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Started By
Message
How do banks work?
Posted on 4/23/09 at 9:05 pm
Posted on 4/23/09 at 9:05 pm
Can someone send me a good link thoroughly explaining the process? Specifically the ability to loan money that they don't have. Thanks.
6
Posted on 4/23/09 at 9:11 pm to C
HowStuffWorks.com: " How Banks Work"
Posted on 4/23/09 at 9:27 pm to Doc Fenton
Sorry. Not at all what I was looking for.
Posted on 4/23/09 at 9:32 pm to The Seaward
quote:
sal khan
Youtube blocked, but thanks for the link. I'll check it out from the house.
Posted on 4/23/09 at 9:33 pm to C
Well, another poster on here linked to a series of YouTube clips that were somewhat entertaining, and got the basic message across: LINK.
EDIT: I like the way they get into the historical origins of the practice in those videos.
EDIT: I like the way they get into the historical origins of the practice in those videos.
This post was edited on 4/23/09 at 9:37 pm
Posted on 4/23/09 at 9:33 pm to C
The bank takes a 1$ bill, waves a magic wand over it, and presto, it becomes $100. They then take that $100, and place it in risky investments that the gubment regulators have said are safe and sound. Then the people who loaned the "bank" $1 dollar want to see their money, and the bank doesn't have it because they are leveraged so high and the bet went against them. Then the bank goes under and our economy crashes.
OK, so that was full of sarcasm, but that's my boiled down version. Some of our experts can probaly explain much better than me.
OK, so that was full of sarcasm, but that's my boiled down version. Some of our experts can probaly explain much better than me.
This post was edited on 4/23/09 at 9:34 pm
Posted on 4/23/09 at 9:40 pm to LSU0358
quote:
Some of our experts can probaly explain much better
Yeah I get what happens. But I don't understand really how it works. Trust is what everyone says, but we are dealing with serious money here. I guess thats why it collapsed. I mean how does a bank just give out $100 if they only have $10 in the bank? Who authorized the other $90 to get "printed?" I mean are banks all just one big Ponzi scheme?
Posted on 4/23/09 at 9:58 pm to C
quote:Where did you get this example? Banks can only loan out what they have in resources, i.e., capital, debt and deposits. I'm not sure I follow what you are asking. Can you use an example as to how it works according to your understanding?
I mean how does a bank just give out $100 if they only have $10 in the bank?
My brief explanation:
A bank takes in $100 in a deposit. It must reserve against that deposit a certain percent. Let's say ten percent (but it's not that high in actuality). So it can loan out $90. Someone borrows the $90 and deposits it in another bank. That bank must reserve 10%, or $9 and it loans out the other $81. If you carry out the math and sum the total of loaned out funds, you will find that the total of loans will equal $1,000. That is the multiplier effect of reserve requirements. The formula to determine the sum of loans from a deposit is = (Deposit/Reserve %). So, $100/.10 = $1,000. If the reserve requirement is increased to 20%, then $100/.20 = $500. So, the Federal Reserve can change the available amount of loanable funds in the aggregate of the banking system by changing the reserve requirement. The lower the reserve requirement, the larger the "supply" of loanable funds.
The bank is not printing money, but because it does not have to reserve 100% for its deposits, the money supply is increased.
Is this what you are asking about?
This post was edited on 4/23/09 at 10:00 pm
Posted on 4/23/09 at 10:03 pm to LSURussian
quote:
Is this what you are asking about?
Yes thanks.
Posted on 4/23/09 at 10:06 pm to C
It's long, but entertaining. Start here.
ETA: Whoops, that's the same video as the one posted above. Different titles threw me off.
ETA: Whoops, that's the same video as the one posted above. Different titles threw me off.
This post was edited on 4/23/09 at 10:10 pm
Posted on 4/23/09 at 10:11 pm to LSURussian
quote:
The bank is not printing money, but because it does not have to reserve 100% for its deposits, the money supply is increased.
Couldn't you call that e-printing?
Posted on 4/23/09 at 10:13 pm to C
You're welcome. Here's a link which goes into slightly greater detail if you need it.
Multiplier Effect
Multiplier Effect
Posted on 4/23/09 at 10:14 pm to Meauxjeaux
quote:
Couldn't you call that e-printing?
Sure, why not?
Posted on 4/23/09 at 10:15 pm to C
quote:
I mean how does a bank just give out $100 if they only have $10 in the bank? Who authorized the other $90 to get "printed?" I mean are banks all just one big Ponzi scheme?
You asked some of the best questions I've read here and gotten some very good answers. Definitely one of the best thread IMHO.
Posted on 4/23/09 at 10:23 pm to foshizzle
quote:Isn't it amazing how informative and useful a Money Talk Board thread can be as long as clamdip, Rivers and MileHigh stay out of it?
You asked some of the best questions I've read here and gotten some very good answers. Definitely one of the best thread IMHO.
Posted on 4/23/09 at 10:36 pm to LSURussian
So as long as the bank, bank funder, and appraisal of assets can be trusted and are seperate, then the system will work for Joe guy on street? I just started to work out what if those three were the same person and it looked really wierd.
Posted on 4/23/09 at 10:44 pm to C
quote:
I just started to work out what if those three were the same person and it looked really wierd.
For "Joe guy on the street" all he really needs to know in the USA is FDIC covers $250,000. But if you're in, say Australia, it might be different.
Posted on 4/23/09 at 10:47 pm to LSURussian
Naa its all the same for the most part. I'm still banking in the US. Their banks are actually much better off than ours. But of course there economy is about the size of Los Angles county so its not really apples to apples. Apples to raisins maybe.
Posted on 4/23/09 at 11:18 pm to C
quote:
So as long as the bank, bank funder, and appraisal of assets can be trusted and are seperate, then the system will work for Joe guy on street?
Bottom line is, it works as long as the underlying transactions are fundamentally sound.
Get a schemer or a thief in the mix and the "e-printed" funds end up as vapor. Then, since they really are "e-funds", any unrealized wealth created with them goes POOF.
ETA: By "unrealized wealth", I mean e-wealth that was not turned into real wealth.
E-wealth would be an equity postion.
Real wealth would be a true asset.
Ex: Some guy schemes his way through 5 homes, realizing inflated values on each and earning $200k per sold home. He takes his $1M and pays cash for a Florida beach house. Everything tanks, he's still got his Florida beach house. Realized wealth.
This post was edited on 4/23/09 at 11:23 pm
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