Quote from Kassz007:
Only if the borrowers can't repay their loans though...The fractional reserve banking system is fine as long as the banks only loan money to those who will repay...American banks have not followed this principle. Others will be fine.
Fractional reserve banking itself is flawed. The world doesn't realize this yet. It doesn't matter the country.
Here's why:
Even if banks only made loans to credit worthy people the system will still collapse. This is because of a key factor: interest. Banks take on deposits and must pay out a set rate of interest to the depositors. In turn they loan out the money to credit worthy (or not so credit worthy) individuals at a higher rate of interest.
Nearly every dollar at the bank has to be loaned out in order to pay for the interest to depositors + profits to the bank owners. Those loaned out dollars are then in turn deposited in bank accounts in other people's names (IE, whoever is cashing the loan check), and are loaned out again in order to pay the loan check depositors' interest.
Under this system $1 can be loaned out across many banks perhaps hundreds of times creating hundreds of dollars in loans. These hundreds of dollars in loans will generate the banks involved huge profits in interest payments! All from $1!!!
All this creates a highly complex web of debt. Banks are the ones keeping the books on who owes who. When this process goes smoothly in good economic times the banks make enormous profits. When it goes poorly (like the USA now) the government bails the banks out so the depositors don't lose money. Trust is essential for this system to work. Without Governmental deposit insurance, people wouldn't give put their money in banks to earn interest on.
$1 can be multiplied across many accounts at different banks to create hundreds in loans. Where will all the money to pay back hundreds in loans come from? This money didn't exist in the first place. The poor borrower will have to come up with a way to pay back money that doesn't exist + interest. Well the borrowers will be unable to pay when such a situation arises. They will then be deprived of their houses/farms/cars by the bankers all because they couldn't pay back something the really didn't exist in the first place. This is the fatal flaw of fractional reserve banking.
Not only are the borrowers getting screwed, the depositors will get screwed too. When the final banking crisis arrives, banks will be stuck with a whole lot of loans that CANNOT be paid back. The banks will be INSOLVENT in the extreme. The government will have to bail them and the depositors out with printed money. So the buying power of the average depositor's $ will be greatly reduced by the money printing. A better solution would be to abolish fractional reserve banking. Wipe away all the debts. Make banking state run with no private for profit banks. Only lend to credit worthy individuals.
99% of economists DO NOT UNDERSTAND THIS. Fractional reserve banking will always result in a debt crisis.
thx for reading ppl. ask me any q's you might have
