For those who think Fractional Reserve Banking is evil incarnate...

The Unqualified Reservations blog sums it up by saying that the price we all pay for maturity mismatching is regular financial crisis, which is wealth destorying. I'm not sure in the long run we are better off. Also, I don't think it is the Government pushing the system beyond its limits, it is the bankers.

There are retirees who would be willing to deposit money for long periods in exchange for consistent income. Yes probably not 25y, but then all maturity mismatching is doing is subsidising or unnaturally lowering long term interest rates. Asset prices are just like bonds, if interest rates go down, asset price go up. If interest rates go up, assets prices decline.

If we did not have maturity mismatching then long term interest rates would be much much higher to properly compensate savers for locking out their money for a long time. In other words, retirees and savers are being screwed in favour of borrowers.

If the longest retirees are prepared to lend money on a fixed term would be 10y, and a borrower can't afford to pay back a house in that time period they wouldn't get a loan. Thus higher interest rates would result in lower asset prices (eg land prices lower) which would actually make housing cheaper. I don't see how this is a problem, it is a way of ensuring prudent and non speculative/greedy behaviour.

Anyway, I'm a free market guy so don't think we need to ban maturity mismatching. What I do have a problem with as a free market guy is subsidies, and the biggest subsidy problem is that the Government implicity guarantees your on call deposit with banks. If the bank stuffs up in not being prudent with their maturity liqudity, depositors and bank executives get a bail out, which ultimately comes out of my (and your) pocket either through higher taxes or inflationary money printing. Sorry, I consider that unfair and totally not free market. The current structures are skewed to favour borrowers at the expense of savers, that is what I object to.

Let the banks do fractional banking, but the Government should just go out and explicitly tell the public you are on your own, we will not bail you out or buy the bank's mortagages or print them dollars when you run to withdraw cash. In that situation interest rates would no doubt go up as we would have a fair number of people who would trade risky on call interest deposits for the security of 100% reserve banking and/or short term fixed deposits (and even gold). Banks would have to convince depositors that their loan books are secure, that they only lend with 20% cash deposits so are not exposed to falling prices. The whole dynamic would change with a focus on security and prudence and banks would compete on that basis. I think this would be a far better situation and would give us a better chance of a more stable interest rate, asset price, and thus economic cycle.

 

They get it from someone who has deposited that amount of money at the bank. Well, actually from the pool of deposited money not any one particular person.

 

[youtube]http://www.youtube.com/watch?v=fWX-ub3thjE[/youtube]

 

I pretty much agree with everything you just said. Slight disagreement on housing prices as I believe it is more to do with money printing and relaxing reserve requirements, increasing leverage etc. FRB has been around a long time, high house prices haven't.

The govt should not back the whole system and people should understand that there are instabilities in FRB. I've strenuously objected to bailouts over and over on economic forums. And yes, I think people should have options. Personally, I would go with FRB as I think it is more flexible as long as the bank had a good track record of risk management. I guess we're discussing a world that doesn't exist though.

I would point out though that most people just don't want to look after themselves so it's no surprise to me really that we've ended up with the current system. People in general with their lackadaisical attitudes who expect others to look after them and don't want to take responsibility for their lives are as much to blame as the bankers imho. When you have that attitude it's just asking for someone to abuse you, the trouble is that the few of us who do want to take responsibility for ourselves get caught up in the net.

 

You are sort of right but let's think about what's actually happening here...

If I lend my friend $10, I then have an iou for $10 from my friend. Let's say I want to buy something for $10 from another friend but don't have the cash. If my friends trust each other I can just say to the second friend that instead of owing me $10 he now owes my second friend $10.

That's all EFTPOS is. Changing who owes who what. There is no magic electronic money. It's just means people don't have to rush off to the bank, grab the cash, pay the person who then puts it in their bank. This is just an electronic way of doing it that cuts out the getting cash out and putting it back in the bank part. Nothing magic about it. Certainly NOT creating money. Don't know how many times I have to say that.

 

Credit acts as money - to a point. Credit is debt, at some point it has to be repaid. Except if you are a well-connected Wall Street banker in which case you get someone else to pay it for you by surreptitiously stealing money.

 

The $10 example is different, the $10 is effectively M0/M1 currency. Which is a note, so it can be transferrable easily.

My examples is based off credit, ie, say you get a 10k credit card. The money comes out from the fractional reserve pool that can be lent out. Its basically the same money recycled and created into existence.

Say that 10k example. Person A has 11k in fiat dollar notes. Deposits it into Bank A, bank A puts 1k aside as a reserve and 10k into the pool of money so that it can be lent out. Person B comes and applies for a loan for 10k to buy a car off person C. Bank A grants loan and person B buys car off person C. Person C deposits the 10k back into bank A.

