Where did the 'Fractional Reserve Banking' meme begin?

[portlandatheist]

So I remember learning about the Federal Reserve and how it works, how stocks work etc back in high school. No big deal, I'm no expert but have a cursory understanding. I've seen the 9/11 conspiracy theorists proclaim the evils of fractional reserve banking, then the Ron Paul supporters, but now I've heard about it from coworkers and at my local coffee shop.
Now, I know there are real concerns about our economy and the Zimbabwe crisis is a great example of a poorly managed currency but the entire Austrian school of economics is just plain stupid.
So where did this meme begin? It's all over the place here. Did it start with Ron Paulians? The 9/11 truthers? Austria? What is giving this movement life? The falling dollar? The credit crisis? Simply Bizarre.

[quixotecoyote]

Are you sure you mean to equate the Austrian school with goldbuggery?

[Gazpacho]

Antipathy toward the idea of lending is as old as lending itself. But you've asked specifically about fractional-reserve banking, which is referring more to the deposit side of things.

The banking system of the 19th century US was not that great. Counterfeiting and fraud were routine, there was nobody to verify a bank's solvency, and no guarantee if it failed. So suspicions were well-justified, in contrast to the situation today.

During that period the people who were suspicious of banks wrote, and they spoke. That rhetoric is still available for reading, and people do read it, without much appreciation for its context.

[Francesca R]

So where did this meme begin? It's all over the place here. Did it start with Ron Paulians? The 9/11 truthers? Austria? What is giving this movement life? The falling dollar? The credit crisis? Simply Bizarre.It is one of many things that I hear about on this forum but nowhere else, and certainly not from anybody I consider to be a serious analyst of economics or banking (then again, those people would all be "apologists for the present arrangement"in the eyes of these memetics).

The credit crisis (not the first such sudden and massive reduction in ability to borrow and willingness to lend) is something that exposes non-trivial weaknesses in the financial systems and policy objectives and incentive structures of the world, but calls to go back on XAU-backed currency and outlaw fractional reserve ratios are IMO incredibly daft suggestions lacking the foundations of analysis, logic and historical knowledge.

[dudalb]

Gold Buggism and Anti Federal reserve crap are much more common then this Anti Fractional Banking nonsense.
What is ironic is that most of the people who support this crap theory would say they are strong supporters of Capitalism and a Free Market, while they want to abolish one of the very institutions that makes a modern Free Market possible:the ability of banks to loan money to people to start and expand businesses.

[OneDollarWilliam]

As someone who's understanding of economics, sadly, starts and ends with his wallet could someone give me a quick rundown of fractional reserve banking, and the argument against it?

[AvarianParakeet]

Sure,
Here's the basics of it. The banks in America don't have to hold all of their deposits in the bank at one time. Only a set reserve amount must be held behind. I believe it is 10% at this moment. So, if a man deposits $1000 at a bank, they must only hold $100 behind. The other $900 can be loaned out. The logic is that the man will not need his whole $1000 in deposits at any one time. If he does need a big deposit, then the bank can dip into the other 10% available.

The big problem people have with it is the multiplier effect on the money supply. That $900 loan will be spent as long as the receiver doesn't burn it in a field (if that was his plan all along, then the bank needs to reevaluate their lending policy). Most, if not all, of this money will work its way back into a bank somewhere as another deposit. This means that $810 dollars will be made in another loan. The cycle keeps going until it fades away. This effectively "creates money" and some people don't like that idea.

The benefits are pretty clear. It generally allows more economic growth. If the reserve requirement was dropped, then we'd see greatly reduced spending for big purchases and economic advancement would happen at a slower rate.

The drawbacks depend on your own thoughts in the end. If everyone wanted to withdraw their money, then the economy would pretty much implode. The likelihood of a nationwide bank run is pretty much nil though. In any event, if such a catastrophe happened to cause a nationwide bank run, then I assume a shotgun and a box of shells would be a better investment. For the most part, the Fed acts as a safety net. In the event of a local bank run, they'd be able to secure a low interest rescue loan from one of the Fed's branches.

Some state that the system does too much to encourage people to go into debt, although I personally think that the real problem lies with credit cards which are effectively out of the system. Mortgages and general loans are just investments that generally help one secure new wealth over time.

The last falls more to gold standard arguments that generally have more to do with fiat currency in general. Some people (I'm sure one from the forum will smell the blood in the water soon) believe that fractional reserve banking works with the fiat currency to grossly devalue the currency and that it will eventually become worthless. That's another discuss though.

I hope I covered everything.

[Gazpacho]

The big problem people have with it is the multiplier effect on the money supply. That $900 loan will be spent as long as the receiver doesn't burn it in a field (if that was his plan all along, then the bank needs to reevaluate their lending policy). Most, if not all, of this money will work its way back into a bank somewhere as another deposit. This means that $810 dollars will be made in another loan. The cycle keeps going until it fades away. This effectively "creates money" and some people don't like that idea.
This analysis is wrong, though, because it overlooks the fact that debtors are on the hook to the bank, and that the bank is on the hook to its shareholders. When these things are properly accounted for, there isn't any "multiplier" or "creation." There is just a temporary transfer of the right to use money that already exists.

[AvarianParakeet]

True. The assets aren't really changing at all since their gain is canceled out by the debt. It does keep the money moving though and effectively increase the spending power. I guess I should have described it more as the velocity (or speed, all my economics terms are jumbled :) ).

[Gazpacho]

I would describe it as full utilization of capital. I'm not sure if that amounts to the same thing.

[Francesca R]

This analysis is wrong, though, because it overlooks the fact that debtors are on the hook to the bank, and that the bank is on the hook to its shareholdersI think you mean its depositors.

[GreyICE]

This analysis is wrong, though, because it overlooks the fact that debtors are on the hook to the bank, and that the bank is on the hook to its shareholders. When these things are properly accounted for, there isn't any "multiplier" or "creation." There is just a temporary transfer of the right to use money that already exists.

This is a bit of handwaving of the issue. The banks 'create' money, pretty much period. This is clearly understood economics, and I don't quite get how you're getting around it with the fact that the debt has to be paid back (hint: The banks lend out the money as soon as it's paid back, so that doesn't do anything to the system).

The concept that there's 'extra' money in the system is reasonably easy to understand when we use something like bonds. Assume there's no bank, no stocks, only bonds. The only sound investment is bonds, therefore (it's the only one, actually). Therefore, if we assume people do not sit on money because they would not miss the opportunity cost of missing bond payments, they will always either spend the money, or invest in bonds (which will then go to people who spend the money).

The only difference is that in this case, no one can call all the bonds at once. Which is what a run on the bank does.

In reality the extra money is spread through a range of investments, including bonds, stocks, and other investment options, not just banks. The multiplier effect remains though.

[G-K-4]

Discussions of this sort always remind me of [/URL][URL="http://www.youtube.com/watch?v=_Er69b4HMl8"]this (http://www.youtube.com/watch?v=_Er69b4HMl8).

As a basic introduction, how accurate is the description in the movie?

[Deus Ex Machina]

So I remember learning about the Federal Reserve and how it works, how stocks work etc back in high school. No big deal, I'm no expert but have a cursory understanding. I've seen the 9/11 conspiracy theorists proclaim the evils of fractional reserve banking, then the Ron Paul supporters, but now I've heard about it from coworkers and at my local coffee shop.
Now, I know there are real concerns about our economy and the Zimbabwe crisis is a great example of a poorly managed currency but the entire Austrian school of economics is just plain stupid.
So where did this meme begin? It's all over the place here. Did it start with Ron Paulians? The 9/11 truthers? Austria? What is giving this movement life? The falling dollar? The credit crisis? Simply Bizarre.


There were several publications in the late 70's or early 80's that were aimed at the "Fractional reserve Banking" evilness along with the Fed as a private institution.

I honestly don't remember who actually wrote them but the person that wrote them seemed to think that economics was all about swapping pigs and fruit in villages and that was a good thing.

[GreyICE]

Discussions of this sort always remind me of [/URL][URL="http://www.youtube.com/watch?v=_Er69b4HMl8"]this (http://www.youtube.com/watch?v=_Er69b4HMl8).

As a basic introduction, how accurate is the description in the movie?

Err, it's been a while since I saw the movie, but from what I remember, okay, given Hollywood.

It's a hell of a lot more complicated than the explanation, I'm sure, but yes, the banks only have a fraction of what they 'have' in savings.

[lomiller]

Sure,
Here's the basics of it. The banks in America don't have to hold all of their deposits in the bank at one time. Only a set reserve amount must be held behind. I believe it is 10% at this moment. So, if a man deposits $1000 at a bank, they must only hold $100 behind. The other $900 can be loaned out. The logic is that the man will not need his whole $1000 in deposits at any one time. If he does need a big deposit, then the bank can dip into the other 10% available.

The big problem people have with it is the multiplier effect on the money supply. That $900 loan will be spent as long as the receiver doesn't burn it in a field (if that was his plan all along, then the bank needs to reevaluate their lending policy). Most, if not all, of this money will work its way back into a bank somewhere as another deposit. This means that $810 dollars will be made in another loan. The cycle keeps going until it fades away. This effectively "creates money" and some people don't like that idea.


If you deposit $100 in a bank, the bank can only loan out $90 of it. Assuming that $90 is spent and the person who receives it deposts it you could loan out another $81, and so on. In the end you would have $1000 in debt (people who deposited money) $1000 in assets (people who you loaned money to) and you must have $100 in cash on hand. At that point you can no longer loan out money, but it means that $100 of real cash in the economy equates to $1000 of instantly redeemable cash equivalent.

This money multiplication is really just an outgrowth of the fact that $1 of cash circulates in the economy and creates more then $1 of economic activity. The people complaining about fractional reserve banking are essentially suggesting we limit economic activity to the amount of available money. They usually go a step further and say we should have a gold standard, so that economic activity is limited to the amount of gold in existence.


It isn’t really possible for everyone to want their money all at once unless their aim was too burry it in their backyard. Barring that, the cash is going to be sitting in someone’s account somewhere. The liquidity of individual financial institutions can be an issue, which is why the Fed has the power to act as a lender of last resort and lend banks the money they need if all their depositors try to get their money at once.

[Francesca R]

It isn’t really possible for everyone to want their money all at once
It is the same with the equity or bond holders of any traded corporation or the partners in a partnership, or the holders of any supranational or sovereign issuer (such as the US government). They can theoretically all "want" their money at once, but they can't all get it. What happens is that the price of their investment falls (or the yield to maturity rises, or the currency it is denominated in falls relative to others . . .) Until enough people change their minds and the demand and supply clears. In extremis the only way to achieve this is via a default event.

The liquidity of individual financial institutions can be an issue, which is why the Fed has the power to act as a lender of last resort and lend banks the money they need if all their depositors try to get their money at once.This is not fail safe either. Your (if you are US) FDIC only has enough readies for a few IndyMacs at a time. After that there is no plan B really. Oh yikes what a risky world eh?

Those who had no idea that such subterfuge was rife in the financial systems of the developed world probably would like to protest "informed consent", but I tend to think their ignorance was voluntary :)

[SaulOhio]

Those opposed to fractional reserve banking are not necessarily opposed to lending money. Its just that money that is lent out needs to be clearly identified as such. I mean that the deposits people have that are readily available for withdrawal should actually still be there in tha bank. Money lent out should first pay for investment instruments like CD's which cannot be withdrawn at will, at least not without a penalty.

As far as all the attacks on the Austrian school, how about actually saying whats wrong with it, instead of just calling it stupid?

I think of the Austrian School of economics as the most realistic, based on human nature as well as the assumtion that government is unable to change the fact that 2+2=4.

Abolishing fractional reserve banking would not end the practice of lending. It would simply introduce some self-discipline into banking by separating the money available for withdrawal from the money that is lent out.

[drkitten]

I think of the Austrian School of economics as the most realistic, based on human nature as well as the assumtion that government is unable to change the fact that 2+2=4.


:notm

[GreyICE]

I think of the Austrian School of economics as the most realistic, based on human nature as well as the assumtion that government is unable to change the fact that 2+2=4.

Why are you blaming the government here? The government does not do this. In fact, the government limits the banks ability to do this. The only way you could accomplish what you want is further government regulation.

Oh and yes. This does make the entire system a house of cards. A house of risky, unstable cards. And people wonder why I'm okay with some government regulation of the economy. Houses of cards are inevitable.

[SaulOhio]

Why are you blaming the government here? The government does not do this. In fact, the government limits the banks ability to do this. The only way you could accomplish what you want is further government regulation.

Oh and yes. This does make the entire system a house of cards. A house of risky, unstable cards. And people wonder why I'm okay with some government regulation of the economy. Houses of cards are inevitable.
That may depend on how loosly you define "regulation". The government's proper role in a free market is to protect rights, such as property rights. Since fractional reserve banking results in inflation, which does rob people's savings of their value, making the practice illegal is a defense of individual rights. Regulation means government doing anything above and beyond such defense of rights.

I think the defining characteristic that differentiates regulation from legal protection of rights is an attempt to achieve specific outcomes, rather than simply setting basic ground rules and letting the system function on its own.

[GreyICE]

That may depend on how loosly you define "regulation". The government's proper role in a free market is to protect rights, such as property rights. And yet whenever people start talking about other rights, such as the right to healthcare or the right to have some sort of shelter or the right to not starve to death in the streets, free marketers always come down and cry about how we're destroying the world and we're horrible communists and...

Oh. It's rights that you like that we have to protect! Silly me.

Since fractional reserve banking results in inflation, which does rob people's savings of their value, making the practice illegal is a defense of individual rights. Regulation means government doing anything above and beyond such defense of rights. Err, no. Regulation means regulation. It's not hard. You're pulling a classic No True Scottsman here.

"Government regulation hurts the economy."
"What about this?"
"We need to stop that immediately!"
"Isn't that Government regulation?"
"No, because it's protecting individual rights, so it's not TRUE Government regulation."

You're in favor of government regulation too. You just want it to be regulation you like.

