US Banks Jumping Without a Reserve?
So in America, banks are required to keep 10% of deposits on hand. That is, when you deposit $100 into your savings account, they’re required to hang onto $10 and they’re allowed to lend out $90 of that to others. The $10 they keep is their reserve. This is called fractional-reserve banking because the bank only keeps a fraction of the money they promise to give you when you try to make a withdrawal. There are many, many problems with this, but for now let’s concentrate on those reserves. The idea is that if there were ever a crisis so huge that more than 10% of the customers wanted their money, the Federal Reserve could print more money out of thin air. This obviously screws everyone who has US Dollars because printing new money causes prices to go up, which means the money you already worked for becomes less valuable.
But that probably won’t ever happen, right? I mean… we’d have to be in pretty bad shape.
Well, check out this graph…
Non-borrowed Reserves = Total Reserves - Money Borrowed from the Fed.
Notice how the latest tick is at -3.9. This means that, for the first time since the Fed started publishing this data series, the banks’ reserves are made up mostly of money they borrowed from the Fed. How do you feel about your bank having to borrow money just to maintain a 10% reserve?
Thanks to Dr. Mark Thornton for pointing this out and to Dr. Randall Holcombe for explaining it to me.
Friday, February 29th 2008 at 11:02 am
The gist of what you are saying is true, but the reserve situation under normal circumstances is much worse. I don’t think there’s ever a 10% reserve… I think its actually closer to a fraction of a per cent. For example, I think for about every $100 in deposits, there’s actually about 70 cents held in reserves. So, yeah, the situation is much worse than what you describe. The system is insolvent. There’s no other way to explain it.
Monday, April 21st 2008 at 11:24 am
Not only that, but the banks also increased the reserves they did have by creating off thebalance sheet entities like siv (structured investment vehicles). in other words they showed greater reserves but hid huge liabilities that created the reserves by removing the liabilites from their balance sheets. The reason you see the huge drop is at elast partially due to the fact that many banks brought the sivs back on their balance sheets (mainly in order to protect their reputation).
The system needs to be fixed. Let’s www.TakeBackTheFed.com !