The role of the Credit Reporting Agencies in the destruction of America

reply to post by CookieMonster09


sure. a lot of valid points. however, they don't negate the points that it's a self-perpetuating beast that has it's tentacles everywhere. nor does it negate the fact that bad things happen to good people every day.

you HAVE to be in the system or you don't get to rent an apartment, get a job, own a home, get cable/phone/electric turned on, buy a car, get a student loan, and heaven only knows what else i've lost track of.

and unless the masterful mr. ramsey has figured out a way for the average joe or jane trying to raise a family on $12 an hour (the new "in" salary range for even the most gifted of americans) to save up enough money to plunk down cash in the neighborhoods of $15K for a car or $150K for a home or $40K for a college education, you're not staying out of this controlling beast no matter what you do.

no, i guess one wouldn't see this as a caste system unless one is on the wrong side of it.

Originally posted by CookieMonster09

Personally, I have looked at thousands of personal credit reports.

Do you trully know the history of whats behind all the reports and do you have personal interaction with people who's credit you are evaluating?

It seems as if most bankers only look at the credit, on request of a borrower, thesedays after a computer has kicked it out based upon the score.

Do you not acknowledge that there are bad business' within the system that are using thier knowledge and connections to do evil?

If there is so much trust for the current system why are there so many credit monitoring companies that have risen up?

How is it that there is a market to request fraud holds on your own credit file?

Identity theft is most likely the act of people within the financial system itself.

How is it that we have millions of undocumented illegal aliens who are able to live and work within this country amost unnoticed?

Why is it when I call my bank I get sent to a call center in India and the on hold recording is in both spanish and english?

How is it that some business get favorable treatment by the Federal Reserve and yet others are hung out to dry?

Where exactly did all of the bailout money go?

Did it goto business owners who volunteered to lay low for awhile in return for silence?


[edit on 3-7-2009 by In nothing we trust]

reply to post by In nothing we trust


Yep and kinda hard to figure out your "character" with a system like that huh?

Originally posted by CookieMonster09

Personally, I have little empathy for people ...

I have no doubt that you have little empathy Cookie.

You are simply a shill for the banking system sir.

Completely worthless as a human being in my estimation.


[edit on 3-7-2009 by In nothing we trust]

Originally posted by CookieMonster09

The smart people that are surviving this recession saved their pennies for a rainy day. It's tough out there.

To me it just looks like people who were always cheap, now value your time even less than before. A cheapskate will always be a cheapskate who wants everything for almost free and then gets self rightous about it.

I think I covered your position on the matter here.

Originally posted by In nothing we trust

- Knowledgable little brothers and consumers within the system own pieces of big brother and know how to manipulate the entire system to thier advantage.

Those consumers who maintain good credit become puppet mouth pieces who support the monster. The system is inheirently designed to be devisive and self destructive in nature ...

You guys forgot one important aspect of the credit system.

If you never borrowed before whether you or too young or you never wanted to go into debt, you are considered a risk.

So basically in order to get good credit, you have to build it up by borrowing little things or having someone cosign for you.

So you need to be in debt just to be part of the system, is it any wonder why so many people are in debt?

response to various questions posed

What? Wells Fargo, Citibank, American Express, Bank of America, Wachovia (Now WF), etc. etc. are NOT looking at your character they are looking at that "historical" data and if that "historical" data defines your character what a sad world this is.

I would tend to disagree. Whether someone stiffs their landlord, cell phone company, electric company, etc. says A LOT about a person's character. I have already mentioned exceptions that are legitimate: medical, divorce, loss of employment, etc.

A historical record in the form of a credit report levels the playing field for extending credit because credit decisions based on credit reports are more objective, factual, and scientific than lending based on subjective, and potentially discriminatory factors, such as one's race, creed, etc.

I have lent millions of dollars to various commercial borrowers based on factual historical records, regardless of a person's race or creed or religion. I have turned down credit applications for white, heterosexual males, for example, due to their terrible personal credit, and approved credit for immigrant, working class, Muslim families because their credit was stellar.

