Question regarding "Fractional Reserve banking"?

Question

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!

ANOTHER QUESTION I WOULD LIKE TO ADD IS THIS:

ARE THE INDEPENDANT BANKS WHO CONSTITUTE THE FEDERAL RESERVE ABLE TO BENEFIT GREATLY BY THEIR ABILITY "TO CREATE MONEY OUT OF NOTHING" OR NOT?

IS THIS FAIR?? HOW SO??

Answer 1

Let's break your question down a bit

- Printing money out of nothing

Let's use an example to simplify it.

Suppose Federal Reserve determines that the economy is sluggish and needs an infusion of $100B.

No problem! They go out and purchase $100B in Treasury Bills owned by the public at the prevailing rate. Whereas prior these instituions and people had $100B in T-Bills, they now have $100B in cash. Like a good investor, they will immediately invest it in other things.

So where did the Fed get the $100B to buy the T-Bills? Out of thin air. Imagine that you had a checkbook that allowed you to write as many checks as you wanted without being overdrawn. That's what the Fed has.

When the Fed buys and sells T-bills, it changes the base money supply. There is another way money is created called the "deposit multiplier" which does not involve the Fed directly and that would be another, longer answer.

- Structure of the Fed

The Federal Reserve is organized with the Board of Governors at the top and 12 branches.

The Board of Governors is a federal agency reporting to congress. There is no mechanism for private ownership at this level.

The 12 branches report to the Board of Governors.They are organized like corporations. Member banks are required to purchase shares for which they get a standard 6% dividend.

- Where does the profit go

To the Treasury. Almost all the profit from the Fed is from the interest on the T-Bills they hold. After expenses, the Fed turns over the remaining profit to the U.S. Treasury. In the past, about 98% of the interest paid on bonds owned by the Fed is returned to the Treasury.

- Borrowing from the Fed

Even though the Fed is the 'bank of last resort', it does very little actual lending to private banks. When a prviate bank need a loan, it goes to other banks who want to make use of their idle money.

Occasionally banks will default on a loan in which case the bank assets are considered fair game by the loaning bank.

Answer 2

As for printing money out of nothing, the fed creates money by buying government bonds, with newly printed money. This is called "monetizing the debt". When there is too much money in the economy, they sell their govt bonds and take dollars out of the economy.

Banks can borrow from the fed, I don't think they default on the loans. Maybe the fed uses the banks "reserve", which is kept at the fed to pay off the debt if a bank goes belly up.

Answer 3

Yes, if a bank borrows money from the Fed, it has to pay it back.

But only a small portion of the money that banks borrow, are borrowed from the Fed. Because the Fed is expensive. Bank borrow large portions of their "money" from the public in the form of savings and check accounts.