Just step aside in this thread. This is yet another thread where we have to spend our time educating you as to how something works. Read this and admit your error. Then leave the thread so that those qualified can discuss matters. http://en.wikipedia.org/wiki/Reserve_requirement
Reserve requirements affect the potential of the banking system to create transaction deposits. If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81 from your web site, what are you disputing, I said banks are required to hold reserves, read the thread edit tia for the apology
Privatize the gains, and socialize the losses. It's the faux-libertarian robber baron's mantra for success.
one more thing I worked in banking for seven years. one bank i was working at, our branch recorded 100 million deposit shortly after I started. huge deal for that bank, we had 90 mill in loans. there was a consistent drive to get more deposits. I know sometimes when you think about most people taking out loans and businesses taking out loans its hard to fathom that there is actually that much money out there in deposits to be lent. believe me, there in is that much money floating around in our world.
It surprises me that in your seven years of working at a bank, you failed to learn what most students learn in their first day of the Money & Banking class at college regarding the multiplier effect and reserve requirements. See Investopedia's quick notes on the topic below for your further edification. Yet another thread de-railed by your lack of understanding of a topic that you so confidently proclaim yourself an expert. Please, pgabs, let us discuss the real meat here, and not have to bring you up another learning curve. Chuck Schumer contributed in large part to the loss in confidence that spurred the run on IndyMac. There is no disputing that. You simply can't. Liberals, there are severe consequences to your selfish pessimism. Read and learn, pgabs, then apologize. The expansion of a country's money supply that results from banks being able to lend. The size of the multiplier effect depends on the percentage of deposits that banks are required to hold as reserves. In other words, it is money used to create more money and is calculated by dividing total bank deposits by the reserve requirement. The multiplier effect depends on the set reserve requirement. So, to calculate the impact of the multiplier effect on the money supply, we start with the amount banks initially take in through deposits and divide this by the reserve ratio. If, for example, the reserve requirement is 20%, for every $100 a customer deposits into a bank, $20 must be kept in reserve. However, the remaining $80 can be loaned out to other bank customers. This $80 is then deposited by these customers into another bank, which in turn must also keep 20%, or $16, in reserve but can lend out the remaining $64. This cycle continues - as more people deposit money and more banks continue lending it - until finally the $100 initially deposited creates a total of $500 ($100 / 0.2) in deposits. This creation of deposits is the multiplier effect.
What doesn't surprise me is your lack of ability to comprehend English. What you described in your post is exactly what pgabriel described many posts ago, except for the reserve requirement. He was correcting another poster that said that for every $100 deposit, a bank can loan out $900. The long-term effect of a $100 deposit is that it's multiplied into many loans, but the bank itself cannot loan out 9x as many deposits as it has. It can only loan 90%. Given that you couldn't understand that fairly basic argument he was making, it seems the expert here is pgabs, not you. I guess your banking knowledge is no better than your political knowledge.
bwaahahaahahah surely you jest mr. jorge! please do not try to speak on issues like imb if you can't even live in reality. perhaps you will tell us next that fnm and fre are being taken down due to a crisis of confidence and a lack of optimism.
A bank can lend out 90% of EACH deposit, which means that if a reserve requirement is 10%, then that $100 deposit can become $1000 (100/.1) in total deposits. That's why when morons like Chuck Schumer start the grandstanding about how horrible a specific bank's financial condition is, and there is a run on the bank, you end up with more loaned out than you have deposited. I'm going to start a thread in the Feedback section that sets a minimum competence level for posting in a thread. Not sure how we monitor/govern that, but this is just getting outrageous.
However, aren't they allowed to borrow from the Federal Reserve to make up the difference between actual reserves and the required reserve? That's where the Fed's interest rates come into play, because the cheaper it is to borrow money from the Fed, the more you can lend out.
Yes, the bank can get to $1000 *if and only if* each deposit is loaned out and re-deposited into the same bank. But in that case, you the bank has $1000 in deposits - not $100. Here is pgabriel from page 1, describing this exact scenario: this is how banks create money depositor puts 100 in bank, the bank has a liability. keep it simple, it then lends 100 dollars, it now has a 100 asset and 100 liability person who borrowed money buys product, now some company has 100 in its bank account, but depositor at lending bank still has his 100 on account. thats now 200 in money from the initial 100. He used a 0% reserve requirement, but his point was to say that this was incorrect: Banks DO NOT get their money from customer deposits and lend out accordingly. They operate from the rule of "9's" dictated by the Fed - for every 1000 dollars deposited, they are allowed to lend out 9 times that amount, and the return deposits are allowed to be stacked, so in essence with a 1000 dollar deposit the bank can create 100K in real debt. For every $1000 deposited, a bank is NOT allowed to lend out 9 times that - they can only do so if their initial $900 loan is re-deposited, re-loaned, re-deposited, etc. In which case, it's not $1000 being deposited.
tj go back and read the thread, I never said there wasn't a multiplier effect, the movie says that the bank can lend that amount after depositing the 10% money in the fed and and then turn around and lend nine times the amount without explaining how, as if the bank gets the money from the fed to lend. i explained the multiplier, the problem with the way its explained by you is that doesn't happen in the real world that way. a borrower doesn't turn around and deposit lent funds in the bank it just borrowed from. so yes technically if a banks keeps lending out money to be redeposited in the same bank, then yes it can turn 100 dollars into 900 dollars. but in the real world, you buy car with money lent from one bank and car lot pays off loan at another bank, or deposits the money at another bank.