Is a personal credit history the end all be all? No, it's an indicator, and a fairly objective one. A lender does take into account other factors, such as the personal interview, the collateral, the cash flow of the borrower, the use of funds, etc. BUT, usually, if a borrower's credit is bad, this is just 1 sign in a whole string of signs that the borrower does not qualify.

and unless the masterful mr. ramsey has figured out a way for the average joe or jane trying to raise a family on $12 an hour (the new "in" salary range for even the most gifted of americans) to save up enough money to plunk down cash in the neighborhoods of $15K for a car or $150K for a home or $40K for a college education, you're not staying out of this controlling beast no matter what you do.

Again, I would beg to differ. If you have two people in a family earning $20,000 per year, that's $40,000 per year. You can live on $30,000, and bank the $10,000 into savings. In ten years, you'll have $100,000 - plenty to buy a house. Maybe not a mansion, but a decent house. And that is not taking into account raises.

Yes, we are in a difficult cycle right now - very difficult. But it wasn't too long ago when people were gainfully employed making good money - But they never saved for a rainy day.

Instead, they might have a family earning $40,000 but living like they earned $55,000, and going into debt. The average American financed everything - Cars, houses, vacations, you name it. They ran up credit card debt, they took out too many loans for illegitimate reasons. Frankly, they were irresponsible with credit.

I don't buy it for one second that a person with willpower can't get ahead in this country with some diligent savings, and living well below their means.

It can be done. Just cut out extraneous expenses and live below your means. Just ask any millionaire business owner how be got that way - He will tell you he stayed out of debt, saved religiously, was very, very frugal, and conserved his resources.

you HAVE to be in the system or you don't get to rent an apartment, get a job, own a home, get cable/phone/electric turned on, buy a car, get a student loan, and heaven only knows what else i've lost track of.

No - That is incorrect. You can take out credit, and not abuse it. You can take out credit cards, and even a line of credit, and never use it - And still build your credit file. That will get you the basics - An apartment, for instance, and a job.

CONTINUED BELOW

Regarding a job, as long as your credit is not trashed, you can still get a job if they check your credit and it only has a few credit cards on it that you never use. You just have LIMITED credit, not trashed credit. That's enough to get hired - They just want to make sure you pay your bills, especially if you are in a sensitive position - such as handling cash, etc.

You can purchase a house with cash, or you can do what is called MANUAL underwriting, which looks beyond your credit score and carefully analyzes your historical income and expenses. So the idea that you need credit to buy a house is false - You just need a very small credit file, such as a few credit cards, and strong personal income. Same with cable, and a phone - Though you can buy disposable phones now without a credit check, too.

Student loans? How about pay as you go?

A car? Buy a beater with cash.

You can work around the system if you choose to do so. No one is forcing anyone to operate on credit. I don't. My wife doesn't, and many others don't as well.

Do you trully know the history of whats behind all the reports and do you have personal interaction with people who's credit you are evaluating?

Yes, they either tell you up front, or you ask them, "Can you please provide an explanation for these derogatory items on your credit report?" You can only discuss public items - such as tax liens, bankruptcies, etc. Private items - such as credit card defaults - the borrower must obtain a copy of their own credit report and determine what problem areas need to be addressed.

It seems as if most bankers only look at the credit, on request of a borrower, thesedays after a computer has kicked it out based upon the score.

Depends on the credit request. For a credit card, all they look at is pretty much your credit score. For a house purchase, they will dig deeper than just your credit score.

Do you not acknowledge that there are bad business' within the system that are using thier knowledge and connections to do evil?

Be specific. Give me an example. Obtaining business credit typically involves the bank getting involved in a heavy amount of scrutiny of the business - It's pretty thorough: credit investigation, client interviews, collateral inspection, etc. If the borrower is engaged in nefarious activities, most banks and commercial lenders definitely do not want them as a client. Are there banks that turn a blind eye to fraud? Perhaps, but they don't stay in business very long. Too much regulation, and it's bad banking business to lend to criminals.

If there is so much trust for the current system why are there so many credit monitoring companies that have risen up?

Identity theft. Which is another area that bankers have to examine when looking at a credit report - Is this person a victim of identity theft? Usually, the borrower already has placed an alert on their credit report, so you are aware of the matter up front. You also have to verify the borrower's identity in such cases.

How is it that there is a market to request fraud holds on your own credit file?

Same as above.

Identity theft is most likely the act of people within the financial system itself.

