5 ms·

Can you really borrow $9B against $1B at such low rate? Obviously, I'm missing something here.

by Slashed 17y ago

nazgulnarsil 17y ago
existing banks with insiders can. you forming a bank with your buddies can not. otherwise every already existing small bank would be doing this.
- DougBTX 17y ago
  Unless your buddies were until recently bankers, with those connections remain intact </dreamer>
bobbyi 17y ago
Only for certain values of "you" that don't include you.
dpatru 17y ago
This is called fractional reserve banking. It's how fiat money is created. In my experience, if you understand it, you're either benefiting from it and support it, or you're angry about it and a Ron Paul supporter.
- bobbyi 17y ago
  This isn't about fractional reserve banking. If the bank could only lend out 100% as much as it had, it would still be making free money here by borrowing from the government and lending the money back to the government at a higher rate.
  - dpatru 17y ago
    The key to the money-making scheme is access to very cheap money from the federal reserve (what you're labeling as government) and lending it to the government (what you're calling the government.) The fed and the government are not the same thing. If they were, the government would not have to borrow money from the banks. It would just get it directly from itself. So I think this is about fractional reserve banking because this is what enables the borrowing/creation of money at below market rates. If a bank had to buy its money on the open market like everybody else, it would have to pay more than what the government pays for money because it's a greater risk. Without a fractional reserve/fiat money/central bank system, a bank would not be able to borrow money at essentially 0% in a credit shortage.
    - ars 17y ago
      Sorry, but you have no idea what you are talking about. That is not fractional reserve banking. Maybe go and actually read what it is before posting about it?
      - mattmaroon 17y ago
        Reading and thinking are hard. Understanding the complexities of our global financial system is even harder. Repeating economic "wisdom" you gleaned from a YouTube video of an obscure doctor-turned-Congressman that made the front page of Digg, then assuming everyone who doesn't agree with you is either uninformed or evil, is easy.
        deleted 17y ago
        [deleted]
      - xster 17y ago
        Would you care to elaborate more about why fractional reserve banking isn't the primary satire of the article? Because the more I read, the more I frown at your lack of distinction between the bond selling government and the money printing fed
        vitaminj 17y ago
        Fractional reserve banking refers to banks holding only a fraction of their deposits in the form of liquid reserves, and lending out the rest. The scheme in the article is about borrowing $9b from the Fed with $1b equity at a low rate, and then selling it to the government for a higher rate. So it's straight up interest-rate arbitrage. In fact there's not even a claim in the article that the $1b in equity are deposits, so this bank is most likely not even a commercial bank. For all intents and purposes, this appears to be an investment bank, and it's very unlikely that it'd even have an account with the Fed to borrow that kind of money.
    - bobbyi 17y ago
      If money flows from one part of the government to another, there is no reason why it wouldn't flow through private banks. The government isn't one monolithic agent with a single (overdrawn) checking account. Whether you count the Fed as being within "the government" is a complex issue but ultimately it is just semantics and doesn't change the nature of the situation. They are in a grey area with some private and some public characteristics, like the post office.
- anamax 17y ago
  Interestingly enough, fractional reserve banking is not significantly different from the way any other business works. If I loan money to a business, that business almost always does something with the money, like buy stuff or pay expenses. It doesn't keep the money sitting around to pay me back. If things go wrong, the biz won't have money to pay me back. Let's compare that with the Wikipedia description of fractional reserve banking. "The fact that banks are required to keep on hand only a fraction of the funds deposited with them is a function of the banking business. Banks borrow funds from their depositors (those with savings) and in turn lend those funds to the banks’ borrowers (those in need of funds)." Yes, there's the quibble about "demand deposits" vs other kinds of loans, but that doesn't really have anything to do with the expansion in the actual money supply. Yes, I know that the article defines "money supply" as "cash plus demand deposits". However, as a loan matures, it becomes closer to a "demand deposit" and eventually becomes one. The original money, meanwhile, has already left the biz. Maybe some came back, maybe it didn't. Either way, the only thing that's there for sure is the obligation to pay. Note that a bank has loans as assets. A biz has whatever it got in return for the borrowed money that it spent. Either one can go bad.
  - DougWebb 17y ago
    The big difference is that when a bank loans money to a business, the business can bring in revenue from other parts of the economy to enable it to pay that loan back. When the Fed loans money into the US economy, there is no place to pull money from to pay the loan interest; only the principle can be repaid. The loans can only be repaid with hard assets (gold, real estate, etc) or by inflating the currency sufficiently to devalue the principle that was borrowed to below the repayment cost.
    - anamax 17y ago
      > The big difference is that when a bank loans money to a business, the business can bring in revenue from other parts of the economy to enable it to pay that loan back. That's not a difference. When a biz spends borrowed money, it does so with the expectation that money will come back, just as the bank expects that its loan (of deposit money) will be repaid. In both cases, the bank/biz sent borrowed money out the door and only has an expectation that sufficient money will come back. (Yes, deposits are borrowed money.) The Fed is different because it gets to print money. We're talking about ordinary banks here. Yes, banks can get into trouble if its lenders call at an inconvenient time, but so can biz.

