The problem lies in our overtly criminal government, obviously, but also in the banking paradigm itself. Fractional reserve banking with unsecured lending has got to go. In the current banking paradigm, banks are required to keep from zero percent to ten percent (yes, thats right, ZERO PERCENT) of customer deposits on hand as reserves, and loan the rest of the money out. If a customer deposits $100 in Bank A, $90 is lent out and $10 remains as reserve (and this is the CONSERVATIVE version). Whoever borrowed the $90 then deposits it in Bank B. Bank B then lends out $81 and keeps $9 in reserve. And so on, and so on. If you go through ten cycles this way, you end up with the original $100 being leveraged into $686.19 of deposits backed by only the original $100. This is what they call money creation. For you math buffs, this is a limit function. With a 10% reserve requirement on a $100 initial deposit sum, the limit terminates at $1000. With a 5% reserve requirement on $100, the limit terminates at $2000. With a zero percent reserve requirement, the limit is obviously infinite. A reasonable, non-zero reserve ratio is workable, but only so long as banks are required to carry one dollar of reserves for every one dollar they lend out. These reserves can be either in the form of the banks own capital, OR in the form of FAIRLY VALUED booking of the assets purchased with the loan. All unsecured lending must stop. This means that all home mortgages must be marked-to-market every single day, and if the home is worth less than the loan outstanding, the bank must post its own capital against the shortfall. This also means that credit cards, which are totally unsecured because they are used to purchase mostly non-assets, such as meals, gasoline, vacations and pure service commodities, must be backed by bank capital dollar-for-dollar. The bank could sell bonds to raise capital if it wants to make unsecured loans and then would be arbitraging the spread between the interest rate it must pay on the bonds and the interest rate plus default risk on the credit cards. In this way, the worst that could possibly happen, namely every unsecured credit line totally defaulting, would result in the bank owners and investors losing their money but the customer deposits would be safe because all of the loans against hard assets, which would be properly valued and marked-to-market, could be sold to other banks in the market, and that revenue would fully cover all customer deposits.
In not posting capital against unsecured loans, the banks are indeed naked short selling our currency and it matters not whether that currency is gold-backed or not. The credit card customer is promising to pay back (deliver) a loan with money that they do not have and does not exist, and they wont be able to borrow. So, the bank and the customer together are colluding in the naked short sale. The long on the other side is the citizen and taxpayer who will subsidize the inevitable need to print more dollars to bail out both the bank and the customer. Taxes will be raised and the currency will be further debased, causing price inflation a one-two punch to the citizen. This is EXACTLY what is happening to us today.
Well, the reality today is that banks are both writing massive quantities of unsecured loans and doing nothing on their side to balance the ledger, AND they are failing to honestly and realistically book the values of their hard-asset loans. The big banks are still booking home values at their original purchase price not the fair market value today. Given the housing bubble, most mortgages today are underwater and are worth far, far less than the principal balance to say nothing of interest. This is why I say, echoing others, that the major banks in this country are not just totally insolvent, they are insolvent multiple times over. If the government wasnt criminal and the favored banks of the oligarchs actually had to comply with Sarbanes-Oxley, the entire system would implode into a singularity tomorrow.
For more info and a much better explanation of the concepts covered to this point, do purchase Leverage by Karl Denninger a very easy-to-grasp, detailed explanation of the whole, stinking mess.