No, it's usually the result of a close friend with a drug problem. Banks have very thorough background and fingerprint checks on their employees - plus cameras everywhere.

How is it that we have millions of undocumented illegal aliens who are able to live and work within this country amost unnoticed?

I don't see the relevance to the credit and banking system in this country. Please explain.

Why is it when I call my bank I get sent to a call center in India and the on hold recording is in both spanish and english?

Same as above. Find another bank - try a local credit union.

How is it that some business get favorable treatment by the Federal Reserve and yet others are hung out to dry?

I need you to be more specific. If you're referring to Lehmann Brothers versus AIG, I think that the government is trying to make the best decisions it can at the moment based on the current circumstances in the economy. Tough decisions, complex decisions, and subject to human error. Easy to criticize months later based on new information. Is their political favoritism? Of course. There has been political favoritism since the time of Moses, my good friend. That will never change.

Where exactly did all of the bailout money go?

Here's what I would guess: Banks that received the funds from the bailout are already hemorraging cash. They are already in dire straits. They are just trying to tread water. They don't want to lend additional funds because the economy is very fragile, and people and companies already have too much debt and therefore don't credit qualify anyways. They need to shore up their cash reservers.

Should there be transparency? Yes, and pressure should be placed on our leaders to do so. You need to see William Black's interview with Bill Moyers on the subject - He recommends a Pecora Commission investigation.

Did it goto business owners who volunteered to lay low for awhile in return for silence?

It went to banks, which are bleeding cash. It went to car companies, that subsequently went into bankruptcy.

I have no doubt that you have little empathy Cookie. You are simply a shill for the banking system sir. Completely worthless as a human being in my estimation.

Grow up. I have been very straightforward in answering your questions.

What you have laid out here is completely false and untrue - Starting with your original post. I have clearly refuted your original claims.

If you want to debate the actual topic, fine, but don't demean yourself by leveling unwarranted insults.

To me it just looks like people who were always cheap, now value your time even less than before. A cheapskate will always be a cheapskate who wants everything for almost free and then gets self rightous about it.

Read the book, "The Millionaire Next Door". It will dispel any myths you have about the rich in this country. Most are very hard working, frugal business owners that value their employees. They run small, family-owned businesses that are pretty boring - Pest control companies, hardware stores, etc.

It is perfectly ethical and honorable to be frugal and careful with one's money. Just ask your grandparents that lived through the Depression.

So you need to be in debt just to be part of the system, is it any wonder why so many people are in debt?

Just because you have a credit card doesn't mean that you have to abuse it. You can have a small amount of credit and never abuse it.

What banks want to know is if you are responsible with using credit or not. The telltale sign is to look at how you have used credit in the past.

Originally posted by SEEWHATUDO
reply to post by In nothing we trust

 

Yep and kinda hard to figure out your "character" with a system like that huh?

Actually in my experience no, that is not the case. For a few years I worked for a used car dealership that did most of it's own financing. I can tell you that any time the dealership took a chance on someone with bad credit due to some sad story excuse it almost always turned out badly. Conversely people with good credit almost always paid on time without incident.

The thing is people with bad credit often consider themselves victims, when in fact it is most often their own irresponsible/selfish behavior that leads to their bad credit. Sadly it seems the majority of society believes they are entitled to a new or very nice car, house etc. whether they can afford it or not. Our society is incredibly materialistic, just because they think they have to impress the neighbors or friends, when in reality no one really cares about much beyond themselves.

I can tell you I have always driven a car at least 5 years old that I pay cash for and have saved a large portion of my pay. I get offers for new credit cards constantly, but I only have one and pay it off each month. As a result I have a decent amount saved up, and will be able to easily purchase a home soon, which I have not up till this point strictly because I knew the prices were way to high. If you take emotion out of your financial decisions, your life really can become much less stressful.

Proximo - Well said. From your experience at the car dealership, you know firsthand that the sob stories and ridiculous excuses for a terrible credit history usually end up biting the lender in the end.

There are some rare instances where this is not the case - a medical emergency that ruined someone's credit - but those circumstances are easy for the lender to determine.

It goes back to character - The primary determining factor of credit. If someone stiffs their creditors, it says a lot about their character and their ability to adhere to legal contracts that they willing enter in to.

