Drudge has linked to an article about rising foreclosure rates. Apparently, 1 in 8 home owners ended the first quarter late on their payment or in foreclosure.
Can fractional reserve banking deleverage? Looks like we're going to find out!
In a fractional reserve system, banks are only required to hold a portion of their deposits. In the US they're required to hold about 10%. They can loan out the other 90%. That loan has to go somewhere and that somewhere is a bank. Sure, you think of it as going to the guy you're buying that house/car/boat from, but it's really going to their bank account. And once it arrives in that bank account, 90% of it is loaned out. The upshot of this is that $1 creates about $9 more dollars in loans.
Let's say there are $10 in assets at our bank—$1 of reserves and $9 from loans. What exactly happens if there are $2 of defaults? The banks reserves of $1 are wiped out, but then what? Call in the other loans? Declare bankruptcy? Ask congress for a bailout?
What happens to the Federal Reserve when the rate of defaults on mortgages and other debt exceeds the reserve ratio?
Foundation & Empire - Is Donald Trump 'The Mule'?
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