|December 30, 2008
The Problems Associated With Our Fractional Reserve Banking System
Of all of the money currently in circulation in America, only 3% is actually physical money (i.e. cash). The rest of the "money" in the USA is computerized, digital money (please watch video #1 in the "Videos" section of this website for more details).
The American banking system is actually a giant Ponzi scheme which dwarfs the recent $50 to $100 Billion dollar (per various articles) Madoff scandal in New York. While our banks, the "Federal" Reserve, and the U.S. Treasury may legally create money "out of thin air" in our fiat-based currency system (backed by nothing instead of gold, silver, or other hard assets), it may become a very dangerous and risky monetary policy when the capital markets begin to collapse as we are now experiencing with our current Credit Crisis worldwide.
As per Wikipedia, the root definition of Fractional Reserve Lending is as follows:
"Fractional-reserve banking is the banking practice in which banks keep only a fraction of their deposits in reserve (as cash and other liquid assets) with the choice of lending out the remainder, while maintaining the simultaneous obligation to redeem all deposits immediately upon demand. This practice is universal in modern banking. The nature of
fractional-reserve banking is that there only is a fraction of cash reserves available at the bank needed to repay all of the demand deposits and banknotes issued. When fractional-reserve banking works, it works because:
1.) Over any typical period of time, redemption demands are largely or wholly offset by new deposits or issues of notes. The bank thus needs only to satisfy the excess amount of redemptions.
2.) Only a minority of people will actually choose to withdraw their demand deposits or present their notes for payment at any given time.
3.) People usually keep their funds in the bank for a prolonged period of time.
4.) There are usually enough cash reserves in the bank to handle net redemptions.
If the net redemption demands are unusually large, the bank will run low on reserves and will be forced to raise new funds from additional borrowings, and/or sell assets, to avoid running out of reserves and defaulting on its obligations. If creditors are afraid that the bank is running out of cash, they have an incentive to redeem their deposits as soon as possible, triggering a bank run".
When I think of a "bank run", I think of the classic film It's a Wonderful Life which was based upon the era near The Great Depression. Once bank customers think their respective bank is running out of cash, then many of them will go to the bank in order to pull all of their money out of their accounts. Sadly, if too many bank customers withdraw their funds out of the bank accounts, then the bank may run out of cash.
During the normal, boom, capitalistic time periods in American history, the Fractional Reserve Banking System worked quite well. During our on-going Credit Crisis, the Fractional Reserve system may not work very well as there may not be enough cash available to please every bank customer.
As a result, more banks will be forced to liquidate their hard assets (i.e. real estate) for cents on the dollar. We will keep you updated on the best REO opportunities nationwide as they become available. For more ways to find money to purchase these REO foreclosure pools, please visit my other website at www.realloans.com for more information.
Happy New Year to All.