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yurbud Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Feb-07-09 01:31 PM
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basic question on banking
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I always thought banks worked the way Jimmy Stewart descrbed it in IT'S A WONDERFUL LIFE in the bank run scene, when he told people he couldn't give them back their balance because it went out in a loan for their neighbor's house. I thought lending had to be no greater than total deposits.

As I've heard more about fractioanl reserve banking, apparently banks can lend nine times what the have in deposits.

Here's my basic question: if they are lending money they don't have, why do they need to charge interest?

I thought if I took out a loan for say $1,000, the bank broke even when I paid back the principle and made a profit on the interest, so if I paod back $1,100, they made $100 profit.

In reality, they made $1,100 profit since the money didn't exist until they lent it to me.

This is even more infuriating when you think about the amount of interest credit cards charge.

Borrowing money from the mafia is a more honest transaction since they at least have to have the money they lend you.

It seems to me we should either require banks to have deposits equal to what they lend or if that's too big change for them,
Take away their right to charge interest.

They would still make $1,000 on my $1,000 loan since the money didn't exist before they loaned it to me.

Even more infuriating, our paper money is based on this same ponzi scheme. The Federal Reserve, a private bank, prints our money and gives it to government as a loan we must pay back with interest. They made it out of thin air, so they would profit even if we paid them only face value OR LESS.

The treasury makes our coins and that creates no debt apart from the cost of making the coin.

Why don't we make banks work on the same basis as other businesses instead of giving them a license to make money out of thin air? That would probably stabilize inflation more than any interest rate rejiggering by the Fed, which shouldn't exist in the first place.
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