No. First off, only idiots loan money without requiring the borrower to put up some collateral to cover most of the sum in the event of a default. Not even th

No. First off, only idiots loan money without requiring the borrower to put up some collateral to cover most of the sum in the event of a default. Not even the Federal Reserve. Second, reserve requirements are there to insure the institution can cover defaults at a modeled rate. The requirement is not to cover the entire amount of the loan in the event of a default, but ONLY the difference between the market value of the collateral against the loan and the principal of the loan. So a bank with a $1000 deposit and a 1:9 capital ratio can, indeed, directly lend $9000 if their risk modeling and lending standards predict a sufficiently low default rate. This is why accurate (and conservative??) modeling and subsequent pricing of risk is so very important to a fractional reserve banking system. Mis-priced risk => actual losses are greater than projected losses => insufficient capital to cover actual losses => bankruptcy. Sprinkle in some 32:1 hedge fund leverage using crap mortgage paper as collateral and you have yourself a financial weapon with a very short fuse. The most recent incarnation of mis-priced risk has been "houses ALWAYS go up in value", leading to AAA-rated mortgage-backed securities (MBS). Which is bullshit and we all know it. The institutions that bought this crap only held enough capital to cover their modeled default rate of AAA-rated bonds, rather than the (much larger) capital to cover defaults on the junk bonds this trash is really composed of. The situation is actually worse than the author says. Those banks turn around and use the mis-priced MBS paper as collateral for even larger loans, and now the problem has REALLY been magnified. This goes 3 or more levels deep with some of the credit derivatives out there. Edit: P.S. I think the pirate author guy is kind of a doomsday nutjob. I do not think the U.S. will collapse in a poof of logic.