My car is paid for as well. I financed a used Honda about 5 years ago, and paid off the note within about a year. I plan on paying cash for my next car. This one has plenty of miles to go, and I plan on driving it until its useful life is over. I don't need a fancy car, and I don't need a new car every other year. I would rather not waste my money on paying interest to some creditor.

Couple more things:

Every banker knows the 5 C's of Credit: Collateral (Real Estate, Receivables, Inventory, etc.), Conditions (Market Conditions), Capital (Net Worth or Assets Minus Liabilities), Capacity (Cash Flow available to service debt), Character (Credit history, time in business, references).

Bankers look carefully at each of these factors in order to determine whether to approve or not approve a credit request. You could have great character, but lousy collateral in a weak market with limited Net Worth - resulting in a declination of credit. Each factor is weighed carefully.

Also, in terms of the comment about "businesses" and "evil", I can tell you firsthand that if you are a business owner, it is very difficult to obtain credit, especially today. In addition, when credit is extended, it has to be for a legitimate business purpose. Examples include: purchasing inventory and equipment, buying commercial warehouse space, financing account receivables (customers that owe you money but haven't paid you yet), etc. Banks don't give businesses bank loans willy-nilly. There has to be a legitimate business purpose, and the borrower has to have the capacity to repay the debt.

Bankers are involved in the risk business - assessing and determining a borrower's risk and likelihood of repayment. They try to be as factual and objective as possible. They carefully examine a borrower's history. They inspect collateral. They order and evaluate appraisals and environmental reports on real estate properties under consideration for financing.

Money isn't given out freely, unless fraud is involved. That could be fraud on behalf of the borrower who falsified documentation given to the bank, or fraud by the loan officer who colluded with the customer in defrauding the bank. Fraud also involves senior management that loosened credit requirements so they could earn a big fat bonus at the end of the year because it appeared that their bank or mortgage company was growing rapidly and doing well - when in fact it was a house of cards.

[edit on 4-7-2009 by CookieMonster09]

If consumers attempt to stop giving money to little brother, little brother resorts to extortion by using of the credit reporting agencies and/or the legal system against consumers.

Consumers enter into legal contracts - loan agreements - that they willingly sign of their own free will and accord. The lender - under the terms of the contract - can legitimately sue the consumer if he fails to meet the obligations of the contract.

Big brother threatens little brother with expulsion from the system if little brother fails to successfully dominate consumers. - The central bank bribes big brother to protect itself from little brother and consumers.

Huh? Where is the proof that government and/or the Federal Reserve is threatening banks? The Federal Reserve system earns interest off of any borrowed funds from banks under temporary lending facilities. Why would the Fed want to see these banks fail? That doesn't make any sense.

Since when does the Federal Reserve bribe the government to allegedly "protect itself from consumers"? Bribes are illegal. If you have proof, please document.

Knowledgable little brothers and consumers within the system own pieces of big brother and know how to manipulate the entire system to thier advantage.

Give me an example. Consumers or businesses don't manipulate the credit system. They simply pay their bills on time, and operate profitable companies. Anyone - with a little bit of effort and time - can learn about the rules and requirements of obtaining financing from their local banking institution.

The credit agencies favor the central bank, big brother and little brother in said order.

All the 3 credit reporting agencies do is supply up to date credit information on consumers. They supply this information to banking institutions, not the central bank. They earn their fees from these banks - both large national banks like Wells Fargo, and small town community banks. Again, this is total nonsense.

Consumers are totally dominated by the credit monster. Those consumers who maintain good credit become puppet mouth pieces who support the monster. The system is inheirently designed to be devisive and self destructive in nature, beacuse people are separated into castes that can be easily controlled by each successive order above it. The model is designed to centralize control of society into the hands of the few. The power is effectively removed from the masses and the entire society is effectively put into bondage as everyone feels powerless to do anything.

Those consumers that overextend themselves and borrow more than they can repay, are not "dominated by anyone". These consumers simply file bankruptcy and begin anew. Banks and collection agencies have to operate within the law. There are no debtor's prisons in America.

Worse case scenario, a borrower that falls behind on their payments might receive some collection letters in the mail, or phone calls from a collector. Big deal! All collectors and lenders must operate within the law: It is called the Fair Debt Collections Practices Act. If the collector violates the law, sue them.

