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

Quote from myminitrading:

Here is what you can do the make the system work in your favor.

Make lager camping contributions to the correct state officials, set up a bank charter. Pay an interest on deposits a little higher than everyone else.

Now you are set to operate in the fraction reserve baking system. that means you can loan out at interest ten times what you have on deposit.

Joe six pack deposits his check for $2000.00, you can now loan out $20,000. at interest. Man what a racket that is. [/B]
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Quote from telozo:

It doesn't really work quite that way. The guy who got the loan will use the money in a way, either pay for something, or deposit it with some other bank. Either way, your checks will come back to you for clearance before you get any interest payment on the money, and you will have to make good for them using your reserves or borrow from the fed.
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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.
 
Quote from Epiphany:

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.
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Here we go again:
http://www.mises.org/Books/mysteryofbanking.pdf
 
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
 
Quote from efficiency:

You might be MORE concerned about how the govt (not just the Fed) changes horses in the middle of the stream and/or spends money like a drunken sailor.
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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?

Quote from telozo:

Here we go again:
http://www.mises.org/Books/mysteryofbanking.pdf
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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.
 
Dear Mr. Matador04:

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

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
federalreserve.gov/pf/pf.htm.

I hope this information is helpful.

Sincerely,

Board Staff
 
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.

Sincerely,

Board Staff
 
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