Banking 8: Reserve Ratios

[diratoba]

Instead of 500/700 shouldnt it be 200/400?? Since the bank doesnt have the 300 they already gave to C????

[MrPEDOCTOR]

Thanks for the video.

[ParaKnox90]

If they taught people that removing money out the bank all at once is bad... people wouldn't do it and therefore banks don't get bank run?

[manofbusiness91]

@ParaKnox90 same thing could be said bout the stock market, individuals have a me proirity so its just not the way things work

[IvanAndreevich]

Why should there be confidence in a system that is ALWAYS insolvent at any given moment in time? I don't see how having $ in the future is being solvent today.

[clray123]

@IvanAndreevich You confuse "insolvency" with "illiquidity". The confidence in banks is justified because most people don't need their money at the same time - if they did, they would just keep it to themselves. By putting money into a checking account you are essentially making a bet that the collapse of the banking system (including FED protection) is less likely than, for example, having your gold stolen from your home. From a statistical perspective, that's quite a reasonable bet.

[IvanAndreevich]

@clray123 Fair enough. I know the difference, I misspoke.

[badjouras]

@Luigi84289 "The form of debt involved in

banking accounts for a large

proportion of the money in most

industrialised nations (see

money, broad money, and

demand deposits for a discussion

of this). There is therefore a

relationship between inflation,

deflation, the money supply, and

debt." from en.wikipedia . org/Debt

[darkdavegmail]

I hate you Sal, tyoure such a phoney. Youll soon get what u deserve.

[Sheediva1]

The word is getting out. :8:)

[sudeepshroff]

option 1:

It can lend money up to 10,000 dollars. So that total cash and lending ration comes to 10%. I think your video explains it this way.

option 2:

It has to keep 10% of 1000 dollars as reserve. That is 100 dollars. And it can lend 900 dollars as loan.

I hope you have understood my query. I think the option two is right. Can you explain?

[sudeepshroff]

Hi Sal,

I like your videos and come back to them often to learn and grasp the concepts.

What I am stuck at is this concept of Reserve Ratio. I have two concepts going on in my mind. Need some clarification.

Say a bank 'A' has cash with it (that includes demand deposits and time deposits) of about 1000 dollars. How much lending it can do on that day (moment!). Reserve requirement is 10%.

[See the rest in my 2nd comment as I am going over 500 characters]

[xXxSHOOPIExXx]

Gold is an illusion of wealth, it is not wealth in of itself.

[manilaenglish]

Reserve lending is nothing but accounting trickery. Really there's no reason to have a reserve at all. Just print the money you want to distribute and don't allow loaning money from deposited money while telling the customer their money is still there. Controlling the amount of new money printed and removing it through taxes accomplishes the same thing as reserve lending without the dishonesty and risk of collapse.

[ananiasacts]

@manilaenglish, But all we actually want to avoid is being on the hook for the liabilities of banks, which means we need only require them to remain fully insured. This suggests to me that our banking system isn't as important to regulate carefully as our insurance industry is. They'll be far better regulators of the financial services they cover than we could ever be. We need only avoid allowing the liabilities of insurers to grow beyond their cash equivalent assets.

[manilaenglish]

@ananiasacts "avoid allowing the liabilities of insurers to grow beyond their cash equivalent assets."

That could work! Good thinking.

[manilaenglish]

The whole concept of reserve ratios are completely criminal!!! Loaning out your money to someone else and then lying about how much is available in the account. The bank would NEVER be able to give back everyone's money EVER.

What you're doing is REQUIRING that ALL PEOPLE only spend 20% of what they have. Except that's not what happens. The poor people's money is taken and given to the rich as loans. So the poor people suffer while the rich get protection from runs on banks.

[manilaenglish]

Oops. I meant people can only spend 10% (or whatever the reserve requirement is) and the middle class gets kicked in the teeth when they actually want to use more than the reserve limit. The rich who own the banks and loaned out the middle class' money get government protection because they are in on the lie while the middle class becomes a poor class because that money doesn't really exist.

[LuqmanNaq]

@manilaenglish Yep... it's basically a pyramid scheme, or a confindence trick. The smoothness of the system is based on people having confidence in the bank, if they don't a do a run it come crashing down. Ditto if more money (via credit expanision) isn't continuously created to fill up the gap that exists each time a loan is created with interest attached. It's all based on a confidence, a time lag, and credit expanision. Only ivory tower intellectuals could think that it's a good idea.

[manilaenglish]

@LuqmanNaq I have joined the RBE Movement. Google RBOSE. Resource Based Open Source Environment. We are working toward removing money & trade from society by declaring all resources on Earth the property of all of society to be managed intelligently without exceeding the carrying capacity of the Earth. Everything that can be automated, we will automate. We will produce everything ourselves and give every thing away for free. No more intellectual property no distribution control.

