You see, people are always asking me why banks behave the way they do when dealing with short sales, foreclosures and loan modifications. Often, investors and agents alike consider banks’ actions bizarre and at times, some even go as far as call their behavior, “dumb.”
Are banks really as ‘stupid’ as some lament? Quite the contrary. The problem is a lack of education as to how our money system works in this country and the truth behind the Federal Reserve.
Four score and 7 years ago, when I was first getting started in real estate, I had a gigantic misunderstanding as to how the American banking system really worked. Naively, I thought banks lent money that they had stored in vaults, the government borrowed real money from banks with tax payer’s approval and the reason why the biggest buildings in every major metropolitan city were owned by banks was because banks had all this vault money. Oh ya, and almost forgot, I also thought banks lost real money when they approved a short sale or foreclosure.
“Dear, dear Phil,” my mentor said as he smiled and shook his head, “you have no idea how our money system works, do you?”
Puzzled, and a bit insulted, I remarked, “Hey, I took 3 years of economics at Vanderbilt University, not that I am an economic expert, but I believe I understand how our money system works.”
Even more amused, he asked, “Then explain to me how the Federal Reserve works.”
I had no idea.
He said, “The Federal Reserve is neither ‘Federal’, nor a ‘Reserve’.”
He then described in detail how our money system worked in America. Blew my mind.
Glenn Beck of Fox News just did a short, but extremely informative segment on this exact same subject:
You may also want to pick up the book he recommended in the video.
This is just the beginning of this rabbit hole. But once you understand how the banking system works and the truth behind the Federal Reserve, you’ll know why the banks do what they do. Enjoy this knowledge journey!