Banking Fundamentals, Stimulus And Economics I Don't Get

I just wonder sometimes how the banks got into this mess and we seemed to have strayed from some very basic and fundamental business practices. As far as I understand it, you give a bank money, they hold onto it for you, loan some of it out, etc. Now things start to get weird, especially when you start talking about pretend money. Let’s say I gave a bank $100.00. They get to put $100.00 on their books. So far, so good. Now, they can lend out some of that money to someone else, and only keep a portion of it in their reserves. So they take my original $100.00 and loan $80.00 of it to someone else. Now this is where some of the magic begins. The bank gets to say it now has $180.00 on its books, even though it still only has my original $100.00. Now the bank can use those numbers to make more loans from money it doesn’t have. Imagine this happening over and over again. Now, this works fine, as risky as it is, if everyone pays their bills. I wonder what would happen if a lot of people were not able to pay their bills and defaulted on their loans…

So where do we go from here? Make smarter loans? Make the banks keep more money in their reserves, not having as much to “give” out? Educate people to only borrow what they can afford to pay back? Probably a little bit of everything. Economic stimulus can only do so much as long and credit and lending practices remain the same and banking fundamentals remain in lala land.