Lesson 2 - The Federal Reserve System Explained (pt. 1)

http://www.federalreserve.gov/

Category:

News & Politics

Tags:

• The
• Fed
• Federal
• Reserve
• Bernanke
• Dollar
• Euro
• Obama
• Inflation
• China
• Debt
• Sound
• Money
• zeitgeist

[lambedan]

Banks can only lend out 90% of our money!

Thats comforting.

[BasicEconomics]

Believe it or not the US 10% reserve ratio requirement is very conservative. Most nations do not require banks to have a reserve ratio. In the Euro zone the ratio is 2%

China has one of the highest ratios at 15.5% so their banks can lend out 84.5%

Banks need to loan out money to business and industry so they can start new ventures, expand employment and create wealth.

Make sense?

[lambedan]

I understand that, they need to be able to make money, but only 10% sounds risky. Although maybe in practice it's not too bad.

I know with fractional reserve banking 10% leads up to 10 times the money being lent out. So $100 can be lent out up to $1000. If a small amount of those loans fail or if a bank run happens then there will be problems.

[BasicEconomics]

Well US banks are FDIC Insured.

One could make the argument this form of government intervention causes banks to be more lax in their lending practices

[BasicEconomics]

FRB also expands the money supply Here is our mini economy Jim has all the money in the world $100.00 A) Jim makes a $100 deposit into a bank B) Tom borrows $90 from the bank C) Tom deposits $80 back in the bank he doesn't need to spend it all just yet D.) Tom's account is a new deposit so the bank can now loan Jill $72 E.) Jim takes out $10 So now we have $8 sitting in the bank and $95 out in the micro economy. Total = $103 Banks create money

[BasicEconomics]

Sorry I accidentally removed one of your comments, I click on remove instead of reply my mistake...

I didn't intend to make reserve ratios sound like a good thing or a bad thing. There are winners and losers in the system.

If reserve ratios were at 50% the cost of capital would skyrocket hampering business and industry.

[patbarkley]

@MysteryGameGeEk3000

When you deposit your money, you give permission for the bank to lend it out.

[patbarkley]

@napper6162 When a bank gets a $100 deposit, it can lend out $1000, NOT $90, under 10% reserve rule.

Wrong. Reserve requirements mean they lend out less than deposits. Not multiples of deposits.

[MysteryGameGeEk3000]

Excuse me, but I dont think loaning other peoples money is a "free market principle" It would be if the banks would loan their own money or capital and take their own risks instead of destroying the currency.

Free market is when you use your own capital that you saved from hard work, not just printing money out to people just so they can end up in debt with a worthless currency.

[VangelisAthens]

@djb5255 the third tool is described in the third lesson..!

[djb5255]

@VangelisAthens I was wondering this myself.. lol

[VangelisAthens]

What is the third tool of influencing the amount of money in circulation ???

[mikegalsworthy]

!? The Fed has 3 tools versus the Euro's 1 tool. But you only told us 2 tools for the Fed (cash reserve and interest rates).

[2598129]

There is absolutely no restriction for the fed to print and land any amount to any foreng bank this in turn creates inflation since it is all global now those free of restriction dollars are coming back andkilling us in form of higher gas prices.

[Nadav34]

This thing needs to come tumbling down!!!

[napper6162]

The author should make some corrections as soon as possible.

The Federal Reserve does NOT borrow in order to lend money to the U.S. government at interest. It just prints money out of thin air, or create electronic credit out of thin air.

The formation of the Federal Reserve in 1913 was in direct violation of the U.S. Constitution, i.e. the Federal Reserve is illegal under the Constitution.

When a bank gets a $100 deposit, it can lend out $1000, NOT $90, under 10% reserve rule. Basic math.