Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: neolib who wrote (251438)	6/2/2010 1:03:25 PM
From: Skeeter Bug	Read Replies (2) \| Respond to of 306849

neolib, the difference is fractional reserve lending - the bank doesn't have most of the the money it lends out, it creates it from nothing. do you think the federal reserve has somehow earned the trillions it lends to the government? no, it has very little cash and creates the rest out of thin air (suck society's wealth). if you lend out money, you have to have earned something of value first (added to society as a whole). if you buy $200k home from someone and they give you a $200k mortgage, that person has to own that home in order to sell it. he has something tangible that has actual value. a bank, OTOH, only has to have $20k on hand as reserves and then magically creates $180k OUT OF NOTHING (there is no value) in order to pay the seller the $200k. this is fractional reserve lending (the system has been gamed many times, so a 9-1 ratio is low. Bernanke is calling for a 0% reserve requirement to allow banks to create an unlimited amount of cash with no money to back it up). in the first example, the money supply of the system stays the same - there is no change. in the second example, the money supply increases by $180k - $180k of money is created out of nothing. the scam is just getting started. in the latter bank example, the seller now has $200k in cash. he can then deposit that in a bank and that bank can then lend out $1.8 million. That's $2 million outstanding based on $20k in a savings account. $1.98 million in the system that didn't exist before. That $2 million can be put in a bank's savings account and that bank can loan out $20 million in new money. Do you see the difference now? Do you see the danger when all these loans are made on assets 2x any reasonable valuation? it is true that the banks have the notes as collateral, but that breaks down pretty quickly when the collateral prices collapse.