People with good credit aren't mouthpieces for the banks. They just understand their legal and contractual obligations, and meet them.

The system is generally fair and objective. Abuses come when government mandates that banks lend money to non-qualified borrowers - Hence, the sub-prime mess.

We don't have a caste system in America. No one is in bondage over credit issues. And if people feel powerless, they need to go attend a Tony Robbins seminar. There is plenty of empowerment in the USA.



[edit on 4-7-2009 by CookieMonster09]

[edit on 4-7-2009 by CookieMonster09]

It is this system of societal domination that breeds an environment that encourages the breakdown of traditional family values and beliefs. The only thing that becomes important is worshipping the central bank as GOD. This effectively elevates the few who control the central bank to the status of GODS. It is they that have the power to create and destroy. It is obvious that thier intentions are hostile towards the entire human race.

What breaks down traditional family values is when consumers selfishly adhere to materialistic values and buy more than they can afford, and get in too deep over their heads with debt. They value materialism more than their Creator. This is an individual choice.

If you choose to abuse credit, that's your issue, and it has nothing whatsoever to do with the banking industry.

Only fools worship money as their god. Central bankers are human beings, not gods. They don't have the power to create and destroy - Consumers do by their choices. Consumers can choose to live a debt-free lifestyle, and choose to manage their financial affairs with meticulous care. Or they can choose to abuse the system, and ruin their credit and future opportunities to use the credit system.

Millions of business owners successfully use credit to their advantage: to purchase equipment, buy buildings, purchase inventory, fuel growth, and hire new employees. Without a banker by their side, they wouldn't have a business partner helping them to grow their business.

Millions of consumers use credit to their own advantage - to purchase a home, buy a car, etc. They pay their loan obligations on time every month, and don't have challenges with their creditors.

The 3 main consumer Credit Reporting Agencies in this country are: Experian, Equifax, and TransUnion.

The core service that these credit reporting agencies provide is a Consumer Credit Report, which is an updated credit file that documents a borrower's credit history: credit cards, mortgages, car loans, etc.

The standard credit report also documents delinquency: tax liens, late pay, judgments, bankruptcy, collection items, charge-off's, etc.

A credit score - which is an indicator - is typically part of a consumer credit report. Scores at 700 or higher are generally considered very positive. Scores at 520 or below are considered generally unfavorable. Credit scores fluctuate based on the amount of debt, pay history, principal balances, etc. The more creditworthy consumers have no delinquencies on their credit report as they pay their bills on time.

Banks, car dealers, furniture dealers, apartment complexes, and other similar organizations use credit reports as a litmus test to determine if the applicant or borrower has faithfully paid their obligations in the past.

The credit report is utilized as a gauge to determine past credit and pay history. Organizations pay a small fee - usually $3-4 per credit report - in order to pull these credit reports from the 3 credit reporting agencies.

These 3 agencies are private businesses. They do not work for the Federal Reserve, and they do not work for the government. They are private companies that provide factual, historical credit data to lenders and organizations that are trying to protect themselves against fraud and collection problems.

we do not need most of the credit we think we do - I think for most it would be tough to go without a mortgage (but possible) - over time we have become accustomed to more and more credit/debt such as credit cards for purchasing everything - must call these what they really are debt cards - I have gone to mostly cash- much easier and best means of preventing ID theft - to avoid credit agencies - avoid debt - I canceled paypal and the one remaining credit/debt card - this debt system is a mind set - I fell into it - finally saw it for what it is - a trap - took me 6 years but I am free now and will NEVER use debt again - I pay cash mostly - for online a debit card - and I don't use banks except for leaving in enough to cover the debit card purchases - it can be done - If one does not use debt, one does not need the crdt agencies - put a credit freeze on your account - BACK OUT OF THE DEBT SYSTEM FOR GOOD- it is a trap and one that millions walk/run into of their own volition - gotta quit cooperating with the system-

we do not need most of the credit we think we do

Agreed. That's the understatement of the year. We Americans could avoid using credit altogether if we really wanted to.

I think for most it would be tough to go without a mortgage (but possible)

Rent until you can afford to buy. Rent either an apartment or a house.

took me 6 years but I am free now and will NEVER use debt again - I pay cash mostly

Awesome.

and I don't use banks except for leaving in enough to cover the debit card purchases

Good in theory, difficult in practice. If you store cash at home, what if you get robbed? What if a burglar breaks into your home? What if you are held hostage at gunpoint and forced to open your safe? If the money isn't in a safe, and your house burns down, then what?

