[NoMoreNicksLeft]

I've tried very hard these past few decades to understand what fractional reserve banking is without spiraling into becoming some whackjob conspiracy theorist. Can someone tell me if this is substantially wrong?

Through some combination of poorly chosen policies in centuries past, social inertia, and perhaps even a little ignorance even on the part of the experts, we now have a society that has normalized the idea that banks get to authorize people (and companies) to receive resources they don't currently have enough cash to purchase outright. When they authorize this, they pay the seller with imaginary money that they say they have (but don't really have). Thus the seller is (most of the time) made whole.

In return for this authorization, the borrowers pay the bank that principal back, along with interest.

In some more conservative ways of thinking, interest is the idea that when a lender risks his or her money loaning it to you, they should receive compensation for that risk.

But the bank didn't have the money to loan to them either. Whether this means the bank is taking less risk, or more risk, I can't even properly process at this point... but regardless of any hypothetical risk that it might be taking, what the interest really is for is nothing more than the fee for them authorizing that the person/company receive those resources. On that point I'm quite certain, the interest pays that "fee".

I do not believe this is a particularly biased take on the matter. I don't believe I've injected much politics into it. I think this system (such as it is) has arisen organically, and without much in the way of design or any group steering it to this.

It seems quite insane to me. Beyond the bounds of mere lunacy. Lovecraft never spoke of eldritch abominations so horrifying that they might cause a madness as profound as this.

Why are we allowing banks to do this? I get it that society needs someone to do this function. But...

1. Why are banks and their staff the most qualified to undertake the function?

2. How did legislatures and even monarchs ever allow this particular power to slip away from them, without even so much as a debate about why they couldn't be trusted to do it?

3. Even if we need this functionality, how do we know how often it should happen (and for whom), and why would this system both keep it from happening not enough and from happening too much? Especially since banks are incentivized to lend as much as possible in many (maybe even all) circumstances? Isn't this sort of like putting the crackhead in charge of the medicine locker key?

4. Why is no one talking about it in this way? Maybe I'm just fucked in the head, but I've never heard it explained like this, and it makes me wonder if I've got it all wrong. But none of the extant explanations are less crazy-sounding, not that I've ever found.

[dragontamer]

> Can someone tell me if this is substantially wrong?

Yes it is wrong in its almost entirety. I don't even know where to start. The fundamental assumption that "Banks don't have your money" is already wrong on the surface level, as all banks have to prove to the Government (FDIC in particular) that their assets are greater than their liabilities.

That is: if a bank owes $5 Billion to its customers, it needs to prove to the FDIC that it has at least $5 Billion hanging around somewhere.

Does the $5 Billion have to be cash? No. It can be a bond, it could be a mortgage, etc. etc. The risk-on/risk-off of lending that asset to others to make further profits is the entire damn point of a bank.

But banks cannot print money, except for the Fed and Treasury in collaboration with each other.

[NoMoreNicksLeft]

> as all banks have to prove to the Government (FDIC in particular) that their assets are greater than their liabilities.

What assets? Defined as you would define them, the things most of us think about as liabilities (outstanding loans) are the same assets.

It's more than a little circular.

> if a bank owes $5 Billion to its customers, it needs to prove to the FDIC that it has at least $5 Billion hanging around somewhere.

This simply isn't the case. Neither in physical cash deposits, nor in electronic deposits of any sort. It may have some collateral, of the sort that isn't and can't be made liquid, and those values are all inflated into the stratosphere anyway. If they did have to liquidate this collateral, the prices would all collapse, and it'd have a tiny fraction of what they had claimed they were worth just days prior.

> No. It can be a bond,

That's another word for "outstanding loan" as I understand it. They gave (imaginary?) cash to some company or municipality somewhere, got a fancy piece of paper saying they can "cash it in 20 years later". That's called a loan.

> it could be a mortgage, e

I thought you were claiming these were liabilities not two sentences higher? If they're not liabilities, what the hell are they? You make it sound as if all banks ever have is assets.

> But banks cannot print money, except for the Fed and Treasury in collaboration with each other.

Who needs printed paper, when you can just modify a few bits in a few flipflops somewhere that amount to an electronic ledger?

They can't print money, but they can certainly let me use the credit card they mailed to me, and they aren't digging around in the couch cushions for some coins so that they have that covered with "assets" as you contend above.

Hell, if I understand you correctly, they could offer someone another mortgage, and then use that as the "asset" that covers my credit card loan (and my credit card loan is also an asset that covers the mortgage!).

[dragontamer]

> What assets? Defined as you would define them, the things most of us think about as liabilities (outstanding loans) are the same assets.

Liabilities are money you owe someone else. Assets are money (and things) people owe you.

You're playing word games with extremely precise words and trying to pretend that these words... don't mean what they mean.

Its perfectly fine to owe $5 Billion to other people, if you yourself have $5 Billion owed to you. Assets and liabilities cancel each other out in all forms of modern accounting.

> They can't print money, but they can certainly let me use the credit card they mailed to me, and they aren't digging around in the couch cushions for some coins so that they have that covered with "assets" as you contend above.

Are you seriously trying to say that Costco doesn't get their money when you swipe a credit card and pay for your groceries?

The banks that fund credit cards have huge amounts of cash on hand. They pay Costco _BEFORE_ you pay the credit card companies (especially if you keep the balance beyond the payment period), and that's only possible because they have huge reserves of cash. Beyond "just" an asset, like true cold-hard cash that they're transferring.

Now the timing is a bit weird. Maybe credit cards pay in net 30. That's somewhat common. But if they have an asset (ex: a 30-day bond) with enough money coming in by day#30, then that's fine. The bond matures, the credit card gets the money on Day#30, the credit card company transfers it to Costco.

Super-short bonds, such as 7-day, 30-day, or even 90-day bonds, are treated as near-cash for good reason. With industry pseudo-standard net30 deliveries of cash, a 30-day bond basically is as good as cash.