A Common Fallacy – Moving Your Money To Small Banks Accomplishes Nothing

I see this fallacy all the time.

To get back at corrupt big banks, you should move your money to small banks and credit unions.

This statement shows complete ignorance of how the financial system works.  With paper money, inflation, and a central bank, the big banks don’t need your deposit.

Most small banks have more deposits than loans.  They lend these surplus deposits to big banks at the Fed Funds Rate (minus a small fee).

Most big banks have more debt than deposits.  They borrow from other banks at the Fed Funds Rate (plus a small fee).

The biggest banks are the Primary Dealers.  They get to borrow directly from the Federal Reserve at the Fed Funds Rate.

The Federal Reserve creates or destroys reserves, so that the Fed Feds Rate stays at the target.  Almost every day, the Federal Reserve creates reserves, but they do occasionally destroy reserves.  The Federal Reserve creates new bank reserves by buying Treasury bonds from the largest banks, the Primary Dealers.  The Federal Reserve purchases these bonds with newly created money, increasing the money supply and the supply of reserves, lowering the Fed Funds Rate to the target.  The Federal Reserve can decrease the money supply by selling bonds, but this is rare.

The biggest banks are the Primary Dealers.  They get the perk of borrowing directly from the Federal Reserve, when the Federal Reserve “monetizes the debt” and performs open market operations.  They get to borrow a little more cheaply than every other bank, because they get to borrow directly from the Federal Reserve.  The Primary Dealers get to drink directly from the firehose of new money, that the Federal Reserve is pumping into the economy.

For example, Primary Dealer X might be able to borrow directly from the Federal Reserve at 0.2%, while medium-sized bank Y borrows from X at the Fed Funds Rate of 0.25%, with X scalping a profit of 0.05%.

Even if a Primary Dealer had zero deposits, it makes no difference.  The banksters borrow directly from the government.  They don’t need deposits.  The banksters buy Treasury bonds and corporate debt.  They don’t need to make loans to individuals and small businesses, although they will lend to you and charge higher fees than insiders.

The fact that Citigroup has deposits is a complete smokescreen.  You should think of a bank’s deposit and loan operations as two separate businesses.  If a bank has more deposits than loans, then it lends the surplus at the Fed Funds Rate.  If a bank has more loans than deposits, then it borrows at the Fed Funds Rate.  The actual amount of deposits is irrelevant.

Suppose that Citigroup has $10B of customer deposits, paying 0.25% including the expenses of managing the account.  Suppose that all of Citigroup’s customer’s switched to other banks.  Now, Citigroup has $0 deposits *BUT* Citigroup borrows $10B from the Federal Reserve at the Fed Funds Rate of 0.25%.  Obviously, Citigroup didn’t need the deposits at all.  It’s just an illusion.  Citigroup only has deposits because the cost of the deposits is a little less than the cost of borrowing at the Fed Funds Rate.  Also, if Citigroup had zero deposits, then it’d be too obvious that the banking system is one big sham.

If you move money from big banks to credit unions, the banksters are completely unaffected.

As long as you use government paper money, you’re indirectly subsidizing the big banks.

Even if you use a credit union, the Primary Dealers can still borrow directly from the Federal Reserve.

Even if you stuff your savings under your mattress, the banksters can still rob you via inflation.

The only way to completely dodge theft by inflation is to boycott paper money, and use gold and silver instead.

Even if everyone withdrew their deposits from the 10 biggest banks, it would make no difference at all.  They would still be able to borrow from the Federal Reserve and continue operating as before.

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