While an $18,000 car probably depreciates when it its driven off the lot down to $9,000, very few people make a $9,000 down payment on a car today. The loan amount is probably closer to $16,000, after which the “assets” are only worth about $10,000, a loss of $6,000 to the bank should the car be repossessed.
Likewise, the value of the house is even more illiquid than the car–this is why banks are avoiding listing their foreclosures on the market. The glut of supply would depress all of the existing “assets” in homes on the market, further eroding the “securitization” of the system.
These loans are not “fully secured,” they’re just kicking the can forward until the organization holding the hot potato paper loses when the music stops.
Lending someone $9,000 to buy an $18,000 car (they put the other half down in case) is in fact not a fractional loan. The lending is in fact fully-secured and thus bears no fractional reserve of any sort. The same is true when one lends $200,000 to buy a $300,000 house. The house and the car embody ACTUAL MONEY as both are the fruits of production and thus fully secure the credit issued in such an instance. Yes, some of their “price” (in dollars) is speculative – but not all, and so long as one does not invade the actual monetary value of these created items no fractional lending has in fact taken place.
via The Market Ticker .