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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: John McCarthy who wrote (87909)	9/2/2007 5:11:53 PM
From: The Vet	Read Replies (2) \| Respond to of 306849

John, your synopysis seems to be correct when you say the amount of lending $$ I thought could only come as a % of the combined monies from (a) Paid in Capital (b) Retained Earnings (c) Deposits by Checking and Savings deposits with (c) being the most important." With fractional reserve banking every $1 in deposits can support almost $10 in loans. I assume that loans in themselves cannot support more loans over the reserve limit set by the regulators. So let's go back to the hypothetical example. The bank has loaned $500K for a house that was completed, and the cash created for that loan has been distributed into the wider community.. We must assume that the bank must have had at least $50,000 on deposit, in capital or in retained earnings in order to make the $500K loan. On the day that the house is completed and before any payments are made I must assume that the bank is "fully loaned out" as it has hit the fractional reserve limit. If the payments start to be made, gradually the loan amount is reduced and the profits from the interest generated increase and the bank would then be able to accumulated more retained earnings and make further loans. However if the loan defaults and the house is foreclosed on and sold, even if for only half the loan value, then the bank gets back an immediate sum of $250K of which added to the initial $50k on deposit means that it's base with which to make further loans has been substantially increased, not decreased. Seems crazy doesn't it, when looked at in this way, because while the debt isn't extinguished the capital base increases! So the bank would have a non-performing loan on its books for $250K but sufficient capital ($300K) to make further loans to others up to a limit of $3 million!!! Obviously, it's not the money or the debt, it's the rules that cause the problems....