Fractional Reserve Banking....Legal or Ponzi Scheme?

late September, the U.S. Justice Department filed a civil suit against Full Tilt Poker, an online gambling site.  They claim that thousands of online poker players were defrauded out of more than $300 million that is still owed to them. The government said that, in total, the 23 owners of the site had taken out $444 million in distributions over the years.

According to the Wall Street Journal…..On March 31, 2011, Full Tilt owed approximately $390 million to players around the world, but the company had just $60 million in its bank account, the government said in its filing Tuesday.  (Quick math…this is about 15% money on hand vs what is owed).

Credit: chadelliot.com

Enter “Fractional Reserve Banking”.

For those that do not know, Fractional Reserve Banking is a form of banking where banks maintain reserves (of cash and coin or deposits at the central bank) that are only a fraction of the customer's deposits. Funds deposited into a bank are mostly lent out, and a bank keeps only a fraction (called the reserve ratio) of the quantity of deposits as reserves.  Typically the reserve ratio is 10%, meaning that for every $1 that the bank has in the system, they can create loans for up to $10. 

Funny how this is legal, yet Full Tilt Poker is a Ponzi Scheme.

Now I know that these examples are different.  The owners of Full Tilt Poker were clearly stealing the money, however if they were intending on putting this money back into the “pool”, should this have been allowed? 

Canadians ought to know that the banking system has their own set of rules.  Sometimes this is a benefit and sometimes it can build a foundation for a catastrophe (see “Lehman Bros.”)

Thoughts?