The next concept you need to understand is, how do banks work? How do they use money?
They use money differently than you do because they work on a different playing field. They work with a different set of rules. So to give you a graphic picture of this, I’m going to tell you a true story. Our daughter-in-law works for Wells Fargo. She started there after college, age 22, roughly. When she started working there, they said to her “You’re an employee here, so we want you to have a checking and savings account here.”
So every Friday, Wells Fargo would pay her, and the money would leave Wells Fargo and go into her Wells Fargo checking account. After a little while, she needed a car. They said, “No problem, we’ll finance the car for you.” So every month at the end of the month, money leaves Wells Fargo and goes back to Wells Fargo, from one account to the other. That’s all that’s happened for the car payments.
A little time goes on, she meets our son. They get married, and they decide they need a house. So they go to buy a house, and Wells Fargo is there. “We’re going to make sure you get a mortgage for that home, so you can start your family and get things going.” So once a month, money leaves Wells Fargo, and where does it go, people? Wells Fargo.
Little more time goes by, and they’re going to have a baby. So they decide it’s time to finish the basement of the house. And Wells Fargo says, “No problem. We’ll get you a HELOC, a home equity line of credit.” So once a month, one more thing leaves Wells Fargo and goes to Wells Fargo.
Now along the way, she needed a credit card and a debit card. So once a month that gets taken care of. The credit card once a month leaves Wells Fargo, her account, and goes to Wells Fargo’s credit card account. You see the pattern here?
One more insidious one. They said to her, “You know what? You’re a valued employee. So what we’re going to do, is we’re going to set up a 401(k) for you. Every week we’re going to take some money out of your paycheck and we’re going to put it in a 401(k) for you. Then later on in life, you’re going to have all kinds of money.” So every week, they take money out of Wells Fargo, and they put it into her 401(k). “We’re going to take that out of your paycheck every Friday, and we’re going to put it in there. And guess what? In 40 years, we’re going to let you use it.” Who’s getting to use it for the 40 years?
Wells Fargo is. That’s exactly right. Do you want to be our daughter-in-law, or do you want to be the bank?
At this point, somebody is usually thinking to themselves, “Well Tim, not everybody works for a bank.” Well, let me tell you the truth. The truth is, it would be better for Wells Fargo if that initial money came from somewhere else. From a different bank. Once you start with one bank, most of you will end up doing all of your financings at the same bank. Maybe a couple different ones, but most people are pretty loyal to their bank.
So now the money is coming from somebody else’s bank into Wells Fargo, and now it’s circulating in there. That’s better for them. There’s still one place that would be better, and that’s if that was your bank. Because if that was my bank, would I care about making my credit card payment every month? No, I wouldn’t care at all. But is it going back into my pocket, or does something else get added to it when it comes back?
Interest. When the bank loans me money, they don’t just get their money back. They get their money back plus some interest on top of it. That’s what they’re in business for. So if the bank gives you 1% interest on your savings deposit, but then they take your money, and they loan it to me at 4%. What percent profit is that for the bank?
They’re giving you one, and I’m paying four. It’s actually three. Three points of difference. So you’re saying it’s either three, four or 5%, somewhere in that range. Yeah, that’s the most common answer. 3%, the difference between the one and four is the most common answer. But that’s just percentages. That doesn’t take into account the fact that that’s actually a 300% profit to them. It’s three points of separation, but it’s 300% profit. Banks are allowed to do this multiple times with money. See, if you give the bank $100, they owe you $100. Because you’re parking it there, they now have a liability on their books. They owe you $100 because that’s your money.
But the bank is allowed to keep 10 of that dollars. Then they’re allowed to loan out $90. So they’re allowed to loan out nine times more than they have, just on that one transaction. Remember, they still owe you $100. So they’ve created money completely out of thin air. That money does not exist. To prove that, go to your bank on Monday and say “I would like to withdraw $10,000.” They will tell you to make an appointment and come back later. They won’t have your $10,000 because they don’t have that much cash there. Most banks don’t have a huge vault with tons of cash stacked in the back of the building. So that’s why they make you set an appointment so that they have time to get the money.
Remember, we said in your case it was 300% profit on one of those transactions. But what if they were doing nine or 10 transactions with that same dollar? That would be maybe a 3000% profit on a one to four ratio. Well, with a credit card it could be one to 29% ratio, it could one to 14%. On a house it could be one to six, or a business loan one to six to eight. You get the idea, that these percentages are big. The gross potential profits on these could be as high as 3,500 to 7,000%, depending on the types of loans. Less all the expenses and stuff, they’re making a lot of money.
This is why you find really nice banks on every corner of every town everywhere. And not just one. I mean, look at Denver. We travel a lot around the country and we were recently out in the middle of nowhere in Kansas. Little tiny farm and ranch town, and there were like four banks in the center of that town. I can’t imagine anybody ever even goes in there. There’s just not that many people. But there’s that much money involved in the banking industry.