea for profit. That generally requires significant investment, and loans make that MUCH more feasible. Well, the banks realized that on any given day, their customers wouldn't withdraw their entire accounts, so the banks started to use their reserves to make loans. In essence, they owed more to their customers (Who could bring the notes in and claim their gold) than they actually kept in storage... That is pretty much the definition of fractional reserve banking. They kept a fraction of their deposits in reserve, and used the rest to generate income. --- So what are the ramifications of this? First, it means you can open a savings account for free. Instead of you paying the bank for storage, the bank pays you for the right to lend out your deposit. Loan interest rates are necessarily higher than savings account interest rates, and the bank makes their profits on the difference. This is good for the consumer, as you can make a small profit on your savings. The problem, of course, is that if everyone tries to withdraw their money at the same time, the bank will not be able to handle it. This is what's known as a "Bank Run." Why would they do this? Well, if people lost faith in the ability of a bank to keep their money safe, they would take it out. That could be due to financial problems, bank robberies, or any number of things. This is, of course, a self-reinforcing problem. The more people withdraw their money, the worse shape that bank is in, and that's all she wrote. Any economic downturn can quickly turn into
Dude this is like 4 courses worth of material. I'm going to Shlasko School of Economics. And then I'ma throw tomatoes at the teachers senior year! (Oh wait, that's you. Nah, nevermind lol) So. I agree with all of your points on the history of the subject. Yes, they exchanged the actual gold coinage for certificates. Then banks realized that they may as well loan that money out for more profit. We can at least agree on the historical accuracy of this idea. But you must understand that it ends there. That, in itself, is NOT how fractional reserve banking is termed. It starts when banks start lending more than what they have. For example: Let's say a bank has $2000 on deposits If a bank lends $50, then it's got $1950 left in actual capital. This won't be fractionl reserve, because he can back that $50 up with what he has in reserve, definitely. Totally legit. Another example: The bank has $2000 on deposit, and loans out $1150. If that loan goes south, he can't back it all up. This is where it's fractional: Theoretically, he chose to have only a fraction of total loans to be backed up in reserves, because he can only cover $850. This is the difference between fractional reserve banking and full reserve banking. And one other note.
Ian Shlasko wrote:
Obviously this doesn't always work, because the current financial crisis was caused, for the most part, by a lot of banks completely screwing this up.
I see this as "the current financial crisis was caused, for the most part, by a lota few banks completely screwing this up." This goes hand in hand with the notion that most banks really are trying to be honest about their money. You only heard about a few institutions NOT paying back quickly the TARP loans, and just a few institutions being allowed to fail completely.
Josh Davis
Always looking for blackjack. Or maybe White Frank. One of the two. -
Dude this is like 4 courses worth of material. I'm going to Shlasko School of Economics. And then I'ma throw tomatoes at the teachers senior year! (Oh wait, that's you. Nah, nevermind lol) So. I agree with all of your points on the history of the subject. Yes, they exchanged the actual gold coinage for certificates. Then banks realized that they may as well loan that money out for more profit. We can at least agree on the historical accuracy of this idea. But you must understand that it ends there. That, in itself, is NOT how fractional reserve banking is termed. It starts when banks start lending more than what they have. For example: Let's say a bank has $2000 on deposits If a bank lends $50, then it's got $1950 left in actual capital. This won't be fractionl reserve, because he can back that $50 up with what he has in reserve, definitely. Totally legit. Another example: The bank has $2000 on deposit, and loans out $1150. If that loan goes south, he can't back it all up. This is where it's fractional: Theoretically, he chose to have only a fraction of total loans to be backed up in reserves, because he can only cover $850. This is the difference between fractional reserve banking and full reserve banking. And one other note.
Ian Shlasko wrote:
Obviously this doesn't always work, because the current financial crisis was caused, for the most part, by a lot of banks completely screwing this up.
I see this as "the current financial crisis was caused, for the most part, by a lota few banks completely screwing this up." This goes hand in hand with the notion that most banks really are trying to be honest about their money. You only heard about a few institutions NOT paying back quickly the TARP loans, and just a few institutions being allowed to fail completely.
Josh Davis
Always looking for blackjack. Or maybe White Frank. One of the two.josda1000 wrote:
For example: Let's say a bank has $2000 on deposits If a bank lends $50, then it's got $1950 left in actual capital. This won't be fractionl reserve, because he can back that $50 up with what he has in reserve, definitely. Totally legit. Another example: The bank has $2000 on deposit, and loans out $1150. If that loan goes south, he can't back it all up. This is where it's fractional: Theoretically, he chose to have only a fraction of total loans to be backed up in reserves, because he can only cover $850.
