Where did the 'Fractional Reserve Banking' meme begin?

[se7ensnakes]

stevea
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]

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!

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

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.

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.

Quote:

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]

Originally Posted by se7ensnakes

stevea
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]

Originally Posted by 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.

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]

Originally Posted by stevea

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]

Originally Posted by stevea

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]

Originally Posted by Francesca R

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]

Originally Posted by stevea

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]

Originally Posted by Free Thinkr

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]

Originally Posted by stevea

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]

Originally Posted by Almo

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

Originally Posted by Francesca R

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]

Originally Posted by Francesca R

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.

Originally Posted by Francesca R

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.

Originally Posted by Francesca R

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]

Originally Posted by brumsen

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]

Originally Posted by Francesca R

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.

Originally Posted by Free Thinkr

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).