The true problem of the economy well explained

[Wiper]

Gives a nice view why things are happening like they do now :thumbs:

Watch all 5 :P:

http://nl.youtube.com/watch?v=vVkFb26u9g8

[Mr Clean]

Do not get your economic news or education from YouTube for God's sake...

[Wiper]

Do not get your economic news or education from YouTube for God's sake...

Some of you need to realize that youtube is only a medium to spread the message.....



All kinda stuff that ain't true cuz it's on youtube :eek: :

http://www.youtube.com/watch?v=Lq-MuEms00w

http://www.youtube.com/watch?v=gZLvSnr6s50&feature=related

http://www.youtube.com/watch?v=0n1rqHo4XyM



So for God's sake.....



ah wel u can do the math :)

[Mr Clean]

No, you need to realize that ANYONE can use that medium to post whatever they want without having to worry about fact checking or professional peer review.

That video is idiotic. Banks to not create money. They loan out about 90% of the deposits they have. That is where the 9 to 1 ratio comes from. A bank cannot, by law, loan out more money than it has in deposits on it's balance sheet. It's really rather simple. How can you believe such rubbish?

[JIMINATOR]

assuming there is one bank in town that everyone places all their deposits, and people do this regularly, then the bank can loan the same money repeatedly. each loan is backed different collateral, but end result is that it is the same money being handed out. When you look at the sum total of all banks, reserves and loans and consider it all to be one bank, then that is what it looks like. Really it sounds like banks are more similar to pawn shops than anything else.

[Mr Clean]

assuming there is one bank in town that everyone places all their deposits, and people do this regularly, then the bank can loan the same money repeatedly. each loan is backed different collateral, but end result is that it is the same money being handed out. When you look at the sum total of all banks, reserves and loans and consider it all to be one bank, then that is what it looks like. Really it sounds like banks are more similar to pawn shops than anything else.

Only if the people make only deposits and never withdrawal any money, but as we know in the real world that is not the truth. If the bank has $100,000 in deposits (on average lets say) every year, year after year, it can only have $90,000 out in loans. For your scenario to work they would have to keep expanding their pool of deposits in order to have the money to loan out...

[JIMINATOR]

only 3% of money exists as currency, the rest is stored in a bank or some other type of institution. money is like musical chairs, it keeps rotating from person to person. banks can expect to have an average regardless of people taking money out or putting it in. lets not mention all of the acquisitions/expansions the past 20 years of banks everywhere.

[Wiper]

No, you need to realize that ANYONE can use that medium to post whatever they want without having to worry about fact checking or professional peer review.

That video is idiotic. Banks to not create money. They loan out about 90% of the deposits they have. That is where the 9 to 1 ratio comes from. A bank cannot, by law, loan out more money than it has in deposits on it's balance sheet. It's really rather simple. How can you believe such rubbish?

They do create money:

Main rule:
Allowed loan out about 90% of the deposits they have.

Which means:
If a bank has 100 billion dollars real money they can loan out about 90 billion (or 95 depending on the country). Leaving 10 billion in the vault.

Virtual:
Most banking is only virtual. If you pay something to someone by I-net banking (or get your salary etc. etc.) the only thing that will change are the numbers on a computer somewhere. The actual real money (paper dollars), still 100 billion, stays in the vault not moving at all.


So how do banks create money?:
A supervisor tells a bank to have 10% (9 to 1) of the deposits in the vault. So when a supervisor comes he'll see the true paper money which doesn't move. Now what the bank tells the supervisor is that those 100 billion dollars is the 10% they need as guarantee. If that 100 billion dollar is the 10% then the actual amount of virtual money loan out is 1.000 billion dollar and so the bank created 900 billion dollar.




This system works if people don't start a cash out (depleting the 100 billion true money) and the 900 billion dollars are paid back. If those 900 billion dollars aren't paid back (collapsing of houseprices, jobless people) the bank has major problem. A 2nd deadly leaver is that banks used a lot of that 900 billion to buy stocks etc. and looking at the Dow Jones it definitely is worth far less.

[Mr Clean]

Jim, only 3% as currency? Where did you get that figure? And please don't quote a YouTube video as evidence, that is not a factual resource.


They do create money:

Main rule:
Allowed loan out about 90% of the deposits they have.

Which means:
If a bank has 100 billion dollars real money they can loan out about 90 billion (or 95 depending on the country). Leaving 10 billion in the vault.

Virtual:
Most banking is only virtual. If you pay something to someone by I-net banking (or get your salary etc. etc.) the only thing that will change are the numbers on a computer somewhere. The actual real money (paper dollars), still 100 billion, stays in the vault not moving at all.


