The thoughts that were thunk and the goings on of my life.

Wednesday, January 30, 2008

A Deposit, a Bank, a System, and a Dream

I found out how we can all afford our dream houses! How? Just make the money ourselves out of thin air like banks do.

Now before you simply dismiss this as a stupid idea, you have to realize 2 things:
  1. Our entire economic system is built on the use of Fractional Reserve Banking. The short story on this system is that when a bank creates a loan it never has to actually have that money in its reserves.
  2. People are allowed to create their own banks. Those banks are known as Credit Unions. Therefore, if you can't beat 'em, join 'em by making our own bank. 10 steps to starting your own credit union.
So how exactly do I pull this off? And how do things actually come together.

Principle 1:
Well, first let's cover the basics. You see up there in item 1? Fractional Reserve Banking is the real key. Banks don't have to have money in their vaults to loan that money. Now the upper limit according to laws in the US mean you have to have a ratio of 9 parts magically created money on loan to 1 part money in the vault. In other words, if you deposit $1000 into my bank, I can take that $1000 in reserve and loan out up to $10,000 to the person of my choice.

Now here is the beauty and the sadness of this system. When a normal bank created that $10,000 loan, they charge ~6% interest on all $10,000. So by you giving the bank $1000 to hold as a deposit they are now using that money to make 6% interest on 10x that much. In other words, in that first year the bank is going to get $600 in interest money on the $1000 you gave them.

So now you should start getting the idea of why the biggest building in town is always the bank's building. -Try to show me any other industry where you can use somebody else's money to make a guaranteed 60% return per year AND be able to only offer the person that gave you the money a 5% money market rate and they are happy about how much they 'made' off the bank.-

So, my point on this level is that it seems somewhat wrong for me to pull out a loan for a home and be charged 60% interest per year on money that the bank magically created. It basically makes the whole I work hard for my money thing seem futile. I spend all of my life working for money and you can simply say that money exists and viola! There it is.

Principle 2:
So the real question is not so much, how do I earn $100,000s for a house. It really should be more focussed on what can I do to make this amazing system that banks have created for themselves work for me. Now I can't just run out and buy Wells Fargo because I'm simply not that rich. But, there is a bit of a legal loophole that I could try to pursue. And that would be point 2, establish my own credit union.

Unfortunately I'm sure somebody saw this establishing a bunch of individual "Federal Credit Union of Me"ses could create some serious problems because then any individual could say they are a bank and loan themselves money. However, if you can get 500-3000 people together you CAN create a credit union. As a credit union you would have all the power that a bank has. You could borrow money from the Fed for 3.5%, and then loan out 10x that much for 6% and laugh all the way to the bank...which fortunately is not far away because you are in the bank.

But, then comes that sticky situation. I've been to my local credit union. They aren't exactly loaded in dough, so what gives? And this is where my credit union would be completely unique, and why my credit union will offer an advantage unheard of in today's world.

So the key to this whole situation is figuring out a way that you can create a loan for yourself using the banks 10x fractional reserve system. In my credit union I would keep a couple things in mind.
  1. Banks would not make loans to people who are not members.
  2. Members would have to buy 'shares' of the bank (likely at around $1000 per share).
  3. Members would only be allowed to borrow up to 10x their share value, no more than that, no exceptions.
  4. All costs would be reduced to minimum so that fees are low.
The first part is really important. Because a bank can only loan out 10x what it has on hand it's important not to give out money to people that aren't vested in our institution. Therefore, no money can be lent to people that aren't members. However, after a strict screening policy we could allow new members the opportunity to buy shares.

Shares put money into the bank's coffers. By putting that money in, you allow the bank to loan that money out. Therefore, if you want to buy a $250,000 house you need to put in $25,000 otherwise we simply can't give you the money. If you can only save $2000 for a house over the course of a few years, then shouldn't be buying a house because you obviously don't know how to save. This bank will only be for those motivated enough to save a 10% downpayment on whatever it is that they want. Now say you wanted to use that $2000 for a $20,000 car, then by all means use it for that.

