Hang on..I'm thinking you are a troll at this point...you are spreading incorrect information..please again..educate yourself. You have things a bit
backwards...banks do not go negative making a loan..they go waaayyy positive..
Nonsense. Just because I don't buy your garbage conspiracy theory about banking, does not equate that you have a picture perfect view of the banking
When a bank closes a loan, they stroke a check to the seller of the real estate property for the sales price, say $500,000. This cash is wired to the
seller of the property once the loan closes. The cash wired is real money, as evidenced by the fact that the seller can use these funds to pay for
tangible products and services in the marketplace.
On the bank's books, after closing the loan, they now have a Loan Receivable for $500,000 plus the interest expected to be received over the next 30
years from the borrower. This Loan Receivable is an asset on the bank's books.
$500,000 Paid at Closing
Mortgage set at a fixed rate of 5% Interest
Borrower's Monthly Payment: $2,684/month
$2,684/month x 180 months (15 years) = $483,120
Even in the above example, the bank still has not recovered its original investment of $500,000 after 15 years
During those first 15 years, if the borrower defaults, the bank has a minimum shortfall of $16,880 ($500,000 less $483,120) before collecting any
interest on the loan.
Banks don't create money out of thin air. When a loan goes bad, the bank takes a loss. Writing more loans doesn't make up for those losses.
Apparently you dont understand where the money comes from to make these loans.
Your "conspiracy theory" logic doesn't make any sense. Either a bank has unlimited cash by writing new loans (your theory) and can never possibly
fail, or a bank takes losses on loans that default.
If your theory is correct (it is not, by the way), then there would be no need for the FDIC and we would not have the unprecedented number of bank
failures in the past couple of years.
Again, answer my questions noted above:
If all it took for a bank to "create money out of thin air" was to simply have new borrowers sign mortgage contracts, then why do banks that are in
trouble stop lending money? Why wouldn't a troubled bank simply keep on writing loans to raise more capital? After all, according to your logic, this
is how banks make "money out of thin air", right? If a bank were in distress, all it would have to do - by your theory - is simply write more loans.
So why do banks stop writing loans when they need to raise more capital?
By the way, banks don't need to "create money out of thin air". Look at the Balance Sheet of any well-run conservative bank and you can see that they
have plenty of assets -- Cash, Stock and Bond Investments, Real Estate, Loan Receivables, etc.
Not to mention plenty of deposits on hand -- Many in the form of CD's or Certificates of Deposit which charge a hefty penalty for early withdrawal.
Technically, deposits from bank customers are liabilities on the bank's books. (However, the general likelihood and probability of every depositor
withdrawing their cash at the same time is highly unlikely, unless in the event of a bank run, which does happen from time to time. Hence the FDIC
guarantee on deposits up to $250,000.)
Banks earn interest on loans. What do you think they do with that interest? They take that profit and use it for expansion, and to make more loans
to other customers.
Banks don't operate in a fairy land of make-believe. They are reality-based businesses like any other business.
edit on 12-12-2010 by
CookieMonster09 because: clarification