Those are both fractional. Just different fractions. Fractional Reserve Banking is loaning out customer deposits that are theoretically available for withdrawal. In Full Reserve Banking, 100% of the money deposited into the bank has to STAY in the bank. Can't loan out even $50 worth of customer money. That's the very definition.
josda1000 wrote:
I see this as "the current financial crisis was caused, for the most part, by a lota few banks completely screwing this up." This goes hand in hand with the notion that most banks really are trying to be honest about their money. You only heard about a few institutions NOT paying back quickly the TARP loans, and just a few institutions being allowed to fail completely.
No, a LOT of banks were giving out those sub-prime loans that were unlikely to be repaid. We're not just talking about huge wall street firms, but small banks too. The problem is that everything is interconnected, and a lot of the wealth is concentrated in the big firms. So the big guys take huge losses, and the little guys are agile enough to recover given a temporary leg up from TARP. I'm not saying that the banks were dishonest, though. I'm saying they were careless.
Proud to have finally moved to the A-Ark. Which one are you in?
Author of the Guardians Saga (Sci-Fi/Fantasy novels) -
josda1000 wrote:
For example: Let's say a bank has $2000 on deposits If a bank lends $50, then it's got $1950 left in actual capital. This won't be fractionl reserve, because he can back that $50 up with what he has in reserve, definitely. Totally legit. Another example: The bank has $2000 on deposit, and loans out $1150. If that loan goes south, he can't back it all up. This is where it's fractional: Theoretically, he chose to have only a fraction of total loans to be backed up in reserves, because he can only cover $850.
Those are both fractional. Just different fractions. Fractional Reserve Banking is loaning out customer deposits that are theoretically available for withdrawal. In Full Reserve Banking, 100% of the money deposited into the bank has to STAY in the bank. Can't loan out even $50 worth of customer money. That's the very definition.
josda1000 wrote:
I see this as "the current financial crisis was caused, for the most part, by a lota few banks completely screwing this up." This goes hand in hand with the notion that most banks really are trying to be honest about their money. You only heard about a few institutions NOT paying back quickly the TARP loans, and just a few institutions being allowed to fail completely.
No, a LOT of banks were giving out those sub-prime loans that were unlikely to be repaid. We're not just talking about huge wall street firms, but small banks too. The problem is that everything is interconnected, and a lot of the wealth is concentrated in the big firms. So the big guys take huge losses, and the little guys are agile enough to recover given a temporary leg up from TARP. I'm not saying that the banks were dishonest, though. I'm saying they were careless.
Proud to have finally moved to the A-Ark. Which one are you in?
Author of the Guardians Saga (Sci-Fi/Fantasy novels)Ian Shlasko wrote:
No, a LOT of banks were giving out those sub-prime loans that were unlikely to be repaid.
I guess it's subjective to interpretation... a little? a lot? I remember when you sent me the list of banks that were "bailed out", though most actually repaid quickly.
Ian Shlasko wrote:
We're not just talking about huge wall street firms, but small banks too.
I understand that.
Ian Shlasko wrote:
The problem is that everything is interconnected, and a lot of the wealth is concentrated in the big firms.
Precisely. I'm not going into the fact that they shouldn't have. We've been there too many times before already.
Ian Shlasko wrote:
I'm not saying that the banks were dishonest, though. I'm saying they were careless.
IMO, both. Back to point one.
Ian Shlasko wrote:
In Full Reserve Banking, 100% of the money deposited into the bank has to STAY in the bank. Can't loan out even $50 worth of customer money. That's the very definition.
This is partially incorrect. http://en.wikipedia.org/wiki/Full-reserve_banking[^] To quote: The reserve ratio of all banks operating in such a system would be 100%, making the deposit multiplier equal to one (1xM=M). This contrasts with fractional-reserve banking, in which the bank would hold only a fraction of all client deposits as reserves with the remainder used to supply loans and create credit. I understand that this means none of the depositor's money would be lent out, as you said, but don't forget about capital injected from other sources (loans to the bank, equity, etc). So there would be some lending going on, just not from its depositors.
Josh Davis
Always looking for blackjack. Or maybe White Frank. One of the two. -
Ian Shlasko wrote:
No, a LOT of banks were giving out those sub-prime loans that were unlikely to be repaid.