There are - despite what the media tells you - safe banks out there. Also, look into locally owned credit unions. If you are really scared, spread your deposits between 2-3 banks.

TheStreet.com has a Bank Analyzer - Just plug in a bank name, and it gives you a grade of A, B, C, D, F, etc. based on soundness and stability. Put your money in 2-3 of the banks rated A or better.

CookieMonster09...

you said banks don't create money

banks are allowed to loan out more money than they have on deposit

en.wikipedia.org...

you said banks don't create money
banks are allowed to loan out more money than they have on deposit

Keep it simple. Let's first talk about your small town community bank, which is NOT the same thing as a central bank, like the Federal Reserve.

Banks have deposits - This is money sitting in checking accounts from thousands upon thousands of customers. These deposits total millions upon millions of dollars.

Let's say that the bank has $100 million in deposits at any given time. This number will naturally fluctuate daily, depending on how many withdrawals occur. But remember, as withdrawals occur, so do deposits. At any given time, money at the bank is in flux.

Bankers keep a very close eye on deposits, and are rewarded for bringing in more deposits from competitors. It's a constant effort to gain deposit share in the marketplace.

Banks are required by banking regulators to have cash reserves on hand to meet the daily demand of withdrawals from clients. These cash reserves are regulated by central banking regulators.

These cash reserves are only an issue in the event of a massive bank run, which means a massive number of individual clients withdrawing at any given time. In those situations, this is typically where the FDIC steps in - A fund that is funded by banking assessments, not tax money.

So now, let's discuss the other part of the equation: Lending.

Take a simple real estate example. A borrower puts 20% down or $40,000 on a $200,000 house. The bank places a first lien on the house. The house is collateral for the $160,000 loan. So the bank has a first lien position on a real estate asset worth at least $200,000, and a loan on the books for $160,000. This is an 80% Loan to Value situation. The bank is in the superior position in this arrangement, assuming the borrower is credit worthy.

At 6% fixed interest, over the course of 30 years, the bank will collect $960 per month for 360 months, or $345,600 total from the borrower. All from a $160,000 initial cash outlay from the bank at closing at the inception of the loan.

So where exactly are the deposits? Where did they go? They are primarily sitting in real estate assets that the bank has financed for borrowers. They also might sit in equipment assets, inventory assets, etc. The bank, however, is always in the first lien position in each loan situation, and a cushion of error is built in - typically 20% or more.

In the case of the 80% Loan to Value situation, the bank has a 20% cushion if the market drops. If after say 10 years, the borrower defaults, the bank can foreclose on the property and recoup their losses. In a good real estate market, that house might now be worth $225,000 instead of $200,000. In the meantime, they have collected primarily interest only during these 10 years, and have maintained their first lien position at all times. Very little principal has been paid down during these first 10 years.

Going back to your article in Wikipedia:

The process begins when an initial $100 deposit of central bank money is made into Bank A. Bank A then takes 20 percent of it, or $20, and sets it aside as reserves and then loans out the remaining 80 percent, or $80. At this point there is actually a total of $180 in the system, not $100; because the bank has loaned out $80 of the central bank money, kept $20 of central bank money in reserve, and substituted a newly created $80 IOU claim for the depositor that acts equivalent to and can be implicitly redeemed for central bank money.

The writer of this article makes a fatal flaw. First, the $80 that is lent out is backed by collateral - as in the real estate example I just noted. The collateral has a safety cushion built in of at least 20% or more, as in the real estate example. Secondly, the bank will earn interest on that $80 over the course of the term of the loan.

CONTINUED BELOW

From Wikipedia article you quoted:

At this point there is actually a total of $180 in the system, not $100; because the bank has loaned out $80 of the central bank money, kept $20 of central bank money in reserve, and substituted a newly created $80 IOU claim for the depositor that acts equivalent to and can be implicitly redeemed for central bank money

No, no, no. There is not $180 dollars in the system. There is $20 on reserve, and $80 lent out to a borrower. Over the course of time, that $80 will return interest to the bank - if the bank made a prudent lending decision to a creditworthy customer. Even then, the bank may never be repaid, and actually suffer a loss.

