What's The REAL Reason We Even HAVE A Fed?

Discussion in 'Economics' started by gnome, Nov 19, 2007.

  1. My dad's friend tried to start up a bank - it failed. It is VERY tough to take on the big banks. You say: 'Well just offer a slightly higher interest rate on checking/savings accounts to steal their customers. The reason why this does not work was touched on indirectly by the poster Telozo.

    Suppose you start a bank called PIKER BANK. An individual called SAVER opens a savings account and deposits $1,000 into your bank.

    This is your balance sheet

    Assets $1,000 cash
    Liabilities $1,000 savings account owned by SAVER

    Say the current reserve ratio is 10%. This means you must keep $100 in reserve ($100 / $1000 = 10%) in and can loan out $900. You now loan out $900 to BORROWER.

    Now that BORROWER has $900, he will spend the $900 and the $900 will flow to RANDOM PERSON.

    Here is the KEY. RANDOM PERSON now has $900, but where does he bank at? If he banks at PIKER BANK, all is well. RANDOM PERSON then creates a savings account and deposits $900 back into PIKER BANK so there is no cash outflow. Here is the new balance sheet at PIKER BANK.

    Assets -> $1000 cash
    $900 IOU from BORROWER

    Liabilities -> $1000 savings account owned by SAVER
    $900 savings account owned by RANDOM PERSON

    The reserve ratio is 10% so PIKER BANK can lend out up to $810 this time, thus leaving $190 in cash which is 10% of liabilities ($1900).

    But what if RANDOM PERSON does not bank at PIKER BANK but banks at BIG SWINGING DICK BANK (where almost everyone banks at)? Then PIKER BANK will be forced to send out $900 in cash. This is the new balance sheet at PIKER BANK

    Assets -> $100 cash
    $900 IOU from BORROWER

    Liabilities -> $1000 savings account by SAVER

    Notice that PIKER BANK can no longer make any more loans. The reserve ratio is 10% and PIKER BANK has just that ($100 cash / $1000 savings acccount).

    That's why it's tough for small banks to compete against big banks. Small banks have limited ability to take advantage of fractional reserve banking (pyramiding loans on top of each other) cause 'RANDOM PERSON' most likely does not bank with them.

    Now you know why commercial banks are so eager to consolidate. The bigger the banks become, the more likely that 'RANDOM PERSON' will also bank with you, so the cash comes right back to you thus replinishing part of your bank reserves, and you can continue to pyramid loans on top of each other while collecting ridiculous amounts of interest.

    So if you the small bank want to steal customers by offering say a high interest of 7% on deposits, a big bank can easily match you or offer even 8% temporarily until you are bankrupt cause they are collecting interest revenue on multiple loans while you are only collecting interest revenue on 1 loan.
    #21     Nov 20, 2007
  2. RhinoGG

    RhinoGG Guest

    Bank of dumbshits
    #22     Nov 20, 2007
  3. telozo


    Here we go again:
    #23     Nov 20, 2007
  4. gnoj


    LOL guy is asking if gnome's money dwarfs his money

    LOL :D

    I was never more sure that ET has fools until I saw people making fun of gnome and inflation
    #24     Nov 20, 2007
  5. Ben must cut rates more!!

    The banks and persons who own the banks that make up the Fed DO NOT PROFIT AT ALL from those loans!!
    #25     Nov 20, 2007
  6. It's actually simple math, something many ppl like Gnome can't understand, so instead they blame the current bureaucrats, which are clueless about the financial system.

    Hypothetical simple scenario. Day 1 of the "new and improved" Fed system in a nation. Govnt wants to issue money for a legit purpose and it goes to the Fed. Fed lends $100 in fed reserve notes, expect back $105 in fed reserve notes in a year. Where the hell do you get the extra $5?

    Good job, I have read this several times and have it saved on my backup. I bet less than 10% who click on the link will end up reading the whole thing.
    #26     Nov 20, 2007
  7. Dear Mr. Matador04:

    Thank you for your recent correspondence and for your questions concerning ownership of stock in the Federal Reserve

    It is important to note that there is considerable misunderstanding about the Federal Reserve. Many people think that
    the Federal Reserve is not part of the government or responsible to the government, but is a profit-making private
    bank. In fact, while the Federal Reserve has been granted a degree of independence in its operations, it is a part of
    the federal government. The Federal Reserve is the nation's central bank. It was created by an Act of Congress on
    December 23, 1913. The Federal Reserve System consists of a seven-member Board of Governors (an independent agency of
    the federal government with headquarters in Washington, D.C.), plus a nationwide network of 12 Federal Reserve Banks
    and 25 Reserve Bank branches.

    The Federal Reserve Banks were established by Congress as the operating arms of the nation's central banking system,
    and they have both public purposes and private aspects. The Federal Reserve Banks are organized like private
    corporations, and their stock, as provided for by law, is held by all national banks and by those state chartered
    commercial banks that are members of the Federal Reserve System. Ownership of Federal Reserve Bank stock is in the
    nature of an obligation that goes along with membership in the System, and does not carry with it the attributes of
    control and financial interest ordinarily attached to stock ownership in corporations that are operated for the
    purpose of making a profit. The amount of stock that member banks are required to own is specified by law, and each
    member bank has only one vote, regardless of the number of shares it holds. The stock may not be sold or pledged as
    security for loans, and dividends are limited by law to 6 percent per year. If a Reserve Bank were liquidated, any
    surplus would go to the U.S. Government, not the stockholders.

    For more in-depth information about all of the responsibilities of the Federal Reserve System, please refer to our
    publication entitled "The Federal Reserve System: Purposes and Functions." The link to the table of contents is

    I hope this information is helpful.


    Board Staff
    #27     Nov 20, 2007
  8. I tried to ask a more probing question and got virtually the same answer:

    Dear Mr. Matador04:

    Thank you for your recent correspondence and for your questions concerning "shareholders" of the Federal Reserve.

    The Federal Reserve System is not "owned" by anyone and is not a private, profit-making institution. Instead, it is an
    independent entity within the government, having both public purposes and private aspects.

    As the nation's central bank, the Federal Reserve derives its authority from the U.S. Congress. It is considered an
    independent central bank because its decisions do not have to be ratified by the President or anyone else in the
    executive or legislative branch of government, it does not receive funding appropriated by Congress, and the terms of
    the members of the Board of Governors span multiple presidential and congressional terms. However, the Federal Reserve
    is subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by
    statute. Also, the Federal Reserve must work within the framework of the overall objectives of economic and financial
    policy established by the government. Therefore, the Federal Reserve can be more accurately described as "independent
    within the government."

    The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation's
    central banking system, are organized much like private corporations--possibly leading to some confusion
    about "ownership." For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank
    stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and
    ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold,
    traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.

    I hope this information is helpful.


    Board Staff
    #28     Nov 20, 2007
  9. the "mystery of banking" book calls for a return to the gold standard... what a pile of crap

    Sincerely yours,

    Ben B.
    #29     Nov 20, 2007