Wednesday, February 9, 2011

How Fractional Reserve Banking is Robbing Us

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Our public schools and Universities in general do not give us much of a real financial education. Sure many can learn to balance a checkbook or learn to stay on a budget, but when you get down to the nitty gritty of how the banking system works, and more in-depth topics most people have little to no understanding of the workings of these financial institutions, and how they are set up to benefit the banking elites and institutions on a scale above and beyond a healthy risk taking profit.

What is Fractional Reserve Banking, and why should I care you may ask? As you shall see this deceptive practice of lending is a swindle, usury on the average folk because they don’t understand how it works. It robs from us through lending privileges granted to banks, on money that is not theirs, but also destroys purchasing power and erodes savings accounts.

Let’s start with the basics. For instance lets pretend that you have a 30-year mortgage on a say $300,000 home with $50,000 down. Say your property taxes are 1.25%, PMI insurance is 0.5% (which is 31 monthly payments), and you took out this loan in January 2011. Here’s the breakdown of your payments.

Total Monthly Payments = $1,654.55
Total Interest Paid = $229,910.29
Total Tax Paid = $112,500.00 (Your rent dues on your property to government)
Total PMI (31 months) = $3,229.17
(NOTE: PMI insurance is a scam banks use to get you to insure them if your down payment is less that 20% of loan in case of default, they are now insured from you paying their insurance for them)
Loan Payoff Date = December 2040

Total Amount of Loan Payments = $595,639.46

Now in this example, that is some major profit taken on a loan that amounted to $250,000 in which you had $50,000 down already, it’s more than double your initial investment. Not to mention maintenance and never ending tax payments (rent dues) to the government on your property.

It gets even worse

Now if looking at that example and realizing many of us are in this situation that banks make out fairly good off the so-called risk involved. You pay their insurance for a default, and they loan you money not having much to worry about since the PMI insurance covers them in case of default. But that’s not the half of it.
Let’s get to fractional reserve banking now. Fractional Reserve banking is a practice in which banks are given the ability to expand the money supply out of thin air 9 times the amount of reserve notes they have on hand. So for a simple example, lets say a bank has $100 dollars on deposit on its books. It can now instantly create a loan in excess of $900 extra dollars to be lend out. This money was not on their books; they had no possession of it, and was created out of thin air the moment the loan papers were signed. So the banks not only make outrageous profit on little risk from your mortgage from above with you paying PMI insurance, they also never even had the money they loaned you on their books until you signed the loan papers. They had $100 dollars but loaned you a $1000.

Now this is where it gets extra worse, the $900 dollars in excess of what they even had on hand, is to be paid back with your monthly payments each month. So you are not only expected to pay the principle back on the loan made, but interest payments on top of the money that was just created. They don’t just charge you interest on the $100, which would be a fair deal, but they charge you interest on the $900 as well.
In the example above, you now are paying the bank back a profit above the $225,000 principle on the loan back in which they only had $25,000 in excess of $233,139.46 in interest payment on this total loan.
That’s a total profit for them of: $458,139.46, profit made on money they never had or owned, on a $25,000 investment, only by legal right to create it are they able to profit on this. If you default, you paid the PMI insurance to cover their loan, and $112,500.00 in property taxes is your rent dues to the government in order to rest your head at night.


I can hear many now saying, wow, this is completely unfair and usury. Well it is, but to add insult to injury it doesn’t end there. This process done over and over again and destroys your purchasing power by causing inflation.

Inflation is due to the printing of money or expansion of the money supply. When a new dollar is created, it takes away value from the pervious dollar in existence. Say for a simple example we have $1000.00. Now the banks create $9000.00 more from that $1000.00 on books, which increase the money supply by 9 times what it was. This is the cause for why we have inflation. Now the same goods and services are chasing larger amounts of dollars in existence, putting downward value on the previous dollars ($1000.00) and raising prices of all things purchased. This is why we have a very low savings rate because it can’t keep up with the level of inflation. With a sound money system backed by gold and silver, this sort of manipulation and expansion of the money supply couldn’t happen unless new reserves of the metals were mined into existence. Inflation from the new metals would hardly affect the money supply that drastically over time and would be very unlikely we would find enough to cause major inflationary problems. The money in savings accounts could be used then by banks for loans made, with interest attached, and a reasonable profit made for banks, and savers for lending the banks money to use for their loans.

Can Fraction Reserve work fairly?

Many critics of not having fractional reserve lending say it would limit growth, by not creating new dollars for investments having static money supply cripples an economy by limiting it’s expansion. There are many schools of thought on this, and fractional reserve banking may work, but not in it’s current form.
What do I mean? Well a restructuring of this system into a workable, and reasonable system for the citizens, not the bankers would need to be applied. Say we agree as a society that we want a fiat fractional reserve banking system, and except a certain amount of inflation or erosion of purchasing power and savings for the overall benefit of the economy. Well the real trick is taking the profit out of this system and bankers hands. If we are to expand the money supply through this system, then the bankers should not profit from it, and the excess money should not have to be paid back to them since it was never theirs.

Bottom line

No matter what system we choose as a society, the main thing we need to be concerned about is that the banking institutions do not profit off our hard labors to make profits on something that never belonged to them in the first place. There is much room for discussion as of how we recreate this or go back to Gold standard, but the banking industry currently profiting from this, needs to end.