Belt Auction

Question regarding fractional reserve banking?

I am confused out of this "they print money out of nothing , and therefor the money never existed in the first place ! " argument. When the Federal Reserve, which I understand is actually composed of different leading banks who own like bonds in it ,I guess?, "prints money out of nothing" and they loan this money to smaller banks to loan out and , let us say the loan is for a home mortgage or a car loan and the loanee defaults, and the bank who lent takes the home or car and auctions it and counts its losses, it still has to pay back the Federal Reserve back, right? I guess simplified version of this question is this : Do the smaller banks who , I guess , borrowed the money from the banks of the Fed, have to repay the Fed if the loan is never paid back or if the asset for the loan is sold off for less at auction. Is the smaller bank still in debt to the Fed? Do they ever default on their loans? Please, help put this confusing rambling into perspective thanks! ALSO DO THESE INDEPENDENT BANKS WHO CONSTITUTE THE FEDERAL RESERVE, DO THEY TAKE ADVANTAGE OF THE ABILITY TO PRINT MONEY? IS THIS FAIR??

Public Comments

1. Okay to answer your question yes banks do default on the debt to the federal reserve. They then issue bonds or do share placings to raise the money to pay back the reserve. If they dont pay back the reserve they are taken over and then either sold off to another bank or declared insolvent and closed down. This rarely happens as it would be very bad for all the people who have savings with the banks. However in general the banks pay back the Fed as they know how to run thier operations at a profit for thier sharholders and those who have savings with them.
2. Let's break your question down a bit - Re: "... the Federal Reserve, which I understand is actually composed of different leading banks..." The Federal Reserve is made up of the Board of Governors at the top and 12 branches under it. The members of the Board of Governors are forbidden by law from having any financial interest in a private bank. The 12 branches are organized like corporations. Members in each branch must buy shares for which they get a standard 6% dividend. Operation of these branches is tightly controlled by the Board of Governors. - re: "...prints money out of nothing..." That is essentially correct. The Fed has the power to write checks from a limitless account. However, they cannot just pay salaries or buy the office coffee with that thin-air money. By law, all money issued by the Fed must be collateralized. What that means is that for every dollar issued, they have to hold something of value. The vast majority of dollars is collateralized by Treasury Bills they hold. - Re: "...and they loan this money to smaller banks..." Not really. Though the Fed can make loans to other banks, it's unsual when they do. WHen banks need money, they borrow from other banks. The Fed is the bank of last resort usually when a bank is in trouble or has unusual circumstances. - re: "...Do thanks ever default on their loans?" Yes, whenever you hear of a bank failure, they are defaulting on someones loans. - Re: "DO THESE INDEPENDANT BANKS THAT COMPOSE THE FEDERAL RESERVE, HOW DO THEY BENEFIT FROM PRINTING THE MONEY??" They benefit indirectly in that the Fed can act quickly when banks need currency. Otherwise there is no direct benefit.
3. ??