(Chapter 2 from "Meet THE SYSTEM")
So far we’ve established that The Federal Reserve System was created in secrecy by a handful of powerful men. We know they sought (and secured) the power of government to maximize their profits and shift the inevitable losses of their fraudulent banking practices onto the backs of the American people. Now, let’s briefly walk through some of the mechanisms that enable them to do this.
The first step is to create money out of nothing. For now, we only need to know that the bankers can “loan out” money they do not possess. So for instance, let’s say you need to borrow $200,000. The bankers simply type “200,000” into your checking account and poof; they just created $200,000. (The actual percentage of your loan that is “created out of thin air” will vary depending on the banks’ “excess reserves.” We’ll cover the specifics in greater detail later on.)
As soon as this $200,000 is loaned to you, it is entered into the banks books as an asset (the contract you signed backs the value of the loan and it is assumed you will pay it back.) However, it is also entered into their books as a liability. (It is assumed you will go out and spend your recently created $200,000 worth of checkbook money.) The odds are good that many of the checks you write will wind up in other banks and that means the issuing bank will owe (potentially) up to $200,000 as those cancelled checks start rolling in.
Being able to earn interest on money created out of thin air is a sweet deal for the bank. If it takes you 30 years to repay your loan (as is the case of a typical mortgage) the bank will earn hundreds of thousands of dollars in interest on the money it loaned you. But $200,000 is small change. Let’s look at the kind of money they’d much rather be dealing with. Let’s consider a loan of say $200 million.
The bankers still create the money out of nothing; they still enter the loan as an asset and a liability, and they still earn profit on the interest. There is hardly any difference between typing 200,000 into a database and typing 200,000,000 (only a few extra keystrokes.) However, those “few extra keystrokes” amount to one thousand times the profit. To put it another way: If you were a banker, would you rather process 1,000 loans at $200,000 each or would you rather find just ONE customer to whom you could loan $200,000,000?
From a “paperwork to profit” standpoint, the $200 million loan is the clear choice. However, there is at least one good reason why a bank might prefer making 1,000 smaller loans to making just one big loan. It’s far less likely that all 1,000 loans will go bad -- one giant loan of $200 million puts an awful lot of eggs in one basket, creating a greater risk.
Some might jump in here and say: “But they created the money out of nothing; what difference does it make if the loan isn’t paid back?” While it is true most of the money was created out of nothing, loans that go into default can still cause serious problems for the bank. In short: When somebody defaults on a loan, that “asset” is wiped from their books but the “liability” side of the equation still exists. (All that checkbook money is still out in circulation and the bank is obligated to redeem those checks.) If the person who defaulted has nothing of value to seize, the bank must get the money to cover their obligations from somewhere else. If the bank’s profits or stockholder equity aren’t sufficient; the bank becomes insolvent and the gravy train (earning money on money created out of thin air) comes to an abrupt end.
Under normal circumstances, this would encourage banks to be very cautious about the loans they approve; especially big loans. Oh, but those BIG loans are so much easier and they generate so much profit! Assuming you had the power; why not devise a system that protects the bank from insolvency in the event the really big loans go bad? --Why not indeed.
The Federal Reserve System, The Federal Deposit Insurance Corporation (FDIC) and The Federal Deposit Loan Corporation all exist to do just that. They stand by to “guarantee” the massive loans that banks make to governments and corporations. The argument for rescuing these loans when they go bad is the same argument that is always used. “It’s in the public’s best interest.” I guess we’re supposed to ignore the fact it is “the public” that ends up paying for the bank’s irresponsible lending, in effect subsidizing and encouraging more “irresponsible lending” in the future.
To put that another way: If you’re a banker and all of your really enormous loans are eligible for a bailout, but your smaller loans are not, doesn’t this encourage you to go big? It’s kind of like telling a gambler “As long as you bet really, really big, there is no need to worry; your losses will be insured.” Not only does the gambler stand to make more on larger bets (as the banker stands to make more on larger loans) the inherent RISK is no longer an obstacle. –Do we encourage “responsible gambling” (or responsible lending) with this approach? And if the answer is no, is it fair to encourage irresponsible behavior knowing full well the financial consequences are going to be shifted to somebody else?
“The end result of this policy is that the banks have little motive to be cautious and are protected against the effect of their own folly. The larger the loan, the better it is, because it will produce the greatest amount of profit with the least amount of effort. A single loan to a third-world country netting hundreds of millions of dollars in annual interest is just as easy to process – if not easier—than a loan for $50,000 to a local merchant…If the interest is paid, it’s gravy time. If the loan defaults, the federal government will “protect the public” and…will make sure the banks continue to receive their interest.” -Griffin
The goal is Perpetual Debt
Before continuing, it’s important to note that banks don’t get to keep the money they “create out of nothing.” If a bank creates $200,000 out of nothing today, loans it to you, and then you pay the loan back next week; the bank doesn’t get to keep the $200,000 you paid them. Whatever they create for loans, they must also destroy when the loan is repaid. (Again, we’ll cover this process in greater detail later on.)
What the bank DOES get to keep is the interest it earns on the money it creates. So the process goes something like this: You ask to borrow $200,000 to purchase a home. The bank “creates” the money and then loans it to you at 8% interest over 30 years. By the time you make your final payment, the bank will have earned $328,000 in interest. $328,000 is a pretty nice profit when you consider the money you paid interest on never even existed.