Fractional Reserve Banking: How Safe is Your Money?

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fractional reserve banking

“You’re thinking of this place all wrong… as if I had the money back in a safe. The money’s not here. Your money’s in Joe’s house…right next to yours. And in the Kennedy house, and Mrs. Macklin’s house, and a hundred others. Why, you’re lending them the money to build, and then, they’re going to pay it back to you as best they can.”

—George Bailey, It’s a Wonderful Life

Although George Bailey’s iconic words teach a lesson in how banking works, things have changed since then. In reality, banks are no longer as conservative as the fictional bank from It’s a Wonderful Life. 

Banks today are increasingly risky, and you may not even know how much risk your dollars in the bank have!

What is Fractional Reserve Banking? 

The Investopedia definition of fractional reserve banking is “a banking system in which only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal.” And it’s not as simple as banks loaning up to 90% of money deposited, either. Banks also create money out of thin air, in the form of credit (or debt, if you prefer). 

Whether we like it or not, this unsecured money is a huge part of our economy. 

In recent years, the reserve requirements of most banks have been around 3-10%. Which means the bank could lend 10-33 times what someone deposits in the bank. To make matters crazier, in March of last year, the Federal Reserve Board removed reserve limits completely. 

This means that banks can “manufacture” money out of thin air, regardless of what’s in the bank. You have to think—if this is possible, what gives money it’s value? The dollar is no longer backed by gold, nor do banks have reserve limits. So money, essentially, is worth what the people agree it’s worth. 

Are the Banks Safe?

When home values were plummeting in the housing crisis on 2008 and 2009, the FDIC insurance was the only thing keeping people from mass withdrawals. In fact, they even threw consumers a bone, and increased that insurance from $100,000 to $250,000. They even had a temporary unlimited guarantee on checking accounts. 

Because people felt as though their livelihoods were safe and insured, “panic withdrawals” were ultimately avoided. The problem? The whole gesture was a bluff. Asset protection attorney Ike Devji asserted, “many professionals I deal with, including a former bank president, have described that limit as a placebo. They believe the FDIC would actually be insolvent in the event of a major run on the banks. The limit was increased to $250,000…to prevent such a run.”

Ultimately, it’s not these miniscule changes we should worry about—we should be worried about the whole system. Bank deposits have increased drastically, and people are saving more money than they have been in a long time. The most recent data shows that total bank deposits in the US are up to $17.12 trillion. 

Only about 2% of that money is covered by the FDIC reserves. Then, of course, we have financial derivatives that are also liable to cause economic damage. The housing market, and other economic factors, have a large bearing on the stability of banks. 

Is There a Safe Place to Store Your Cash?

Even if we don’t have to worry about the reserves, there are things that could impact YOUR money. If banks fail, we may be looking at “bail-ins,” where depositors might be liable for a failing bank, and their money subject to pay for those failures. Then of course, creditors and cybercriminals may have more access to bank accounts than you realize. To top it all off, banks are beginning to limit how much money you can take from your own account. 

So where is your money safe, where you can access it?

Since the establishment of the first mutual life insurance company in 1752, mutual companies have proven to be reliable, safe, and liquid. In fact, we’d say they are the most stable financial institution in history. Mutual companies are owned by the policy holders, so they are truly by-and-for the people. And they’ve paid dividends through every war and recession since their inception.

Leave Fractional Reserve Banking Behind

Fortunately, mutual insurance companies do not use fractional banking. All dollars in their system are backed by actual dollars, because the company must guarantee that they can pay the Death Benefit at any time—even if you have only paid a single premium. As such, they must have that money on hand. 

Policy holders can save their money, through premiums, into a cash value account. That account grows at higher rates than any bank, and is liquid at any time for any reason, in the form of policy loans. And, that money is safe from the prying eyes of creditors, the IRS, and cyber-thieves. 

Some call this privatized banking or infinite banking, and we think it’s time that everyone know what cash value life insurance can do. We at the Prosperity Economics Movement believe that it is the solution to financial instability, uncertain economies, and the pitfalls of Wall Street. 

To find out more about how you can use high cash value life insurance in your financial strategy, contact us and we will put you in touch with a Prosperity Economics Advisor.

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