I think the defining characteristic that differentiates regulation from legal protection of rights is an attempt to achieve specific outcomes, rather than simply setting basic ground rules and letting the system function on its own. I thought you were trying to eliminate the 'Fractional Reserve Banking' effect. Isn't that a rather specific result?

[Gazpacho]

I think you mean its depositors.
I mean the shareholders, who are supposed to influence the bank not to make bad loans.

This is a bit of handwaving of the issue. The banks 'create' money, pretty much period. This is clearly understood economics, and I don't quite get how you're getting around it with the fact that the debt has to be paid back (hint: The banks lend out the money as soon as it's paid back, so that doesn't do anything to the system).
Maybe. Maybe the bank needs to increase its reserves instead. The handwaving is in saying that "money will usually end up going this way" as if it's the only relevant possibility.

It's well understood throughout business that, when determining how much something is worth, you have to subtract out obligations. So I don't see how you can say that money is being created. What happens is that the use of money is allocated over time. Borrowers can use it, and what they are able to buy with it, while depositors don't. They aren't using the same money at the same time.

[Tippit]

And yet whenever people start talking about other rights, such as the right to healthcare or the right to have some sort of shelter or the right to not starve to death in the streets, free marketers always come down and cry about how we're destroying the world and we're horrible communists and...

Oh. It's rights that you like that we have to protect! Silly me.
Err, no. Regulation means regulation. It's not hard. You're pulling a classic No True Scottsman here.



The problem here is that you assume "rights" like healthcare, food, and shelter are in fact, rights when they are not. No right can depend on the coercion of another to exist. The right to free healthcare depends on forcing a doctor to care for you, or forcing someone else to pay for it. The right to shelter depends on forcing a builder to build you a shelter, or forcing someone else to pay for it. The right to food requires forcing a farmer and a cook to farm and cook your food, or pay someone else to do it. These are basic human necessities, not rights.




"Government regulation hurts the economy."
"What about this?"
"We need to stop that immediately!"
"Isn't that Government regulation?"
"No, because it's protecting individual rights, so it's not TRUE Government regulation."

You're in favor of government regulation too. You just want it to be regulation you like.
I thought you were trying to eliminate the 'Fractional Reserve Banking' effect. Isn't that a rather specific result?

The limit to regulation, should be that which is necessary to protect free people from being defrauded, or harmed.

[Roboramma]

That may depend on how loosly you define "regulation". The government's proper role in a free market is to protect rights, such as property rights. Since fractional reserve banking results in inflation, which does rob people's savings of their value, making the practice illegal is a defense of individual rights. Regulation means government doing anything above and beyond such defense of rights. It seems like you're saying that anything that causes inflation should be made illegal, because it robs people's savings of their value. Is that really what you're saying?

I think the defining characteristic that differentiates regulation from legal protection of rights is an attempt to achieve specific outcomes, rather than simply setting basic ground rules and letting the system function on its own.

Look, either you think that fractional reserve banking is a problem because it has negative economic effects, in which case you want regulations so that we can avoid those effects, or you think it's a problem because it violates someone's inalienable rights to not have their money decrease in value. If the latter is a "right", the former doesn't really matter, does it? Either way, we should make this practice illegal.
But your whole point seems to be the former, rather than the latter. Your whole argument is one of regulation for the benefit that it will cause, not the protection of some nebulous rights.

I mean, you think government should limit what banks can do, because those limits would be good for the economy. That's regulation.

[GreyICE]

Maybe. Maybe the bank needs to increase its reserves instead. The handwaving is in saying that "money will usually end up going this way" as if it's the only relevant possibility.

It's well understood throughout business that, when determining how much something is worth, you have to subtract out obligations. So I don't see how you can say that money is being created. What happens is that the use of money is allocated over time. Borrowers can use it, and what they are able to buy with it, while depositors don't. They aren't using the same money at the same time. I start with a blank economic system. Fractional reserve rate 10%, $1,000 in system.

John Q puts $1,000 in a bank. Charley G company takes out a $900 loan. They use it to build a business, which sells widgets.

I have $1,000. The Charley G company has $900. The bank has $100.

Charley G invests in many things, and makes a decent profit. He gives the profit to his employees, who put it in a bank, or spend it (giving to Paul F or Nancy C or something). This puts $900 eventually into a bank (if not through the employees, through the corporations they are purchasing from.

The bank lends out $810 to Ron W corp.

At this point, there has been $1710 dollars of capital investment from the $1,000 deposit. This $1710 has gone into two loans, which were used to build Charley G and Ron W's business. These businesses are permanent economic features, and are capable of generating a more revenue. The economy gained $1710 of value from these two stores ($900 in value from the Charley G store, $810 in value from the Ron W store).

That's a significant economic gain, right there. Charley G has built a $900 business, Ron W has built a $810 business.

That growth would have been impossible without the bank. The best John Q could have done was take his $1,000 and invest it in a business, which would have created $1,000 in economic value to the community. Therefore $1710 of economic dollars (value) exist, and $1,000 was the initial input. $710 in value has been created.

Now imagine that John Q walks into the bank and asks for $1,000?

The banks have $1710 in outstanding debt, but only $190 cash on hand (two inputs). They need $810 quick. That's not a big deal, right? They have $1710 outstanding debt, they need less than half back.

They call up Ron W and Charley G for $400 each from the loan back. Charley G is a responsible business man, he cuts 2 employees, and comes up with the $400. Only now the two employees need their money. They go in and ask the bank for their money - they are out of work, they need it.

The bank just scrambled together $1,000. They need to call in more debt for, say, $300 for these employees. They call up Charley G and Ron W.

Ron W can't absorb this. He's out of business. Now his employees need their money back. Also, Charley G is nearly dead.

This run has collapsed one business and nearly killed another. Now people get worried. They want their money before the banks can't scramble hard enough to find it. They all run into the bank.

Money creation - its advantages and costs.

[Roboramma]

The problem here is that you assume "rights" like healthcare, food, and shelter are in fact, rights when they are not. No right can depend on the coercion of another to exist. The right to free healthcare depends on forcing a doctor to care for you, or forcing someone else to pay for it. The right to shelter depends on forcing a builder to build you a shelter, or forcing someone else to pay for it. The right to food requires forcing a farmer and a cook to farm and cook your food, or pay someone else to do it. These are basic human necessities, not rights.

The right to not be murdered means forcing a police officer to enforce murder laws, or forcing someone else to pay him to do so. The right to a fair trial means forcing a judge to hear your case, or forcing someone else to pay him to do so.

[Francesca R]

Those opposed to fractional reserve banking are not necessarily opposed to lending money. Its just that money that is lent out needs to be clearly identified as such.It already is. Monies you deposit in your current account are lent out with full disclusure. So deal with it :)

Money lent out should first pay for investment instruments like CD's which cannot be withdrawn at will, at least not without a penalty.You, like Tippit, appear to be unaware of how money-market instruments work. CDs can be traded at any time without penalty.


Abolishing fractional reserve banking would not end the practice of lending. It would simply introduce some self-discipline into banking by separating the money available for withdrawal from the money that is lent out.Suggestion--stuff the money you might need any moment under your mattress. That separates it from what it is lent out.

Oh wait, you are worried your currency is being "debauched" . . . OK then, there is little alternative to you immediately buying all the goods and services that you may need at anytime, and hoarding those now as well. Sorry about those perishable foodstuffs :)

[AvarianParakeet]

This run has collapsed one business and nearly killed another. Now people get worried. They want their money before the banks can't scramble hard enough to find it. They all run into the bank.

Money creation - its advantages and costs.


That's one of the reasons for a well structured banking system. In the event of this situation, they could get a quickie loan from another bank to cover the loan. Only a nationwide run would cause said crisis, and such a situation would probably just be preceded by a catastrophe that would place money low on my list of priorities.

[Chaos]

That may depend on how loosly you define "regulation". The government's proper role in a free market is to protect rights, such as property rights. Since fractional reserve banking results in inflation, which does rob people's savings of their value, making the practice illegal is a defense of individual rights. Regulation means government doing anything above and beyond such defense of rights.
*snip*

But raising prices also causes inflation. Do you intend to outlaw raising prices as well?

[bobrayner]

But raising prices also causes inflation. Do you intend to outlaw raising prices as well?
Yes! The government must cap the price of every transaction, in order to defend individual rights! :D

In that case a lot of economic actors would simply choose not to make the transactions. Presumably the government would have to force employees to work without payrises, and force businesses to sell goods & services at a loss, in order to maintain stable prices.


I think the defining characteristic that differentiates regulation from legal protection of rights is an attempt to achieve specific outcomes, rather than simply setting basic ground rules and letting the system function on its own.
I'm not sure whether this is immensely ironic or a very bad joke.

[Tippit]

The right to not be murdered means forcing a police officer to enforce murder laws, or forcing someone else to pay him to do so. The right to a fair trial means forcing a judge to hear your case, or forcing someone else to pay him to do so.

Using that logic, you might as well declare every possible need or want a "right", and then wait for the prosperity to roll in.

Presumably if I have the right to life and the right to protection under the law, I will be capable of providing for my basic necessities, whether it's food, shelter, or health care. If I were an anarchist, I might claim that I can even protect myself without the aid of police and secure private arbitration without the aid of a public legal system to settle differences, but I'm not.

There is also the concept of the difference between codifying a right, and having a legal infrastructure to ensure that right is protected. Even an anarchist might not be quick to waive his right to life, despite his unwillingness to support a police and legal infrastructure. The right may exist in his mind as something endowed by his creator, or it may be merely a secular idea that involves some shared expectation of baseline human behavior towards one another.

In any case it's important to realize that whether you believe basic necessities are "rights" or not, if you expect others to provide these for you, then you must agree to provide them to others, or else you have a condition of servitude.

If you wish government to force your will upon others, then you should be prepared to submit to government force. Even more importantly you should be aware that human nature dictates that power will be abused, and so the more that you require of government, the more abuse you can expect from government.

Since the act of government taxation is independent from the act of receiving a government benefit, and since those who control government have a perpetual incentive to maximize the power of the system of taxation and minimize the system of benefit, it might be constructive to actively limit the scope of government and other coercive entities in our lives.

[Rob Lister]

But raising prices also causes inflation. Do you intend to outlaw raising prices as well?

Nixon did (15Aug71), with dismal results.

[Francesca R]

In that case a lot of economic actors would simply choose not to make the transactions..I think that transactions would be outlawed too . . .

"You'll have what you're given, and there won't be much of that!"

[Francesca R]

Using that logic, you might as well declare every possible need or want a "right"Yeah. The right to own property means forcibly preventing someone from waltzing up and helping themselves to it, or it means forcing other people to pay against their will for the means to forcibly prevent someone waltzing up and helping themselves to your property. The right to a binding contract means forcing someone to honour promises they made even if they no longer feel like it, or it means forcing others against their will to pay for the means to force people to do what they promised to do.
So no way can these things be considered "rights", eh?

[GreyICE]

The problem here is that you assume "rights" like healthcare, food, and shelter are in fact, rights when they are not. No right can depend on the coercion of another to exist. The right to free healthcare depends on forcing a doctor to care for you, or forcing someone else to pay for it. The right to shelter depends on forcing a builder to build you a shelter, or forcing someone else to pay for it. The right to food requires forcing a farmer and a cook to farm and cook your food, or pay someone else to do it. These are basic human necessities, not rights.
Oh this is insane. People don't have the right to get enough food that they're starving in the streets, but it's absolutely essential to outlaw banking to protect the people's rights?

This is insane! Absolutely completely insane!

The limit to regulation, should be that which is necessary to protect free people from being defrauded, or harmed. Free to die in the streets? Wow. We have different definitions of free. I think that people can't be free if they're starving, if they have nowhere to live, if they have no access to basic sanitation and basic services.

You apparently think they can't be free if they can deposit money in the bank.

[drkitten]

Using that logic, you might as well declare every possible need or want a "right", and then wait for the prosperity to roll in.

Absolutely. That's another reason that libertarianism fails epically.

Because under libertarianism, either something is a "right" or there's no way for society to enforce a demand for it.

In the real world, you have no right. You have only those privileges which you can negotiate with society to respect, privileges that society will demand payment of some sort for. If you want the right to life, you have the corresponding duty not to murder and to obey society's rules to limit opportunities for murder (such as obeying gun control regulations).


Presumably if I have the right to life and the right to protection under the law, I will be capable of providing for my basic necessities, whether it's food, shelter, or health care.

How do you figure this? How are you going to secure "health care" via the "right to life"?
If you were on a desert island, will your "right to life" provide you with a surgeon if your appendix ruptures?



Since the act of government taxation is independent from the act of receiving a government benefit, and since those who control government have a perpetual incentive to maximize the power of the system of taxation and minimize the system of benefit, it might be constructive to actively limit the scope of government and other coercive entities in our lives.

Or, alternatively, it might be constructive to take better control of government instead of trying to abolish it completely.

[Francesca R]

Since fractional reserve banking results in inflation, which does rob people's savings of their value, making the practice illegal is a defense of individual rights.
Actually, let's not piss about here: shooting in the back a banker who has lent out some of your current account balance ought to be self-defence against an invasion, fully covered by law.
Right?

[lomiller]

This is insane! Absolutely completely insane!


Come on, I know someone wants to say it…

:p

[Tippit]

Oh this is insane. People don't have the right to get enough food that they're starving in the streets, but it's absolutely essential to outlaw banking to protect the people's rights?

This is insane! Absolutely completely insane!
Free to die in the streets? Wow. We have different definitions of free. I think that people can't be free if they're starving, if they have nowhere to live, if they have no access to basic sanitation and basic services.

You apparently think they can't be free if they can deposit money in the bank.

Considering that modern banking and government taxation are the two largest contributors to poverty and wealth condensation (http://en.wikipedia.org/wiki/Wealth_condensation) in the world, protecting people from those evils would go a long way towards helping them feed themselves.

