How Banks Make Money

Why would Susie deposit her loan into her bank?
 
I would think she took out a loan to spend it.

She puts the money back into the bank for illustration purposes. It lets us easily add up the result. If she spent it, it would exist, but in a different place.

Mark M. This was for simplicity's sake. They could have said that Susie buys a radio at Walmart and Walmart, then, deposits it in the bank.
The bank do not really make money out of thin air, the central banks does. Sort of. What happens is that the banks plays out the loan-deposit cycle until most of the money is in loans. Then, if the deposits withdraws the loan is still out. The banks earn interest on the loans but the loans have no backing. When everything is paid back the whole thing vanishes. There is no inflation there caused by private banks. What happens, if something happens that causes people to withdraw their money from accounts, now the bank is unable to meet the money demanded by depositors. I introduce to you the discount window. The banks borrow money from the federal reserve who creates money and thus increase inflation. It is like going to vegas and the general public guarantee your bets. You cannot loose either way.

Assuming total money in the whole economy is $100, how the money able to expand when the bank simply loaning the same amount of $100? I believe the bank will put the $100 as reserve and creates new money equal to 90% from the original sum of $100. Only then money can expand into $190.

Thank you for helping to educate all of us with the exact details of how we are being robbed, by our current economical structures.
Love-Light, Nova Cynthia
http://novacynthiaart.blogspot.com/

I originally posted this article for the 99% to read on my Arts Blog Nova Cynthia Art on July 7th 2009 with not one response. So I am reposting this Article today Nov 27, 20011 at Nova Cynthia Arts (Please note the Name Change)! MAYBE NOW the 99% are ready to respond read it and make educated choices around banking practices? http://www.novacynthiaarts.blogspot.com/

Hi! Thank you so much for posting this...way back. I know how you feel, as I have been telling people about this scheme for almost a decade, with no response. Let me send this out again and see what happens. Take care.

U R Welcome and I am soo glad to hear you too are going to send it out again to! You know it's what we do; plant the info & maybe it take root & grow, smiles and encouragement http://novacynthiaarts.blogspot.com/

But if you don't like it, there's nothing to stop you keeping your money as cash in your house.

Nice article; I think it's very important that everybody understantds this money creation mechanism through loans.

I think that there's an error: government DOES NOT print our paper money. It's the FED that does that, and buys interest-bearing securities from the government with these notes it prints. This is of paramount importance, being the cause of the coming into existence of the public debt.

The Fed does not print the money. The Bureau of Printing and Engraving prints up the paper money and this paper money is sold to the private Federal Reserve per cost of producing the paper. Ex: is The fed buys a $100 dollar bill for 10 cents, a $10 dollar bill for 10 cents, a $ 10 dollar bill for 10 cents. The Federal Reserve Act of 1913 gave the orders to print the paper money aka federal reserve notes.

If you don't like how banks make money off of you to pay their return commitments to their investors from who knows where than I would encourage you to look at http://www.commongoodfinance.com to learn about a bank model that will be chartered to give most of it's profits to the common good. It'll use a democratic process for sustaining communities plus create a local currency that is quite the same as the story told in this article. A local currency will remain flowing in your community turning over many times more than your loan at a traditional bank. Yes! Magazine featured an article about Common Good Finance in May, 2008. http://www.yesmagazine.org/[…]/common-good-finance

A nearby county just unveiled their Mountain Money. http://scseed.org/[…]/mountain-money.php

Thank you for the article. The question I have now is how do we change the system? The Federal Reserve is no more a government agency than Federal Express is. It is an institution owned by bankers for bankers. They print our money and buy bonds with it (charging us interest) and also control the interest rate. It is a perfect cabal, and as long as it exists, we will always be sailing into a headwind.

well, YES! did a whole print magazine issue on the New Economy: http://www.yesmagazine.org/issues/the-new-economy, and has been publishing online articles highlighting all the possibilities from local and state owned banks to business cooperatives and more

This is the greatest fraud perpetuated on the ordinary man that most people just don't understand.

"Give me control of a nation's money and I care not who makes it's laws."-- Mayer Amschel Bauer Rothschild

The New World Order is in progress.

I believe the article is well intentioned but quite incorect. Banks create money based on their capital not on the amount of cash. Yes, banks have to maintain a small amount of cash mainly for the customers who may need the cash, but cash is not the factor when making out a loan. The lending or rather credit creation is ruled by Capital requirements not Reserve requirements. These rules have been developed by Bank for International Settlements in Basel, Switzerland.

