We have a banking system that uses fractional reserves. A bank reserve is how much money they have in the vault at the end of the day. This money can be in the form of cash, convertable financial instruments, and other standard types of assets.
US banking laws allow the banks to loan out 9 times the amount of money they have in reserve. What this means is that for every dollar the bank has in their vault, they can make 9 dollars of loans.
By law, the bank has to maintain their reserves at this 10% margin. The banks also have to report this level to the Fed. It's done in the H.3 (502), Table 3
AGGREGATE RESERVES OF DEPOSITORY INSTITUTIONS AND THE MONETARY BASE. Don't let the name throw you, it's how much money all banks have in the vault. The H.3 report has been maintained for over 50 years. Here is the link. http://www.federalreserve.gov/releases/h3/Current/
On occasion, the banks need to borrow money to keep the minimum amount in their vaults. This is caused losses, like the 107 billion dollars in losses the banks suffered in 4Q/07.
Here is the important part:
For the first time in over 50 years, the amount of money in the vaults is completely borrowed. Matter of fact, they have had to borrow all the money and then another -1.407 BILLION dollars. This means, the banks, as a whole, do not have enough assets to stay in business. The banking system literally failed last week.
What this means:
This is why you suddenly heard about an incentive program out of Washington and the FDIC saying they are going to step in unless it's addressed. The only reason that the banks have not been shut down is because the Federal Reserve is loaning the entire US banking system enough money to meet the federally mandated reserves to stay in business.
What this means to you:
(I'm not a financial adviser. This is commentary. Please see a certified financial adviser doing anything.)
If you haven't pulled every red cent out of the banking system, get down to your bank and pull it out. As a frugal squirrel, you should turn this money into preps as fast as you can.
As for Precious Metals, if you can figure out how to convert your PM into real goods after the collapse of the banking system, go for it. If you are like me, and know from experience that people just don't know how to use PMs in normal day to day transactions, convert it all into cash. Preferably a foreign currency.
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3 comments:
apologies, i'm totally green...
what do you mean by preps and,
if you don't mean just giving your two cents (i understand you are not a financial advisor), what foreign currency would be a good investment?
thanks in advance.
-n
John,
You need to get a grip and really take a look at what happened to the banks during the depression when they did fail. It was because they ran out of real money to hand to real depositors. This will not happen this time because if we do see a run on any bank, the fed will simply step in and print enough money to hand out to everyone who wants their deposit. Then they (the banking system and governments ECB, BOE, FED etc. will step in and shore up the major banking institutions) If the bank is small, then they will buy it out or absorb it. The world is not coming to an end. Japan 1990's style of banking is getting ready to overtake us. You are right about one thing. No more money to lend which means no liquidity which means business as usual in the toilet which means one mean worldwide recession coming. How deep is anyone's guess.
John,
Long time viewer, first comment.
I have a few facts that you may not be aware of. First of all, the 10% rule you are refering to is called the 23 a regulation. Banks have been exempted from this!It is posted in a bulletin on the FRBNY website. A few economists have made public calls for it to be reinstated.
The big banks that are in trouble have not met the 10% rule since August.
The FDIC insurance pool is reported to be at 6.8 cents on the dollar. The fact that your money is insured is one thing. Immediate access to your money is another. Ever file a claim with an insurance company that didn't want to pay you? Good luck on getting that money quick.
In response to refurbsystems,
The demand deposits ARE the regulatory capital. It's not so much the piece of paper as it is taking that dollar off the ever dwindling assets side of the balance sheet. If they go completely red with a butt load of borrowed, the jig is up. The inevitable run will have to be tempered by the government(banking holidays) Then you will see why they need the police state that has been built.
Find nature where ever you are. Gain a complete understanding of the difference between wants and needs. Stay close to your families and friends. America has come through very hard times. She may just come out better...
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