What is a bank?

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Hello,
I am still trying to understand the complex world of banking. I recently discovered some videos on youtube about fractional reserve lending.

Based on what I gathered, my understanding is that money is essentially created when a loan is signed. A bank only has to have 10% of the money
it is actually lending you in reserves, and once you sign the loan, the money that you agree to pay back is essentially created out of thin air, and the bank considers it an
asset, which it then is able to package into some other "financial" product which it then sells.

Honestly this all seems pretty shady to me. If this is really the case, then consider a hypothetical scenario in which I simply cut out the middle man, and treat myself
as a bank. I have $10,000 dollars, and I decide to lend myself $100,000 dollars, putting down my $10,000 dollars as the 10% requirement. I then consider the $100,000 I just
lended myself an asset, and I use that asset to then pay back the loan, to myself. After all is said and done, I basically just created $100,000 out of thin air and paid it
to myself, basically going through the same motions that I would have happened at a bank, except that in this case I my own banker.

I imagine, of course, that there are many things wrong with my hypothetical scenario, because I know that there are a lot of much more financially savvy people than me
and if this scheme would've worked they would've done it by now. So is there something I'm not understanding about how banks lend money, or are there some laws that
the government basically declares banks as being special middle men who have these special money creation from debt privileges?

Anyways, hopefully someone can correct me in the various ways I'm misunderstanding things, so that I can understand it better.

​Thanks!


 

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That's exactly how the Bank of Mattress works.

qcumber98 (Oct. 14, 2016 @ 12:01a) |

You forgot the part where you have to have an account at the Federal Reserve, or one of its members.

Or, to eliminate the... (more)

mapen (Oct. 14, 2016 @ 6:44a) |

Or that 0% lenders aka depositors, won't lend you a dime unless their money is insured by the FDIC. Oh, and you better h... (more)

TravelerMSY (Oct. 14, 2016 @ 4:31p) |

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Okay, we aren't doing your macroeconomics homework for you.

youve got it a little backwards.  The reserves is a percentage of deposits.  The bank has 100% of the money being loaned, nothing is "created out of thin air".  When you deposit $1,000, the bank must keep $100 in reserve and can lend out $900.  That $900 is then deposited by someone, and the bank must keep $90 of that in reserve while lending out the other $810.  So at that point the bank has $1900 in deposits and $1710 in loans (and will be as high as $10,000 in deposits and $9,000 in loans) despite there only being $1,000 in actual money involved - but it isn't shady or some complex mysterious exotic concept creating money out of thin air, it's based on rather fundamental math.


Glitch99 said:   youve got it a little backwards.  The reserves is a percentage of deposits.  The bank has 100% of the money being loaned, nothing is "created out of thin air".  When you deposit $1,000, the bank must keep $100 in reserve and can lend out $900.  That $900 is then deposited by someone, and the bank must keep $90 of that in reserve while lending out the other $810.  So at that point the bank has $1900 in deposits and $1710 in loans (and will be as high as $10,000 in deposits and $9,000 in loans) despite there only being $1,000 in actual money involved - but it isn't shady or some complex mysterious exotic concept creating money out of thin air, it's based on rather fundamental math.
  
Yup.  That's how you get bank runs - thanks 'It's a Wonderful Life'!!!

Megaman3 said:   ...I have $10,000 dollars, and I decide to lend myself $100,000 dollars, putting down my $10,000 dollars as the 10% requirement. I then consider the $100,000 I just
lended myself an asset, and I use that asset to then pay back the loan, to myself. After all is said and done, I basically just created $100,000 out of thin air and paid it
to myself, basically going through the same motions that I would have happened at a bank, except that in this case I my own banker...
 

Great logic... You had only 10,000 but was able to lend 100,000.



 

Megaman3 said:   Hello,
I am still trying to understand the complex world of banking. I recently discovered some videos on youtube about fractional reserve lending.

Based on what I gathered, my understanding is that money is essentially created when a loan is signed. A bank only has to have 10% of the money
it is actually lending you in reserves, and once you sign the loan, the money that you agree to pay back is essentially created out of thin air, and the bank considers it an
asset, which it then is able to package into some other "financial" product which it then sells.

Honestly this all seems pretty shady to me. If this is really the case, then consider a hypothetical scenario in which I simply cut out the middle man, and treat myself
as a bank. I have $10,000 dollars, and I decide to lend myself $100,000 dollars, putting down my $10,000 dollars as the 10% requirement. I then consider the $100,000 I just
lended myself an asset, and I use that asset to then pay back the loan, to myself. After all is said and done, I basically just created $100,000 out of thin air and paid it
to myself, basically going through the same motions that I would have happened at a bank, except that in this case I my own banker.

I imagine, of course, that there are many things wrong with my hypothetical scenario, because I know that there are a lot of much more financially savvy people than me
and if this scheme would've worked they would've done it by now. So is there something I'm not understanding about how banks lend money, or are there some laws that
the government basically declares banks as being special middle men who have these special money creation from debt privileges?

Anyways, hopefully someone can correct me in the various ways I'm misunderstanding things, so that I can understand it better.

​Thanks!


 


I think you need to keep studying.

It's no different than you borrowing $100 from me and lending it to someone else, except that the money you got from me is a deposit rather than a loan. The amounts a bank can lend out are constrained by regulators to keep banks from taking too much risk.

