So banks keep 10% reserves, and can lend out money they don’t have.
We hear that all banks are essentially bankrupt, because they cannot pay all their depositers etc?
But don’t banks keep a balance sheet, where assets equal liabilities plus owners equity?
Clear this up plz
The banks put the deposit as $X on the liabilities side and put ($X - reserve ratio) + reserve ratio on the asset side.
the assets (i.e what they have out on loan) is an income stream that stretches into the future
whereas the liablity is what they need to have available for their depositors right now.
this means they are taking a long term view.
they are insolvent always in the short run, and rely on people not realising so that they can continue to play a little longer. but of course their short run moves along with them, and after enough rolls of the dice they may get found out. then people act suprised that a bank that is ‘solvent on paper’(by confusing time (or by confusing property rights!)) isnt solvent in reality.
U.S. dollars = more debt: If all loans where actually paid back, then there would be no money in circulation and on top of that more money would be owed to the banks due to interest. U.S. dollars are printed and buy IOU’s (Treasury bonds). The Federal Reserve “prints” the money and takes the IOU’s which gain interest over time. If the government “tried” to pay the initial amount of money back plus interest when the Federal Reserve would cash in on these Treasury bonds. The Government ends up owing more than it borrowed. Just like any loan we would pay back to a local bank. We pay back the initial amount plus interest. The government pays back the loan of dollars printed out of thin air with interest. So any time more money is printed, which is in the trillions now, the borrower will automatically owe back more than they receive. Where are they going to get the other money to pay back the interest when the only place to get the money will again ask you to borrow with interest? Well that leads into Nationalizing assets.
Oh, and this yellow box came up around my post and I did not intentionally put that there. I don’t know if this was the answer you were looking for or not.
I think there’s a bit of confusion over insolvency vs. illiquidity here. In any case, these videos may clear up the mystery of banking. The first 8 videos are what you’re looking for: http://www.khanacademy.org/#Banking%20and%20Money
Government agencies, banks, investment banks, insurance companies and other friends of the Federal Reserve don’t have to obey these annoying little accounting rules that the rest of us have to obey. So you have to get clever if you really want to know the financial health of a bank. This web page gives us the Texas Ratio that is a measure of current liabilities of a bank measured against current assets as the old fashioned current ratio=current assets / current liabilities is kind of meaningless.
for the record, reserve requirements aren’t 10% anymore. They’re technically 0-3% as of september’s bank bailout.
What reserves?
[Y] i lol’d