The banks and corporations break people's legs, and the government is there to offer dependency in the form of a crutch called welfare. The system of coercion that funds the welfare is independent of the actual welfare distribution. If the government administrators decide that corporate welfare is more important than social welfare, or if they decide to transform the welfare state into a warfare state, how do you hold them accountable? Not vote them back into office in another four years, after the damage has already been done? Better to accomplish all of this while you guilt the public into thinking they "voted" for it, or the ones responsible.

[GreyICE]

Considering that modern banking and government taxation are the two largest contributors to poverty and wealth condensation (http://en.wikipedia.org/wiki/Wealth_condensation) in the world, protecting people from those evils would go a long way towards helping them feed themselves. Your premise is nonsensical. The government taxing the incomes of people and using that money to create social services for the needy is bad? And that taking away those services would help the needy?

Do you get why I'm using the words 'insane' here? Extraordinary claims require extraordinary evidence. Your claim is that taking something away from people would give them more of the thing you're taking away.

Go to it. Extraordinary evidence.

The banks and corporations break people's legs, and the government is there to offer dependency in the form of a crutch called welfare. The system of coercion that funds the welfare is independent of the actual welfare distribution. If the government administrators decide that corporate welfare is more important than social welfare, or if they decide to transform the welfare state into a warfare state, how do you hold them accountable? Not vote them back into office in another four years, after the damage has already been done? Better to accomplish all of this while you guilt the public into thinking they "voted" for it, or the ones responsible. That slope be mighty slippery, right there.

How about we provide food and shelter to the people who need it?

[stevea]

It isn’t really possible for everyone to want their money all at once unless their aim was too burry it in their backyard. Barring that, the cash is going to be sitting in someone’s account somewhere.

As you say - withdrawing the money isn't the problem - it's just the failure to deposit it at some federal reserve bank. Actually it *IS* possible to have a more general bank run, but it involves a general distrust of the banks (therfore withdrawal not matching deposits. This has a very negative impact on bank reserves, forcing banks to sell assets (loans) thus

Anyway the nutjob paranoia view of banking goes at least back to Lynden LaRouche in the 1970s. I honestly don't know history well enough to understand how deep the paranoiac aspect of Andrew Jackson's anti-bank sentiments ran in the 1830s.

I do think there has been in the past decade a real revival and expansion of paranoiac thinking with many different outlets, banking, 911, Bush lying the nation into war (and apparently deceiving most congresspersons, by conspiring with the intelligence agencies of half a dozen countries), Obama's Muslim connections. A Comical-tragedy for our times.

[Tippit]

Your premise is nonsensical. The government taxing the incomes of people and using that money to create social services for the needy is bad? And that taking away those services would help the needy?

Do you get why I'm using the words 'insane' here? Extraordinary claims require extraordinary evidence. Your claim is that taking something away from people would give them more of the thing you're taking away.

Go to it. Extraordinary evidence. That slope be mighty slippery, right there.

How about we provide food and shelter to the people who need it?

How about you voluntarily provide food and shelter to people who need it, instead of forcing others?

You're using the word "insane", because hyperbole is helpful in the absence of substance. You seem to have a problem with reading comprehension. The confiscatory monetary and bank policies, corporatism, and all-powerful government are what serve to keep people impoverished all around the world. Increasing the government's coercive power in the name of helping the needy will only serve to hurt the needy. The world's elite super-rich do not pay income taxes, and in fact they use their influence over government to maintain their positions. If we would all agree that the monopoly on coercive power, ie: the government, should be used to prevent people from being robbed, killed, or defrauded, then the institutions that are in place will be abolished or reformed.

Giving corrupt plutocrats in government more coercive power won't ensure the needy get fed, but the opposite.

[GreyICE]

How about you voluntarily provide food and shelter to people who need it, instead of forcing others? How about we provide food and shelter for them? Seem tough?

You're using the word "insane", because hyperbole is helpful in the absence of substance. You seem to have a problem with reading comprehension. "Reading Comprehension" of course meaning I don't agree with you. If I comprehended your babble it would immediately convince me of the one true way?
The confiscatory monetary and bank policies, corporatism, and all-powerful government are what serve to keep people impoverished all around the world. Increasing the government's coercive power in the name of helping the needy will only serve to hurt the needy. You're insane.

"If we try to help the needy, we'll hurt the needy. But if we ignore the problem, look! The problem will go away."

"Why?"

"Err... charity."

"Has that ever worked in the past?"

"Past events do not tell you anything about future events! Global conspiracy! Confiscatory monetary policy! Corporatism!"

"How does that relate to your magical method of helping homeless people by not doing a damn thing?"

"Chewbacca is a Wookiee from the planet Kashyyyk!"


Or, to summarize, how will this help the needy?

The world's elite super-rich do not pay income taxes, and in fact they use their influence over government to maintain their positions. Really? They don't pay income taxes? I admit that they have proven adroit at avoiding them, but I don't see how 'we need better enforcement' and 'Oh my god, someone broke the law, lets scrap the legal system' are the same thing.

If we would all agree that the monopoly on coercive power, ie: the government, should be used to prevent people from being robbed, killed, or defrauded, then the institutions that are in place will be abolished or reformed. You have interesting definitions of the words robbed and defrauded. I don't think they mean what you think they mean.

Giving corrupt plutocrats in government more coercive power won't ensure the needy get fed, but the opposite. You keep saying this, I still keep seeing poor children fed with food stamps (even if the system is not perfect), poor people living in low income housing (even if the system isn't perfect), and people surviving. Where in the past they died.

[bobrayner]

The world's elite super-rich do not pay income taxes, and in fact they use their influence over government to maintain their positions.
By "elite super-rich" you've neatly cherrypicked an extreme example... but it still didn't fit your case so you had to lie about their tax liabilities. Many do pay rather a lot of tax.

Instead, let me suggest a more reasonable example; how much tax is paid by the upper quartile or upper quintile (by income) of the population? In most developed countries this is a higher proportion, and a vastly higher absolute amount, than the poorest quartile or quintile. The tax I pay is sufficient to fund five or six people dependent on state funding - but then again I'm a real earner rather than some mythical billionaire bogeyman.

Redistribution works.

Giving corrupt plutocrats in government more coercive power won't ensure the needy get fed, but the opposite.

As with so many other claims, this simply doesn't fit the evidence.

There are many countries where the government has redistributive policies and, effective agencies to realise these policies. There are also many places places where the government has little intent or ability to redistribute (or there's no government at all). Compare them. Do more people go hungry in Egypt or in Somalia? Transnistria or Austria? 1930s China or 1930s Argentina? There are thousands of cases...

[drkitten]

How about you voluntarily provide food and shelter to people who need it, instead of forcing others?

When has that ever worked?


You're using the word "insane", because hyperbole is helpful in the absence of substance.

No, he's using the word "insane" in its exact clinical sense. Your proposal is both delusional and harmful to yourself and/or others.

Increasing the government's coercive power in the name of helping the needy will only serve to hurt the needy.

Because, naturally, the poor are better off starving to death than using food stamps.

Delusional.

The world's elite super-rich do not pay income taxes,

Simply wrong.

More deslusion.

If we would all agree that the monopoly on coercive power, ie: the government, should be used to prevent people from being robbed, killed, or defrauded, then the institutions that are in place will be abolished or reformed.

No, because we will not agree that taxation is robbery or fraud.

In fact, it's a necessity to pay for government services. While we might object to some specific government services, the idea that government services in general must be paid for is almost unassailable. Except by the delusional.



Giving corrupt plutocrats in government more coercive power won't ensure the needy get fed, but the opposite.

Because no one ever buys food with food stamps?

Delusional and harmful to others.

Insane.

[stevea]

bobrayner, GreyICE,

Please don't feed the troll.

[Francesca R]

How about you voluntarily provide food and shelter to people who need it, instead of forcing others?
Because it is a public good. Mathematically it will be under-provided by individual voluntary action in the absence of selective incentives. That's why. And I think you know that.

It is tempting to conclude that you do not regard it as a public good--that is--you personally derive no value from the concept of a threshold level of welfare of others, and you cannot compute how a society would do. Hence you may have a "screw them!" attitude. If that was true, it would of course call into question whether any of your policy proposals were formed for any other reason than to enrich yourself at the expense of others.

I would rather conclude that you are just hopelessly deluded.

[Deus Ex Machina]

Oh this is insane. People don't have the right to get enough food that they're starving in the streets, but it's absolutely essential to outlaw banking to protect the people's rights?

This is insane! Absolutely completely insane!
Free to die in the streets? Wow. We have different definitions of free. I think that people can't be free if they're starving, if they have nowhere to live, if they have no access to basic sanitation and basic services.

You apparently think they can't be free if they can deposit money in the bank.

So people have a right to food?

OK - who are you going to compel to supply it?

People have a right to shelter?

Who are you going to compel to supply it?

You are assuming that food magically appears and that a person who does not have it is having the magic food withheld.

You seem to be talking insanity. Is this normal for you?

[Francesca R]

So people have a right to food?

OK - who are you going to compel to supply it?

People have a right to shelter?

Who are you going to compel to supply it?
If society collectively believes that threshold provision of food/shelter should be provided, society compels itself to provide it via installing a central authority to compel payment for it from taxation etc.

If you are a member of society who disagrees with this collective decision, your options are 1) find a juristiction populated by people like yourself, or 2) tolerate being subdued by a population whose preferences have out-competed yours.

ETA: Or 3) agitate to attempt to change those societal preferences. Good luck with that--you will need it.

[lomiller]

So people have a right to food?

OK - who are you going to compel to supply it?

People have a right to shelter?

Who are you going to compel to supply it?


You have the choice to leave and live on your own in the jungles of Mexico or whatever. As long as you have such a choice you are not being compelled. The fact that this choice simply isn’t as attractive as staying in the community and lending the help required simply highlights the fact that you are gaining benefits from a cooperative community that exceeds what you are expected to contribute in return.

[Francesca R]

You have the choice to leave and live on your own in the jungles of Mexico or whatever [ . . . ]Mexico is a sovereign state. Use their roads, consume their water or trespass on their territory and sooner or later the government will be after you for a contribution (if it can be bothered with what amounts to petty theft).

The only real solution for someone as troubled as these poor, affected "government is violence" types is 1) outer space (currently a military programme) or 2) to set themselves adrift in international waters. I recommend going well armed--pirates will be on their tail, and flying a treaty flag isn't likely to strengthen one's bargaining position.

[GreyICE]

So people have a right to food?

OK - who are you going to compel to supply it? Society. As for 'compel' if by that you mean taxes, you're wandering off onto the anti-tax nonsense again.

Society can easily afford to feed the hungry and give them shelter.

People have a right to shelter?

Who are you going to compel to supply it?See above.

You are assuming that food magically appears and that a person who does not have it is having the magic food withheld.

You seem to be talking insanity. Is this normal for you? Look! What's that light over there! It's your strawman! Oh no, it's on fire!

[Francesca R]

As for 'compel' if by that you mean taxes, you're wandering off onto the anti-tax nonsense again.No, taxes are indeed compulsory. That just doesn't mean they are not good.

[GreyICE]

No, taxes are indeed compulsory. That just doesn't mean they are not good.
Oh, I agree they're compulsory. I just don't see how losing a bit of each paycheck is somehow a worse evil than people starving, or us not having any roads, or us not having any sewage system, etc.

[69dodge]

I just don't see how losing a bit of each paycheck is somehow a worse evil than people starving,

Tragedy is when I cut my finger. Comedy is when you walk into an open sewer and die. --Mel Brooks

[lomiller]

Mexico is a sovereign state. Use their roads, consume their water or trespass on their territory and sooner or later the government will be after you for a contribution (if it can be bothered with what amounts to petty theft).

True but I picked Mexico as an example because it’s a country located close to the US where taxes are much lower then the US and there are remote places where the government has only limited influence. Except for the gun laws it’s libertarian heaven. (I realize, many of us are not from the US, but it’s relatable to most of us.)

[ladyattis]

Be honest, fiat currency systems fail by design as their debt is always asymmetrical in growth (it cannot be reversed nor negated by an opposing force in the economy).

[bobrayner]

their debt is always asymmetrical in growth (it cannot be reversed nor negated by an opposing force in the economy).

Be honest; that always cannot be true because there are real examples of it happening in the past.

The first test of any claim should be "Does it fit the evidence?"

I'd be very grateful if you could provide some evidence to support your side of the argument.

[lomiller]

Be honest, fiat currency systems fail by design as their debt is always asymmetrical in growth (it cannot be reversed nor negated by an opposing force in the economy).

What do you mean? 100% of debt is balanced by assets, and in addition to that there is a reserve that is not balanced against any debt meaning at any given time wealth is 110% of total debt. All that would happen if you no longer allowed fractional reserves is that 90% of the worlds wealth would disappear overnight.

Doesn’t anyone else find it interesting that people who claim to support property rights as the primary function of government want government to legislate 90% of the world’s property into non-existence?

[portlandatheist]

My goodness, I have to apologize for posting and running, I forgot about this thread as this is a section I rarely visit and I appreciate all the responses. I 've heard this stuff alot from some of the 9/11 conspiracy people and the Ron Paul people but I heard it from a coworker who seems like an otherwise smart guy that sent me this garbage:
http://www.chrismartenson.com/three_beliefs
From one of the videos comes this gem:
"for 111 years a dollar saved was well...a dollar saved
Can you imagine what it would be like to live in a world where you could earn a thousand dollars put it in a coffee can in your backyard, and your great great grandchildren could dig it up and enjoy the same benefits from it as you would have 100 years previously"

My point I'd like to make:
Inflation is good. It gives you incentive to do SOMETHING with your money: spend it, invest, put it to work as it were. This era of 111 years the author refers to had minimal economic growth in real terms and an economy were the wisest thing to do is stuff your money under your mattress is a recipe for decreased economic activity.
Tippit, how is this system impoverishing others? I'm not impoverished by it or am I a beneficiary of the system? Americans, economically, have and are doing quite well over partially due to our monetary system. Take a look at the microcredit movement that is happening in Africa, I would contend this is helping both lenders and borrowers, increasing overall economic activity. The economy is not a zero sum game.

