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I am Changing my mind on Fractional Reserve Banking

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8. The following advantage of the fractional reserve system was overlooked by Patman. That point should be made to establish the concept that whoever runs the money system should bear the losses for bad loans. If that were well known, we probably would not have gotten into the money problem of 2008: the bankers would have been more cautious.

9. One good but often overlooked thing about having the bankers run the system is that if they lose money on bad loans -- that money theoretically comes out of the banker's pockets (because the bankers own the banks). If the government ran the system and owned the banks -- all losses would come out of the pockets of the taxpayers.

10. Most people do not realize that the Sovereign Money Banking System (the underlying system we use now) gives the managing or owning institution -- whether the Fed or Congress -- a system that has enormous leverage built into it. Banks essentially have no limit on how much money they can lend and that can OBVIOUSLY lead to terrible problems if the lending is mismanaged.

11. I know that sounds impossible -- but it is the way the system works as far as I can figure.

12. The downside leverage comes into play when, for instance, a $1,000 loan goes bad -- a borrower does not pay back the loan and -- collateral can't be seized. In that case, the bank must call back $10,000 in loans and lose the income on the $10,000/ In that case the loss of a $1,000 loan costs the bank $400 / year -- or 40% every year on that bad loan.

13. Originally, it must have been thought that the enormous leverage would work to keep the Bankers prudent, conservative and cautious. It appears that this was not a conscious decision of any group. As far as I can tell, it never appeared in print as a goal of the Fractional Reserve System. Patman [citation needed] points out that everyone in the know tries to keep the actual mechanism a secret -- but in any case, the downside leverage built into the Fractional Reserve System, naturally and organically forced that prudent, conservative, cautious and very important behavior on the bankers -- because for every dollar of bad loans they made, they would have to call back TEN dollars of loans and they would therefore lose the interest on that 10 dollars. That loss was painful.

Disadvantages of the fractional reserve system as it evolved into a Sovereign Money Banking System

1. Somewhere along the line, it appears, and I believe, that four major things can and have happened that messed up the system. The system was not, and probably is not now, protected against those problems -- see (A) to (D) below.

(A) Bankers forgot the downside of the system's leverage and thereby took chances that were not prudent.

(B) The Government allowed, and even encouraged, (by setting up Fannie Mae and Freddie Mac) the banks to sell-off the loans they placed, thinking that would free up money and would allow the banks to make new loans. Whoever did that did not understand how the Sovereign Money Banking System works -- the banks do not now need existing money to make loans. They can prudently create whatever money is needed if they have a trustworthy lender with good collateral who has a reasonable plan to create new wealth with the money in the loan. And why should it be otherwise?

(C) The Government did not know that the inherent downside leverage built into the Fractional Reserve System was important. They simply did not understand the ramifications of the system. They did not realize that an unintended benevolent consequence (that leverage of the previous sentence) was built into the system. Unintended consequences do not always have to harmful -- lots of times (in evolution for instance) they are very valuable. Any good scientist, investigator, explorer or engineer knows this instinctively -- they are always on the alert for benevolent, unplanned results. Serendipity and fortuitous accidents are very important (think of Christopher Columbus and Isaac Newton's apple). They may have led to more great discoveries than planned action.

(D) Laws became anachronistic. Primarily because Congress writes the laws and Congress does not understand how the Money and Banking System works. That is because the people running the Fed. don't tell Congress what is going on -- and the Fed. is not audited by a reliable independent agency

2. The system is very counter-intuitive and difficult to understand unless the details of the system are studied carefully.

3. Hardly anyone understood or understands how the system worked or works. This is not a healthy situation.

4. Most of the information about the systems originate with the Federal Reserve System and that information is very unreliable. In fact, it would not be a mistake to say that most of the information put out by the Fed. is self-serving and designed to confuse the subject of money and banking, so as to make the public very insecure about money and banking.

5. It can be safely assumed that many authors take information by the Fed as gospel and put that unquestioned information into their books and on their websites. Students then are exposed to that information in the classroom and generally believe what they are told. Those student than fill the internet discussion groups with that incorrect information. The result is that even people who have formally studied economics have no clue as to how the banking system really works. A good example of misleading information about how much a given bank can lend follows. 5.1 to 5.4 gives the written law for all banks. 5.5 gives a Wikipedia explanation which is contradictory to the law.

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Retired engineer, product and business developer, inventor (six patents). Currently (a) trying to completely understand our money and banking systems and (b) planning to pass that information to the American public. Photo is ca. (more...)
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