Posted by: distributorcap | March 5, 2009

Banking 101

Banking 101 (in better days)

It is all so simple:

  • Employed people earn money.
  • That money is deposit by those employed people in “demand deposit” (checking and savings) accounts, which become a liability on the bank’s balance sheet.
  • Banks are only required to keep a certain percentage (called the “reserve requirement”) of that deposited money on-hand (this is why runs on banks are very bad).
  • Banks loan that money out (assets on their balance sheet) and charge interest.
  • This interest is their revenue.
  • Money that was loaned out gets “re-deposited” in another bank.
  • Bank B is only required to keep a certain percentage as a reserve requirment, the rest loaned out.
  • The cycle repeats.
  • This is called the money multiplier effect (1 divided by the reserve requirement) and helps grow the economy by expanding the money supply (so we can all buy more Chinese crap).
  • This is how businesses make payroll, buy supplies and run an operation.

Example = with reserve requirement 20%, a deposit of $1000 when loaned out will create $5000 in deposits.

Banking 2009

It is all so simple:

  • Unemployed people don’t earn money, they collect unemployment ‘insurance’ (which is partially taxed).
  • That money is automatically deposited by state governments in “demand deposit” (checking and savings) accounts to banks they make deals with, which still becomes a liability on the bank’s balance sheet.
  • Unemployed are issued a debit card to that bank.
  • Banks are only required to keep a certain percentage (called the “reserve requirement”) of that deposited unemployment insurance money on-hand.
  • Banks don’t loan out that (or any) money out, so they cannot charge interest.
  • Banks accept money from the US Government and don’t loan that out either
  • No loans, no interest – no interest, no revenue – no revenue, no profit – no profit, no fat bonuses.
  • No money loaned, no money “re-deposited” into another bank.
  • Banks charge fees to unemployed holding debit cards to access their own money
  • Banks make some profit nickel and diming the unemployed to death.
  • No multiplier effect to expand money supply (but we still are forced to buy Chinese crap since it is the only thing that is affordable).
  • No money, no loans no businesses making payroll, buying supplies
  • The cycle repeats
  • Recession or depression

Today’s Reality = with banks making their own reserve requirements of 100% (since they won’t loan any money out), a deposit of billion$ from government infusions means the creation of no additional deposits, hence no increase in (or maybe retraction of) the money supply and no economic expanion.*

*but it does mean a bank with a better capital reserves and a lot of businesses filing chapter 7/11.

So in lieu of making “risky” loans (which today is defined as any loan), banks have gotten deep into the fee business. Fees for returned checks, fees for certified checks, monthly account fees, fees to use ATMs, raised interest rates on credit cards, fees for using their pens, fees for fixing their lousy toasters.

Add to that fees the unemployed are charged for accessing their own money – and voila, some profit! (which is good these days). And because the states cut deals with the banks, the unemployed have no choice but to accept the given bank.

Some of the banks that charge the unemployed – Citigroup, Bank of America, JP Morgan Chase. You do the math.

(of course the Banking system and Money Supply creatin is more complicated, but at least I remember this much from Money & Banking in college)



  1. good job of boiling it all down to the bare bones, dcAp.

  2. Hi Cap;I fine illustration of this mess.I for one don’t understand what was wrong with the old way of banking business where reserves were higher and banks lent out their own money and kept the loans instead of parceling them off.The interest the banks used to make payed for the services and everyone was happy (I assume).

  3. So that’s how they do it!I always thought the banks grew profits like mushrooms, by keeping our money in dark vaults and spreading a lot of horse puckey.

  4. You forgot about them firing the tellers and of course keeping the ATM machines only half filled.Regards,TengrainPS – Nice job, DCap!

  5. Those unemployed debit cards come with lots of fine print. IF you don;t choose to have $ auto deposited into a bank account, they default to the card with lots of fine print. The first 2 cash withdrawals (per month) are free, and then they charge you. You CAN take out the whole amount. Yes, the bastards tax unemployment money. They also charge you to ask a real teller a question!The States claim they are saving a bundle by dispersing $ this way….. but it seems like quite the scam.

  6. In Wisconsin we have the option of getting a check or having the weekly payment deposited directly.At this time I am getting the check and then depositing it in my checking account in a locally owned small town bank that doesn’t charge fees.I guess there’s something to be said about small town banking.

  7. What a dishonourable scam. If only the banks hadn’t made it so difficult for the general population to join credit unions, most customers would have fled by now.

  8. For. Mentioning. Our. Services. Dcap. At. 123 Main St. New York. New York. Will. Be. Charged. A. Twenty. Five. Dollar. Advertising. Fee. Please. Call. 1. 800. GOTOHEL. If. You. Have. Any. Questions. First. Highway. Robbers. Bank.

  9. Why the Feds keep bailing out these crooks is beyond me.They need to put some strict conditions on those crooked bastards before they see another penny.Or better still, let them fail and give smaller, well run banks a shot at our money.

  10. Great summation D-Cap, I am so tired of getting charged each time I want to access my money I could scream.

  11. Economist Paul Krugman has equations that show that when the interest rates dip to 0% (as they effectively have today), any additional money printed by the Federal government effectively becomes mattress money — either stuffed under people’s real mattresses, or into virtual mattresses at the banks. And mattress money doesn’t do anything to keep people employed, build infrastructure, or anything else that is useful in the present. Only handing the money out with strings attached — e.g., “we’ll give you this money, but you have to build a bridge with it” — will keep the money from disappearing under mattresses. I.e., we’re at the point where monetary policy fails, and fiscal policy is the only thing left. Sad to say, Obama seems to be hedging his bets and trying to do *both*, but he’s putting too much into monetary policy (bailouts, tax cuts) and not enough into fiscal policy (building bridges, extending food stamps — which are spent on food and cannot be saved now that they’re a debit card — and otherwise handing out money with strings that require it to be spent on something). Oh well, at least Obama is only half stupid, unlike his predecessor, who was 100% certifiably dumber than a box of rocks…– Badtux the Economics Penguin

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