If there is any real difference between Fractional Reserve banking, and a Ponzi Scheme I'd be very grateful to have it pointed out.
When mismanaged they're pretty much the same thing. I'm on the side that our current system is a Ponzi Scheme but that doesn't mean the concept
itself is flawed. It wasn't always this way though, and the corruption of our current system doesn't mean that fractional reserve banking is entirely
bad. When the leverage rate is in the range of 5:1 or 10:1 money becomes accessible and it allows for the creation of loans. Loans have many
beneficial traits (along with some bad ones). Notably they allow for the creation and sale of bonds to fund municipal projects, they allow people to
purchase homes, and they allow people to purchase needed vehicles. There's other uses too such as the commercial paper market, without which our
entire agricultural system would grind to a halt, along with many other businesses, and college loans. None of this is possible without a fractional
reserve system (which if you aren't aware has been in use since the 1600's). The problem we have right now is that our banks (in the US, each country
has different official rates as well as rates the banks actually follow) are leveraged in the range of 35:1 with occasional reports of some banks like
Chase and BofA being leveraged as much as 75:1. There's regulations against being overleveraged but the fines for violating it come to millions while
the profits for doing so total in the billions.
Fractional reserve systems in theory pay the customer because the bank pays interest on that money of yours it's holding. In past decades the
interest rate has been quite generous, infact free market principals say that under competition banks will push up the interest rate for the consumer
right up until the point that they're no longer making anything. In 1980 for example you could get a checking account with an interest rate of 20% by
shopping around a little bit (they averaged between 16 and 20). By 1990 they had been cut in half (meaning your checking account only accrued
interest at a rate equal to what a good credit card charges you these days), and as we all know they're under 1% for most accounts today. As a result
of this, which is only explainable as bank collusion the competition aspect no longer matters and we're not getting what we should from the system.
Furthermore, since dollars are created at interest the problem gets worse. Lets say someone wants to buy a $100,000 home and puts 15% down. What
ends up happening is the person gives the bank $15,000, the bank then takes that money and through investments and taking advantage of the money
multiplier that is leverage creates $525,000 in assets. It gives the home buyer $85,000 of that to purchase a home (which they'll then charge about
$135,000 for in repayment). The remaining $440,000 is loaned out, again at interest. When all is said and done, from that $15,000 that wasn't even
the banks to start with, the bank ends up as 1,000,000 in actual assets (this process takes years). Now the bank has a million dollars it can
leverage again if it chooses to.
So the question is... what's good about that? Well, that remaining money was invested in businesses to grow the economy. That means more jobs,
higher wages (in theory), and so on. It's a good process even if it does make one party obscenely rich for doing nothing other than having a charter
that allows them to create funds. Where the real problem occurs is with debt based currency. The bank creates essentially those 1 million dollars
but it was created at interest, lets say 1%. Now 1,010,000 must be paid back when only 1,000,000 was created. This means that someone is going to
have to give the bank atleast $10,000 in assets they've already purchased. Usually this happens in the form of things like home foreclosures. The
bank got the downpayment on the home, and created money from nothing. They're not actually out anything when the home buyer fails to pay their
mortgage. Infact, the bank is now in a better position because they got the initial funds, whatever was put into paying off the mortgage, and a piece
of property on top of it. All for 0 risk.
Under this concept, it's actually better for a bank to make risky loans as the collateral they grab is more profitable for them in the long run
(particularly when they inflate the currency). It's just as true for banks as it is for the government with student loans (which is legally predatory
lending... it's just exempt from such status).
So anyways to sum things up, it's not a fractional reserve that's bad it's a system where a private corporations owns and directly profits from the
creation of the money supply. The founders had it right when they wanted it to be controlled by congress. When congress has created debt free money
such as colonial script or greenbacks, we still had a fractional reserve system and things ran smoothly.
edit on 23-9-2013 by Aazadan because:
(no reason given)