Join us.

[badjouras]

@manilaenglish That has been tried a few times - it's called communism. It doesn't work, you can't force people to be completely selfless and you can't just expect them to turn that way. I don't know why you Zeitgeist fans like to call "Resource Based Economy" when the idea is not new. I guess it's just to avoid the US stigma with communism.

[manilaenglish]

@badjouras I am not a Zeitgeist nor Venus Project fan. Those are dictatorships. Of course you wouldn't know the difference between various philosophies because to you everything is communism.

[clray123]

@LuqmanNaq No, it's neither a pyramid scheme nor a confidence trick. As long as there are assets backing the balance sheet (as per Sal's example - the loans are presumably collateralized, so the bank could in fact pay everyone's liabilities, just not immediately). And EVERYONE who transacts with a bank realizes it and agrees to this arrangement! (except for the brainwashed conspiracy theory dummies, who are more than welcome to take their assets elsewhere)

[LuqmanNaq]

@clray123 There was only so long we could base our economic system on the constant expansion of debt before it began to collapse and we reached that point in '07-'08. To stubbornly defend a collapsing system is irrational. How is a economic/monetary system based on exponential growth in a finite world sustainable? How can you defend a system that requires the constant expansion of debt to remain solvent? A steady state economy is the only rational system. /watch?v=Q5dDQQ76zTc

[clray123]

@LuqmanNaq The current system requires neither "exponential growth" nor does it require a "constant expansion of debt". These are confused ideas spread by Zeitgeist and co. In fact the money (debt) amount in the system can be easily shrunk in face of declines in productivity. However, unless your standpoint is that there are absolutely no worthwhile projects left to be done in this big world (commit suicide then), there is little reason to be concerned about an insufficient growth potential.

[LuqmanNaq]

@clray123 "unless your standpoint is that there are absolutely no worthwhile projects left to be done in this big world" If businesses, gov's, individuals and banks are simultaneously encumbered with too much debt, assets depreciating and begin deleveraging then credit contracts. It begins a deflationary collapse (that's what happened in '08). What's keeping things limping along is the trillions that have been pumped into the global system but that too will fail. Also cheap oil is gone

[clray123]

@LuqmanNaq As for the "system collapsing", the only thing I can see is hiccups caused by banks abandoning due dilligence (in mistaken hope of externalizing risks) and pumping money into many worthless projects over the past few years (housing bubble in US, mad EU subsidies for corrupt countries). It doesn't mean that really worthwhile projects don't exist, just that the incentives for funding them have been temporarily disabled, but as we see the system is smart enough to correct such idiocy.

[high5flyer]

In this example the Reserve Ratio is 20%Having a bank run is not a question of the percentage of customers coming in to claim their "money." For instance, 20% of the customers could potentially be the ones with the least stake in the bank. It is more of a question of the amount of "money" being pulled out and not the amount of customers coming in to claim their "money." I know you understand this and I am just clarifying your statement.

[BMendenhall84]

never stated it was 80% of customers. he states 80% of value being removed. he states the reserve ratio is gold over demand. not gold over customers. it doesnt matter if 1 person comes or 9000... its based on demand. which he clearly states. Im not sure why you think he means customers. in his fake situation, you see person a respresents x value which is why he states customers. but he is referring to the value behind that individual

[high5flyer]

I agree with what you said. The 7:45 mark is what I was referring to. He says, "if no more than 20% of 'these people' (customers) don't demand their money back, the bank is going to have liquidity." I know what he was talking about & he definitely knows what he is talking about, but the the novice might not. I was just clarifying it for anyone watching the vid & reading the responses.

[high5flyer]

I don't care about his "fake situation". In real life customers are going to have different amounts of deposits so its not about the % of customers but the % of deposits that are taken out at a given time. W

[high5flyer]

When he keeps saying "these people" (customers), I could see how the student might get that confused, thats all. Good vid anyways.

[BMendenhall84]

ok, true but if you have to re-explain what the man says then where does that lead? If one cant understand 10, dont try to explain 100.... i find what he stated 100% clear and shouldnt be overlooked or restated... it was precise and accurate...dont try to change his words becuase someone doesnt understand why the difference between represented value is and actual value

[blahdelablah]

@khanacademy

You said in this vid that Federal Reserve Ratio is 10%. Going back to vid 3 of this series, you say (paraphrasing) the bank's wealth exists in the fractional reserve system as long as investments boost the economy by a sufficient amount. So as far as I can see that means the economy of a society has to grow by (100-10% =) 90% in productivity for the banking system to stay solvent in terms of real wealth. Isn't that a hugely unrealistic risk?

