To: hubbubhubbub
I'm not so sure this is such a big deal. Of course banks don't keep "reserves" in their vaults to cover any more than a tiny fraction of the outstanding deposits. That's basically what a bank is -- an institution where borrowers and lenders can exchange money without ever dealing directly with each other.
The scene from Frank Capra's "It's a Wonderful Life" in which George Bailey uses his honeymoon funds to help the family-owned building/loan company weather a run on cash deposits is particularly instructive. When one of the customers tries to withdraw a huge sum of money, Bailey points out: "We don't have that kind of cash here -- we'll fill out a form for you, and you can get your cash next week when the bank down the street opens."
When the customer protested, Bailey explained it quite clearly: "Your money is in the mortgage on Fred's house, and the mortgage on Bert's house, etc. You want us to call all of these loans from people who can't pay them in full -- just so you can get more cash than you need for a week?"
4 posted on
11/29/2005 1:41:13 PM PST by
Alberta's Child
(What it all boils down to is that no one's really got it figured out just yet.)
To: Alberta's Child
LOL. Everything's all right. It's just like the movies.
To: Alberta's Child
Ya but I think your missing something, or maybe I am.
I think the story is that the banks can borrow ten times their deposits from the fed, and only have to keep a tenth of the deposits on hand.
So they loan out their customers money, and borrow money from the fed to loan out as well.
So the banks borrow the money from the fed.
Where does the fed get it?
By holding the unsold Government bonds and listing them as assets, and printing money, using the bond as an asset of security.
But the asset is not backed by anything. It is a printed note from the government that went unsold.
Smoke and mirrors.
Without the apparent bifurcation of Fed and Gov, and the complicity of their partners the banks, the whole system would fail.
If we all decided to go down and take our cash and buy gold, or oil or land or soybeans, the cash is not there. It does not exist.
At a certain point [10%] draw down...the only thing you could get is a note from the bank that is backed by a note from the fed, that is backed by a note printed by the government that nobody wanted.
LOL...
241 posted on
12/02/2005 11:27:00 AM PST by
antaresequity
(PUSH 1 FOR ENGLISH, PUSH 2 TO BE DEPORTED)
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