basic question on banking

[yurbud]

I always thought banks worked the way Jimmy Stewart descrbed it in IT'S A WONDERFUL LIFE in the bank run scene, when he told people he couldn't give them back their balance because it went out in a loan for their neighbor's house. I thought lending had to be no greater than total deposits.

As I've heard more about fractioanl reserve banking, apparently banks can lend nine times what the have in deposits.

Here's my basic question: if they are lending money they don't have, why do they need to charge interest?

I thought if I took out a loan for say $1,000, the bank broke even when I paid back the principle and made a profit on the interest, so if I paod back $1,100, they made $100 profit.

In reality, they made $1,100 profit since the money didn't exist until they lent it to me.

This is even more infuriating when you think about the amount of interest credit cards charge.

Borrowing money from the mafia is a more honest transaction since they at least have to have the money they lend you.

It seems to me we should either require banks to have deposits equal to what they lend or if that's too big change for them,
Take away their right to charge interest.

They would still make $1,000 on my $1,000 loan since the money didn't exist before they loaned it to me.

Even more infuriating, our paper money is based on this same ponzi scheme. The Federal Reserve, a private bank, prints our money and gives it to government as a loan we must pay back with interest. They made it out of thin air, so they would profit even if we paid them only face value OR LESS.

The treasury makes our coins and that creates no debt apart from the cost of making the coin.

Why don't we make banks work on the same basis as other businesses instead of giving them a license to make money out of thin air? That would probably stabilize inflation more than any interest rate rejiggering by the Fed, which shouldn't exist in the first place.

[Zynx]

1. I encourage you to look at a bank balance sheet for your answer here:

http://www.marketwatch.com/tools/quotes/financials.asp?symb=PNC&sid=3605&report=2&freq=1

You will see under liabilities that deposits totaled about $82 billion, both interest and non-interest baring, and loans were $73 billion. In truth, they are not lending more money than they have on deposit. They are lending out 90% of what they have on deposit and keeping the rest as reserves(with many other factors involved including borrowed reserves from the Fed and other banks). They only have reserves at a rate of about 1 : 9 with outstanding loans.

[dkf]

2. Its called the Money Multiplier Effect...see this from Investopedia...

Multiplier Effect

The expansion of a country's money supply that results from banks being able to lend. The size of the multiplier effect depends on the percentage of deposits that banks are required to hold as reserves. In other words, it is money used to create more money and is calculated by dividing total bank deposits by the reserve requirement.

The multiplier effect depends on the set reserve requirement. So, to calculate the impact of the multiplier effect on the money supply, we start with the amount banks initially take in through deposits and divide this by the reserve ratio. If, for example, the reserve requirement is 20%, for every $100 a customer deposits into a bank, $20 must be kept in reserve. However, the remaining $80 can be loaned out to other bank customers. This $80 is then deposited by these customers into another bank, which in turn must also keep 20%, or $16, in reserve but can lend out the remaining $64. This cycle continues - as more people deposit money and more banks continue lending it - until finally the $100 initially deposited creates a total of $500 ($100 / 0.2) in deposits. This creation of deposits is the multiplier effect.

The higher the reserve requirement, the tighter the money supply, which results in a lower multiplier effect for every dollar deposited. The lower the reserve requirement, the larger the money supply, which means more money is being created for every dollar deposited.

http://www.investopedia.com/terms/m/multipliereffect.asp

[Zynx]

3. One other thing, the Fed is run by government appointed officials and returns

its profits to the Treasury.

[yurbud]

4. do you have link for that? it would make me feel much better

[Zynx]

5. Here:

http://www.publiceye.org/conspire/flaherty/flaherty4.html

Don't listen to the Ron Paulists. They're not right about very much. The Fed is more government than private by far.