Can you really borrow $9B against $1B at such low rate? Obviously, I'm missing something here.

by Slashed 17y ago

Can you really borrow $9B against $1B at such low rate? Obviously, I'm missing something here.

existing banks with insiders can. you forming a bank with your buddies can not. otherwise every already existing small bank would be doing this.

DougBTX 17y ago
Unless your buddies were until recently bankers, with those connections remain intact </dreamer>

bobbyi 17y ago

Only for certain values of "you" that don't include you.

dpatru 17y ago

This is called fractional reserve banking. It's how fiat money is created. In my experience, if you understand it, you're either benefiting from it and support it, or you're angry about it and a Ron Paul supporter.

bobbyi 17y ago
This isn't about fractional reserve banking. If the bank could only lend out 100% as much as it had, it would still be making free money here by borrowing from the government and lending the money back to the government at a higher rate.
- dpatru 17y ago
  The key to the money-making scheme is access to very cheap money from the federal reserve (what you're labeling as government) and lending it to the government (what you're calling the government.) The fed and the government are not the same thing. If they were, the government would not have to borrow money from the banks. It would just get it directly from itself. So I think this is about fractional reserve banking because this is what enables the borrowing/creation of money at below market rates. If a bank had to buy its money on the open market like everybody else, it would have to pay more than what the government pays for money because it's a greater risk. Without a fractional reserve/fiat money/central bank system, a bank would not be able to borrow money at essentially 0% in a credit shortage.
  - ars 17y ago
    Sorry, but you have no idea what you are talking about. That is not fractional reserve banking. Maybe go and actually read what it is before posting about it?
    - mattmaroon 17y ago
      Reading and thinking are hard. Understanding the complexities of our global financial system is even harder. Repeating economic "wisdom" you gleaned from a YouTube video of an obscure doctor-turned-Congressman that made the front page of Digg, then assuming everyone who doesn't agree with you is either uninformed or evil, is easy.
      - deleted 17y ago
        [deleted]
    - xster 17y ago
      Would you care to elaborate more about why fractional reserve banking isn't the primary satire of the article? Because the more I read, the more I frown at your lack of distinction between the bond selling government and the money printing fed
      - vitaminj 17y ago
        Fractional reserve banking refers to banks holding only a fraction of their deposits in the form of liquid reserves, and lending out the rest. The scheme in the article is about borrowing $9b from the Fed with $1b equity at a low rate, and then selling it to the government for a higher rate. So it's straight up interest-rate arbitrage. In fact there's not even a claim in the article that the $1b in equity are deposits, so this bank is most likely not even a commercial bank. For all intents and purposes, this appears to be an investment bank, and it's very unlikely that it'd even have an account with the Fed to borrow that kind of money.
  - bobbyi 17y ago
    If money flows from one part of the government to another, there is no reason why it wouldn't flow through private banks. The government isn't one monolithic agent with a single (overdrawn) checking account. Whether you count the Fed as being within "the government" is a complex issue but ultimately it is just semantics and doesn't change the nature of the situation. They are in a grey area with some private and some public characteristics, like the post office.
anamax 17y ago
Interestingly enough, fractional reserve banking is not significantly different from the way any other business works. If I loan money to a business, that business almost always does something with the money, like buy stuff or pay expenses. It doesn't keep the money sitting around to pay me back. If things go wrong, the biz won't have money to pay me back. Let's compare that with the Wikipedia description of fractional reserve banking. "The fact that banks are required to keep on hand only a fraction of the funds deposited with them is a function of the banking business. Banks borrow funds from their depositors (those with savings) and in turn lend those funds to the banks’ borrowers (those in need of funds)." Yes, there's the quibble about "demand deposits" vs other kinds of loans, but that doesn't really have anything to do with the expansion in the actual money supply. Yes, I know that the article defines "money supply" as "cash plus demand deposits". However, as a loan matures, it becomes closer to a "demand deposit" and eventually becomes one. The original money, meanwhile, has already left the biz. Maybe some came back, maybe it didn't. Either way, the only thing that's there for sure is the obligation to pay. Note that a bank has loans as assets. A biz has whatever it got in return for the borrowed money that it spent. Either one can go bad.
- DougWebb 17y ago
  The big difference is that when a bank loans money to a business, the business can bring in revenue from other parts of the economy to enable it to pay that loan back. When the Fed loans money into the US economy, there is no place to pull money from to pay the loan interest; only the principle can be repaid. The loans can only be repaid with hard assets (gold, real estate, etc) or by inflating the currency sufficiently to devalue the principle that was borrowed to below the repayment cost.
  - anamax 17y ago
    > The big difference is that when a bank loans money to a business, the business can bring in revenue from other parts of the economy to enable it to pay that loan back. That's not a difference. When a biz spends borrowed money, it does so with the expectation that money will come back, just as the bank expects that its loan (of deposit money) will be repaid. In both cases, the bank/biz sent borrowed money out the door and only has an expectation that sufficient money will come back. (Yes, deposits are borrowed money.) The Fed is different because it gets to print money. We're talking about ordinary banks here. Yes, banks can get into trouble if its lenders call at an inconvenient time, but so can biz.