Monday, November 10, 2008

2 Trillion dollar bailout; $700 billion bailout; Fractional Reserve Banking; Fulton Bank; Lancaster, PA

The Federal Reserve bailout plan is causing predictable consequences, as spending is out of control:
The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.
H/T Bloomberg

This item from Lancaster, PA provides some insight into how the money is being spent and a brief mention of the real cause of the meltdown (and the business cycles we have endured for 100 years):
The Treasury Department's $700 billion rescue plan is best known for propping up wobbly financial institutions.

But the plan also has a provision for healthy ones, figuring they can help guide the economy back on track.

Fulton Financial Corp. said Thursday it has applied to get $375 million in capital under that government-investment initiative, the Capital Purchase Program.

"If we get it, our intention is to use it to provide additional loans," Fulton Financial's Charles J. Nugent said today.

Since banks generally loan 10 times their amount of capital, an extra $375 million in capital potentially could lead to an extra $3.75 billion in loans, he explained.
emphasis added

I did not know that the multiplier was as high as ten, but I knew that this process exists. Ask yourself, how does a bank loan "10 times their amount of capital. . . "? Where do they get the money to make such loans, if such loans do not represent actual capital? In the above example, where does the other $3.4 billion come from?

The answer is found in our system of fractional reserve banking. The system (and its consequences) are described (in layman's terms) in "The Bubble that Broke the World" and "America's Great Depression." Knowing how a bank can take $375 Million and create $3.75 billion in loans would be a tremendous step in understanding how our financial system collapsed this year.


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