“Like Money in the Bank”??

Some people are surprised to learn that a bank doesn’t keep all of its deposits on hand, in reserve, in case its depositors decide to withdraw it. (If you know someone who lived through the Great Depression in the ’30s they remember FDR’s “bank holidays”: when the banks run out of $ it’s time to take a holiday.)

Bank RunQ. So if your bank has deposits of $40 million how much cash does it keep on reserve (not loaned out)?

A. $1.2 million, or about 3% on average.

The cash reserve % is dictated by the Federal Reserve, supposedly to avoid a repeat of the 1930s when banks’ reserves were depleted by nervous customers withdrawing their savings. When a bank’s reserves went to zero the bank went bust–the trick was to get your $ out before the bank ran out. Back in 1937 the Fed told banks they had to keep 20% in ready reserves. Since then they’ve been dropping it steadily, hoping we wouldn’t catch on.

BUT… this ain’t the bad news!

Bank Reserves Go NegativeEven though your bank may only have 3% of the money you’ve deposited on hand for withdraw (they lent the rest out) the Fed just announced the banks actually don’t even have 3% on hand. As of Jan 31, 2008 their cash reserves have gone negative!

“Oh, don’t worry,” the Fed says, “it’s not a problem.”

MadnessYou see, in order to make life easier on the banks the Fed lets the banks BORROW the money for their “cash” reserves. So the banks are borrowing the 3% they’re supposed to have for reserves. But wait, it gets better! The banks are now borrowing MORE than the 3%, meaning their reserves have gone NEGATIVE. Holy smokes! Does this strike you as insane?

◊◊◊◊ As of today: Gold @ $899.75, Silver @ $16.70 ◊◊◊◊


2 Responses

  1. […] Yeah, I know, sounds dangerous. I wrote about it in Feb 2008 [“Like Money in the Bank”??]. […]

  2. […] Remember: I’ve reported that America’s banks already have ZERO cash reserves. […]

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