Subway Kitty Talks Banks.

[LC EFA]

undergroundpanther  Donating Member  (1000+ posts)  Wed Feb-25-09 08:56 PM
Original message
how banks create money from nothing   Updated at 9:20 PM
   
Edited on Wed Feb-25-09 08:59 PM by undergroundpanther
Bankers know how to create money out of thin air. In fact, banks are money factories. Banks exist to make money. You might think that banks are in business to provide services such as banking accounts and loans to their customers. It's true that banks provide essential financial services. However, the reason that the banks provide such services is that banks need money to use as raw material to create more money. Where does this money come from? It comes from customer deposits. In other words, it comes from the money you and I deposit into the bank.

Notice very carefully, banks "create" money. It's not simply that banks "earn" profits when they provide bank services and loans. Banks actually "create" new money that did not exist before.

Here is an example of how banks create money. You deposit $100,000 into a one-year Certificate of Deposit at 5% interest. The bank now can use your money to create loans.
The Federal Reserve sets the reserve rate for the bank from 3-10%. A 3% reserve rate means that the bank must keep 3% of the $100,000 on reserve and can loan the remaining 97%. A 10% reserve rate means that the bank must keep 10% of the $100,000 on reserve and can loan the remaining 90%. For our example, let's assume that the reserve rate is 10%. This allows the bank to loan $90,000 of your $100,000 deposit.

So, the bank makes Loan #1 of $90,000 and keeps $10,000 on reserve. This is the critical point where the bank creates money. According to the bank's balance sheet, the $90,000 loan to the borrower is also a $90,000 asset for the bank. By its own brand of money magic, the bank has created $90,000 out of thin air.

[snipped link]

The only thing backing up the 'market now is user confidence and theories in economists heads,and who's willing to bet on it.
We've been had people.**** the Fed!!!

Ten dirty tricks to prop up a massive fraud!
[snipped link]

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x5136542

This shows such a fundamental lack of understanding it makes me wonder how UGP manages to make even the most simple transactions.

ormercia  (1000+ posts)  Wed Feb-25-09 09:03 PM
Response to Original message
1. Central Banks, on the other hand, create money out of thin air.
   
They hold assets that another bank or government conjured out of thin air as well. It's what made today's bubble possible. If they had to back their 'money' with liquid assets such as Gold, we wouldn't be in this mess because there isn't enough Gold in the Galaxy to cover the bad paper floating out there.
 
undergroundpanther Donating Member (1000+ posts) Wed Feb-25-09 09:13 PM
Response to Reply #1
2. yep!!   Updated at 9:20 PM
   
If you took all of anything that is precious, combined it all into a big pile, that isn't enough to cover it.

[jukin]

This is like Jukin talking about male panthers packed inside human females...under mucho drugs...with atinge of psycho thrown on the side.

[The Village Idiot]

do these people know what happens if banks did not loan money?? Lets say there zero loans. The economy would vanish basically. Most of us would end up dying.

[jukin]

do these people know what happens if banks did not loan money?? Lets say there zero loans. The economy would vanish basically. Most of us would end up dying.

I don't know about most but I guarantee that 90% of the DUchebags would.'


Oh and women, children, and minorities would be hit the hardest.

[delilahmused]

Well it's a good thing SOMEONE is creating money. How the hell else are we going pay for its new stripes, its endless supply of safety pins so it can attach its tail to its fat ass, or its titectomy? You'd think it would be grateful since it does absolutely nothing to help itself. You know when someone wants to have sexual reassignment surgery they have to go through psychological evaluations (imagine declaring one of those people "sane" and "normal") but whom does one see when one wants to become a new species? Jack Hanna?

Cindie

[BlueStateSaint]

I don't know about most but I guarantee that 90% of the DUchebags would.'


Oh and women, children, and minorities would be hit the hardest.

I'd up the ratio of DUchebags dying to about 100% . . .

[Carl]

Idiocy doesn`t even begin to describe it and no one at the DUmp is either bright enough or cares enough to really explain where it is messed up.

I guess it has never heard of collateral.

[Carl]

The last response to its op....

FarCenter (1000+ posts)        Thu Feb-26-09 12:13 AM
Response to Original message
3. no money was created in the transaction you describe
   The 100,000 of deposits is booked as a liability.

The 90,000 of loans is booked as an asset, as is the 10,000 reserve.

Everything is still equal on the balance sheet.

However, if the borrower bought some real estate from customer #2 of the bank, and #2 deposited the $90,000 back in the bank, then the bank could keep 9,000 of that on reserve and lend the 81,000 out.

Now we have 190,000 of deposits as liabilities and 19,000 reserves and 171,000 loans as assets.

So now some money has been created.

I have been wondering how people can be so ignorant of these things so I went to the link it lifted the op from.
It is an ezine article trying to hawk a get rich in real estate book of some kind.
Going beyond what it posted is this from the article...

But the process does not stop here. Since the bank now has an asset of $90,000, it can make another loan based on this asset. Since the same Federal Reserve rules apply, the bank must keep 10% of this asset on reserve. This means it can loan only 90% of the $90,000. This means that Loan #2 is $81,000. By creating another loan, the bank has created another asset. The $81,000 loan to the borrower becomes an $81,000 asset for the bank. Once again the bank creates money out of thin air.

And since the bank now has an additional $81,000 asset, it can make another loan. Once again, the bank must keep 10% of this asset on reserve. This means it can loan only 90% of the $81,000 asset. Loan #3 is $72,900.