You're doing it wrong. You borrow $100,000 and bet it on black. Then you pay off your loan and blow the rest on blow and hookers.

A bank is an institution where you deposit your hard earned money and then see that disappearing while paying bills!

What, no one showed up and tell us about "BeYourOwnBanker" yet? They don't make shills like they used to.

A bank is a generous sugar daddy with poor judgment who will fly you around the world for free and won't make you put out.

I just did this and it TOTALLY WORKED.

I had $10 in my wallet. Loaned myself $100.
Now I have $100. Loaned myself $1,000.
Now I have $1,000. Loaned myself $10,000.
Now I have $10,000. Loaned myself $100,000.
Now I have $100,000. Loaned myself $1,000,000.

So I am now a millionaire! Woohoo!

89transam said:   I just did this and it TOTALLY WORKED.

I had $10 in my wallet. Loaned myself $100.
Now I have $100. Loaned myself $1,000.
Now I have $1,000. Loaned myself $10,000.
Now I have $10,000. Loaned myself $100,000.
Now I have $100,000. Loaned myself $1,000,000.

So I am now a millionaire! Woohoo!

  I did it too.  I had $1000, loaned myself $900, keeping $100 in reserve and a $900 IOU note.
loaned myself $810, keeping $181($18+$100) in reserve,a $900 IOU note, and an $810 IOU note.
....
Total loans to myself: $9000 with $9000 IOU notes and 1000 in reserve.  

Then, I invested the "$1k" in real estate and property declined in value by $1000 and I pulled a Trump and defaulted on all the loans while my creditor decided to just forgive all the loans because the creditor knew I couldn't pay them (myself! but in this case at OP's direction I am my own "bank").   Deducted $9000 personal loss while not having to claim income for the forgiven debt.   Ended up with $9000 NOL to apply to prior 2 years and next 15 years income tax.  So, with my $1000 lost investment I got $2250 in profit from tax deductions!   I'm such a smart businessman.  *(I did this in 1995, of course, before the loophole was closed)

wilesmt said:   
Glitch99 said:   youve got it a little backwards.  The reserves is a percentage of deposits.  The bank has 100% of the money being loaned, nothing is "created out of thin air".  When you deposit $1,000, the bank must keep $100 in reserve and can lend out $900.  That $900 is then deposited by someone, and the bank must keep $90 of that in reserve while lending out the other $810.  So at that point the bank has $1900 in deposits and $1710 in loans (and will be as high as $10,000 in deposits and $9,000 in loans) despite there only being $1,000 in actual money involved - but it isn't shady or some complex mysterious exotic concept creating money out of thin air, it's based on rather fundamental math.
  
Yup.  That's how you get bank runs - thanks 'It's a Wonderful Life'!!!

  "I want 242 dollars and 10 cents!"

alamo11 said:   Okay, we aren't doing your macroeconomics homework for you.
  Lol, whenever I post that, I got an alert from the Mods.

forbin4040 said:   
alamo11 said:   Okay, we aren't doing your macroeconomics homework for you.
  Lol, whenever I post that, I got an alert from the Mods.

  Your stalkers are highly effective.  Mine are like the Stasi.

How is babby formed?

Crazytree said:   How is babby formed?
https://www.youtube.com/watch?v=uIQ9b1FcWxw



Megaman3 said:   Hello,
I am still trying to understand the complex world of banking. I recently discovered some videos on youtube about fractional reserve lending.

Based on what I gathered, my understanding is that money is essentially created when a loan is signed. A bank only has to have 10% of the money
it is actually lending you in reserves, and once you sign the loan, the money that you agree to pay back is essentially created out of thin air, and the bank considers it an
asset, which it then is able to package into some other "financial" product which it then sells.

Honestly this all seems pretty shady to me. If this is really the case, then consider a hypothetical scenario in which I simply cut out the middle man, and treat myself
as a bank. I have $10,000 dollars, and I decide to lend myself $100,000 dollars, putting down my $10,000 dollars as the 10% requirement. I then consider the $100,000 I just
lended myself an asset, and I use that asset to then pay back the loan, to myself. After all is said and done, I basically just created $100,000 out of thin air and paid it
to myself, basically going through the same motions that I would have happened at a bank, except that in this case I my own banker.

I imagine, of course, that there are many things wrong with my hypothetical scenario, because I know that there are a lot of much more financially savvy people than me
and if this scheme would've worked they would've done it by now. So is there something I'm not understanding about how banks lend money, or are there some laws that
the government basically declares banks as being special middle men who have these special money creation from debt privileges?

Anyways, hopefully someone can correct me in the various ways I'm misunderstanding things, so that I can understand it better.

​Thanks!


 

  That's exactly how the Bank of Mattress works.

Megaman3 said:    If this is really the case, then consider a hypothetical scenario in which I simply cut out the middle man, and treat myself
as a bank. I have $10,000 dollars, and I decide to lend myself $100,000 dollars, putting down my $10,000 dollars as the 10% requirement.
 

You forgot the part where you have to have an account at the Federal Reserve, or one of its members.

Or, to eliminate the middle man, you can declare your own fiat currency "Megaman Dollars" and be your own reserve bank "Reserve Bank of Megaman".

Or that 0% lenders aka depositors, won't lend you a dime unless their money is insured by the FDIC. Oh, and you better have a nationwide infrastructure of branches and atms so that they can visit their funds anytime they want.



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