Now you won't be able to pull out any more loan money until you pay off the amount that you owe OR you deposit more money into the bank by purchasing more shares. The way banking regulations work, if you pulled out $250,000 for a house you have to pay back all of the principle before the original $25,000 is free to be multiplied out for something else.

One thing we also have to keep in mind is that all businesses have underlying costs that need to be paid. We'd have to hire a CPA, setup a website, etc. However, those costs could be greatly minimized if we had NO business front, required that all members handle their own loan authorizations (it's THEIR money after all, not the bank's), etc. But the beauty is that by not having a real front, we can easily run the thing in our spare time as an algorithm that simply sits there willing to help anybody that understands how it all works. Or at the very least somebody who understands that you can't pull out more than 10x what you put in in the first place.

So, how would we pay for those fees? I'm thinking just interest on the money that is on loan. But here's the kicker. Instead of charging 60% interest like the bank would our credit union would simply charge 6% on the principle, which means that you're only paying 0.6% on the entire loan. Now that is one SWEET deal. And totally legal because banks are not required to charge a minimum interest rate.

So let's look back at that home you might be interested in. Say the home costs $200,000. Well, if you want to buy, that means you need to start saving. In fact, if you save $10,000 per year (feasible if you're willing to work for it), you could own that home within 2 years. And the best part is you only pay 0.6% interest! So, based off of this calculator, that make your home go from costing you $1200 per month for the life of the loan and paying a total of $231,750 in interest...on top of the $200,000 for the house. And brings things down to paying $600 per month over 30 years and owing a total of under $18,750 in interest. So quick comparison. Would you rather pay $431,750 to Bank of America for your home, or would you rather just save 10% down-payment and pay $218,750? I can tell you which one I would do.

So, now all I have to do is find 500 people who like using the system to their advantage and we're set! Who's in?

This post quite possibly had a lot of concepts in it that may be unfamiliar. Just so you know, everything written is totally legit. If you have some questions about what I'm actually talking about I suggest you watch a documentary called Money as Debt. Once you've watched that once (or if you're too lazy), do a search for "Fractional Reserve Banking" and you'll come up with all sorts of sites, such as this one, that one, or this other one. Most sites will be paranoid because they are thinking 'fight the system'...I'm thinking 'work the system'.

1 comment:

Anonymous said...

You're mistaking the 10x money multiplier in the system. A bank can loan out up to 90% of the money it has on hand, or it can borrow money from the Fed at the funds rate when the Fed decides to pump money into the economy through open market transactions. Once that money winds its way through the economy (getting lent out, redeposited, lent out, etc.), there ends up being 10x the original deposit (i.e., $1000 eventually results in $10000 on the books, but if everyone runs to get their deposit at the same time, there's still only $1000 and the banks fail). Unless the economy is actually growing, which is what happens in a productive economy as wealth is created by our labor, the $9000 extra in loans default. That's generally what happens in a recession (loans default and wealth disappears...think recent housing mess in which investors lost money).

If you have 500 credit union members, each with a $1000 share deposit, then the credit union can only loan out 500 x $1000. Maybe if you join the Fed (which can be done by any entity with millions of $$$ to buy a share in the Fed) you could borrow at the funds rate, but you'll still have to charge enough interest on the loan to cover the interest on the funds rate plus enough to cover your bank's fees. That's why the prime rate depends on what the Fed funds rate is. (The money the Fed is given to the US government minus operations costs, FYI).

If you want to make a 100%-reserve bank that doesn't create money through the fractional reserve system, you can go ahead and do that and charge depositors to hold onto their money in order to cover costs, but you can't make loans (due to the 100% reserve requirement). Or, if you're worried about inflation, look into hedging with investments in various commodities or commodity-related companies.