[TheLoneBedouin]

Why is an idea you support called an idea, while an idea you disagree with called a "meme"?

[Francesca R]

Inflation is good. It gives you incentive to do SOMETHING with your money: spend it, invest, put it to work as it were.I don't agree that "inflation is good". It's just that low and predictable (stable) inflation is probably the optimum place to be on a continuum.

Stable and predictable because inflation volatility otherwise becomes one more source of risk to protect against. Higher risk premia to investing (in anything) increases the rate at which investors discount the future payback back to now, which--all else equal--makes all investments less attractive than if future inflation is more certain.

Low and positive because, well, it has to have a number, and as discussed on other threads, negative inflation kills not only investment but also consumption, and the reason why is that it is technically impossible in a free society for the monetary authority to adjust the real risk-free interest rate downwards (and real interest rates that are too high promote saving over investing and consuming). So aiming for positive inflation reduces the risk that it will end up negative and get stuck there.

With regards providing an incentive to invest and spend--this is driven by the real (net of inflation) interest rate as just mentioned, and not by inflation per-se (ex the above point about high inflation uncertainty). The lower the real rate, the more favourable the invest-or-spend versus save tradeoff is towards investing and spending.

Aside from monetary metrics, incentives to invest are stimulated by credit availability, derivative (risk transfer) instruments, low corporate taxes, no/few capital controls, and other desiderata of capitalism.

how is this system impoverishing others?Inflation--if it is stable and predictable--does not "rob" anyone of anything. By itself it steadily decreases purchasing power, and therefore transfers purchasing power from savers to borrowers. But this is compensated for by the risk-free rate of interest in a stable-inflation system, because the real interest rate is known with decent certainty in advance of the decision to save or borrow. *Unexpected* inflation (or deflation) creates winners and losers because unexpected inflation is not compensated before it happens. This is why virtually all central banks target a low positive rate of inflation.

[Francesca R]

Why is an idea you support called an idea, while an idea you disagree with called a "meme"?It is not. If the response to anti-FRB enthusiasts on this forum was nothing more than "that is stupid" and the argument in favour of FRB was mothing more than "it's the best" your question would have relevance here. But the truth is far from that. On several threads it has been argued in great detail *why* full-reserve lending and a gold-backed currency is a thoroughly dreadful idea in comparison to the system we have. In my view the opposing side has had every argument it has made dismantled and has provided feeble or no responses to any challenge levelled at it. So I suppose after a while you get posts where such ideas are simply ridiculed. But at that point, the complaint of "you are just calling it a meme" is invalid.

[portlandatheist]

[QUOTE=Francesca R;4029706]I don't agree that "inflation is good". It's just that low and predictable (stable) inflation is probably the optimum place to be on a continuum.

Stable and predictable because inflation volatility otherwise becomes one more source of risk to protect against. QUOTE]

Right, I should habe been clear. There is most certainly bad inflation but like you said, low and predictable inflation is probably the best system.

[Roboramma]

But at that point, the complaint of "you are just calling it a meme" is invalid.
I agree with the rest of your post, but the poster didn't say "you are just calling it a meme[/quote]. He/she only asked why it's being called a meme at all. And I agree - we should (as you have done) argue an idea on it's merits, or lack thereof, and not use emotional language, or paint the other side with words rather than argument.
Personally I agree. I don't think you've done so, and I'm not sure that others have, but it's something I think we should always avoid.

[drkitten]

I agree with the rest of your post, but the poster didn't say "you are just calling it a meme". He/she only asked why it's being called a meme at all.

Both the word "meme" and the word "idea" denote mental concepts.

But the word "idea" connotes correctness in a way that "meme" does not.
("Rufus, why not just let some of the air out of the tires?" she asked. "Hey, that's an idea!" Rufus replied, as he leaped out of the car.)

So TLB was right --- this thread is leaning towards a pejorative use of the word "meme." But there are also times when pejorativity -- pejorativeness? -- pejoratization? -- dissing damn-fool notions is justified.

[portlandatheist]

Perhaps I'm abusing the word "meme". My point is that this idea is spreading somewhat virally, at least anecdotally from my perspective as I'm being hit by it from multiple places. Although I really don't understand economics, it is even more obvious to me that the people who promote this stuff know/understand less than me. The wiki article is a good read: http://en.wikipedia.org/wiki/Austrian_School and makes it clear that this is not science based.

[Gazpacho]

Excuse the delayed response, as I had other matters to attend to and couldn't be online much for the last week.

I start with a blank economic system. Fractional reserve rate 10%, $1,000 in system.

John Q puts $1,000 in a bank. Charley G company takes out a $900 loan. They use it to build a business, which sells widgets.

I have $1,000. The Charley G company has $900. The bank has $100.
No, this is where you go wrong. Charley G doesn't "have $900", nor does the bank "have $100." Charley has the temporary use of your $900, on the condition of paying it back, and the bank is holding your $100 in its reserve.

The idea that the same money can belong to two people at the same time does not hold up when tested, i.e. when a financial institution fails. Over the last year it has been tested repeatedly, so this shouldn't be debatable.

[lomiller]

I start with a blank economic system. Fractional reserve rate 10%, $1,000 in system.

John Q puts $1,000 in a bank. Charley G company takes out a $900 loan. They use it to build a business, which sells widgets.

I have $1,000. The Charley G company has $900. The bank has $100.




No, this is where you go wrong. Charley G doesn't "have $900", nor does the bank "have $100." Charley has the temporary use of your $900, on the condition of paying it back, and the bank is holding your $100 in its reserve.

The idea that the same money can belong to two people at the same time does not hold up when tested, i.e. when a financial institution fails. Over the last year it has been tested repeatedly, so this shouldn't be debatable.


You are still wrong. Since charley has spent the money presumably he has assets worth $900. The bank does have $100. $900 is sitting out there in someone else’s hands. You have an asset redeemable for $1000 cash on whatever notice you choose. This asset is also insured against the bank not being able to pay you.

When you deposit money into a bank account you are, in effect investing it. Since it’s redeemable on demand, held by a reliable source, and insured by the federal government, it’s an extremely low risk investment so the return it yields is low. (Rule 1 of investing. You get paid to take risks with your money, the more risk the higher return you must demand) Since the return is so low you may decide to take additional services instead of actual cash in return for your deposit. (I.E. a checking account)

As you can see, the money never belongs to two people at the same time.

[Francesca R]

Charley G may have assets worth $900 but a debt worth the opposite of that. His net worth is zero at that point. The bank's balance sheet has zero worth too. The original depositor has net worth of $1000. But if Charley G's business generates enough added value to service the debt he is solvent, and liquid. $1000 has not become "more money".

[GreyICE]

Charley G may have assets worth $900 but a debt worth the opposite of that. His net worth is zero at that point. The bank's balance sheet has zero worth too. The original depositor has net worth of $1000. But if Charley G's business generates enough added value to service the debt he is solvent, and liquid. $1000 has not become "more money".

You've invented an extra player. "The debt."

But what is "the debt?" It's a negative number that exists on a piece of paper IN ORDER to make it look like money wasn't created.

That's all. It has no economic reality (even if it has a financial reality). Remember, in economic terms, the $10,000 dollars you have in your mattress is not money.

The reality is that banks create money, this is well documented and understood, and in fact the economy depends upon banks and similar institutions to facilitate the rapid motion of money within our economy.

[Francesca R]

You've invented an extra player. "The debt."This player was "invented" (recognised in accounting identities) five centuries ago (http://en.wikipedia.org/wiki/Double-entry_bookkeeping_system). Welcome up to date :)

The rest of your post is completely wrong, except for this bit:the economy depends upon banks and similar institutions to facilitate the rapid motion of money within our economy.

[se7ensnakes]

Banks are a problem, they create money each time someone borrows, but they use some of that money to buy off politicians, give them free tv and newspaper space. 200 million to in campaign contributions is not unheard of. You dont think this is a problem?

[The Central Scrutinizer]

Banks are a problem, they create money each time someone borrows, but they use some of that money to buy off politicians, give them free tv and newspaper space. 200 million to in campaign contributions is not unheard of. You dont think this is a problem?

In the real world? No.

[Francesca R]

Banks are a problem, they create money each time someone borrowsAnti fractional-lending enthusiasts would have you believe it would be better if banks did not do this--which was the case before the mid 17th century (in Europe). So we had Spanish conquistadors looting Latin America for precious metals and the Madrid crown later going bankrupt anyway. And the Italian Medicis dominating commerce in Northern Europe as well as supplying the region with two popes, three dukes and two queens of France.

Then (and correlation doesn't mean causation) the birth of non-reserve lending (in Amsterdam and London) concpicuously precedes Britain's industrial revolution and transformation to sustained positve economic growth, which later spread to Europe and the former empire, and made a whole lot more people a whole lot better off than the prior several centuries (or millennia).

I remain rather unkeen to abolish banking as we know it.

[soylent]

No right can depend on the coercion of another to exist.

By this definition there exist no rights.

In particular you don't have a right to life, liberty and the persuit of happiness because it takes a major effort to protect such rights; effort you have to coerce someone to expend or coerce someone to pay for. Without such enforcement rights are a mere quaint notion lacking any application to the real world.

[stevea]

Banks are a problem, they create money each time someone borrows, but they use some of that money to buy off politicians, give them free tv and newspaper space. 200 million to in campaign contributions is not unheard of. You dont think this is a problem?

Yes $200M in contributions from banking is completely unheard of, we might even call your statement a misrepresentation of fact.. Your anti-banking paranoia is showing.

The TOTAL 2008 contributions from all commercial banking was $37M USD, (~25M to individual candidates and ~11M to PACs). Also the party split was 52%/48% Dem/Rep of the banking contributions. Your $200M figure is ridiculously wrong - the fabrication of a someone willing to distort the truth for the sake of making a point.

http://www.opensecrets.org/industries/indus.php?ind=F03

Now if you want to find who plows big money into politics with a party bias look at

lawyers/law firms, 2008 was $235M with 76% Dem vs 23% Rep.
Telecomm $139M, spread 70%Dem, 30% Rep.
Labor Unions $76M, spread 92%Dem, 8%Rep
Energy/Nat.Resource $76M, 34%Dem, 66%Rep
Agribiz $65M spread 38%Dem, 62%Rep.
Movie/TV industry $48M spread 78% Dem, 22%Rep

The Oil and Gas portion of Energy/NatResource was only $35M distributed 23% Dem vs 77%Rep.

Isn't it strange that we were all told the "big oil" was the dirty player in politics when in fact lawyers shifted the party cash positions by 6 times as many dollars ? And labor unions by 2.4x as much ?

In 2008 each national party took in an amount just shy of $1billion ! So the commercial banks accounted for less than 2% of the total. Not trivial, but not the sort of clout the ridiculous $200M statement would imply.

Yes our politicians are bought and sold, and yes they fail to listen to their constituents IMO. But it might pay you to spend an hour trying to understand who really pulls the wallet-strings of each party. Laywers are the major purchasers with Telecomm a distant 2nd. Banks are far down the list.
==

I'm with Francesca - there is nothing wrong, mysterious or underhanded about fractional reserve banking. It's a prudent and proven system.

[stevea]

Sorry, duplicate.

[Patrick_R]

I'm not defending anything, only suggesting that the foundations of the criticism of fractional reserve banking are very reasonable and rational points.

An article from Rothbard on fractional reserve banking: http://www.lewrockwell.com/rothbard/frb.html

It seems most of us can agree that increasing the money supply faster than the demand for money and the velocity of money means you have inflation. Way too much money leads to hyper inflation.

The Austrians just take this one step further - understanding that banks are expanding the money supply by lending more than they have.

And naturally this does present some problems. If creditors demand their money when you have lent it out your bank is in a bit of a rough spot.

Here is what Rothbard says,

“Let's see how the fractional reserve process works, in the absence of a central bank. I set up a Rothbard Bank, and invest $1,000 of cash (whether gold or government paper does not matter here). Then I "lend out" $10,000 to someone, either for consumer spending or to invest in his business. How can I "lend out" far more than I have? Ahh, that's the magic of the "fraction" in the fractional reserve. I simply open up a checking account of $10,000 which I am happy to lend to Mr. Jones. Why does Jones borrow from me? Well, for one thing, I can charge a lower rate of interest than savers would. I don't have to save up the money myself, but simply can counterfeit it out of thin air. (In the nineteenth century, I would have been able to issue bank notes, but the Federal Reserve now monopolizes note issues.) Since demand deposits at the Rothbard Bank function as equivalent to cash, the nation's money supply has just, by magic, increased by $10,000. The inflationary, counterfeiting process is under way.

The nineteenth-century English economist Thomas Tooke correctly stated that "free trade in banking is tantamount to free trade in swindling." But under freedom, and without government support, there are some severe hitches in this counterfeiting process, or in what has been termed "free banking." First: why should anyone trust me? Why should anyone accept the checking deposits of the Rothbard Bank? But second, even if I were trusted, and I were able to con my way into the trust of the gullible, there is another severe problem, caused by the fact that the banking system is competitive, with free entry into the field. After all, the Rothbard Bank is limited in its clientele. After Jones borrows checking deposits from me, he is going to spend it. Why else pay money for a loan? Sooner or later, the money he spends, whether for a vacation, or for expanding his business, will be spent on the goods or services of clients of some other bank, say the Rockwell Bank. The Rockwell Bank is not particularly interested in holding checking accounts on my bank; it wants reserves so that it can pyramid its own counterfeiting on top of cash reserves. And so if, to make the case simple, the Rockwell Bank gets a $10,000 check on the Rothbard Bank, it is going to demand cash so that it can do some inflationary counterfeit-pyramiding of its own. But, I, of course, can't pay the $10,000, so I'm finished. Bankrupt. Found out. By rights, I should be in jail as an embezzler, but at least my phoney checking deposits and I are out of the game, and out of the money supply.

Hence, under free competition, and without government support and enforcement, there will only be limited scope for fractional-reserve counterfeiting. Banks could form cartels to prop each other up, but generally cartels on the market don't work well without government enforcement, without the government cracking down on competitors who insist on busting the cartel, in this case, forcing competing banks to pay up.”