So how do banks create money?:
A supervisor tells a bank to have 10% (9 to 1) of the deposits in the vault. So when a supervisor comes he'll see the true paper money which doesn't move. Now what the bank tells the supervisor is that those 100 billion dollars is the 10% they need as guarantee. If that 100 billion dollar is the 10% then the actual amount of virtual money loan out is 1.000 billion dollar and so the bank created 900 billion dollar.

This system works if people don't start a cash out (depleting the 100 billion true money) and the 900 billion dollars are paid back. If those 900 billion dollars aren't paid back (collapsing of houseprices, jobless people) the bank has major problem. A 2nd deadly leaver is that banks used a lot of that 900 billion to buy stocks etc. and looking at the Dow Jones it definitely is worth far less.

First off, I don't believe banks are able to use deposit balances for purchases of stock, or other banks, etc. That has to come from their profit balance sheet only. Where did you get that information from if I may ask?

Also, the 900 million in loans is not "virtual" money just because the actual cash is not on hand. Value is a measure of worth, and loans have a value because they are owed to the bank, just like your checking account has value because the bank owes you that amount in your account. There is investment risk in loans, which the bank has to calculate and take on, but all investments have risk. Your checking account, by the way, is actually an investment too. You are paid interest on your money, so you too are making an investment, albeit a small one and, if FDIC insured, with practically no risk.

There is an investment risk associated with loans, and not all get paid back, but again as said in a previous post they have to keep a percentage of money to write that off.

They may be owed 900 million, but they can't do squat with that amount, so it is not "virtual money". It is a bunch of IOUs, nothing more...

[Wiper]

Jim, only 3% as currency? Where did you get that figure? And please don't quote a YouTube video as evidence, that is not a factual resource.



First off, I don't believe banks are able to use deposit balances for purchases of stock, or other banks, etc. That has to come from their profit balance sheet only. Where did you get that information from if I may ask?

Also, the 900 million in loans is not "virtual" money just because the actual cash is not on hand. Value is a measure of worth, and loans have a value because they are owed to the bank, just like your checking account has value because the bank owes you that amount in your account. There is investment risk in loans, which the bank has to calculate and take on, but all investments have risk. Your checking account, by the way, is actually an investment too. You are paid interest on your money, so you too are making an investment, albeit a small one and, if FDIC insured, with practically no risk.

There is an investment risk associated with loans, and not all get paid back, but again as said in a previous post they have to keep a percentage of money to write that off.

They may be owed 900 million, but they can't do squat with that amount, so it is not "virtual money". It is a bunch of IOUs, nothing more...


It's funny that you say it yourself with those two lines. I think we both agree that the original idea of money was to represent worth.

That 900 million is created out of thin air, nothing more simply cuz the banks say the 100 million is the 10% which means that those 900 million dollars represents nothing. Why would banks do such a thing?

It's very easy actually: the more money loan out equals more interests. At an interestrate of 10%:
loan out 100 million dollars will give 10 million extra
loan out 1000 million dollars will give 100 milion extra

not only that, just say that the banks pay 2% interest to the people which will be 2 million dollars. The difference in profits will be 98 - 8


And again this will only work if people pay the 900 million back which didn't representate anything already.

[Mr Clean]

It's funny that you say it yourself with those two lines. I think we both agree that the original idea of money was to represent worth.

That 900 million is created out of thin air, nothing more simply cuz the banks say the 100 million is the 10% which means that those 900 million dollars represents nothing. Why would banks do such a thing?

It's very easy actually: the more money loan out equals more interests. At an interestrate of 10%:
loan out 100 million dollars will give 10 million extra
loan out 1000 million dollars will give 100 milion extra

not only that, just say that the banks pay 2% interest to the people which will be 2 million dollars. The difference in profits will be 98 - 8


And again this will only work if people pay the 900 million back which didn't representate anything already.

But it does represent something. That 900 million is NOT out of thin air. They can't loan out 900 million unless they have 1 billion in deposits. They can't get 100 million in deposits and loan out 900 million, it doesn't work that way.

Wiper your math and your understanding of banking is way off.

[Wiper]

But it does represent something. That 900 million is NOT out of thin air. They can't loan out 900 million unless they have 1 billion in deposits. They can't get 100 million in deposits and loan out 900 million, it doesn't work that way.

Wiper your math and your understanding of banking is way off.

Read my 3nd post in this thread again and try to understand how they toy around with that 9:1 rule.

