Where did the 'Fractional Reserve Banking' meme begin?

[stevea]

Originally Posted by 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.

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]

Originally Posted by 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...

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

[Francesca R]

Originally Posted by Patrick_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]

Originally Posted by Francesca R

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.

Quote:

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]

Originally Posted by Tippit

Why should borrowing be "encouraged" at all?

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

Quote:

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.

Quote:

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]

Originally Posted by Francesca R

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.

Quote:

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]

Originally Posted by Tippit

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.

Quote:

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.

Quote:

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]

Originally Posted by Francesca R

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.

Quote:

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.

Posted By:Cuddles

[The Central Scrutinizer]

Originally Posted by Tippit

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!

[Francesca R]

Originally Posted by Tippit

Insurance premiums are not deposits, and insurance claims are not demand deposits

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?

Quote:

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.

Quote:

I'm afraid my position is quite consistent.

No it isn't.

[Tippit]

Originally Posted by Francesca R

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.

Quote:

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]

Originally Posted by Tippit

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).

Quote:

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.

Quote:

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

Quote:

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]

Originally Posted by 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.

Obviously, you are "most people".

[drkitten]

Originally Posted by 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.

Originally Posted by 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]

Originally Posted by 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.

It's the joohs, isn't it?

[drkitten]

Originally Posted by se7ensnakes

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]

Originally Posted by stevea

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!

Quote:

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.

Quote:

The folks who took mortgages and couldn't repay should have failed.

Haha, hooboy!

Quote:

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.

Quote:

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.

Quote:

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]

Originally Posted by drkitten

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]

Originally Posted by 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.

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]

Originally Posted by stevea

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]

Originally Posted by se7ensnakes

To allow a certain industry to be privileged is unconstitutional.

Citation?

[The Central Scrutinizer]

Originally Posted by Michael Redman

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]

Originally Posted by 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.

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
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]

Originally Posted by se7ensnakes

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.

Quote:

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).

Quote:

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]

Originally Posted by se7ensnakes

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]

Originally Posted by se7ensnakes

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]

Originally Posted by Free Thinkr

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.

Originally Posted by Free Thinkr

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

Sigh - you need to read this thread again ....

Originally Posted by se7ensnakes

Banks are a problem, they create money each time someone borrows,....

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

Originally Posted by Free Thinkr

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 !

Quote:

The folks who took mortgages and couldn't repay should have failed

Quote:

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.

Quote:

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.

Quote:

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 ?

Quote:

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.