I guess it's subjective to interpretation... a little? a lot? I remember when you sent me the list of banks that were "bailed out", though most actually repaid quickly.
Ian Shlasko wrote:
We're not just talking about huge wall street firms, but small banks too.
I understand that.
Ian Shlasko wrote:
The problem is that everything is interconnected, and a lot of the wealth is concentrated in the big firms.
Precisely. I'm not going into the fact that they shouldn't have. We've been there too many times before already.
Ian Shlasko wrote:
I'm not saying that the banks were dishonest, though. I'm saying they were careless.
IMO, both. Back to point one.
Ian Shlasko wrote:
In Full Reserve Banking, 100% of the money deposited into the bank has to STAY in the bank. Can't loan out even $50 worth of customer money. That's the very definition.
This is partially incorrect. http://en.wikipedia.org/wiki/Full-reserve_banking[^] To quote: The reserve ratio of all banks operating in such a system would be 100%, making the deposit multiplier equal to one (1xM=M). This contrasts with fractional-reserve banking, in which the bank would hold only a fraction of all client deposits as reserves with the remainder used to supply loans and create credit. I understand that this means none of the depositor's money would be lent out, as you said, but don't forget about capital injected from other sources (loans to the bank, equity, etc). So there would be some lending going on, just not from its depositors.
Josh Davis
Always looking for blackjack. Or maybe White Frank. One of the two.josda1000 wrote:
I understand that this means none of the depositor's money would be lent out, as you said, but don't forget about capital injected from other sources (loans to the bank, equity, etc).
Exactly. But the instant the bank loans out one dime of customer money, that's Fractional Reserve Banking. If you have $2000 in deposits and you loan out $50 of that money, it's fractional. If you loan out the $50 from a proprietary account (The bank's money, not the customers' money), that's not fractional.
Proud to have finally moved to the A-Ark. Which one are you in?
Author of the Guardians Saga (Sci-Fi/Fantasy novels) -
josda1000 wrote:
I understand that this means none of the depositor's money would be lent out, as you said, but don't forget about capital injected from other sources (loans to the bank, equity, etc).
Exactly. But the instant the bank loans out one dime of customer money, that's Fractional Reserve Banking. If you have $2000 in deposits and you loan out $50 of that money, it's fractional. If you loan out the $50 from a proprietary account (The bank's money, not the customers' money), that's not fractional.
Proud to have finally moved to the A-Ark. Which one are you in?
Author of the Guardians Saga (Sci-Fi/Fantasy novels)Yes I think I misunderstood originally, my bad. But that actually futhers my point even more than I thought, in the end. If I had it wrong and it's worse than I thought... ouch. lol
Josh Davis
Always looking for blackjack. Or maybe White Frank. One of the two. -
Ian Shlasko wrote:
No, a LOT of banks were giving out those sub-prime loans that were unlikely to be repaid.
I guess it's subjective to interpretation... a little? a lot? I remember when you sent me the list of banks that were "bailed out", though most actually repaid quickly.
Ian Shlasko wrote:
We're not just talking about huge wall street firms, but small banks too.
I understand that.
Ian Shlasko wrote:
The problem is that everything is interconnected, and a lot of the wealth is concentrated in the big firms.
Precisely. I'm not going into the fact that they shouldn't have. We've been there too many times before already.
Ian Shlasko wrote:
I'm not saying that the banks were dishonest, though. I'm saying they were careless.
IMO, both. Back to point one.
Ian Shlasko wrote:
In Full Reserve Banking, 100% of the money deposited into the bank has to STAY in the bank. Can't loan out even $50 worth of customer money. That's the very definition.
This is partially incorrect. http://en.wikipedia.org/wiki/Full-reserve_banking[^] To quote: The reserve ratio of all banks operating in such a system would be 100%, making the deposit multiplier equal to one (1xM=M). This contrasts with fractional-reserve banking, in which the bank would hold only a fraction of all client deposits as reserves with the remainder used to supply loans and create credit. I understand that this means none of the depositor's money would be lent out, as you said, but don't forget about capital injected from other sources (loans to the bank, equity, etc). So there would be some lending going on, just not from its depositors.
Josh Davis
Always looking for blackjack. Or maybe White Frank. One of the two.josda1000 wrote:
I guess it's subjective to interpretation... a little? a lot? I remember when you sent me the list of banks that were "bailed out", though most actually repaid quickly.
Oh, and I think a lot of banks made those sub-prime loans... It's just that most of them had enough other investments to make up for the losses, so they didn't need TARP money.