[stevea]

I'm not defending anything, only suggesting that the foundations of the criticism of fractional reserve banking are very reasonable and rational points.

Your quoted example is oversimplified. If the Rothbard bank gets a deposit of $1000 it must put $100 on reserve and only has $900 to loan. If someone borrows and then deposits all $900, then the bank can put $90 more in reserve and has $810 to loan ... after an infinite number of borrow/redeposit transactions then all $1000 is on reserve and the bank has lent $10000 creating $9000 in money supply (same number you arrive at, but it's NOT in one fell swoop. And yes this is inflationary.

The reality is alluded to in your second paragraph. The guy who borrows the $900 obviously intends to spend it - so he will not keep it on deposit long if at all. He transfers the money to a 2nd party who may well deposit it. ... the $810 to be loaned to a 3rd party and redeposited by a 4th and so one.

The consolidation of all the banks $10000 loan in a single borrower is a case that does not occur. The bank obviously wants and needs and generally a divisified portfolio of loan assets.

Special economic conditions can cause a large fraction of borrower to fail to repay at the same time, or else a large fraction of depositors to want to withdraw at the same time (see the news for examples). In such cases a backing central bank (federal reserve for the US) issues credit to the banks until the crisis subides.

The example presented is not a credible counterargument to the value of fractional reserve banking.

Although the fractional reserve system causes the creation of money supply for additional deposits, and that is inflationary, this inflation only occurs when there is "new money" to deposit. Nearly all of the existing M2 and M3 are already on deposit with associated reserves - these aren't being multiplied further. Also note the central bank or government has complete control over this since they can increase the reserve requirement to reduce the money supply. More commonly the Fed issues or repurchases bonds to adjust the money supply.

The terms "counterfeit" and "pyramid" in your quotation, marks the article as incendiary prattle from some paranoid fool.

Yes it's a complex system to analyse, but not beyond a 1st year book on economics. No it is neither a pyramid scheme or a license to print money.

[Patrick_R]

Yes you are correct.

And what if the bank cannot repay creditors? Does it not go to the fed which bails them out with a new line of credit, therby expanding the money supply again?

As I understand it fractional reserve banking expands the money supply and encourages investment. But I think it is reasonable to question if the pain of inflation is worse than the increased investments.

[lomiller]

[QUOTE=stevea;4899860
Special economic conditions can cause a large fraction of borrower to fail to repay at the same time, or else a large fraction of depositors to want to withdraw at the same time (see the news for examples). In such cases a backing central bank (federal reserve for the US) issues credit to the banks until the crisis subides.[/QUOTE]

It’d need to be very special economic conditions. Since banks can also borrow from other banks the only way the money isn’t available is if people are burying it in their back yard.

Even in the current crisis this isn’t happening, a better description is that the banks are attempting to deleverage at once. I.E. they are attempting to go from 40:1 reserves down to 15:1 and there isn’t enough cash in the system for them to do it. If they had been prevented from leveraging 40:1 in the first place, of course, this wouldn’t be an issue.

[The Central Scrutinizer]

I'm not defending anything, only suggesting that the foundations of the criticism of fractional reserve banking are very reasonable and rational points.

An article from Rothbard on fractional reserve banking: http://www.lewrockwell... (http://www.lewrockwell.com/rothbard/frb.html)

This is as far as I got. You realize Lew Rockwell is an idiot, right?

[Francesca R]

As I understand it fractional reserve banking expands the money supply and encourages investment. But I think it is reasonable to question if the pain of inflation is worse than the increased investments.It "encourages" borrowing by lifting what would otherwise be a legal restriction on the creation of credit. One could roll back restrictions further by allowing chartered banks, or anyone, to lend and borrow as much as they jolly well liked.

Why is someone, who elsewhere appears to be warm to libertarianism, apparently sympathetic to the criminalisation of undercollateralised credit?

[Tippit]

It "encourages" borrowing by lifting what would otherwise be a legal restriction on the creation of credit. One could roll back restrictions further by allowing chartered banks, or anyone, to lend and borrow as much as they jolly well liked.



Why should borrowing be "encouraged" at all? It is precisely the scarcity of capital which would discourage malinvestment and fraud. As I recall the real estate asset bubble was created by a combination of massive monetary inflation over decades and "liberal" (some might say predatory) lending standards. Why do statists like you insist that that every demand for credit must be satisfied by perpetually debased currency and artificially low interest rates? Given a static or at least relatively static supply of money, it is the interest rate itself which will expand or contract with the demand for money. This would force creditors to actually manage risk, rather than rely on the corruption and massive fraud inherent in the bailout nation.

I'm sorry, just because you want to live in a home that is far beyond your means should not and does not entitle you to the credit to do so.

The same goes for business loans, or any other loans. When credit is naturally scarce (and not unnaturally so), and lenders can't expect to be bailed out for their indiscretions, lenders will typically make sound and rational lending decisions, unlike those evident from the last two decades.



Why is someone, who elsewhere appears to be warm to libertarianism, apparently sympathetic to the criminalisation of undercollateralised credit?

Probably because he, unlike you, recognizes the inherent unfairness and instability introduced by the system as it exists today, and rightfully objects to it. Nor does he, unlike you, apparently have a vested interest.

[Francesca R]

Why should borrowing be "encouraged" at all?Wrong question. Why should it be outlawed? Are you a statist?

It is precisely the scarcity of capital which would discourage malinvestment and fraud.You want to enforce capital scarcity under the threat of violence? How about the same in respect of food and shelter scarcity? Might cut back on obesity levels and "undeserved" McMansions.

When credit is naturally scarce (and not unnaturally so)Criminalisation of voluntary lending isn't "natural" scarcity. It is unnatural scarcity. The merits of doing it lie in the appraisal of its benefit to society. But poor form for calling it by the wrong name.

[Tippit]

Wrong question. Why should it be outlawed? Are you a statist?



Despite the obvious dishonesty of your spurious analogy, I will humor you in the interest of other readers.

The practice of lending something of value isn't inherently fraudulent, hence, borrowing should not be outlawed.

The practice of central banks and governments creating money out of thin-air and monetizing debt as a surreptitious and poorly-understood form of regressive taxation is fraudulent. So is the inherently unstable form of fractional reserve banking that seeks to liberalize bank deposits by promising them to borrowers and depositors at the very same time. Both of these criminal practices are the primary causes for prior and current economic debacles, and hence should be outlawed.

Anti-statism isn't to be confused with anarchism. The fact that you try to obfuscate systemic monetary corruption with such innocuous terms as "borrowing" in an attempt to label me as one of your own is dishonest, to say the very least. I am about as far from being a statist as one can get, but I'm all for laws with the goal of monetary reform, and throwing the corrupt bankers and politicians who run Wall Street and Washington into jail.



You want to enforce capital scarcity under the threat of violence? How about the same in respect of food and shelter scarcity? Might cut back on obesity levels and "undeserved" McMansions.

Criminalisation of voluntary lending isn't "natural" scarcity. It is unnatural scarcity. The merits of doing it lie in the appraisal of its benefit to society. But poor form for calling it by the wrong name.

Or, less dishonestly, I want to end the practice of institutional counterfeiting, and abolish the practice of lending deposits while simultaneously promising them on demand. It has nothing to do with creating "capital scarcity", and everything to do with abolishing the very system that creates economic instability. Please, lend all you want. Just lend your own hard-earned capital, or don't lend demand deposits. It's really simple.

How honest can you really be when you have to resort to labeling the abolition of the fiat money frenzy on Wall Street and Washington as "creating unnatural scarcity"? About as honest as I've expected you to be on these forums, I suppose. If they are responsible for creating an inordinate amount of monetary inflation, how can you rightfully conclude that abolishing this practice is tantamount to creating scarcity? That sort of doublespeak is certainly at home in George Orwell's worst nightmare, I guess.

[Francesca R]

I want to [ . . . ] abolish the practice of lending deposits while simultaneously promising them on demand.That's very clear. As I said--poor form for referring to this intervention as somehow reverting to a "natural" state.

To be consistent you ought to want to outlaw insurance. After all, if every policy holder claims at once the insurer can't pay. That could be extended to myriad promises to provide service or goods, in public and private sectors, in which demand above a critical level cannot be met. Your prescription is one of folly for the dark ages. Risk pooling happens everywhere. Yet you only, inconsistently, have a problem with it in banking.

It has nothing to do with creating "capital scarcity"At a stroke you create a Tippit-made capital famine. Fortunately I believe you stand no chance of being listened to. But you're free to tie yourself up in contradictory knots for public display all you wish of course.

Please, lend all you want. Just lend your own hard-earned capital, or don't lend demand deposits. It's really simple.I will lend/borrow to the extent I desire thank you, with legal backing.

[Tippit]

That's very clear. As I said--poor form for referring to this intervention as somehow reverting to a "natural" state.

To be consistent you ought to want to outlaw insurance. After all, if every policy holder claims at once the insurer can't pay. That could be extended to myriad promises to provide service or goods, in public and private sectors, in which demand above a critical level cannot be met. Your prescription is one of folly for the dark ages. Risk pooling happens everywhere. Yet you only, inconsistently, have a problem with it in banking.



While there are similarities between fractional reserve banking, and insurance, there are marked differences. Insurance companies are valued on the basis of their floats, which enable the companies to invest at very low costs-of-capital and at vast profit which enable them to subsidize risk. Insurance premiums are not deposits, and insurance claims are not demand deposits, this is where the similarities end. If you're really asking me whether the practices of AIG were fraudulent and in need of much better regulation, I'm pretty sure you can guess my answer. The destruction and subsequent bailout of AIG was hugely destabilizing to the economy, and criminal as far as I'm concerned. No doubt you will just rationalize this as business-as-usual.

I'm afraid my position is quite consistent.



At a stroke you create a Tippit-made capital famine. Fortunately I believe you stand no chance of being listened to. But you're free to tie yourself up in contradictory knots for public display all you wish of course.

I will lend/borrow to the extent I desire thank you, with legal backing.

There are plenty of viable and sustainable roads that lead to monetary reform which will in turn lead to a more just and equitable society. The fact that this view isn't prevailing at the moment in these dark ages of economic ignorance and large-scale swindling probably won't reflect the future.
Do not insult other posters.

[The Central Scrutinizer]

There are plenty of viable and sustainable roads that lead to monetary reform which will in turn lead to a more just and equitable society. The fact that this view isn't prevailing at the moment in these dark ages of economic ignorance and large-scale swindling probably won't reflect the future.

Lead us to the promised land, oh great exalted one!

:dl:

[Francesca R]

Insurance premiums are not deposits, and insurance claims are not demand depositsInsurance claims represent potential bankruptcy and system-wide hazard in the event that too many of them are incurred at once. To avoid this possibility you would need to advocate only insurance where all liabilities were covered by hard cash. Why don't you?

If you're really asking me whether the practices of AIG were fraudulent and in need of much better regulation, I'm pretty sure you can guess my answer.Poor attempt at suggesting this is about AIG. You don't just get to claim AIG behaved fraudulently, for consistency you need to declare all insurance a fraud, and declare risk pooling to be a crime.

I'm afraid my position is quite consistent.No it isn't.

[Tippit]

Insurance claims represent potential bankruptcy and system-wide hazard in the event that too many of them are incurred at once. To avoid this possibility you would need to advocate only insurance where all liabilities were covered by hard cash. Why don't you?



This sounds fine by me. I'm not an expert on insurance capitalization requirements or the regulation in general, but it would be prudent that liabilities have a 1:1 ratio to liquid assets. I also don't support any government bailout of any insurance company, ever. Insurance companies bear risk which is underwritten by reinsurance companies, and policy holders should bear the ultimate risk of whether any or all of these companies will remain solvent.



Poor attempt at suggesting this is about AIG. You don't just get to claim AIG behaved fraudulently, for consistency you need to declare all insurance a fraud, and declare risk pooling to be a crime.



I never said it was all about AIG, AIG is an example of what is obviously a serious problem. What I'm tired of is the recurring theme of privatized profits and socialized risk, no matter what the business model happens to be.

[Francesca R]

This sounds fine by me. I'm not an expert on insurance capitalization requirements or the regulation in general, but it would be prudent that liabilities have a 1:1 ratio to liquid assets.Such a requirement would do away with the concept of insurance. If you want me to insure the cost of your house burning down (disregarding any possibility that you might elect to secretly torch it yourself), and I need to maintain a liquid balance of assets equal to the replacement value of your house, then premium I am going to charge you will be prohibitive. I'm not going to base it on the discounted probability of your house burning down because that is simply the expected loss unadjusted for risk, and by law I have to cover the biggest possible loss as though it is certain. If I insure all the real estate in your town then I need a cash balance of equal value to all the real estate in your town. You would gain no advantage above setting aside the replacement value of your house yourself (less actually since I would need to cover my costs and earn something too).

I also don't support any government bailout of any insurance company, ever. Insurance companies bear risk which is underwritten by reinsurance companies, and policy holders should bear the ultimate risk of whether any or all of these companies will remain solvent.The parties you list usually do bear all that risk, and since the Lloyds debacle in the 1990s which led to the creation of Equitas, almost all insurers now have limited liability in insolvency.

What I'm tired of is the recurring theme of privatized profits and socialized risk, no matter what the business model happens to be.
I am not sure from this statement if you oppose all limited liability, but you will realise that it amounts to a put option on the state (society) in virtually all walks of commercial life. The implicit "social contract" which you apparently object to--though I don't think you understand it well--is that society benefits via positive externalities from commerce, and in return it grants limited liability as part of its chartering of many commercial agents. The downside to society is that if a bank, insurer, car company, national airline or any other concern goes insolvent with big enough unmet liabilities when it stops trading (or if it was clear that this would happen), and those liabilities becoming put to the state are serious enough to threaten a worse outcome than a state bailout would do, then public rescue is rendered in the public interest.

[stevea]

There really isn't much differrence between banking and insurance, despite Tippet's objections.

