FRB Commentary 2: Deposit Insurance

More on the weaknesses of fractional reserve banking. The FDIC and deposit insurance and its side effects.

Category:

Education

Tags:

• fractional
• reserve
• banking

[johnnyfenger]

Sal, So the bank pay interest on my deposit? but it can collect interest on up to ten times the amount it pays me interest on?

[siggyboss]

Banks really don't want the property, but the interest on the money they created and lent.

[SomeUsefulIdiot]

@SSedmak

Would you consider speculators nonproductive jobs with that reasoning?

[SSedmak]

Modern finance is just a con job. It's like a hustler on a street corner, except that he wears a suit and works out of a skyscraper instead wearing a trenchcoat and working from a stool and a folding table. Listening to those guys, they're just con artists with a doctorate in BS (and I don't mean Bachelor of Science...)

[SirTenenbaum]

I wonder if Sal is of the opinion that fractional reserve banking contributes to the business cycle à la Austrian School. Of course he may not agree with the Austrian explanation of the business cycle in the first place. Perhaps he mentions this in a related video?

[StAndAl0neCompl3x]

Sal, do you know EVERYTHING??!

[mwong000]

macroman52

U r right -- having insurance doesn't always make one negligent. But it does remove one of the top penalties for being not negligent.

It is hard enough to evaluate a single business. A bank lends $ to many businesses, so the difficulty is multiplied by the number of businesses. I hope this helps.

[mwong000]

@johnnyfenger

Banks do not collect interest on up to 10X the amount it pays u money on.

If u deposited $100 into Bank1, it can loan out $90 of that to Borrower1. Borrower1 deposits that $90 to Bank2, which has to pay Borrower1 interest. Bank2 now lends $81 to Borrower2 who has to pay Bank2 interest. At each level, the Bank(s) has to pays and collects interest.

For simplification purposes, all $ loaned out eventually gets deposited in some other bank.

[macroman52]

@mwong000 I don't think this is relevant to my point that having insurance doesn't always make one negligent. But if you are right that financial risk cannot be evaluated I guess Standards and Poor should go out of business. maybe you are right.

[mwong000]

@macroman52

It is much harder to evaluate risk on a bank, as each bank have many loans, each with different risk. The risk evaluation tends to require local knowledge (eg how valuable is a coffee shop in a town which tends to drink a lot of tea?), which is also difficult for an FDIC to have.

A person is very easy to evaluate, based on his age and driving record -- which are easily obtainable.

[mwong000]

@johnnyfenger

No so. Remember the 10X the initial $100 came from $ circulating back in the system to other people ($90+81+ 72 ..... = $1000) , who then deposit their $ in the bank at the bank interest.

So if the bank pays 5% on deposits, it will have to pay 5% on $1000, not $100