[Aun LeKeth]

Fractional-reserve banking refers to the common banking practice of issuing more credit than the bank holds as reserves. Banks in modern economies typically loan their customers many times the sum of the credit reserves than they hold.

Thats from Wikipedia, it does a fair job of summing up the fractional reserve system. So, how do people feel about this? After all, we're saying that these banks can create money from nother and then Charge you INTREST when you borrow money from them. Money that they just created to loan you! Doesn't this seem flawed to anyone else?


Sidenote: One of the few good thing Hitler did was to try to bring down the Fractional reserve system. To bad he didn't put more effort into that and less into "The purification of the Aryan race."

[icer190]

Overal, I am AGAINST loans and Credit cards, why use Money that you do not have? It just ends up getting you into trouble over time, thus why I save up for every purchase before hand.

[Chton]

Originally Posted by Legatus Glacies(Icer)

Overal, I am AGAINST loans and Credit cards, why use Money that you do not have? It just ends up getting you into trouble over time, thus why I save up for every purchase before hand.

Dude, loans are extremely important for many things in the economy.
If it was not for loans in general, how the heck would smaller stores exist?
You think a guy can first earn up a few hundred thousand to get a store going?

Really, I myself see how important loans are in my daily life.
Without loans, ("educational-loan") my social-economically status would be a lot lower.
Because of these loans, I have now been able to finish my first two years of higher education and three years to qualify for that education at all.
In a few years, I will make another loan to buy myself a home as it would truly suck to live in a small bedsit or trailer while saving for that million NOK (ca.155000$) it takes to buy an apartment.

If it weren't for the ability to loan money, education and such would only exist for those who already have money. It would only be for the rich and privilaged.

Why use money I do not have? Because if I didn't, I would be a lot worse of in life.

[icer190]

True... I'll just aleviate it to overspending on credit cards

[AuinMyrrath]

I don't have a problem with loans and the like, as it's a major part of the economy - I despise credit cards, since they're often the only means of paying for things and the companies are miserly bastards who circle like vultures waiting for you to miss a payment.

However, consider that ~90% of the money in circulation on Earth doesn't really "exist". That's a little scary.

[Aun LeKeth]

The issue here isn't loans, its banks making loans with no means of backing up those loans. If everyone wanted their money withdrawn from banks
(Even in worthless paper notes that are printed for $0,02 a bill) the banks could provide a tenth of it. If they wanted it in gold and silver which actually have value it would be even less, maybe a millionth of the worlds money actually has the reserves to back it up that way.

[Ironwinds]

You have it wronge. They are not creating money. The money they hold in reserve is money that they have to keep in cash, their reserves don't make up their total supply of money just what they have in the vaults at any given time. When a bank borrows money it then invests that money in other things(like loans). They use your money to invest in other things and make money off the interest. Also if your money is being used for such things then you are being given interest on your deposits as well(not as much as they are charging the next guy though, they make their money off the split). Deposit accounts that don't afford interest payments can not be used by the bank for financing(ex. savings accounts which grant interest are used for making loans). If they didn't invest your money then they wouldn't be able to make money and hence no bank or loans. Loans are something we desperatly need. The whole problem in the US economy right now is that getting loans got 'harder' in some areas(like housing) and it is causing a big blow to the economy as a whole. Imagine if we didn't have any at all.

Banks are by law required to keep a certain percentage of their total deposits as cash in the bank vaults.

The money not kept in reserves does exist though, the money you put in the bank is loaned out for mortages, and other such things like short term corporate paper(one day loans to corporations). Banks are not allowed to invest their money in really risky stuff(like stocks) so the money is rather safe.

Now if everyone went to get their money out at the same time the bank would run out because it has loaned so much of it to other people. The money is there though, just being used by someone else so they are not making money out of thin air. Also at least in the US your deposits are insured up to $100,000 per bank(if you have more... use more banks) so if there is a run on the bank you still get your money up to that amount. Also the term 'backing up a loan' is refering to wether the borrower(not the bank) can back up the loan(normally with collateral, like a house or car) if for some reason they can not pay. In this case the collateral(the house) then belongs to the loaner(the bank). The bank doesn't need to back up its loans, it provides the cash up front. The bank has to back up its deposits but like I already said the government backs them up if anything really bad goes wronge which doesn't happen that often. The government also inforces that they keep a certain percentage as reserves so that the bank running out of money is less likely to happen.