The entire notion of insurance involves pooled risks. The probability my home may burn or that your cargo ship may sink are each small, but the joint proability that both happen is much smaller yet. Further the chance that all homes may burn and all ships sink it certainly conceivable but highly improbably. Insurers limit coverage to avoid the risks of act of war, yet they must account for hurricanes and floods than can affect millions of policy holders. Obviously if they must keep 100% liability reserve available, then no one would bother to purchase insurance - the cost would match or exceed the benefit.

Banks have a similar situation, they take deposits and loan these out knowing some borrowers will default. Obviously they distribute their risk across many borrowers, but this is still a set of pooled risks. Default represents a loss of their loan asset. With sufficient losses they won't be able to repay depositors and will default.

The only aspect of Tippet's argument I can agree with is that a clear statement of risk and a limitation on withdrawal should be given depositors. Perhaps only the immediately guaranteed part, the reserve assets should be considered part of M3. This has no impact on the transaction but it makes the paranoiac charge that banks mint money disappear.

===

Also the comment that

Even in the current crisis this isn’t happening, a better description is that the banks are attempting to deleverage at once. I.E. they are attempting to go from 40:1 reserves down to 15:1 and there isn’t enough cash in the system for them to do it. If they had been prevented from leveraging 40:1 in the first place, of course, this wouldn’t be an issue.

Isn't realistic. The US federal reserve ratio has been 10% for a long time. Canada has none at all since 1992. The UK, if I understand correctly has about a 3% voluntary rate. The 40:1 and 15:1 type numbers do not refer to US Federal deposity banks. Private lenders and do as they please - buyer beware.

The problem w/ AIG is that we didn't let the people who incorrectly estimated the systemic risk lose their bet. AIG should have failed, the bond holders should have failed to the extent that AIG was insolvent and that their packaged mortgage loans fails. The folks who took mortgages and couldn't repay should have failed. Instead the Federal goverment is propping up all the losers using money from those who rejected this sort of risk. The government has a place in making sure this sort of business catastrophy happens in an orderly fashion. It has no business in assuming the bad risk or propping up the losers.

Predatory lending ???? What a complete nonsense term ! Some mean old bankers stalk you and forces you take loan money you'd like but are unable to repay ??? That's an insane scenario. It's more like this ... banks wanted to make low quality loans since they could sell these, even to the GSEs, at the same prices as higher quality loans. Greedy, short-sighted individuals agreed to take these loans and live-high until the party ends. It's tortured logic to call the loan-takers victims; they are barnacles on the hull of society.

===

History ... I think the Lyndon LaRouche was one of the early whackadoodle paranoiac opponents to the US Federal Reserve. If I understand correctly Ron Paul is against the Federal Reserve's independence (which is IMO is mostly fictitious) and want's it organized under the government more like most European Central banks. He also rails against fiat currency, which is pretty far out ... OTOH Milton Friedman also pointed out that all fiat currencies eventually fail and usually b/c they are debauched by their government.

[se7ensnakes]

While the Edisons, Fords, Wright brothers of this country created wealth for this country and intellectual growth, the fractional reserve system of creating phantom money stole the wealth from the system. We are where we are because of these types of entrepreneur. Fractional Reserve banking was borne of a scam because it essencially gave wealth to people that all they did was to move money. In many instances it also gave wealth to people that created money out of nothing. Imagine if you will where all we did was to move money around. Imagine if everyone did this. Then, we will grow poor and broke, indebted to anything that produce actual goods. A group of these banks can make as much as if not more than Ford Corp or Boeing. But what we get from it is just a lot of debt.
Additonally, our monetary system was borne out of bankers manipulating monetary policy. The great majority of the people have no clue what fractinal reserve banking is, how they are actually lenders of last resort, how the central banks create money out of thin air for the benefit of banks. When someone deposits money in a bank, the majority of the people have no idea that they are actually loaning that money to the bank. Most people dont know how money enters circulation, how it is created. Additonally, you are in the belief that using wealth to manipulate the political machinery of the usa is okay.

[se7ensnakes]

The Federal Reserve is not the lender of last resort..we are. Everyone that make purchases is, unknowingly and unwittingly a lender of last resort. To allow a certain industry to be privileged is unconstitutional. In this country there are no kings and queens and nobility, everyone should be on equal footing. Fractional reserve banking allows a certain group of people to create phantom money. If i own a rental store, all i could do is rent what i have. If i rent a cement mixer, all i could do is rent a cement mixer. I cannot rent and IOU cement mixer. My business does not rely on anything other than what i do there. If all my customers were to come in at once, I do not get in trouble. I dont need the government to insure anything for me. I rent pound pound what i actually have. Most companies are like this except for banks. What more this system of fractional reserve banking exist because of he ignorance of the great majority of the people. No one publicly debated this type of system where it became a voting issue. This system exist because it remains under the radar of most people.

[The Central Scrutinizer]

While the Edisons, Fords, Wright brothers of this country created wealth for this country and intellectual growth, the fractional reserve system of creating phantom money stole the wealth from the system. We are where we are because of these types of entrepreneur. Fractional Reserve banking was borne of a scam because it essencially gave wealth to people that all they did was to move money. In many instances it also gave wealth to people that created money out of nothing. Imagine if you will where all we did was to move money around. Imagine if everyone did this. Then, we will grow poor and broke, indebted to anything that produce actual goods. A group of these banks can make as much as if not more than Ford Corp or Boeing. But what we get from it is just a lot of debt.
Additonally, our monetary system was borne out of bankers manipulating monetary policy. The great majority of the people have no clue what fractinal reserve banking is, how they are actually lenders of last resort, how the central banks create money out of thin air for the benefit of banks. When someone deposits money in a bank, the majority of the people have no idea that they are actually loaning that money to the bank. Most people dont know how money enters circulation, how it is created. Additonally, you are in the belief that using wealth to manipulate the political machinery of the usa is okay.

Obviously, you are "most people".

[drkitten]

While the Edisons, Fords, Wright brothers of this country created wealth for this country and intellectual growth, the fractional reserve system of creating phantom money stole the wealth from the system. We are where we are because of these types of entrepreneur. Fractional Reserve banking was borne of a scam because it essencially gave wealth to people that all they did was to move money. In many instances it also gave wealth to people that created money out of nothing. Imagine if you will where all we did was to move money around. Imagine if everyone did this. Then, we will grow poor and broke, indebted to anything that produce actual goods. A group of these banks can make as much as if not more than Ford Corp or Boeing. But what we get from it is just a lot of debt.
Additonally, our monetary system was borne out of bankers manipulating monetary policy. The great majority of the people have no clue what fractinal reserve banking is, how they are actually lenders of last resort, how the central banks create money out of thin air for the benefit of banks. When someone deposits money in a bank, the majority of the people have no idea that they are actually loaning that money to the bank. Most people dont know how money enters circulation, how it is created. Additonally, you are in the belief that using wealth to manipulate the political machinery of the usa is okay.

The Federal Reserve is not the lender of last resort..we are. Everyone that make purchases is, unknowingly and unwittingly a lender of last resort. To allow a certain industry to be privileged is unconstitutional. In this country there are no kings and queens and nobility, everyone should be on equal footing. Fractional reserve banking allows a certain group of people to create phantom money. If i own a rental store, all i could do is rent what i have. If i rent a cement mixer, all i could do is rent a cement mixer. I cannot rent and IOU cement mixer. My business does not rely on anything other than what i do there. If all my customers were to come in at once, I do not get in trouble. I dont need the government to insure anything for me. I rent pound pound what i actually have. Most companies are like this except for banks. What more this system of fractional reserve banking exist because of he ignorance of the great majority of the people. No one publicly debated this type of system where it became a voting issue. This system exist because it remains under the radar of most people.

:notm

[The Central Scrutinizer]

The Federal Reserve is not the lender of last resort..we are. Everyone that make purchases is, unknowingly and unwittingly a lender of last resort. To allow a certain industry to be privileged is unconstitutional. In this country there are no kings and queens and nobility, everyone should be on equal footing. Fractional reserve banking allows a certain group of people to create phantom money. If i own a rental store, all i could do is rent what i have. If i rent a cement mixer, all i could do is rent a cement mixer. I cannot rent and IOU cement mixer. My business does not rely on anything other than what i do there. If all my customers were to come in at once, I do not get in trouble. I dont need the government to insure anything for me. I rent pound pound what i actually have. Most companies are like this except for banks. What more this system of fractional reserve banking exist because of he ignorance of the great majority of the people. No one publicly debated this type of system where it became a voting issue. This system exist because it remains under the radar of most people.

It's the joohs, isn't it?

[drkitten]

Fractional reserve banking allows a certain group of people to create phantom money. If i own a rental store, all i could do is rent what i have. If i rent a cement mixer, all i could do is rent a cement mixer. I cannot rent and IOU cement mixer.

Except that you could, and people do.

Have you ever flown "standby"? Airlines do, in fact, sell IOU tickets, based on the belief that not everyone who has bought a ticket for a particular flight will show up. In fact, they'll even overbook flights for the same reason -- if it turns out that a particular flight is over capacity, they will simply move the passenger to a different flight (usually giving them a voucher or something in exchange).

In fact, any business that takes reservations -- restaurants, hotels, car rentals, &c. -- will routinely overbook. Many is the time I've reserved ("rented") an economy car, only to be told at the time of pickup that they're all out of the type of car I reserved, so they're giving me a "free upgrade." It works out to be more profitable to overbook the compact cars and to sometimes rent out a mid-size sedan at a compact rate than it is to turn down reservations because you don't have enough compacts on the lot.

Renting an IOU cement mixer is not a problem if the customer decides not to pick it up. It's not even a problem if the customer picks it up, as long as you can beg borrow or steal a cement mixer from someone else. ("I'm sorry, I don't have the six cubic foot model available, so I'm giving you an eight cubic foot model instead. Is that all right?" Or even more accurately, "I'm sorry, I don't have the six cubic foot model available right now, so I'm ordering one from the warehouse, and it should be here in about fifteen seconds... Ah, there it is.")

It's only a problem when the warehouse runs out of mixers.

[Free Thinkr]

There really isn't much differrence between banking and insurance, despite Tippet's objections.
LOL, what a gem of a quote. There's hardly any difference at all, except the fact that their purposes are totally and completely different!

The only aspect of Tippet's argument I can agree with is that a clear statement of risk and a limitation on withdrawal should be given depositors. Perhaps only the immediately guaranteed part, the reserve assets should be considered part of M3. This has no impact on the transaction but it makes the paranoiac charge that banks mint money disappear.
Sigh. First of all, no one claims that banks "mint" money. Minting is a process of creating currency. If you cannot distinguish between money and currency, probably you should avoid comment on this topic. But more importantly, it doesn't matter a whit how explicit banks make the fractional reserve process; banks create money because money is what is commonly accepted in exchange. As long as the fractional reserve process has an inflationary effect on the money supply, and it always will, banks create money.

The folks who took mortgages and couldn't repay should have failed.
Haha, hooboy!

Instead the Federal goverment is propping up all the losers using money from those who rejected this sort of risk.
Really? Not last I checked! Last I checked, the government is primarily propping up the banks. And it's doing so because it knows what the result of a massive collapse of the money supply would be.

Predatory lending ???? What a complete nonsense term ! Some mean old bankers stalk you and forces you take loan money you'd like but are unable to repay ??? That's an insane scenario.
Insane? No, more like idiotic. An idiotic scenario because you specifically dreamed it up with the purposes of making an idiotic strawman.

It's more like this ... banks wanted to make low quality loans since they could sell these, even to the GSEs, at the same prices as higher quality loans. Greedy, short-sighted individuals agreed to take these loans and live-high until the party ends. It's tortured logic to call the loan-takers victims; they are barnacles on the hull of society.
More likely, they aren't financial experts, and believed the lies the bankers told them. Sure, some are as you described, but many were not.

[Francesca R]

In fact, any business that takes reservations -- restaurants, hotels, car rentals, &c. -- will routinely overbook.It also means--rather happily for the lied-to and defrauded customer--that you can normally cancel a hotel or restaurant reservation or a car rental or a ("flexible") air ticket at under 24 hours notice and--hey presto--get almost all of your money back. I have frequently found that rather useful in comparison with being told "No way, we had a deal, pay up or you're going to jail for violating a contract, you promised!".

And the reason this can happen is that, over a large number of reservations, merchants have a pretty good idea of how many will cancel. Why they even agree cancellation conditions up front with their customers. The forecasting isn't perfect, but it works well enough for everyone to be on average better off than they would be if merchants were legally prohibited from overbooking and cancellation refunds were obliterated.

But some day there's bound to be a massive slip up with thousands of people bumped from airlines, hotels, restaurants and car rentals, so maybe we better start up some anti fractional-reserve-air/hotel/restaurant/rental car activism!

[Francesca R]

I heard not so long go that Airbus takes orders for jumbos without actually having a finished model in their showroom. Sometimes they might not have even sourced all the parts and labour to build to order. Such fractional reserve plane building is a complete scam. As for those South Koreans and their vacuous promises to supply ocean going oil tankers without having them available already, it makes my blood boil. They are all using those pesky mean-variance risk models too which everyone knows are a crock when you get black swans.

[drkitten]

I heard not so long go that Airbus takes orders for jumbos without actually having a finished model in their showroom. Sometimes they might not have even sourced all the parts and labour to build to order. Such fractional reserve plane building is a complete scam. As for those South Koreans and their vacuous promises to supply ocean going oil tankers without having them available already, it makes my blood boil. They are all using those pesky mean-variance risk models too which everyone knows are a crock when you get black swans.

Yeah. I even knew a book author who accepted money for a book before it was even written.

Obviously, this lax morality must be stamped out. Down with all economic agreements except for barter!

I will go speak to my congressmen about it, as soon as I can find someone willing to change a goat for me as I need bus fare.

[Francesca R]

Have the police standing by to arrest the driver in the event that there is not enough room on the bus. I hate fractional reserve mass transit with a passion fruit.