Proud to have finally moved to the A-Ark. Which one are you in?
Author of the Guardians Saga (Sci-Fi/Fantasy novels) -
josda1000 wrote:
I guess it's subjective to interpretation... a little? a lot? I remember when you sent me the list of banks that were "bailed out", though most actually repaid quickly.
Oh, and I think a lot of banks made those sub-prime loans... It's just that most of them had enough other investments to make up for the losses, so they didn't need TARP money.
Proud to have finally moved to the A-Ark. Which one are you in?
Author of the Guardians Saga (Sci-Fi/Fantasy novels) -
Yes I think I misunderstood originally, my bad. But that actually futhers my point even more than I thought, in the end. If I had it wrong and it's worse than I thought... ouch. lol
Josh Davis
Always looking for blackjack. Or maybe White Frank. One of the two.josda1000 wrote:
Yes I think I misunderstood originally, my bad.
No worries. That's why I posted this thread... To make sure everyone knows the facts behind these debates :)
Proud to have finally moved to the A-Ark. Which one are you in?
Author of the Guardians Saga (Sci-Fi/Fantasy novels) -
Right, precisely.
Josh Davis
Always looking for blackjack. Or maybe White Frank. One of the two.You forgot to tell him that the Fed gave the banks tons of cheap credit to play with, and how the main credit rating agency rated trash as a good investment, and how Goldman knew about the trash they were selling and insured it through AIG.
Invisible Empire: A New World Order Defined (High Quality 2:14:01)[^] Watch the Fall of the Republic (High Quality 2:24:19)[^] The Truthbox[^]
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You forgot to tell him that the Fed gave the banks tons of cheap credit to play with, and how the main credit rating agency rated trash as a good investment, and how Goldman knew about the trash they were selling and insured it through AIG.
Invisible Empire: A New World Order Defined (High Quality 2:14:01)[^] Watch the Fall of the Republic (High Quality 2:24:19)[^] The Truthbox[^]
Oh we've been over the corruption aspect yesterday (talked about fascism, and they're denying it). I didn't talk about that specificially, but that's a really good point, and just chalk it up to one more reason why we are living in a fascist state. But nobody wants to listen to you, because you're crazy. Honestly, they're the ones living with a belief system, just as if they really were religious about "keynesianism" or something to that effect. But I have Ian almost totally agreeing with the points here, so that's a great start.
Josh Davis
Always looking for blackjack. Or maybe White Frank. One of the two. -
Oh we've been over the corruption aspect yesterday (talked about fascism, and they're denying it). I didn't talk about that specificially, but that's a really good point, and just chalk it up to one more reason why we are living in a fascist state. But nobody wants to listen to you, because you're crazy. Honestly, they're the ones living with a belief system, just as if they really were religious about "keynesianism" or something to that effect. But I have Ian almost totally agreeing with the points here, so that's a great start.
Josh Davis
Always looking for blackjack. Or maybe White Frank. One of the two.Well keep up the good work. Personally I think these people are lost causes, especially Graus. Graus knows that he is wrong, but he enjoys being manipulative in a sick way.
Invisible Empire: A New World Order Defined (High Quality 2:14:01)[^] Watch the Fall of the Republic (High Quality 2:24:19)[^] The Truthbox[^]
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Here is a better lesson from people who have way more experience and education than the above crapper. Millennium Money[^]
Invisible Empire: A New World Order Defined (High Quality 2:14:01)[^] Watch the Fall of the Republic (High Quality 2:24:19)[^] The Truthbox[^]
Firstly, CSS, Blink text? lol Terrible. Secondly, I just watched it. It's pretty much the case in point of the whole thing we've been talking about. A) Crash is inevitable. B) Our governement (nevermind EVERY government EVER to exist) is corrupt. C) We're the largest debtor nation in the world. D) We got off the gold standard. We will have hyperinflation, because of the crash, and countries will dump the dollar. But let everyone continue to sleep, it feels good to be in a delta wave state. (pretty much a pun... the state has us in a delta wave state... lol I crack me up.)
Josh Davis
Always looking for blackjack. Or maybe White Frank. One of the two. -
It's a video, so it must be good, right ? Did you know that studies of brain activity have proven you learn far more from reading than from watching video ? Well, people capable of learning do, YMMV.
Christian Graus Driven to the arms of OSX by Vista. Read my blog to find out how I've worked around bugs in Microsoft tools and frameworks.