[trotskij4]

In reality the growth should be 10 ->> 100 = 1000%

because you start from 10 and you should arrive to 100, that meens 10fold increase :)!

long live GDP growth......

[BMendenhall84]

its not a ten fold increase.... 2 fold is 10 x's 10= 100 3 fold is 10x10x10  10 fold is 10 x10, ten times...

[blahdelablah]

@khanacademy

You said in this vid that Federal Reserve Ratio is 10%. Going back to vid 3 of this series, you say (paraphrasing) the bank's wealth exists in the fractional reserve system as long as investments boost the economy by a sufficient amount. So as far as I can see that means the economy of a society has to grow by (100-10% =) 90% in productivity for the banking system to stay solvent in terms of real wealth. Isn't that a hugely unrealistic risk?

[caveltor]

Sal, you say at the end that the bank has more assets than liabilities. Does not the bank have exactly the same amount of assets and liabilities? until it starts making some interest?

[likeriver]

wait... at 5:05 why does the bank have to pay back a loan? I thought they were giving them out.

[Evulmeh]

checking accounts are loans from people to the bank.

[BlindWebster]

Bank Runs are good. Endlessly building confidence in malinvested banks is bad. Banks that are not overextended would be survive, others would fail

[Evulmeh]

Not really. A bank that would use a healthy fractional reserve of, let's say 20%, can still be hurt by a bankrun on other banks.

If other banks start to get a bank run, public might fail to trust the entire banking system, and a run can begin on banks that are very responsible.

[girlinsanfrancisco]

why are some of the videos not available anymore?

[BlindWebster]

reload it

[luke2468013579]

so have they printed more money than they have in gold?...thus are able to lend more than reserves?

[antsy9000]

there is no gold, its all credits now. watch the fractional reserve video in this series.

[Luigi84289]

@antsy9000 Actually it's not credits it's debt. Every dollar is printed with interest. Everyone is just trading debt around. US citizens have no real money anymore unless they own gold. Look at how much gold keeps increasing in value. The dollar is nearly kaput. It takes over a 1000$ to buy 1oz of gold. 1oz of gold used to be 1 dollar. 1 dollar today is worth 4 cents of a 1913 dollar.

[parklinkin52]

@Luigi84289 What the hell are you talking about

[Luigi84289]

@parklinkin52 The nature of the dollar it didn't come off that well because I was high as fuck when I typed that but that is what it is. This whole thing is just a big Ponzi Scheme. Paper is worthless because it is abundant so when it is used as a medium of exchange the Government in a position of superiority over us or the FED and the Government combined in this case prints note after note until they hold all of our wealth but what is necessary for us to survive.

[Luigi84289]

@parklinkin52 If I have 20 dollars and there are 800 in the economy I have a certain percentage of wealth. Now if you add 500 more dollars but only give me an extra 5 then there is a newly created disparity between the amount of wealth, that is purchasing power that I had before and have now. This is what the Government does. That Gold retains it's set value as there is always X amount of Gold.

[Luigi84289]

@parklinkin52 Now combine that with the fact that each dollar is a loan itself with interest and you have a self destructive system. This is why prices keep going up. If you wanted to pay for something in water for example you would have to give someone an insane amount to buy anything since it is everywhere. The value of money comes down to scarcity. What is scarce is fought over. Hell scarcity is what pushes people to murder each other whether it be land, resources or what have you.

[badjouras]

@Luigi84289 Yeah, I believe it's called inflation... Salaries today are also much higher than in 1913.

[manilaenglish]

@badjouras Inflation is caused by the interest of the debt based monetary system.

[yasaswy]

@manilaenglish Even money comes from debt dude.. think of it.. our loan is shown as an asset to someone and will be given loan... so on..

[Luigi84289]

@badjouras Debt has nothing to do with inflation. Credit and inflation (expanding money supply) are two different things.

[jackuy12345]

no if u printed too much money than the gold u got then money would be useless everything will rise and the country will fall

[dontblamethemessenge]

if the reserve ratio is 20 percent.

And if some people want to remove their savings from the bank.

In order to remain on 20 percent, must the bank get back their lendings, so they musts request people that have loans at the bank to bring it back?

[draggeddownthehole]

Yes, and that's called deleveraging and it contracts the money supply. That's what happened and boosted the demand for the US dollar.

[dontblamethemessenge]

In fact the bank does not need a vault.

Because it is all numbers on a computer nowadays

[ariesas]

I love those, especially bank notes of SAl Bank:D

[pongman]

Thank you.