[lomiller]

Isn't realistic. The US federal reserve ratio has been 10% for a long time. Canada has none at all since 1992. The UK, if I understand correctly has about a 3% voluntary rate. The 40:1 and 15:1 type numbers do not refer to US Federal deposity banks. Private lenders and do as they please - buyer beware.

As far as I can tell that 10% number only applies to transactional deposits, everything else is 0%. City and BoA were running leverage ratios of just over 5% and the investment banks like Merrill Lynch, Lehman Brothers, etc were frequently running in the 2%-4% which must now be brought up as they are no longer classed as investment banks.

[Aepervius]

ABout right, we already had that discussion in a previous thread, and that came to a stop when the proponent of certain right to be natural were requested to give an example. The reality is that a society give the right those which belong to it think they should have. For example for a long time black people had no right in certain US state and were called "slave". The right to property is like the right to health care. A right which is octroyed by a governement.

This thread is not the place to discuss it again I think.

[Michael Redman]

To allow a certain industry to be privileged is unconstitutional.

Citation?

[The Central Scrutinizer]

Citation?

LOL!!! Good one!

In other words, don't hold your breath.

Come to think of it, the answer might prove to be quite entertaining.

[Michael Redman]

With just-in-time inventory, business routinely sell thing they have not yet acquired or produced. If they were suddenly prohibited from selling things they didn't actually possess, that would cause an economic catastrophe.

But I'm no economist. Is lending somehow categorically different than selling in this regard?

[se7ensnakes]

"The people complaining about fractional reserve banking are essentially suggesting we limit economic activity to the amount of available money. They usually go a step further and say we should have a gold standard, so that economic activity is limited to the amount of gold in existence."
The system is not self-sustainable, and lot of interest money is being made. The Federal Reserve is not the lender of last resort...we are. We pay for it thru inflation and taxes. This indicates an industry that is directly priviliged. As far as money liquidity, there are other monetary systems out there that should be discuss and made an issue among the voting public. Crying out that only a debt money system is the ONLY alternative is ignorance at its best.

[The Central Scrutinizer]

"The people complaining about fractional reserve banking are essentially suggesting we limit economic activity to the amount of available money. They usually go a step further and say we should have a gold standard, so that economic activity is limited to the amount of gold in existence."
The system is not self-sustainable, and lot of interest money is being made. The Federal Reserve is not the lender of last resort...we are. We pay for it thru inflation and taxes. This indicates an industry that is directly priviliged. As far as money liquidity, there are other monetary systems out there that should be discuss and made an issue among the voting public. Crying out that only a debt money system is the ONLY alternative is ignorance at its best.

I'm sorry, I wasn't listening. Could you repeat that?

[se7ensnakes]

Have you ever flown "standby"? Airlines do, in fact, sell IOU tickets, based on the belief that not everyone who has bought a ticket for a particular flight will show up. In fact, they'll even overbook flights for the same reason -- if it turns out that a particular flight is over capacity, they will simply move the passenger to a different flight (usually giving them a voucher or something in exchange).
dr kitten Thats not fractional, both service and/or money are available without resorting to the government.
That contains no ticket creation, the customer purchased tickets for the purpose of transportation. If the airlines cannot meet the demand, they are either book to another flight or they are given their money back. There is no danger of a run on the airlines because the airline still has the money or it can, in a timely manner provide the service. If you wanted to compare airlines to banks the airlines will need to sell ten ticket with the hopes that nine customers did not show up, while collecting interest on the other nine tickets.

[se7ensnakes]

Michael Redman (http://forums.randi.org/member.php?u=256)
Business typically do sell things that they dont have, but at one point they can give the money back to the customer or they can give them the product. If the business cannot do either...it is call fraud. Someone plain-out stole your money.

[Francesca R]

Thats not fractional, both serhvice and/or money are available without resorting to the government.If an airline becomes insolvent, then various governments get involved. If it doesn't, then there is no issue. If a bank would not be rendered insolvent by redeeming a deposit, then there is no issue there either.

There is no danger of a run on the airlines because the airline still has the money or it can, in a timely manner provide the service.That is not the reason why there is not a "run on airlines". There is not a "run on airlines" in the sense of customers mobbing airports because you can't just go and grab your flight now the moment you hear the company is in distress. You can try to cancel and get a refund and rebook somewhere else and that sort of "run" certainly does happen and can send the airline under.

And when that happens, customers lose money and get stranded, which is sometimes mitigated by consumer protection schemes that tour operators are legally required by government to set up in some countries before they can sell air travel. But get this--if there was a systemic collapse of a whole bunch of airlines at once, there would not be enough money in the kitty to bail them out (or bring them home).

If you wanted to compare airlines to banks the airlines will need to sell ten ticket with the hopes that nine customers did not show up, while collecting interest on the other nine tickets.If it was routinely the case that 9/10 customers did not show up, then I fully suspect that is what airlines would do, and would be legally allowed to do.

Virtually any business that does not trade exclusively in a spot market has the element of fractionality that you are only protesting about in respect of banks. You need a different rationale for your protest because the one you have offered is invalid.

[Francesca R]

Business typically do sell things that they dont have, but at one point they can give the money back to the customer or they can give them the product. If the business cannot do either...it is call fraud. Someone plain-out stole your money.Incorrect. Insolvency, for example, is not fraud.

[drkitten]

If you wanted to compare airlines to banks the airlines will need to sell ten ticket with the hopes that nine customers did not show up, while collecting interest on the other nine tickets.

... which is approximately what they do, except that the "interest" is instead called "change fees," and the percentage of people who don't show up for any given flight is much smaller than the percentage of people who don't show up on any given day to demand their money from a bank.

Which is why the banks are able to operate on only a 10% reserve, while airlines need 90-95% reserve or so, and hotels need 70-80% reserve.

[stevea]

LOL, what a gem of a quote. There's hardly any difference at all, except the fact that their purposes are totally and completely different!

Perhaps you don't understand what banks do (a common disease on this thread). I would not loan my neighborA $450k for a home loan, nor would I loan neighborC $30k for a new car, nor would I loan neighborC $1.5Mill for a business loan. I *would* however deposit money at a local bank that makes all of these loans and a lot more. The reason should be obvious, even to a fool - the bank amortizes the risk of default over a much larger pool. So banks are basically consolidators of risk - EXACTLY LIKE AN INSURANCE COMPANY.

Then look at Citibank or Lehman's - they bought mortgages and consolidated these into large pools, and in doing so provided value. The buyers of these mortgage backed securities obviously misunderestimated the risk, but no fault to Lehman's. Again this is EXACTLY LIKE INSURANCE - it's risk reduction via pooling of risk events.

Sigh. First of all, no one claims that banks "mint" money.

Sigh - you need to read this thread again ....
Banks are a problem, they create money each time someone borrows,....

7snakes isn't the only kook here. Look at you ...

But more importantly, it doesn't matter a whit how explicit banks make the fractional reserve process; banks create money ...

If your major complaint is that I'm blurring M1, M2 and M3, fine - but if you think M3 is inferior to M1, then do I have a trade for you !

The folks who took mortgages and couldn't repay should have failed
Haha, hooboy!

Please explain EXACTLY what you mean. If a bank offered me a $10M loan for a home, I would assess that I could not easily repay the $600k/year interest and so I would reject that offer. If OTOH a bank offered my small business a $10M loan on outstanding orders I might take that loan. Anyone with an IQ approaching 3 digits should be able to reasonably assess their ability to repay a loan. Why on earth wouldn't we give ppl the freedom to say yes/no to a loan ? Given that personal freedom why wouldn't we expect them to take the full consequences of their decisions ? Someone offering me a truly excessive loan does NOT abrogate my obligation to act responsibly and in my own self-interest. Unlike you, I don't believe that the general population is stupid and in need of a paternalistic government hand to control their lives. If some of them make bad decision - that is clearly their responsibility and not my business. It's also the lender's problem. If you say were the Russian gov't buying mortgaged back securities from Lehman's and getting default insurance from AIG - then it is ENTIRELY the responsibility of that government to a/assess the quality of these mortages and b/ assess the ability of the insurer, AIFG to repay. They failed at both and so they should take the consequences.



Really? Not last I checked! Last I checked, the government is primarily propping up the banks. And it's doing so because it knows what the result of a massive collapse of the money supply would be.

Not so fast. The Fed is appropriately injecting liquidity into Fed member banks to avoid a currency collapse. This is loaned money and in the long run costs the taxpayer nothing but the interest reduction. This is separate and different from the US Gov't, (not the Fed) injecting $765Bnl into propping up commercial banks like Citibank. Let's face it, FNMA & FreddieMAC lost too and should be fold.
Yes there are overlap cases, but these aren't the major headlines. IMO the gov't should NOT be propping up badly operated banks. The Fed should use a loose money policy, and the Gov't should be involved in creating an orderly process for the sale of Lehman'.s Citibank and other incompetent banks assets. Your brush is too broad.

Insane? No, more like idiotic. An idiotic scenario because you specifically dreamed it up with the purposes of making an idiotic strawman.

Really - so you don't believe in predatory lending exists either ? Great, we agree. What does "Haha hooboy", mean then ? Perhaps you haven't seen the liberal news in the past 18 months but chock full of claims that "predatory lending", and "greed", the two nonsense terms - so it's certainly not a strawman. How can an offer to loan money be predatory ?

More likely, they aren't financial experts, and believed the lies the bankers told them.

Awww - the po' wittle dumb, peepow, we must protect them from themselves and take away their choices. What a load of BS. What a clear road to fascism !

Can you cite any realistic data that individuals were lied to by bankers; if not it's just slander on your part. I have news for you sunshine - in tort law the contract is abrogated if there is deception. If this was a common case then lawyers & courts would be beating the tar out of the lenders, and the borrowers would be completely protected. The CNBC special on this showed a lot of examples of West Coast house traders who assumed their (zero equity) house would be worth more in the future - gamblers. They also showed a number of the poor; several were full of whiney victmhood, but the majority were quite honest and stated they knew it was wrong to take the loan from the beginning. They knew their income was misstaed and they knew they couldn't repay.

You either declare these ppl as mentally incompetent, make them wards of the state and take away their rights to make individual decisions, to make contracts, and obviously to vote. Otherwise you must admit there are of reasonable intelligence and capable of living their own lives without government "help", and accept that they can make mistakes and can take the consequences of their own decisions. A bail-out just b/c someone offered them more than they could repay and they foolishly took the offer isn't reasonable.

[se7ensnakes]

wrong francesca
you are confusing a latency effect for the multiplier effect. The constant borrowing and deposits make phantom accounts. A deposit becomes both an asset and a liability many times over. Once the airline ticket is used it is just an asset, it is not re-borrowed and deposited many times over, while collecting interest. You need to re-read your modern money mechanic booklet again.
If the airlines serviced 1 out 10 tickets they sell, it will come close to what the banks actually do. The airlines, then, could pull a maneuver where they might re-sell tickets someone actually think they have. Unfortunately for airlines, people actually use the tickets, they dont bank tickets.

[se7ensnakes]

stevea (http://forums.randi.org/member.php?u=19091)
Thats all fine and dandy until we get to "Lender of last resort" bit and money creation out of thin air by the central bank for the benefit of private banks. The banks go, or mr president we cannot pay all the people that are coming to our window asking for their gold. OH my what are we to do? Mr president closes all of the banks...calling it a bankers holiday and voila, prints up so fancy looking paper and trade for actual gold. Then everyone goes home happy...right? What makes you think, stevea, that you are money is not being diluted. Your wages is always trailing inflation, hence, this money-dilution is making your wages worth less. In 1960 median household income was about $6200 and the median home was a about $14,000. Today the median is approximately $40,000.00 and the median price of homes is about $180,000. You could follow inflation by looking at the median incomes and the price of necessities, like food. This is far more accurate than posted inflation rates.

[stevea]

LOL, what a gem of a quote. There's hardly any difference at all, except the fact that their purposes are totally and completely different!

The primary feature of both banking and insurance is amortized risk - get a clue.



Really? Not last I checked! Last I checked, the government is primarily propping up the banks. And it's doing so because it knows what the result of a massive collapse of the money supply would be.

No the Gov does NOT have to prop up badly managed banks to avoid a massive collapse. The Gov/Fed must (and has) keep liquidity high despite the counter-forces in the market. They must cover defaults with the promised FDIC/FSLIC insurance. Pouring money into the failed banks is an insane policy. They are propping up the losers, instead of letting the market clean-house. To a certain extent the Gov did fold some of the losing regional banks into the better managed ones - and this is exactly what should happen.

This time think before you dismiss and re-iterarte your closed minded views. What problem would the average person experience if your bank was sold/taken over by another and if you received FDIC payment for the (limited) losses your old bank incurred. That's not a tragedy - it happens all the time. The Gov does have a place to make sure this 'discounting' occurs in an orderly fashion - but that should have been finished before the end of '08. Instead we've decided to have the Gov manage bad banks and bad car companies perpetually.



More likely, they aren't financial experts, and believed the lies the bankers told them. Sure, some are as you described, but many were not.

No one was lied-to - this is a provable untruth, and anyone perpetuating it is a fool. If the banks actually lied to the borrowers then the borrowers can easily break that contract and get redress - it violates basic tort law - the contract would be invalid.. The fact that there aren't tens of thousands of suits against the lenders tells us instantly this is a FALSE scenario.

You should look for the CNBC program where they want around interviewing ppl who held bad loans. California young ppl who always assumed the prices would go up - so they took huge irrational risks to ladder up the housing market - buying and turning ever bigger homes till the music stopped - greedy and stupid IMO. Or the Elderly black woman from ?Detroit/Cleveland? who said she knew she couldn't repay the loan when she signed it, but she wanted the up-front money. She was honest about her motives, but basically this is a person with an inability to delay gratification, and oblivious to the consequences. Nothing can protect a fool from being "taken" until we get to the point of declaring them mentally incompetent. Or the person who knew and colluded with the lender to mis-state their income. On the show they said that the KNEW the income was over-stated yet they signed the agreement attesting to that income; IOW the borrower (lender) was a cheater/liar in this case.

