The cat is out of the bag. 3/22/09

Here is a video admitting that it is depositor's money that is at the base of most lending -- and not the bank's capital,
http://www.youtube.com/v/3XwnCSvNiFg&hl=en&fs=1

In the video, this bank executive clearly says that "bank deposits are used to provide the funds for new loans".

Although I have known that for years, I have never seen that admitted in print before. (I suspect the banker in that video will wind up being chastised by officials at the Federal Reserve.)

The printed law on the subject skirts the issue by saying "reserves" are needed to support new loans while it does not mention "bank customer's deposits" as being part of those reserves. I have the laws on my website where I try to explain how lending works.

Here is what it says about reserves at § 204.9 (b) "Form and location of reserves. (1) A depository institution ... shall hold reserves in the form of vault cash, a balance maintained directly with the Federal Reserve Bank ... This comes from <<http://www.fdic.gov/regulations/laws/rules/7500-500.html#7500204.2 >>. In other places -- I think there is approximately the same definition

I can find no mention customer's deposits being used to calculate "reserves".

This is very important for the following reason. If customer's deposits can be used as reserves, then it logically follows that the dollar value of all new loans can also be used as reserves. This is true because the accounts created on the bank's books are indistinguishable from accounts created when a customer makes a deposit. This leads to the logical conclusion that all loans create their own reserves. I have no trouble with that concept -- but lots of knowledgeable believe that it would be a perversion of the banking system -- because it leads to the conclusion that any bank can lend an infinite amount of money. That is, the bank would never run out of reserves.

Evidently, the law as quoted above -- equates "customer deposits" with "vault cash". Unless it explains elsewhere that "customer deposits" equals "vault cash", nobody outside of a banker could possibly know that fact -- they would think that "vault cash has nothing to do with customer's deposits". You might think that is not significant -- but it is. How could a student, or a reporter or a member of the general public know how the money system works unless they are told specifically that "vault cash and customer's deposits are the same thing"?

If the public, reporters and students knew that "vault cash and customer's deposits are the same thing", they would immediately know that customer's deposits are the basis for most lending.

I think the Federal Reserve System wants to keep that fact a secret. It is in their best interest to have the public believe that all loans come from the bank's "capital" which is the money invested in the bank by the stockholders and the accumulated profits of the bank.

The way the system works is that if a new bank that opens with $1 million of capital, it can, on the day it opens, lend any amount up to $10 million by virtue of the leverage inherent in the "Fractional Reserve System" (I can refer you to the actual law if you want that information). If that bank then lends that $10 million at 4% interest. the bank is making 40% interest on its $1 million invested capital.

No-one can reasonably object to that because that is the law, it works, and no banking system has ever been found that works as well.

But if it were widely known that not only can the bank lend 10 times its own money, it can lend 10 times the amount of its customer's deposits -- the public might go berserk. They might be inclined to say -- "how dare you lend my money out and make 10 or 15 times more in interest than you pay me?"

Is this all understandable to you? I had a very hard time clearly explaining all this -- even though it is clear in my mind.

Note that the banker in the video did not mention that he can solve his lack of money to lend by getting more investors. The problem with getting more investors is that those investors essentially directly share those 40% returns with the existing investors -- and although that does not, in reality, take anything away from the existing investors -- it feels like it does.

It is my firm opinion that the FED des not want the public to know how the money system works. See the following URL
<<http://www.howto-ville.com/Money%20Section/arewebeingliedto.html >>