General Question

walterallenhaxton's avatar

Is Fractional reserve banking a Ponzi scheme?

Asked by walterallenhaxton (888points) July 3rd, 2009

Whoever goes to the bank last does not get his money.

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9 Answers

Zaku's avatar

Technically, it’s not a Ponzi scheme; it’s a banky scheme.

From The Big Earth Book: ”... if Jesus Christ had invested $1 in our economic system it would now be worth $1,000 trillion trillion trillion.”

critter1982's avatar

Well technically if your bank is FDIC insured, and your bank went bankrupt you would still get your money.

cwilbur's avatar

No. A Ponzi scheme is a very particular sort of scheme that is obviously fraudulent. Fractional reserve banking is not the same thing, and this is true whether you believe it si fraudulent or not.

And here’s a question: if it’s two days before payday and you have no cash, but use your credit card to fill your car with gas, is that fraud? It’s based on the same principles that underlie fractional reserve banking. You’re making a commitment to give someone money that you don’t have, on the expectation that someone will give you money before you need to pay that person.

RareDenver's avatar

Not a Ponzi Scheme at all. A Ponzi Scheme pays returns to investors from subsequent investors capital but doesn’t actually make any investment profit and is therefore guaranteed to collapse as new investors dry up.

Fractional reserve banking is a completely legitimate practice. When you deposit your savings with a bank you expect them to pay you interest on your deposit, that’s the deal you make with them. “I’ll give you my cash so long as you give me some form of return over and above that amount”

So to give you that return the bank has to make your money make money! They then lend your money to someone else, charging them interest on their repayments and split the profit from this between themselves (salaries, bonuses, shareholders dividends etc) and you (your savings account interest rate). This system is not destined to fail like a Ponzi Scheme and can run indefinitely, so long as there isn’t a run on the bank.

Always beware of banks offering very high rates of returns on deposits, they are doing this as a way to attract depositors because they are short of money to lend. A bank that offers reasonable rates of returns on deposits is far more likely to have enough deposits to sustain their lending business.

Hope that all makes sense but if you have any questions then feel free to ask me further.

whatthefluther's avatar

There is no actual or implied fraud with fractional banking, whereas a Ponzi scheme is just that, a fraudulent scheme, to screw downstream investors to the benefit of those upstream. They are not comparable. See ya….wtf

walterallenhaxton's avatar

@whatthefluther How can you say that? They lend out demand deposits and report them as being timed deposits. Worst of all if you put your money into such a bank the courts have decided that it is no longer yours and it is the bankers. Is that your understanding about that money? Just asking.

walterallenhaxton's avatar

@RareDenver The banker can always stop giving his customers any money at all. After all the courts have decided that because it is in the bank it is The Bankers anyway. If they did that then the people who had accounts at that bank would be the last investors in what ever kind of fraudulent organization a bank is.
I really don’t know what name to put to it. I do think that with the government as the bank of last resort and it too putting out more money than it is good for that eventually it too will keep all of it’s investors money. After all the courts support that. If the bank has the money it is the banks. If the government has the money as the banker of last resort then the money is the governments. It does not legally have to pay back those t-bills.
Talking about a bad law.

RareDenver's avatar

@walterallenhaxton The main difference here is that a Ponzi Scheme is an out and out lie that relies on ever increasing numbers of new investors to support existing investors. Fractional reserve banking is not a lie and is a sustainable business model.

It would not be in the bankers interest to not give depositors their money on request if he was able to. As this would lead to all depositors requesting their money back and subsequently a lack of funds available to enable the banker to carry on the lending business, resulting in the banks eventual collapse.

It’s all about risk and reward, you give your money to the bank, at the very slight risk that you may not get it back, the reward is the interest you earn on that money. A higher risk investment would be purchasing corporate bonds (basically a loan to a company) again you take the risk that the company can’t pay back the loan to you but the reward is the bond’s yield (the interest on that loan that they pay you).

The problem really arises when banks lend too high a fraction of their deposits or make too many bad loans. This is part of what we saw recently in the credit-crunch and one of the reasons why the banks are desperately trying to rebuild their balance sheets. It doesn’t mean the model of banking in necessarily bad or wrong it just means that mistakes were made, admittedly some fucking huge mistakes, but the fractional reserve model of banking is, as a business model, a sustainable one when run within certain parameters.

bh419904's avatar

If you deposit $10,000 at a bank that bank can now loan out $100,000. Where did that $90,000 come from ?? Thin air. Counterfeit. You made a loan to a bank for 1% interest (a CD) which allows them to loan out $90,000. So they pay you 1% on $10,000 and collect 4% on $100,000 and $90,000 of it they never had. (inflation??) Nobody in thier right mind would keep money in a bank that only has a 10% reserve requirement unless it was a major gamble for a very high interest rate. (or all of the banks were controlled by one bank called the Federal Reserve and your only option is 10% reserve banks) The equalizer is FDIC. In order to get you to loan the bank money, FDIC was born which created the illusion that your money is safe. FDIC is just a program that will steal money from your neighbors to pay you back if you made a bad bet on what bank to loan your money to!!!

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