Hello hippo567 I am mostly with you however I still have trouble with the one point you make about lending depositors money. That is (?) that Joe Blow puts his $100k into the bank and said bank loans that out or a portion of it.
I am told it does not work that way. He puts in $100k and this can be 'used' as reserve money only - according to capital ratios so in that sense they do 'use' the money. They are forced to back loans and use our deposits to do that - not a good practice surely! They do not have to use their capital to back the loans by this method.
Offshore wholesale money markets are used for the borrowing of money at a price and this is the source of the money they extend to you when you take out a loan. They can also raise money by other means to loan out to people.
The mismatch - I agree this is one of their MAJOR weaknesses. The use of depositors money which is a liability, on the reserve book is a trap because as you said ... and they can never recall loans fast enough when something goes wrong. This is why they then have to shrink the loan book and call the most liquid loans and sell those assets as distressed assets. Because their reserves drop. As deposits fall during weak economic times the loan book is constricted as they cannot loan as much out on the lower reserve money (ours).
Timber correct me if this is wrong. Hippo we are 95% on the same page it is just this one point is that what the Gold University taught? Or was that from another source I am curious where you got this idea.
I appreciate the discussion it is valuable for readers and I will pass your comments to a contact for discussion and report back as well. We need to get to the bottom of this, I apologise if I am being thick but I remain unconvinced as yet.
The worst thing they have done is to form trading desks - proprietary trading arms - that is where the money went astray and where horrible structured products were born. Disastrous - looks like the banks are going to lose those trading arms however as they will get broken up. We shall see how that pans out.