thus the keep it simple comment tj has a hair on his ass about proving me wrong, you have to forgive him
No no no....well, first, yes, it IS true that the bank can loan out 90% on the customer deposit, BUT, the very customer money that is deposited was itself created from the "rule of 9's" from the initial central bank deposit. So, if you open a bank with an initial central bank deposit of 1000, you can create 9000 in money as debt. This NEW money is then deposited into a bank again, and it is THIS money that can created ADDITIONAL, NEW money to the tune of 90%. So this new 9000 loan gets deposited into a new bank, and .9x9000, or 8100 in NEW money can be created by the bank in which the loan was deposited.
Just to note, when I say "central" bank, I mean the Central Bank we all know as "The Fed". This initial money is known as "high-powered" money, which is differentiates itself from customer deposits.
coverage of banking crisis Steffy: Is coverage of banking troubles `reprehensible'? ONE of my first assignments as a business reporter was covering the second failure of Dallas' Sunbelt Savings. I attended a press conference at the Dallas branch of the Federal Home Loan Bank, which oversaw savings and loans. Regulators overseeing the bailout fielded questions from reporters, and the busted thrift's chief executive, Tom Wageman, sat silently in the corner. When reporters tried to ask a question of Wageman, who'd served as Sunbelt's pitchman in its TV ads, the feds answered. Twenty years later, the government is still shielding the banking industry from tough questions. Earlier this week, John Reich, who heads the Office of Thrift Supervision — a bureaucracy that inherited some of the FHLB's responsibilities — deemed media coverage of the banking burnout "reprehensible" in a speech to an industry conference in Florida this week. He blasted reporters for "staking out" banks, interviewing customers and stoking public fears, saying journalists were "seemingly oblivious to the fact that they could drive otherwise healthy banks to fail and push troubled institutions away from potential solutions toward ruin." Where's the supervisor? Banks shouldn't fail just because someone asks questions. If they do, consumers have reason to be worried, even if their deposits are insured. Maybe he doesn't read his own signs. "Supervision" is part of his office's name.Yet where was the supervision of IndyMac Bank, a California thrift that failed this month, and other home lenders who were doling out loans to borrowers who didn't deserve them? Fortunately for Texas, we're on the sidelines of the nation's next great financial crisis. But 20 years ago, we were at the epicenter, and the latest banking malaise shows the lessons from that time were largely ignored by both banks and regulators. With deregulation in the early 1980s, thrifts, which had been primarily home mortgage lenders, plunged into commercial lending. At the same time, Wall Street began shopping brokered deposits, basically big pools of "hot money" from investment funds, seeking the highest interest rates. Quick money In other words, small-town savings and loans found themselves awash in money from around the country, and big-time developers lined up at their door looking for loans. As thrifts wallowed in this new world of easy cash, regulators in Washington faced thinning ranks from budget cuts. After all, "If you deregulate, why do you need regulators?" went the thinking. From its roots in easy money and loose regulation, the S&L crisis grew on a steady diet of inflated property appraisals, fake documentation and, sometimes, outright theft. Taxpayers footed the bill for the bailout, and eventually, the real estate market recovered. In fact, it roared back with a vengeance. Homes became a short-term investment, flipped for a quick buck. At first, would-be home buyers found it harder to qualify for loans because their incomes didn't keep pace with the rising home prices. Lenders turned to subprime financing, which had been the last resort of borrowers with ruined credit. Subprime and its cousins such as Alt-A loans became just another convenient tool with which mortgage brokers could close deals and collect fees, all wrapped in a sales pitch about how rising home prices would make the shaky numbers work. Bad outcome The lenders didn't have to worry if the loans went bust. Their Wall Street buddies had found something far better than brokered deposits: mortgage securities. By bundling these dead-fish notes, Wall Street convinced rating agencies they smelled like Treasuries, and the underlying loans were sliced and diced into a cross-collateralized chop suey. And so here we are, a place not all that different than 20 years ago in Texas. Once again, we face the consequences of easy money combined with lax regulation and the greed of borrowers, lenders and investors. This time, the toxins may be more dangerous because they threaten to poison not just federally insured institutions but government-sponsored mortgage resellers Fannie Mae and Freddie Mac. And once again, accountability gets passed on, from lenders to Wall Street to the government, and then, ultimately to the taxpayers, many of whom will lose their homes while funding to rescue those who started it all. All the while, the regulators sputter and point and blame while shielding the real culprits standing in the shadows awaiting their bailout.
Steffy has some good points, but he does not do anything to support his notion that you can't harm a healthy bank by insinuating to spooked depositors that the bank *might* be in trouble. That sort of thing is in fact irresponsible because it can in fact have a very real and very harmful effect. That said, the real culprit is the notion that 'everyone should be able to have their own home'. Not everyone can afford their own house. Ifn' ya cain't afford it, don't buy it. The real estate market will recover, just like it did 20 years ago, and hopefully this time the lessons stick.
