How is fractional reserve banking different from naked short selling?

water_skipper: How is fractional reserve banking different from naked short selling?
How is fractional reserve banking different from naked short selling? When a bank lends more money than it has, isn’t that the same as a daytrader selling more shares than he has? Doesn’t that mean fractional reserve banks are really naked short selling the dollar?

Answers and Views:

Answer by chrisbro74
Hi
Yes and no.

Its not the same as the day trader scenario because the day trader actually has assets (shares) behind his stock certificates!

‘short selling’ is actually the purpose of fractional reserve banking – to create more money.

When fractional reserve banking is used, a bank must have 10% of what they are actually lending out. This is recognized as standard banking practice in many countries. So if they have $ 100 in cash, they can issue $ 1000 in bank loans. But when this $ 1000 is paid back, they still only have $ 100 cash, they can then lend this out as $ 1000 again, not as 10,000.

But here is why fractional reserve banking does suck:

because you are paying interest on the full $ 1000 of that loan, the bank is raking in all the profit and only having to pay a small amount of that back to its depositors, who only actually deposited $ 100.
On an 8% interest loan, the banks return is not 8%, its 80%.

and here is why fractional reserve banking really sucks:

90% of money can be (and probably is) created through fractional reserve banking, with interest charged on all of that.
Put simply, for every dollar there is an attached amount of interest that must be paid back, in dollars.
But, how can you ever pay back interest in dollars, when the person you borrowed from creates all the dollars, and is not willing to give you interest free loans?
You can only pay the interest by borrowing more money, with more attached interest. Never ending debt.

bottom line: you can never get out of this cycle of debt without serious monetary reform, such as repealing the federal reserve act 1913 and having the government create its own, interest free money, as its given the right to in the constitution.

Hope this helps