Also, the bank DID NOT lend out central bank money - It lent out the original $80 of the $100 placed on deposit at the bank. The central bank is simply a backstop to lend money to the bank temporarily (and at interest) in the event that it needs additional capital because cash reserves have gone below regulatory requirements.

For business reasons alone, the small town bank doesn't want to borrow from the Fed - It's expensive for one, and is therefore bad business. Instead, the bank pushes its employees to gather deposits, even setting quotas for their bank employees to raise more deposits.

From Wikipedia:

Although no new money was physically created in addition to the initial $100 deposit, new commercial bank money is created through loans.

This is just silly. If you take out a loan, you have to pay back the loan with real, tangible cash. Period. If you don't pay with real money, that's called fraud.

Now, taking a macroeconomic view, you could hypothetically make an argument, as the critics of the fractional reserve system do, that by creating a loan you "created money out of nothing".

No, that's not the case. You created an obligation for a borrower to repay more than what the bank paid for the asset at the onset of the loan. That obligation may or may not ever be repaid. It is up to the borrower to pay the note through his own resources - cash, cash flow, sales of goods, etc.

What I am asking you to do, is to take a practical, reality-based look at how a small bank operates. It doesn't want to borrow Fed funds, and it pushes for a large deposit base from its clients. It keeps cash on reserve for the day to day withdrawals from depositors, and uses the remainder to lend AT INTEREST to qualified borrowers. The bank is taking a risk when it makes these investments, but the bank is also investing in jobs, financial stability, and supporting the local community in the process.

The real question posed by the Wikipedia article is whether LENDING inflates the money supply. The article clearly states:

The creation and destruction of commercial bank money occurs through this process. Whether it is created or destroyed depends on what direction the process moves. When loans are given out, the process moves from the top down and money is created. When loans are paid back, the process moves from the bottom to the top and commercial bank money is canceled out, effectively erasing it from existence.

My argument is that using the term "created or destroyed" is pure gibberish, and volatile language that distorts the true picture.

The reality is that a bank creates obligations through loans. Loans may be repaid, or not, depending on the borrower. If repaid, the bank earns interest. If not, the bank could lose its investment.

Go back to my example. If lending $160,000 at 6% interest over 30 years, the total return on investment for the bank was $345,600, right? Payment was $960 per month.

$960 x 120 months (10 years) = $115,200.

After 10 years, the bank has still NOT recouped its $160K investment. IF you make the claim that money is "created out of thin air" (its not, by the way), you then have to agree that it is done through lending over a long period of time, at a pretty significant risk to the bank.

[edit on 4-7-2009 by CookieMonster09]

And now, let's discuss what some of those risks of lending, in detail.

First, the collateral could lose value. We see that everyday with real estate prices. You have banks that made loans on weak collateral, or collateral that is rapidly deteriorating in value based on market conditions.

Secondly, the borrower - during these 30 years - could default and the bank could have to go through the expensive process of foreclosing - hiring attorneys, taking legal action, hiring collectors, etc. A bank expends high costs for foreclosing - It's pricey.

In its fundamental form, a bank that lends on a house walks $160,000 in hard cash out the door at the onset of the loan. It will not recoup its money even after 10 years of interest payments. The pay day comes well after 10 years - That's a long time to wait for repayment. At any point during the term of the loan, the borrower could default.

So back to what I said before: Lending is a risky business. If you make the argument that "banks create money out of nothing", you are taking an oversimplified explanation of banking and turning it into a conspiracy theory. Banks simply lend money, and expect to receive an adequate return on its investment for the risk it takes.

The only thing that you could POSSIBLY call "creating money out of nothing" is the interest paid on this loan obligation - and even then, only after 10 years on the typical real estate loan. As I have highlighted, this does not take into account defaults, losses, etc. of the bank in the event the borrower reneges on his loan agreement.

To call it "inflating and deflating the money supply" is not an accurate definition. The accurate definition would be, "The bank takes a risk that his investment may or may not be repaid during the course of 30 years on a typical real estate investment. The bank only breaks even well after 10 years into this investment - and it is then, and only then, that one could consider that more money is being brought into the bank than was taken out."