2 votes

Bank bailout question?

Just got home and was reading some of the comments under RP's Fractional Reserve banking video on the first page on something occurred to me and I thought I'd hang it out there and get some opinions.

Scenario of contemplation:
Ok, I'm a bank and someone gives me 100k cash to hold. I then lend out 700k based on the 100k that I hold. The person who borrows the 700k then uses that money to buy a home. In 2 years the housing market takes a dump and the cost of the 700k house drops to 350K or 50%. The owner now defaults on the home because of other issues. I now take possession of the home and resell it for the new market price of 350k.I then claim a loss of 350k.

Here's my thinking. The price of the 700k house would have to drop to '0' for me to lose real money, right? The other 700k was essentially a fools bet in my favor since I didn't have to give up anything to lend the 700k and could only profit from lending the money. Also, in the end I made 350k profit without any risk.

So, my question is this - When the bailouts went through did we the tax payers pay for actual bank losses (with our actual money) or for losses they took in non-existent fractional reserve banking moneys?