[EXEcution]

"The United States' Federal Reserve gives a summary of why fractional reserve banking is used and what its effects are:

The fact that banks are required to keep on hand only a fraction of the funds deposited with them is a function of the banking business. Banks borrow funds from their depositors (those with savings) and in turn lend those funds to the banks’ borrowers (those in need of funds). Banks make money by charging borrowers more for a loan (a higher percentage interest rate) than is paid to depositors for use of their money. If banks did not lend out their available funds after meeting their reserve requirements, depositors might have to pay banks to provide safekeeping services for their money. For the economy and the banking system as a whole, the practice of keeping only a fraction of deposits on hand has an important cumulative effect. Referred to as the fractional reserve system, it permits the banking system to "create" money. [4]

It is very important to realise that the banking 'system' is 'creating' the additional money, not the individual private banks. The privately owned banks are only lending out the amounts they receive in deposits less any reserve requirements depending on monetary legislation but an initial amount of money created by the central bank can pass through the banking system more than once and creating a higher effective volume of money in the economy."

http://en.wikipedia.org/wiki/Fractional-reserve_banking

Banks create money! It may seem counter intuitive, very difficult to understand (at least for me), and few banks actually knew that by lending money they were creating it before the 1920s, but that is simply how banking and the majority of money creation works. It's not illegal since it's endorsed by the Fed itself.

[Nitro]

"The United States' Federal Reserve gives a summary of why fractional reserve banking is used and what its effects are:

The fact that banks are required to keep on hand only a fraction of the funds deposited with them is a function of the banking business. Banks borrow funds from their depositors (those with savings) and in turn lend those funds to the banks’ borrowers (those in need of funds). Banks make money by charging borrowers more for a loan (a higher percentage interest rate) than is paid to depositors for use of their money. If banks did not lend out their available funds after meeting their reserve requirements, depositors might have to pay banks to provide safekeeping services for their money. For the economy and the banking system as a whole, the practice of keeping only a fraction of deposits on hand has an important cumulative effect. Referred to as the fractional reserve system, it permits the banking system to "create" money. [4]

It is very important to realise that the banking 'system' is 'creating' the additional money, not the individual private banks. The privately owned banks are only lending out the amounts they receive in deposits less any reserve requirements depending on monetary legislation but an initial amount of money created by the central bank can pass through the banking system more than once and creating a higher effective volume of money in the economy."

http://en.wikipedia.org/wiki/Fractional-reserve_banking

Banks create money! It may seem counter intuitive, very difficult to understand (at least for me), and few banks actually knew that by lending money they were creating it before the 1920s, but that is simply how banking and the majority of money creation works. It's not illegal since it's endorsed by the Fed itself.

Did you watch The Money Masters video I posted a link to in the presidency topic? Explains history of this monetary system dating back to the decline of the Roman Empire to present day. well worth the 3.5 hours of watching time.

[Wiper]

"The United States' Federal Reserve gives a summary of why fractional reserve banking is used and what its effects are:

The fact that banks are required to keep on hand only a fraction of the funds deposited with them is a function of the banking business. Banks borrow funds from their depositors (those with savings) and in turn lend those funds to the banks’ borrowers (those in need of funds). Banks make money by charging borrowers more for a loan (a higher percentage interest rate) than is paid to depositors for use of their money. If banks did not lend out their available funds after meeting their reserve requirements, depositors might have to pay banks to provide safekeeping services for their money. For the economy and the banking system as a whole, the practice of keeping only a fraction of deposits on hand has an important cumulative effect. Referred to as the fractional reserve system, it permits the banking system to "create" money. [4]

It is very important to realise that the banking 'system' is 'creating' the additional money, not the individual private banks. The privately owned banks are only lending out the amounts they receive in deposits less any reserve requirements depending on monetary legislation but an initial amount of money created by the central bank can pass through the banking system more than once and creating a higher effective volume of money in the economy."

http://en.wikipedia.org/wiki/Fractional-reserve_banking

Banks create money! It may seem counter intuitive, very difficult to understand (at least for me), and few banks actually knew that by lending money they were creating it before the 1920s, but that is simply how banking and the majority of money creation works. It's not illegal since it's endorsed by the Fed itself.


It's indeed the closed "system" what makes this possible, like it's 1 big bank. Kinda probability and chances: power of the mass. Money borrowed will eventually return as a deposit waiting to be loan out again for 90% etc. etc., maybe not the money a bank loan out itself but money from any other bank in this system and vice versa.


And jup I needed to crack my head also to see how it works simply cuz it ain't intuitive/logical till you see the idea behind it.

Edit:

Illustration ^_^

[JIMINATOR]

how about as an alternate easier to understand explaination, every dollar of deposits put into a bank allow banks to create $9 of debt in the form of loans. So they are not creating money but debt. Right now banks have been in the process of building up their reserves to compensate for losses. Each dollar they save for reserves is $9 of potential loans that are pulled out of the system. That is why there has been a massive credit crisis and various bailouts.