The money does exist though, your money is just being used to finance your neighbor buying a new house or car, or your money and the money of a few thousand other people is being used to finance building a factory for XYZ corporation. No need to worry, it does exist, its just not in the vault right now. If it was how would banks make money?

On the subject of credit cards they can get you in trouble if used wronge. If used right they can be life savers in bad situations and can build your credit. I've always kept a small balance on my one card just to build my credit and several months ago I ran on hard times. First my car had problems, then my roommate left leaving me with the full rent bill. My credit card saved me, I almost maxed it out during those months. After getting a new roommate and getting my car fixed I started paying my car back off. Now I have a balance of $200.00 and a minimum monthly payment of around $15.00. Nothing I can't handle but I still pay $100-200 on it each month which is how I got it down so quickly. Without it I would be living in my broken down car and have horrible credit problems. Instead I have great credit, a nice apartment, and my car is running like brand new. Just use them right and always pay a whole lot more than the minimum.

[Gada Mazaha]

If you think that pisses you off, go watch the third part of Zeitgeist, dealing with the Federal Reserve.

To sum it up, the Federal Reserve isn't tied to the government, it's an independent corporation. The government borrows money from them, and for every dollar that dollar has a certain amount of interest tied into it. The entire scheme is for every dollar you take, you owe a dollar back and then some, and if they are the only means of getting money, how do you pay for the interest? By borrowing more money, which creates more debt. Perpetual debt.

And people wonder why we are in so much debt as a nation.

[crazedmongoose2003]

I guess my impression that at least a good few of the people in this thread wouldn't know much about the workings of the economy was pretty much spot on.


First of all, they're not making money out of thin air. That money they're loaning to you is from people who have deposited money within the banks.


First of all, think about the roles that the banking system has to play:

It has to earn at least enough money to give everybody depositing there a nominal interest rate, so as to a) create an incentive to deposit and b) keep up with the inflation rate.

Now this extra money, how does it attain it?

Simple, because most people will never withdraw all of their deposits, the banks can use these other deposits on loans and investments and such to create more capital and assets and such. This is a masterful manipulation which essentially leaves everybody richer and better off except the idiots who can't manage their own credit in the first place.


The average bank reserve/deposit ratio is something akin of 15%, and then the banks themselves in the optimal case has a central bank ruled over by independent groups which acts as a buffer. This means that the economy only fails when the government does something stupid (ie. Zimbabwe's "let's print more money" hyper-inflation) or the investors and the government collectively do something stupid (ie. US. great depression).


You do realize that without the fractional reserve banking system, there would be absolutely no incentive to keep your money in a bank because there's no way for the banks to generate additional money, thus no way to maintain a nominal interest rate. Which means every day your money is in the bank it's being devalued.


So if you like your 3% interest rate on your savings account and the fact that the act of saving money isn't made completely pointless by inflation, then you should probably stop ragging on the factorial reserve system, it's what's keeping you from going poor.




Also, on the issue of the federal reserve, I don't know how it works in the US, but in Australia and most other economically successful nations of recent times, the federal reserve has always been independent. It only works when it's independent. It's like the judicial system, the executive branch of the government making fiscal decisions must have no part to play in it.

[Tau-killer]

The Fractional Reserve Banking System, like any system, is not without risk. It depends very strongly on people's confidence in the banking system - for should everyone try to take out their money at the same time, utter economic chaos can ensue - as shown so clearly by the dramatic events of September 1929.

Also, too much confidence can also be a bad thing when banks themselves make imprudent lending decisions and end up with not enough money in reserves - and it is arguable that this is what helped to caused the run on Northern Rock in September 2007.

But, that said, the fractional Reserve System, as I see it, is broadly a very strong economic and financial system, capable of sustaining and enlarging the massive economies that countries in the world now currently have - for the reasons that Ironwinds and Crazed Mongoose have gone through. There are weaknesses, but I'll let the economists argue over how best to strengthen and improve it - as I have nowhere near their level of expertise in this area.

Originally Posted by Gada Mazaha

If you think that pisses you off, go watch the third part of Zeitgeist, dealing with the Federal Reserve.

With all due respect Gada Mazaha - and this is something I feel very strongly about - I'd like to advise you against basing your world opinions on what Zeitgeist says. When I saw the film, I was appalled by the sheer number of innaccuracies, distortions, unsubstantiated claims, reliance on anecdotal evidence, appeals to emotion and simple ignorance that it contained. Because of that, in my view, Zeitgeist has no credibility on this kind of subject whatsoever.