The Wall Street Ponzi Scheme Called Fractional Reserve Banking

Discussion in 'Economics' started by AMT4SWA, Dec 31, 2008.

  1. Borrowing from Peter to Pay Paul: The Wall Street Ponzi Scheme Called Fractional Reserve Banking

    Ellen Brown
    Web of Debt ( )
    December 30, 2008

    Cartoon in the New Yorker:
    A gun-toting man with large dark glasses, large hat pulled down, stands in front of a bank teller, who is reading a demand note. It says, “Give me all the money in my account.”

    Bernie Madoff showed us how it was done: you induce many investors to invest their money, promising steady above-market returns; and you deliver – at least on paper. When your clients check their accounts, they see that their investments have indeed increased by the promised amount. Anyone who opts to pull out of the game is paid promptly and in full. You can afford to pay because most players stay in, and new players are constantly coming in to replace those who drop out. The players who drop out are simply paid with the money coming in from new recruits. The scheme works until the market turns and many players want their money back at once. Then it’s game over: you have to admit that you don’t have the funds, and you are probably looking at jail time.

    A Ponzi scheme is a form of pyramid scheme in which earlier investors are paid with the money of later investors rather than from real profits. The perpetuation of the scheme requires an ever-increasing flow of money from investors in order to keep it going. Charles Ponzi was an engaging Boston ex-convict who defrauded investors out of $6 million in the 1920s by promising them a 400 percent return on redeemed postal reply coupons. When he finally could not pay, the scam earned him ten years in jail; and Bernie Madoff is likely to wind up there as well.

    Most people are not involved in illegal Ponzi schemes, but we do keep our money in accounts that are tallied on computer screens rather than in stacks of coins or paper bills. How do we know that when we demand our money from our bank or broker that the funds will be there? The fact that banks are subject to “runs” (recall Northern Rock, Indymac and Washington Mutual) suggests that all may not be as it seems on our online screens. Banks themselves are involved in a sort of Ponzi scheme, one that has been perpetuated for hundreds of years. What distinguishes the legal scheme known as “fractional reserve” lending from the illegal schemes of Bernie Madoff and his ilk is that the bankers’ scheme is protected by government charter and backstopped with government funds. At last count, the Federal Reserve and the U.S. Treasury had committed $8.5 trillion to bailing out the banks from their follies.1 By comparison, M2, the largest measure of the money supply now reported by the Federal Reserve, was just under $8 trillion in December 2008.2 The sheer size of the bailout efforts indicates that the banking scheme has reached its mathematical limits and needs to be superseded by something more sustainable.

    Read article.........
  2. its pretty scary.
    its just #s on a screen.
    and with a push of a few buttons you can do really significant and consequential moves...... strange times friends.
  3. Very interesting article.

    What I think that most people miss is the fact that we have had several "economic systems" in human history. From hunter gatherer to the middle ages/economic boom. Gold/fiat. etc.

    What most people don't question is: what happens when money, as a system, fails? It won't last forever....forever doesn't really exist in our reality, even stars with billions of years of life expectancy, don't exist forever. So how can people blindly assume that the fiat money system can in fact live forever? Only time will tell.

    The article is really a question of growth and how to go about doing it. What it didn't really mention directly, but hinted at was the money multiplier. It would have been interesting to see how the author would have dealt more directly with that concept. Especially with regards to the "mathematical phantom of interest" quotation from another author.

    Overall good read. Something to ponder upon. Thanks!

  4. bidask


    An economy only has two people and one bank.

    A builder who makes shelters.
    A farmer who makes food.

    This economy doesn't need to borrow any money from the bank. The two people simply trade with each other and they can live their lives.

    1 shelter = 3 pieces of food.

    Now the farmer wants 10 shelters immediately so he can live like a king. But, to get 10 shelters, he needs to produce 30 pieces of food all at once. He can't make so much food all at once, so he goes to the bank and borrows 30 paper dollars. Everyone agrees that each paper dollar lets the holder buy 1 piece of food.

    The farmer now has 30 paper dollars and he give it to the builder. The builder gives the farmer 10 shelters. As time passes, the builder uses the 30 paper dollars to buy food from the farmer. The 30 paper dollars are returned to the farmer, and the farmer gives it back to the bank. Everyone is happy at this point.

    But, suppose the bank wants interest. It wants the farmer to pay back 33 paper dollars instead of 30 paper dollars. The bank will not take food or shelters as repayment. It will only take paper dollars. The farmer has 30 paper dollars, but how in the world can he get the additional 3 paper dollars? He can't, because there are only 30 paper dollars in circulation. The only way he can repay the bank is if he borrows more from the bank. But borrowing more means he'll eventually owe more interest, and he'll have to borrow more to repay that interest. This cycle continues...

    One day the bank says, "I want all the paper dollars plus interest back right now! And, I'm not going to let you borrow any more." The farmer is completely screwed now. It is mathematically impossible to get enough paper dollars to pay back the bank. The bank takes all of the farmer's shelters. The bank also takes the farmer's land so the farmer can't make anymore food to trade directly with the builder. The farmer now has no shelter and no food. He dies.

    Now the builder doesn't have anyone to sell his shelters. The builder doesn't owe the bank anything, but he can't get any food because the farmer died. So the builder goes to the bank and says, "you own the farmer's land now. can you produce some food? in exchange, i'll give you some shelters." the bank says, "no. bank doesn't want shelters. bank only wants paper dollars. bank will lend you paper dollars. you can then use paper dollars to buy food." the builder has no choice so he borrows the paper dollars from the bank. the bank does the same thing to the builder as it did to the farmer. the builder dies.

    the bank now owns everything in this world. the end.
  5. Farm and Builder can kill the banker, you know, it calls revolution. :D Usury was a crime. LOL
  6. Actually, they have. :)
  7. Fed putting the biggest crook on wall street in charge of buying MBS.

    What they are really doing is just giving Goldman free money. There will be no oversite the Fed will do what ever the hell thay want. You tax's will pay for this. Bend over you idiots.

    The FED is choosing Goldman Sachs as 1 of the banks overseeing $500 billion in mortgage security buybacks .
  8. welcome to macroeconomics.
  9. dve250


    It's just about time for another revolution, bloody or otherwise, don't you think?
  10. #10     Dec 31, 2008