[quote=davelj]
First of all, I have no dog in the Dem vs. Rep discussion here. Having said that… in the 5+ years I’ve been visiting this site I’ve seen some real whoppers of misunderstanding where banks, their balance sheets and reserves are concerned and… this has got to be the winner. You have absolutely no idea what you’re talking about here. I mean zero. Although I must admire the zeal and detail you provide in illuminating your misunderstanding of the topic.[/quote]
So how would you explain the reserve system and the risks it presents should the loans involved end up being ‘soured’ without going to 50 pages. It is a complex subject, particularly to non-accountant people. Remember that to non-accountant people, what gets considered as a credit vs debit can be very confusing and counter intuitive. I tried simplifying(see your second that you took from me w/ respect to rates – my first sentence was “I am just oversimplifying to..”).. maybe way too much, but I am open to your suggestion of how to explain it, demonstrate the risk and why it had to be ‘covered’.. but we don’t have 50 pages here..
[quote davelj]Anyhow, go back to the drawing board and begin with two important principles: (1) in a bank, equity is leveraged, NOT assets (leverage is applied to the right side of the balance sheet, not the left side), and (2) for a bank to leverage its equity it must have… drum roll please… deposits.[/quote] which I basically hinted at in “To not default on the banks creditors, which may be someones (possibly DomArigato’s) bank account or retirement or pension..”. The deposits are not the ‘banks’ money, but they are custodians of it. Correct me if I am wrong, but isn’t equity the net of assets – liabilities.. and asset, liabilities are the two columns.. not equity?
[quote davelj]
Despite the craziness posted above, this is a salient point that I’ve pointed out before. Banks don’t own 30-year treasuries. They don’t even own 5-year treasuries for the most part. Most risk-free securities on banks’ balance sheets have a maturity of less than one year. So, after receiving 15 bps on these ST securities and then paying out 40 bps on the deposits (or borrowings) that fund them… there’s either a negative spread or no spread left. So, while the Fed is certainly providing liquidity – which is important, don’t get me wrong – the banks don’t actually make any money off of it. But it does help in keeping the doors open in times of crisis.[/quote]
The main point I was trying to address was that the money that was loaned to them from the fed is not making the banks millions/billions, and its primary purpose was to shore up the accounting and keeping the deposits safe as well as making the bank good on any interbank-loans. I was also trying to explain it outside of a pure S&L type of structure. There is a widely spread misconception that the banks are making a mint off the fed money. I tried to make it simple, maybe too simple.. and maybe ended up with foot-in-mouth(keyboard). I am very open to your description.