I believe the article is well intentioned but quite incorect. Banks create money based on their capital not on the amount of cash. Yes, banks have to maintain a small amount of cash mainly for the customers who may need the cash, but cash is not the factor when making out a loan. The lending or rather credit creation is ruled by Capital requirements not Reserve requirements. These rules have been developed by Bank for International Settlements in Basel, Switzerland.

Anyone who charges interest can also create money out of thin air.

In fact, anyone who provides a service (labour) can make money out of thin air, they are creating money from their own unused time.

Banks also make money through investing in FOREX, insurance, hedge funds, stocks, and bonds. If the banks relied only on your money, they wouldn't be able to stay in business.

I won't even try to explain how our financial system works because I would have to write a small book to do that.

However, if your point is to let people know that there is no 'real' asset based money, then you should just point out to he investment banking, not commercial banking.

In essence, commercial banking that you are describing here has almost no problem if you let it be. In 1920s when market crashed, it really wasn't the commercial banking that caused the problem. It was the investment banking and overinvesting done by average joes like you and me.

When market crashed in late 2000, it was very much same thing that happened in 1920s when stock market crashed. But this time, it wasn't the stock market, it was real estate market. FDIC should be able to sustain much of the damages to commercial banking if same thing would happen, but then you saw that when real estate crash happened in late 2000, it was really the Neo Keynesian economic mind set that we have altered the outcome. However, the whole real estate crash probably happened because of the Neo Keynesian macroeconomics theory.

Why would I bring all this up? Well, money is created out of thin air llike you have said, but not by commercial banks. The example that you provided is too simplified and only thing that you really show is how commercial banking is nothing more than consistantly mimicking multiplier effect. I would say it is not a bad thing when we are not as globalized as now.

Commercial bankers do heavily depend on your deposit and small banks live and die by it. However, bigger banks such as JP Morgan Chase and Citi became, at one point, commerical and investment banks. At least they had variety of sources of businesses. For banks like Lehman Brothers, well, they were full investment bank.

Here comes the real issue with our current system. Even though big and all out investment banks have been fallen, they are not gone totally. Even though they can no longer do business as they did before, they can still borrow money!! Fed will always come out with discount rate for banks to buy. Do you ever wonder why we, as consumers, have to pay high insterest rate when Fed has been keeping the short term rates to 0% or near? Well, that discount rate is what banks get and that is why they play with.

When you take a mortgage in current market, you probably get somewhere from 3+ to 5% rate depending on your qualification. Well, when your mortgage company underwrite your loan they secure the loan amount based on current discount rate. As so, you can shop around with mortgage companies that will charge you less for percentage or basis point, so that you will have lower interest rate. As so, your mortgage company or the bank secured the funds from the market at the current rate and gave you a jacked up rate so that they make money on top of it. So you wiil be paying both the mortgage company and the market funds. So, you have to ask yourself. Where did the 200K mortage that you just took out? Well, it comes from the the good ole government. I don't care who prints the money or who controls the money supply, at the end, government in general is the key factor.

Now, in recent years, the biggest issue was and still is the swapping of these investments. Meaning, your bank just invested 200K on you, but it really does not make much sense to keep your investment for up to 30 years. It's just not a smart move. So, what they do is they will package up your loan with other loans and sell it. If it is a quality loan and worth holding on to for awhile, then they will keep it under their book. However, they need to move some of these investments so that they have more capitals to invest, so they can make more money. As so, they will sell your loan with others and spread them out. From there it gets more complicated. From banks to banks, they all buy investments from each other. As so, they create a multiplier effect, but not really. What they are actually doing is that they are causing a inflation. All these investment banks care about is short term profit. They have levelized their books each month and they will continue to make money. However, banks are using each other as collateral. Which means that one big bank loses money, then other big banks next to it will lose money as well since they are spreading the risk too wide and too much.

I may have been a bit scattered, but I hope you can make the distinction between commercial banking and investment banking. Commercial banks had their hands on it, but they did not create the problem and their significance is too isolated in our financial market (meaning their investments are not spread out too much) to make any demages and even create money out of thin air. Even though it is not true example of multiplier effect, but what commercial banks do with deposit funds is not a bad thing. They help you get a loan while caring whether you will fail to make the required payments or not. Of course, bigger banks do play different role, but not like the one you have explained above.

Only thing I can say is that we got into our current financial system and it is not something that you can get out of it!