Lets see what happens to the balances:

Bank A has: 1k + 900 in reserves and has 9100 in the pool that can be lent out. All M0 Money base currency.
Bank A also has 2 liabilities to person A and person C (11k and 10k) both are considered part of the M3 money supply. But has person B as an asset of them owing 10k as debt.

Person A has 11k positive balance in the bank, this is a liability for the bank. Basically bank has 11k of IOU to person A. It is not money but a balance on the books. It can be used as money via eftpos or cheque or even withdraw in fiat dollars.

Person B has -10k as debt to be repaid to the bank

Person C has 10k as a positive balance in the bank. Again this is a liability.

So suddenly 11k of fiat paper notes, now has 11k balance + 10k balance + 9100 (able to be lent out and cycle continues).

In the above example you can see how funds (as good as money) are created into existence. If the cycle continues the amount of circulating funds can be up to 10 times the base amount of 10k, which is 100k.

Slam

 

You are correct apart from this bit. Credit is not equal to money. You are making a big deal about this 10x but failing to realise that before fiat currency, eg in the 50's and 60's there was no real inflation.

That's because 10x is the limit with a 1:10 reserve ratio. Things can bounce back and forth a bit but you'll generally have the same price level. In fact, you'll have price deflation over time with productivity improvements.

Today, they've played all kinds of games with Fiat to constantly increase the debt levels over the last few decades to insane levels. Pump more liquidity into the system, etc. Like piling ever more bricks on to a tower, it's now so high and so unstable it threatens to topple. This is the problem. And like I said, I believe it's as much all the babies in societies who want to be looked after fault as much as the bankers.

 

You only have to lend money out once, just once any lend of money will do, doesn't have to be FRB and you have twice the amount of "money" circulating.

But not really, because some is credit and some is money. Is that fraud? Will people not be allowed to lend at all in your world? Or will people not be allowed to pay for things with credit?

 

Firstly I aplogise for only having skimmed the thread I will fully read it later.

You can have a gold backed currency first of all. Each dollar would be redeemable by a certain amount of gold.

In relation to the issue of maturity mismatching it is important to note that once upon a time short-term commercial bills were commonly employed to match short term-funding with short-term lending and that they circulated freely in the economy.

For day to day liquidity needs rather than merely depositing money in a bank people as was the case once upon a time would buy and sell short-term corporate debt (i.e. commercial paper or bank bills). Much like short-term treasury bills with 90 day maturities are highly liquid and can be bought and sold, commercial 30, 60 and 90 day bills could be bought and sold on the open market.

You would walk into a bank and hand over $1000. The bank would then hand you a bill redeemable by the holder for $1000 that matures in 30 days. The bank would then match the level of short-term lending to the amount of bills issued i.e. secured lending to businesses. The banks could lend excess depsosits to other banks or borrow from other banks if they need more money to expand their loan book. You can either redeem the bill in 30 days at the bank or sell it to others in exchange for goods as it is highly liquid and generally accepted.

There is a lot written about this issue on professor Fekete's website: http://www.professorfekete.com/

 

I think its worse than that. If you deposit 11k the bank doesn't just keep 1k and lend the real 10k. It keeps the whole 11k as the reserve and lends out another 100k+ as the frb shadow of that reserve.

That shadow 100k in turn creates another pyramid on top of it etc. Its obscene.

 

You know I actually didn't think about the fact that even though you've locked your money up you can then sell the debt if need be. I guess it would be fairly liquid too.

Just sort of tentatively thinking it through, maybe it would work OK, it would require the public to think slightly different, but I don't think it would be a huge deal.

Thanks for the thoughts BH, very interesting and very clearly articulated. I'll have more of a think about it and get back to the thread.

 

You're getting it mixed up because you are looking at the fact that people most times actually don't get cash in their hand. You have to look at in terms of the balance sheet

11k deposited at bank

Assets 11k cash
Liabilities 11k debt to depositor

10k loaned out
A 11k cash
10k loan to 2nd Person

L 11k debt to depositor
10k debt to 2nd Person(because person has account at the bank and has deposited it there but the extraction and redeposit of the 10k cash has been skipped, since it zeroes out and would be a waste of time)

If the 2nd person then decides to take out all that cash the banks balance sheet looks like this
A 1k cash
10k loan to 2nd Person

L 11k debt to depositor

and it can't make any more loans under the 10% ratio until it gets more deposits.

 

Hi Stackers,

To understand what money is and how the fractional Reserve system works I recommend 'Money as debt II" http://vimeo.com/6822294

To see how 'The capital machine' enslaves individuals, companies and countries, watch the 'Debunking Money' series by searching for the torrent (This series is so powerful that the creator Damon Vabel had death threats from the elites and pulled all trace..it is very important that you download and seed these vids!!)

You can see other excellent Damon Vabel material here: http://goo.gl/GcvE8

To understand why you are in the matrix, then watch 'The Century of the self' http://goo.gl/7AlQo