How did we get here?

How did we get where we are?  And is a bailout really the answer?

In order to answer that you really have to know how our banking system works, and how our government has used and been used by it.

It all starts with the foundation of the banking system in the United States–the fractional reserve banking system

Fractional reserve banking is a pretty simple concept.  US law says that banks must keep 10% of their deposits on hand in case you want to withdraw some of your money from the bank.  In other words, for every $100 deposited in the bank, they have to have $10 ready in case someone wants to make a withdrawal.  Its based on the idea that most people leave their money in the bank and not everyone will withdraw their money all at the same time.

What do they do with the other 90% of the money they have on deposit?  They loan it out.  And what do the people who borrow it do?  They put it in another bank, which operates under the same rule…they keep 10% on hand and loan out the other 90%.  You can probably already see where I’m going with this.

$100 x 90% = $90

$90 x 90% = $81

$81 x 90% = $72.9

$72.9 x 90% = $65.61

You get the idea…so now instead of just your original $100, you also have an additional $90, $81, $72.90, etc, etc, etc…keep going long enough and you’ve created about 10 times the original $100 out of thin air.  So now we have about $1000 in circulation even though you started with just $100.  The beauty of this system (from the perspective of banks) is that they are charging interest on the entire $1000…money that they invented out of thin air, and the first $100 wasn’t even theirs to begin with.

But the main point is that by doing this the supply of money expands very rapidly.  The more money loaned out, the greater the supply of money in the economy because it keeps multiplying.  So the economy grows rapidly.

So what do you think would happen if banks suddenly started giving home loans to millions of people who have never owned a home before (because they weren’t previously eligible for a loan)?  Not only would lending these vast amounts of money rapidly expand the money supply, but the laws of supply and demand would kick in (because more people would be buying houses) and housing prices would rise very quickly, which would cause even more money to be loaned out…it would create a self-perpetuating process.

But what happens when those people can’t pay their loans?

The whole process happens again in reverse.

That’s right, just as the supply of money expanded rapidly, it can contract just as rapidly.  And that’s what’s happening right now.

The proposed bailout would inject money into the economy and get the ball rolling…not because its $700 billion, but because its a $700 billion loan.

Congress will borrow the money and increase the national debt in order to do this.  And the money will multiply out in the economy as banks make more loans.

If you can’t see it already, the problem with this type of system is that our entire economic health and future is totally dependent upon debt.

If we were to pay off the national debt, our homes, credit cards, etc, etc, the money supply would contract in the same way.  The only way to keep the economy “healthy” (operating is probably more accurate) under a fractional reserve system is to be a nation of debtors who continue to borrow more and more money.  Any time loans are repaid (or defaulted on) on a mass scale the supply of money would contract and create an economic crisis just like we have now.  This system depends entirely upon most people carrying debt, and continually borrowing more and more money.

The bailout will only perpetuate our system of debt based money.  Under this system debt is money.  Under a fractional reserve banking system every dollar is a debt, not an asset.

So a bailout financed by an increase in the national debt is not the right solution.  It only continues the problem.

We must eliminate the Federal Reserve system of debt based money and return to the sound currency this country’s founders intended–gold and silver.

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4 thoughts on “How did we get here?

  1. Hey Doc, this is the first time I have had the federal reserve explained in a way I understand it. Thank you, no
    wonder we are in such a mess…..

  2. Great post for explaining the madness of the perpetual debt system (also one of my favourite topics at: uglyrumors.wordpress.com)
    but the explanation for the current crisis is a little too simple in my view:
    “what do you think would happen if banks suddenly started giving home loans to millions of people who have never owned a home before (because they weren’t previously eligible for a loan)?”
    It is a myth that all problems derive from “sub-prime” loans…
    In my view the real problem is deregulation of the banking industry, creating financial conglomerates “too big too fail” and mixing up commercial banking, investment banking and insurance…..

    (see also my post “Greenspan and Market Morals”)

    P.S: RE: “Make Congress read the laws it passes” – Absolutely! 🙂 (the Commodity Futures Modernization Act – another source for the current mess – came into being because nobody read the bill except the Wall Street lobbyists who wrote it..!)

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