If you have paid attention to the headlines lately you will see that banks are failing in record numbers.
Why? It basically boils down to the way commercial banks approach money management. You see, banks use what is called a fractional reserve system whereby they only have to keep only a fraction of their deposits on hand.
The “Fractional Reserve” System
The banking industry has made sure they can play with “monopoly money.” The current fractional reserve system allows them to create money out of thin air!
Banks are only required to keep a fraction of their total loans outstanding on reserve and they can “lend” the difference. For example, if you deposit $100 in a bank, they can loan as much as $900! Where did that money come from? (Thin air…$100 is 10% of $1000) You are probably already thinking, “But what if some of those people don’t pay back the loans or people get scared and start withdrawing their money from the bank?” The past couple of years are prime examples of what happens to banks that are over-leveraged in this way.
You see with banks, they take your money, then immediately loan it out to someone else in the hopes that they will earn interest on it. Meanwhile, they pay you little to no interest on your deposits because the profit they earn has to go to the shareholders.
Using this type of system, up to 10 dollars for every 1 dollar in deposits can be loaned out. When these loans default, they fail and you lose your hard-earned money. That’s also why the interest they pay you is little to none…they charge higher rates to the borrowers of your money to help mitigate the losses they inevitably encounter when loans default.
Think About This…
Have you ever really sat down and thought about how the banks treat you? They can’t operate without YOUR money, yet they treat you with complete disrespect! You deposit your money in the bank, they pay you little to nothing for using it. Instead, they loan it out to others at high interest rates and then charge you fees upon fees if your balance is low or you want to talk to a teller or a myriad of other reasons! And if your account accidentally goes a little under…BAM! A $30+ overdraft fee. Meanwhile, they over-leverage themselves by loaning out more money than they have.
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