Federal Reserve rules allow the bank to make five to six loans based on the original $100,000 deposit. Each loan creates an additional asset. We'll stop at three loans, review the process, and add up how much money the bank has created.

You deposit $100,000 into a CD. The bank creates three loans based on the original $100,000 deposit. Loan /Asset #1 = $90,000 Loan/Asset #2 = $81,000. Loan/Asset #3 = $72,900. The total = $243,900 in assets for the bank. This is $243,900 in new money.

When you cash out your CD, you get your $100,000 deposit back, in addition to the $5,000 interest. Meanwhile, the bank has created $243,900 of new money. After it pays you 5% interest, the bank has made a tidy profit of $238,900. ($243,900 - $5,000 = $238,900.) If the numbers are confusing, go over them again until you see how magical this process is. This is how banks create money.

To make this point, I have oversimplified the process. A bank doesn't really make a series of separate loans based on a single deposit. Your deposits become part of a pool of money the bank can use to make loans. But this oversimplified example demonstrates how banks create money out of thin air. A bank manufactures money by using the deposits of customers to make loans. The loans become assets and the assets turn into money.

This is misleading at best and deceitful at worst because all along the way the bank is responsible to the depositor of each transaction they are loaning against.
They owe back the first 100,000.00,then the second 90,000.00 and so on...they don`t get to simply keep everything after paying the first depositor back.

Left out too,whether deliberately or not,is what the person responding to it almost got and that was each step of the way the bank also had a liability that if a loan failed would leave them paying back essentially what the bank borrowed to begin with.

If properly collateralized they would assume possession of the asset (forclosure) and then recoup the loan by selling it.
If all goes well the bank recovers the original $100,000.000 and the difference between the interest paid and what it collects in interest charged is the profit needed to pay employees of the bank,pay for the electricity and purchase the supplies and hardware required to function as well as taxes.

Money in this case was the tool used to conduct its business and provide a service just as a carpenter uses a hammer and their tools to do the same.

It doesn`t take a genius to understand that the article it was reading from was a sales pitch and not a course in the functioning of a lending institution.
If I have stated anything incorrectly here please someone correct me,I always appreciate the chance to learn about how the machinery of our every day lives works.

If any of you from the DUmp are reading this take note....these are the reasons you are known as DUmmies.

[DumbAss Tanker]

If any of you from the DUmp are reading this take note....these are the reasons you are known as DUmmies.

Really the stuff you're quoting is based on legitimate economics, though it may be quoted from a huckster who slanted it his way; the real point is that the lending power of a financial institution has an iterative effect far beyond a straight one-for-one correspondence of deposits against loans.  I believe in my high school econ class they had some number for it, of course based on size of required reserves and some other assumptions, but I think it was something like loan values being 6-2/3 times the net deposits, though I could be way off on that since I have never had any practical use for the knowledge and that was about 35 years ago.  The point wasn't that bankers made money (In either sense), but that the lending structure had an economic effect far beyond just the funds on deposit, and also that there is a certain fragility to the whole thing; i.e. since it is an iterative process of re-lending rather than a discrete single loan of specific deposit assets out on a specific loan, anything that interrupts the flow has an effect larger than failure of the single transaction itself.

Now the really stupid part of the U-Katze's post is that idea that banks are some sort of public utility which exist only to provide a service.  OF COURSE the people who run them, and accept all the regulation, overhead and risk that entails, are in it to make a profit!  It's a business, not a charity.  Does she expect to walk into the bank and find her teller wearing a clerical collar, habit, or Salvation Army uniform?   It ain't a charity, U-Katze.

[MarshallLaw]

Oh my.

When I first glanced at this headline, I saw:


"Subway Kitty talks, barks."


I thought- Well, that doesn't make sense.....

[Chris_]

Oh my.

When I first glanced at this headline, I saw:


"Subway Kitty talks, barks."


I thought- Well, that doesn't make sense.....

It's just yer monitor dying on you, Marshall.  Better make sure Teh One delivers a new one for you when he drops by to pay your mortgage, buy your gas for the month, and give you your pony.

[Chris_]

So, the bank makes Loan #1 of $90,000 and keeps $10,000 on reserve. This is the critical point where the bank creates money. According to the bank's balance sheet, the $90,000 loan to the borrower is also a $90,000 asset for the bank. By its own brand of money magic, the bank has created $90,000 out of thin air.

I would imagine that creating $90,000 out of thin air is even more difficult than creating a ghost chicken.

If I only had some organic pineapple juice I wouldn't mind doing some remote viewing so I could watch that money making magic in action.

I wonder if they have banks on Panther Mountain. If they do I wouldn't need any organic pineapple juice. I could just astrally travel to the mountain to watch the magic.

[BlueStateSaint]

I would imagine that creating $90,000 out of thin air is even more difficult than creating a ghost chicken.

If I only had some organic pineapple juice I wouldn't mind doing some remote viewing so I could watch that money making magic in action.

I wonder if they have banks on Panther Mountain. If they do I wouldn't need any organic pineapple juice. I could just astrally travel to the mountain to watch the magic.

 

H5!

[The Village Idiot]

O's budget plan would create $1.75 trillion out of thin air. The money sucks the value out of your dollars.

[InfamousAndy]

The Subway Cat's analysis is only partially correct.  It forgets that when the bank makes that 90,000 loan from the  100,000 CD, the bank gets another 10% in interest.  When the loan is paid back, the bank is ahead.  Then the bank pays back the CD, and has 10,000 of profit.

That is what interest is, you are paying, or being paid, for time.  The bank can make more money in that time because they can reduce risk by having exponentially more capital than an individual such that you can widely diversify.