I can't empathize w/ the plight of most of these people. If you really believe that putting 0% down on a home, or taking a loan you can't repay is a solid financial investment you are a fool. It's not the lenders job to educate you on the risks.

If the Gov wants to legislate the use of a common one page form outlining the risks for ppl for any large loan - I'm all in favor of that. It would not have stopped these "something for nothing" seekers from making exactly the same foolish mistakes.

[stevea]

stevea (http://forums.randi.org/member.php?u=19091)
Thats all fine and dandy until we get to "Lender of last resort" bit and money creation out of thin air by the central bank for the benefit of private banks. The banks go, or mr president we cannot pay all the people that are coming to our window asking for their gold. OH my what are we to do? Mr president closes all of the banks...calling it a bankers holiday and voila, prints up so fancy looking paper and trade for actual gold. Then everyone goes home happy...right? What makes you think, stevea, that you are money is not being diluted. Your wages is always trailing inflation, hence, this money-dilution is making your wages worth less. In 1960 median household income was about $6200 and the median home was a about $14,000. Today the median is approximately $40,000.00 and the median price of homes is about $180,000. You could follow inflation by looking at the median incomes and the price of necessities, like food. This is far more accurate than posted inflation rates.


No no no no - you don't have a bank holiday, nor is the President involved. The Board of Governors of the Fed lower the interbank lending rate, and pump more money into circulation by repurchasing bonds. That's all that's needed. This the the conventional method the fed uses to adjust the money supply. The big commercial banks aren't generally Feb banks, so these need another means of liquidity control.

I completely agree that if the Fed is increasing the money supply (above the GDP growth rate) that inflation will be the certain result. I never said that inflation wasn't part of the problem. We both generally agree abt the cause of inflation. This doesn't change the fact that if you want to prevent a bank-run you need to increase liquidity, and this is in the long run inflationary. These "above GDP" liquidity injections should be only considered a short term remedy/policy and we all either pay for them w/ diluted currency(inflation) or else the excess liquidity is recovered later (deflationary).



Geithner/Obama want to add new oversight powers to the Fed to they will be empowered to seek out these risk bubbles and manage thenm before they get "too bad". This is nonsense, or perhaps more hubris.. Many thousands of highly intelligent highly motivated investors have fallen for every bubble since the tulip craze. The ~2000 dot-com crash and teh ~2007/8 mortgage bubble are alike in nature. People fail to correctly assess risks. No G18 at the Fed can consistently find and manage problems that Peter Lynch and Warren Buffet can't foresee - that's ridiculous. So this is just another layer of government making markets inefficient.

I do think we need some major risk-reducing reforms, but my thinking is along the lines that we need to prevent individual banking institutions from getting so large that their failure and the resulting discount/clearance is such a large problem. This certainly doesn't address the entire problem since there is quite a bit of "herd mentality". All the big banks except Goldman-Sach's took a major blow wrt mortgage credit, tho' most were still viable

[daenku32]

What I consider ironic is that quite a few "free marketers" appear to dislike fractional reserve banking, even though it is purely a free market practice.

[stevea]

What I consider ironic is that quite a few "free marketers" appear to dislike fractional reserve banking, even though it is purely a free market practice.

I don't understand your point. How can you consider the quasi-private Federal Reserve setting a reserve limit and forcing banks to meet the reserve requirement a "free market practice". Doesn't seem like a free market practice at all.

[Francesca R]

I don't understand your point. How can you consider the quasi-private Federal Reserve setting a reserve limit and forcing banks to meet the reserve requirement a "free market practice". Doesn't seem like a free market practice at all.It isn't free (unrestricted) borrowing and lending, no. But the anti-FRB enthusiasts don't want to free society from fractional reserve limits. They want to force them up to 100%. Their position is nominally consistent with criminalisation of all credit creation (and this includes risk pooling and forward transactions). They want to vastly restrict voluntary transactions under the guise that those transactions constitute a violation of individual rights.

This is from whence the apparent irony comes. A bunch of people crying "Freedom for freedom's sake!! Unless we don't agree with it"

[Free Thinkr]

It's not the lenders job to educate you on the risks.
It's a lender's job not to make too many risky loans. Making loans to, as you describe them, fools is bad business on the lender's part. Period. You're an apologist for greedy filth.

[Free Thinkr]

It isn't free (unrestricted) borrowing and lending, no. But the anti-FRB enthusiasts don't want to free society from fractional reserve limits. They want to force them up to 100%. Their position is nominally consistent with criminalisation of all credit creation (and this includes risk pooling and forward transactions). They want to vastly restrict voluntary transactions under the guise that those transactions constitute a violation of individual rights.

This is from whence the apparent irony comes. A bunch of people crying "Freedom for freedom's sake!! Unless we don't agree with it"
Not really, because credit-creation is a privilege.

[Francesca R]

It may be (a protected one, though).

What it isn't is a criminal violation of others' rights.

[lomiller]

I don't understand your point. How can you consider the quasi-private Federal Reserve setting a reserve limit and forcing banks to meet the reserve requirement a "free market practice". Doesn't seem like a free market practice at all.


It’s more of a free market then what the anti-FRB crowd want, since they want to enforce reserve requirements of 100%. Under the current system at least consumer banks are allowed to have reserved between 10% and 100% and investment banks could go higher still.

All the investment banks are gone now, they either went bankrupt or turned into bank holding companies…

[lomiller]

It's a lender's job not to make too many risky loans. Making loans to, as you describe them, fools is bad business on the lender's part. Period.

That depends. When the lender is free to externalize the costs of that risk, it’s actually a good business practice because you make more money. Of course the risk of the borrower devaluing is still there but as long as it isn’t the lender paying for it why would they care?

[daenku32]

I don't understand your point. How can you consider the quasi-private Federal Reserve setting a reserve limit and forcing banks to meet the reserve requirement a "free market practice". Doesn't seem like a free market practice at all.
Because "free marketers" want to restrict money creation, which is what the Fed's reserve requirements do.

[Almo]

It occurs to me that a really good history teacher I had in high school was into this. I say he was good because he cared. He was a hardcore conservative of some sort, and assumed I was since I got along with him well and we had interesting discussions. :) He had me read a book presented in comic form about fractional banking.

It started with 3 people on an island using fish for currency. Expanding credit was loaning out more fish than he had. That (if I rememeber right) required reconstituting the fish into less edible ones. Which meant the inherent value of them was lower, so the currency was debased and it accomplished nothing.

I remember reading this, and thinking it was an interesting point, but that we don't need to eat our money. It was reasoning by analogy, and I don't think it worked very well. It expanded from the small fish economy out to complaining about FDR and other real political stuff. I never told the guy I thought it was a load of crap, because I valued him as a friend, and was in fact grateful to have seen the book.

Unfortunately, he soon became disillusioned with his job because he was not allowed to fail someone who didn't do any of the work.

When I was in his class, he did interesting things like:

There was a true/false test that really chewed us up, because the answers all seemed obvious, but you had to think or you'd get them wrong. It wasn't a test of knowledge of facts, it was whether you understood the question or not.

One day, he handed out our graded test papers, and told us that he would be redistributing the points from the high-scorers to the low-scorers. The students went ballistic, but he played along. Eventually he told us that he wouldn't be doing that, but that he wanted to illustrate somthing about socialism and how it can cause motivational problems.

[daenku32]

One day, he handed out our graded test papers, and told us that he would be redistributing the points from the high-scorers to the low-scorers. The students went ballistic, but he played along. Eventually he told us that he wouldn't be doing that, but that he wanted to illustrate somthing about socialism and how it can cause motivational problems.

Sounds like he was trying to do the typical conservative complaint about progressive taxation. Which of course is "socialism" to a conservative.

In the end however, the top scores still end up with a greater score than the lower scorers.

But I do wonder, what is the favorite "conservative" grading method. Curve or not?

[brumsen]

What strikes me as interesting is that quite a few people - and not only here, I would guess - place ideas about monetary reform to get rid of FRB in the corner of woo and such. FRB is clearly not a conspiracy, since it is very much out into the open. Yet, many people - probably including myself - do not understand all details and implications of it. People who argue against FRB are supposedly ignorant, and yet, the masses who suffer the consequences of FRB don't even know that that's where quite possibly the trouble begins. Yeah, sure, I do see the similarity with 9/11 truthers there on that particular point.

Anyway; given that arguably a lot of financial troubles from, say, the beginning of the 20th century could at least partially be explained by the characteristics of our monetary system, as based on FRB, it seems to me that it cannot hurt to have a debate on advantages and disadvantages of FRB as compared to other possibilities.
Which is hardly being done by saying things like
What it isn't is a criminal violation of others' rights.
since what is at issue is not so much whether it is criminal (given current legislation it clearly isn't), but whether it ought to be. Compare with the debate about slavery at the time.

On to a question that I have, which - unless I missed it - has not been addressed here yet. What of the argument against FRB which says that it requires the money supply to expand continuously since otherwise there simply would not be enough money for everybody to pay the interest over their debts; which in turn requires that our collective wealth keeps growing exponentially in order to prevent inflation; which in turn requires infinite resources, meaning that such growth simply cannot be sustainable?

[Francesca R]

So substitute "isn't" with "isn't and shouldn't be" because both are my position. And since that is the complaint levelled against FRB by free-market enthusiasts (read the thread) it seems to me that this is directly on track with debating it, neither exaggerating nor playing down the direct objection.

Are pre-loading your post with "the masses who suffer the consequences of FRB" and "compare with the debate about slavery at the time" supposed to help keep discussion on a more even keel? Might as well shove a Nazi reference in there as well for good measure, eh?

[brumsen]

So substitute "isn't" with "isn't and shouldn't be" because both are my position.
Just my point. Your post would then, rather than a trivial statement of fact, be just a statement of position, not an argument at all. Just stating your position is not debating.

Are pre-loading your post with "the masses who suffer the consequences of FRB" and "compare with the debate about slavery at the time" supposed to help keep discussion on a more even keel?
The first is maybe not so balanced. But are you suggesting there is not a considerable number of people who do suffer such consequences? Are you saying it is all roses?
I don't see a problem with the second statement. Please explain.

Might as well shove a Nazi reference in there as well for good measure, eh?
Don't you think you are exaggerating just a tiny wee bit?

Anything to ignore my question, apparently.

[Startz]

On to a question that I have, which - unless I missed it - has not been addressed here yet. What of the argument against FRB which says that it requires the money supply to expand continuously since otherwise there simply would not be enough money for everybody to pay the interest over their debts; which in turn requires that our collective wealth keeps growing exponentially in order to prevent inflation; which in turn requires infinite resources, meaning that such growth simply cannot be sustainable?

The argument is just wrong. Technically, it confuses stocks and flows. There is nothing inconsistent in the repayment of interest with a constant money supply.

[brumsen]

I can see what you're getting at but that doesn't sound like the whole answer (if it is one at all). Sure, the interest can be repaid with a constant money supply, but it is impossible to repay both the interest and the sums borrowed. And since there always have to be loans somewhere in the system, the amount of interest that has to be repaid from the inception of those loans will grow steadily as well over time. At some point, in a system with constant money supply, this will mean that all circulating money will go into paying the interest on the loans outstanding, which surely is an impossibility.
So, where is the mistake in this train of reasoning?

[Francesca R]

It is riddled with mistakes. It also confuses interest (which is a real variable) with money supply which is a nominal one.

A real interest rate exists when an economy produces income from its inputs. So money (or anything that represents deferred consumption) has positive time value. Real interest therefore accrues alongside the increase in real income, or real wealth, whenever the owner of capital and whoever is using it are not the same.

If an economy cannot produce income from any sort of investment, then deferred consumption can't sustain a positive real interest rate either.

This is a completely separate consideration from money supply, and nominal interest rates and inflation.

[stevea]

It isn't free (unrestricted) borrowing and lending, no. But the anti-FRB enthusiasts don't want to free society from fractional reserve limits. They want to force them up to 100%. Their position is nominally consistent with criminalisation of all credit creation (and this includes risk pooling and forward transactions). They want to vastly restrict voluntary transactions under the guise that those transactions constitute a violation of individual rights.

This is from whence the apparent irony comes. A bunch of people crying "Freedom for freedom's sake!! Unless we don't agree with it"

Francesca, I agree with many of your positions, but I think you are creating a strawman here. Yes I've heard of a few kooks who want to basically outlaw credit, but I don't think this is any more common among classical liberals than is the belief that the state should control the press among progressives. I think it's an outlier position, but perhaps you can provide references.


It's a lender's job not to make too many risky loans. Making loans to, as you describe them, fools is bad business on the lender's part. Period. You're an apologist for greedy filth.

You are so foolish that you can't understand individual rights and freedoms and you are exaclty the sort of dictatorial/authoritarian personality who would substitute your (supposedly superior) judgement for the freedom of choice of others.

It is NOT the lender's job to do anything - period. If a lender chooses to make foolish loans that is their business and it is NOT mine or yours. If these loans fail they should suffer the full consequences. Similarly for borrowers. All that is required is that a valid voluntary contract exist between the parties. Even that is optional, as if they make bad contracts they will receive proper treatment in court.

The entire problem that bugger's your imagination only occurs when do-gooders, like yourself, insert themselves into these private matters to try to prevent fools from receiving the consequences of their acts. If you are dim enough to try to bail out for foolish lenders or foolish borrowers, then suddenly you imagine that you have some right to tell these parties how to act in their lives ... and this is the genesis of fascism.

So I'll gladly suffer the fact the fools act foolishly in return for the freedom to act as I please. You instead are the sort who feels the need to control others based on your personal views and no good can come from that position.

BTW if it was SOOOOO obvious to everyone how foolish the lenders were acting then why didn't you short the bank stocks and make a huge fortune ??? Same for the dot-com bubble in 2000-2001. Like every bubble it is never obvious until the crash, and it's 100% pure hubris to imagine that anyone can foresee the outcome.

Also FWIW I find that ppl of your bent are usually dismissive of both the rights and the intelligence of others, as you've shown (you must protect the poor little dummy borrowers - who exist only in your imagination).