QUOTE(Sittin @ Jul 26 2008, 02:40 PM) [snapback]1456422[/snapback]
Actually, your wrong. A Bank's "money" is backed by the federal reserve, which in turn is backed by the United States governement, which is in turn back up, in part, by gold reserves. The additional value held in the "dollar" is intrensic, that is, that other investors and governments respect the "dollar" and believe it's value is reliable.
Thats why there are variations in the value of the dollar.
When a bank makes a loan, it's loaning real money. Lets say you buy a house with a thirty year mortgage. When you buy the house, you go to the bank to get a loan. The bank gives you the loan, BUT it owns the house untill you pay off the loan. At that moment, the bank must give the value of the loan in "real" money to the person who sold the house to the bank.
The bank has to have real money to give the seller, after all, as i'm sure the seller is not interested in an IOU for $250,000 dollars.
I think you missunderstand what fractional reserve banking is. What that means, is that BANKS have to have, in cash, real money that they can't make loans on. So, if a bank had 100 dollars in deposits to loan out, and its fractional reserve requirement was 20 percent, it would only loan out 80 dollars the deposits it received. Banks can't loan out imaginary money because the ammount they can loan out is less than the ammount of deposits the bank received.
The Fed does not have any reserves. The gold and silver in the US mint doesn't enter into the equation because USD has not been backed by gold or silver for many years. USD, literally, is not worth the paper it is printed on. Its only value is as fiat currency - which means that we have to hope that someone will exchange something of real value for our worthless dollar bills.
Your basic sentiments are correct but you aren't seeing the simple picture. Let's say you put $1000 in the bank, let's further say that the fractional reserve rate is 10%. $100 of it goes into reserves. The bank is able to then lend out $900 of that $1000 in the form of a loan and earn interest off your money. Because the person who took out the $900 loan inevitably feeds that money back into the banking system where it is lent out again. This goes on and on until an extremely large amount of money has been invented and added to the system from minimal reserves. However, the money needed to pay interest doesnít exist in the system yet, so more debt is required through more loans to pay the interest off. This leads to an exponential increase in debt, which in turn requires perpetual economic growth to service the debt.
You think this is okay because you do not understand that this system of money is mathematically guaranteed to collapse. It can not be sustained. At some point, all this imaginary money is going to go up in smoke because it is not, and never was, real. It is not based on anything of value.
Central Banks can lend fiat money, created out of thin air and backed by nothing of real value, to rich people at very low interest rates. Those rich people can then lend that make believe money to poor people at very high interest rates. Those poor people pay those high interest rates with the only source of real wealth in the entire system - their labor.
It all underscores exactly what Cheney meant a while back when he said "deficits don't matter". We all thought he was having a W moment, but he actually had just slipped up and spoken the truth for a change. In the short term, the deficits of the Federal Guvmint, and all these investment banks, truly don't matter because, no matter how astronomical the deficit is, the Fed will type a few digits into a central bank's computer database and make it go away - for the short term.
Of course, in the long term, creating money out of thin air, with nothing of value to back it up, is a guaranteed recipe for inflation, devaluation of the USD, and economic depression. And, we have been experiencing all those symptoms for quite a while. The current state of the economy is the direct result of the greed of financial institutions, unchecked by the federal government, who, for the last several years, have escalated the costs of home loans and credit card debt far and beyond what the clueless American citizen could afford to pay.
The problem with Bear Sterns was that they made bad loans, and people couldn't pay them back. Normally, they would foreclose on the houses, and sell them to recoup the loan. However, the number of foreclosures was exceptionally high because the banks had made exceptionally bad loans, and therefore the bankers were unable to sell the homes that they had foreclosed on because there was too much supply.
This is a double whammy, persay. Not only are the banks NOT receiving cash from the loans, they are also having to payout taxes on the properties they now take responsibility for.
Before i move on, i should point out that banks, from time to time, take loans from other banks who have reserves that exceed the fractional reserve requirement, in order to meet their own fractional reserve requirements. However, because of Bear Sterns poor decisions regarding their loans, credit rating agences, (which rate the credit of banks) lowered the value of Bear Sterns credit, which caused other banks to no longer want to loan to Bear Sterns.
At that point, Bear Sterns could no longer raise the funds required to meet their fractional reserve requirement, and the federal reserve took control over the bank, which was then bought by citibank.
If you or I get behind on our bills, our society call us financially irresponsible, the bank forecloses on our home, the IRS takes our car, and our creditors garnishee our paychecks from now until the debt is paid. But, when rich folks get behind on their bills, they just have the Fed print them up some new money out of thin air. Was it necessary that the Federal Reserve assume $30 billion of Bear Stearns debt, even though Bear Stearns has $17 billion in cash reserves just sitting around collecting interest?
Bear Stearns gets itself into a hole through the process of their own greed. They decide they do not want to file bankruptcy and lose their $17 billion in cash (which they never had any intention of using to pay their bills with anyway). So, another set of rich folks, the ones running the Fed, bails them out. And, this is all supposed to be legal?
If America really believed in the self-correcting sanctity of the free market, Bear Stearns would have been allowed to collapse. To bail out incompetent rich white folks, merely because they are rich and white, only serves to reinforce in their minds that they are gods among men - to reinforce the notion that what is good for them is synonymous with what is best for everybody When Massa sick, we sick.
It reinforces the notion that it is both wise and necessary to bail Massa out of the pickle into which his own greed and avarice got him.
If you, or I, due to unwise business decisions, pushed our business into an early grave, no one would expect the fed to bail us out. But, when rich white folks drive their good ship into an iceberg [Chrysler, Bear Stearns, and the entire banking industry], oh, Lord! That's different.
The richest people in America and the world have acquired what they have purely from speculation (i.e. stealing wealth from the losers without creating anything worthwhile). Bankers, hedge funds, stockbrokers, investment banks; they all leverage their investments with money that is not even theirs, and when they win it is simply a transfer of wealth into their hands - nothing is created. Take the stock market as one small example. Every stock traded on the common exchanges is in the secondary market, meaning it has already been sold as an IPO long ago and is no longer making the issuing company any money. But, due to our inflationary monetary system, everyday people must take risk with their money in order to keep it from losing value over time - so they invest in the stock market. What happens when the individual investor loses his life savings in the market? Who gets it? Has any real wealth been created? No, just transfered to someone else.