Booms, Busts, and Recoveries Message Board

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Strategies & Market Trends : Booms, Busts, and Recoveries

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To: Ilaine who wrote (11799)	12/12/2001 9:14:19 PM
From: LLCF	Read Replies (1) of 74559

If a bank takes all it's depositors money @ 1% and invests it in overnight "federal funds market" @ 1.5% it has no risk and makes quite a profit. This is a simple model of a bank that has 100% of it's loans backed by assets. No money has been created by the bank. In reality the bank being very large could loan a portion of this money out for different terms, etc.. because they know everyone won't come in the same day and want money. Even if they did, they could sell or borrow against their longer term securities. In addition of course they can loan out their own capital. This is infinitely more 'conservative' than what goes on now [many different 'tiers' of capital, some at the fed. etc] where fractional reserves allow money creation. Under your definition there would clearly be no banks. DAK

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