The Banks and Their Free Ride

JP Morgan Chase has captured all the financial headlines today with a lead photo of a smiling Jamie Dimon.  Kicking off 2020 right, generating an annualized $32.5 billion in profits.  And so Jamie gets a few slaps on the back and some "job well done, man"s.  

But what many people don't understand is that there is absolutely no way in the world the banks should not be the most profitable entities on Earth.  They are the only industry that has access to make-believe capital.  The fractional reserve banking system allows banks to access and thus invest about 10x actual capital.  

In simple terms what that means, is while most companies can invest the capital they have earned and can sometimes leverage that up by borrowing on top of it, banks literally get to invest 10x the amount of capital they have.  

How does this happen?  Well through a simple piece of written policy.  That's right.  While we as consumers require a loan to access more capital than we have, banks get to actually type what they want into a computer and it is created.  Not only is that capital made available, they call it an asset rather than a liability.  

So why is this a free ride?  Well if I can earn 5% return on my $100 of capital, I make a profit of $5.  But banks will make $50 on that same $100.  

The system is rigged so that money that didn't exist for either of you magically comes into existence as your liability but their asset.  Welcome to a system designed to create two very distinct classes of society.