Fractional Reserve Banking

[Lateralus]

Post your thoughts.

[nozflubber]

I think it should be a very small fraction, and the fraction should become smaller in relation to how much liquid assets the bank has. A tiny bank that has real estate and strong stocks should be able to lend a much larger percentage of thier holdings than a chain of banks with very weak backings. Basically I'm for letting banks lend as much as possible, but they also need to be accountable in the event of market instabilities.

[Kiddo]

It's not like you could do away with it. It's economical since banks pay interest. However, it also needs to be regulated. I guess my opinion is, it is what it is.

[Veneti]

I think most so called Austrian economist types haven't cottoned onto the fact that if banks could only lend the equivalent of their cash deposits then it would approximate a gold standard. The gold standard was only relevant at the time it was used because the complexity of financial instruments did not exist. The gold standard is effectively a rule preventing governments manipulating wealth, the reserve (federal etc) is now supposed to be this independent body.. but, hell its not.

Anyway...

The biggest issue the financial world faces is fractional banking coupled with escalating ability to lend (to external parties) simply through banks lending to each other. (I believe this hasn't been legislated against yet?) In essense, a bank takes $1 USD deposit, lends $1 USD to another bank and lends $9 USD to home owners, the other bank that was lent $1 USD then can lend $8 USD? externally (Its an inflationary lending bubble).

But to be honest, the only problem in the current world of economics is one of variability and risk. They could dampen this, but there is no political will. There has been little legislation to protect the most vulnerable sectors of society on the increasing complexity of economic transactions and the risks that now exist that never did previously.

[Electric]

Umm don't we need a way to manage the economy? How do we reduce the supply of money in times of inflation? Sure there are short run problems that are caused by risky lending, but in the long run these problems should be stabilized by rational choice. Don't expect to rely on fiscal policy. It takes way too long to implement.

Originally Posted by Veneti

The biggest issue the financial world faces is fractional banking coupled with escalating ability to lend (to external parties) simply through banks lending to each other. (I believe this hasn't been legislated against yet?) In essense, a bank takes $1 USD deposit, lends $1 USD to another bank and lends $9 USD to home owners, the other bank that was lent $1 USD then can lend $8 USD? externally (Its an inflationary lending bubble).

IMO, it depends on how you look at it though. I think one of the functions of lending was to create a larger supply of money. This can help us during recession time when price level is least flexible to change.

[Lateralus]

Originally Posted by Veneti

I think most so called Austrian economist types haven't cottoned onto the fact that if banks could only lend the equivalent of their cash deposits then it would approximate a gold standard. The gold standard was only relevant at the time it was used because the complexity of financial instruments did not exist. The gold standard is effectively a rule preventing governments manipulating wealth, the reserve (federal etc) is now supposed to be this independent body.. but, hell its not.

The equivalent of a gold standard? Not really, since gold is easily manipulated.

Anyway...

The biggest issue the financial world faces is fractional banking coupled with escalating ability to lend (to external parties) simply through banks lending to each other. (I believe this hasn't been legislated against yet?) In essense, a bank takes $1 USD deposit, lends $1 USD to another bank and lends $9 USD to home owners, the other bank that was lent $1 USD then can lend $8 USD? externally (Its an inflationary lending bubble).

But to be honest, the only problem in the current world of economics is one of variability and risk. They could dampen this, but there is no political will. There has been little legislation to protect the most vulnerable sectors of society on the increasing complexity of economic transactions and the risks that now exist that never did previously.

I'm somewhat torn on the issue. Philosophically, I dislike the idea of fractional reserve banking, but I also realize we can't just get rid of it because the worldwide economy is completely dependent on it. What I see as the biggest problem is that while banks have an upper limit on how much money they can lend, there is no lower limit. This gives private bankers the ability to manipulate the money supply. So in lieu of banning it, I think it needs to be much more tightly regulated. If banks are allowed to lend 10 times their reserves, they should be required to stay near that figure (ie. stay above a ratio of 9.9:1).

To answer my own question, I don't think it's a necessity. I think that we're so accustomed to the current system that it's difficult for people to imagine any other system being successful. I'd like to find a painless way out of it, but I'm afraid economic collapse is the only cure.

[Electric]

Originally Posted by Lateralus

I'd like to find a painless way out of it, but I'm afraid economic collapse is the only cure.

That doesn't look like a cure. LOL

[Lateralus]

Originally Posted by Veneti

There's better ways than playing havoc with the money supply, one good one would have been to legislate that banks can only lend (on property) at the reserve rate + %. (Probably a band like 0-3.5%) and that so long as the borrower pays the repayments the bank could not call the loan in).

The thing that nobody ever gets, is that you can't control the economy investors always seek the highest returns possible, and if you take away risk they will just lever their position to assume more risk.

The money supply is being contracted, right now. That's what this 'credit crunch' is, essentially. The Fed appears to be trying to hold this off, but it's inevitable. Banks aren't loaning money like they used to, despite the fact that it's not even real money they're loaning.

[ygolo]

I am ambivalent about the practice in question. But the idea that returning to a Gold Standard as some magic elixir is preposterous to me.

I think price is just a momentary agreement to make an exchange of some sort--currency for a good or service, a good or service for currency, currency for currency, or good/service for good/service with various time components built in (I give you this now if you agree to give me that later, etc.)

People may or may not honor those agreements.

So whatever the fed or the banks do are still nothing more than momentary agreements. Some of those agreements may be more likely to be honored than others. But only certainty is what was exchanged at the time of the agreement.

How prices change throughout the system of markets and trading-networks is still nothing more than best guesses. Some are very sophisticated guesses indeed.

Will lowering the rates lead to increased prices due to currency devaluation? Only if people to agree to trade more currency for the same things (which seems likely to me).

Will lowering the rates stave of a whole gamut of broken agreements, thereby giving people more confidence to make trades in general, leading to a more productive economy? Again, only if people actually don't default on their agreements, have more confidence, and make more intelligent an productive exchanges of good/services/currency.

For all practical purposes, people still behave as if they have free will.

[Electric]

I just noticed that you were from England. England does keep it's cash way too appreciated for efficient trading to happen. I don't know much about England's economical system, so I can't say anything substantial. I do believe the federal reserve is bias. Is it true jobs are not based on merits over there?