How Banks Make Money

March 7, 2020

The following is an excerpt from my book, smoke and mirrors. From the section titled “Banks”

“Every one of your financial decisions creates opportunities for you or for others. Unfortunately, it’s usually the latter.” David Lukas puts this so succinctly in his book Whose Future Are We Financing? I’m surprised it hasn’t become a mainstream quote within the financial field. One of the oldest and most profitable businesses has been the banking industry. We all need a safe place to store our money, but how and why have banks and banking families been able to keep and maintain wealth for generations? Certainly, they didn’t make it by storing their profits away like we’re taught to do.

I’d like to begin this earth shattering point with a chilling quote by the Rothschild brothers, dating all the way back to 1863:
“The few who understand [the banking system] will either be so interested in its profits or be so dependent on its favors that there would be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint.”

To add credence to my argument, I asked Matthew Love, author of Don’t Be Debt Free and Broke! Love answered my question on how banks make a significant profit on the loans, and Matt described exactly how the banks earn more than a 100 percent rate of return on a loan.

“[Put simply], the banks will pay a small interest rate to people who keep their money in a savings or checking account; they then take that money and loan it out at a higher interest rate.” What Love is saying here is that if you put $10,000 in a savings account earning 1 percent, the bank can then turn around and loan to my neighbor the same $10,000 at 6 percent. This earns the bank a 500 percent rate of return. The first time I heard this, I was more than skeptical. Math tells me that the bank only earns 5 percent, because obviously six minus one equals five. So, I asked Matt why he claims the bank earns 500 percent. He put it like this:

“The bank can charge $600, or 6 percent to lend the money, and pay me $100, or 1 percent. This gives them a net profit of $500! Imagine buying a computer for $100 on Monday and on Tuesday you sell the same computer for $600: you made $500, or a 500 percent rate of return. So, the connection is this. The bank has debt in the form of an interest rate owed to all the people who have money with them. They pay us in pennies to keep our money in savings or checking accounts, then they lend that same money out for mortgages and other loans and charge borrowers dimes.”

That’s when it clicked. It nearly chilled me to the bone, because you have to multiply that profit per loan, per person across every state, every county, and every city. And then there are student loans. These are loans with exorbitant interest and cannot be removed through bankruptcy. Most student debt isn’t paid off until age forty or forty five, so the bank earns a guaranteed income stream for twenty years. Additionally, the student is broke, so they’ll most likely take on more debt from the bank for other purchases. This is just the profit per student, not even counting the credit card debt…

You can operate like a bank too, but would it bother you if you found out that traditional financial theories are driving you away from that goal?