Fractional Reserve Banking : Criminal?

Discussion in 'Markets & Economies' started by hawkeye, Feb 28, 2013.

  1. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    Okay. I trust we've dealt with the insolvency issue. Who wants to move onto the counterfeiting side of things? Volunteers?
     
  2. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    Technically not (and it still happens obviously). But deposit guarantees and willing central banks reduce it's potential (which I suspect what shiney meant).
     
  3. Old Codger

    Old Codger Active Member Silver Stacker

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    Deposit guarantees are a fiction.

    Using Westpac as a guide, there are probably TWO TRILLION in deposits and Debenture holdings in the Big 4.

    Komrade wayne could not possibly print that much. He would have to issue OZ Treasury Bond, and pay interest on them.

    OC
     
  4. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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    Well if government guarantees don't require legislation to be enacted then I guess it is "technical", but yes, that's what I'm referring to. :)

    At OC, they are not a fiction, they are guaranteed.

    Whether they actually can be guaranteed is another argument though :lol:

    More lies peddled, the deeper we go :/

    Gotta go damn it. Mum is visiting. :( :lol:
     
  5. Old Codger

    Old Codger Active Member Silver Stacker

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    "Guaranteed"

    A guarantee is only as good as the money or assets backing it up!

    IOW a fiction!
     
  6. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    And with a willing central bank that's infinite. Not to mention a government can legislate any fiat amount into existence so the guarantees are as real as fiat.
     
  7. Old Codger

    Old Codger Active Member Silver Stacker

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    "And with a willing central bank that's infinite. Not to mention a government can legislate any fiat amount into existence so the guarantees are as real as fiat."


    Yes, I know that, but the RBA or Treasury MAY be eventually liable to 'guarantee' up to 2 Trillion in bad deposits. in a worst case scenario.

    That would equate to about THIRTY trillion in American terms where the economy is about 15 times the size of ours. Now suggesting that the guvmint prints 2 trillion in currency notes, or issues 2 trillion in Treasury Bonds, would devastate the Australian economy.

    The guvmint would have to pay interest on those Bonds for a start, at maybe 4% which is $80 Billion a year, every year.

    OC
     
  8. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    But there's absolutely no need to issue bonds at interest. The issuance of fiat is at govt decree so they can decree it. In terms of the devastation, if the guarantees are being called in then there's already been a total loss of confidence in the banks giving fiat demand deposits back to their owners. Off the top of my head, the most likely reason may be cascading defaults combined with a bank run. The reason is probably irrelevant except that:

    (a) some serious SHTF thing has happened

    (b) the demand deposits were already part of people's consumption decisions and hence were already in the real economy and rather than them being deleted via bank defaults, the government/RBA will be replacing the money. Hence the same $$$ exist, just now rather than it being perceived money from the banks it transforms into real $$$ from the govt/RBA.
    So,
    (c) in and of itself, this is not inflationary but the SHTF things and the undermining of confidence associated with the banking system collapse & willingness of the govt/RBA to print in very large quantities may significantly affect economic activity. As you can probably see, there are string parallels with what the Fed Reserve did at the start of the GFC. They replaced billions of banking system created money equivalents with real money. This was not inflationary and indeed prevented deflation in the total money supply.
     
  9. hawkeye

    hawkeye New Member Silver Stacker

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    Let's discuss what Full Reserve Banking would look like for a moment. I think that's worthwhile before condemning FRB.

    In full reserve banking, in order to make a loan the bank would have to find someone (or people) who were willing to lend out the exact money required for the exact amount of time required and would not have access to it during this time. If they just wanted to store their cash at the bank they would have to pay the bank to store it. There would be no getting interest for putting your money in a bank.

    This to me seems a completely impractical model. Think about it. A person comes in wanting a mortgage and the bank now has to go out and try to find someone who want s to lend that amount of money at that exact time for that length of time.

    Now if someone could show me a simple model, a balance sheet of how full reserve banking would work in practice I am quite willing to take it back. But I think the market would not like it.

    I think the market chose FRB because it was the superior model. It was subsequently corrupted by government.

    Another thing to remember is that it is credit, not cash that the banks are creating. If it was a free market, businesses would have to make the decision whether they wanted to accept the banks credit or not. And the bank wouldn't have the government standing behind them. That's why I think FRB would exist but in a much more limited capacity.
     
  10. hawkeye

    hawkeye New Member Silver Stacker

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    As for creating the loan and liability at the same time it is quite simple.

    The loan we know is created. I don't think anyone disputes that. The liability is created because instead of handing the customer cash, the bank puts the cash that the customer is borrowing in their account and the cash goes back into the banks reserves thereby creating a liability matching the asset at the same time as the loan. You just have to think about the mechanics.
     
  11. hawkeye

    hawkeye New Member Silver Stacker

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  12. Old Codger

    Old Codger Active Member Silver Stacker

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    Hawkeye,


    So now we have gone from 'FRACTIONAL Reserve Banking to 'FULL Reserve Banking'

    To me the first IS possible, and the second is NOT possible. Yes, you can and do have 10% in reserves, but you cannot have 100% in reserves, you would have nothing to lend that earns the interest to pay the interest on the Banks borrowings.

    I am afraid that much of what is claimed on this Forum confuses me greatly.

    ....and my question (about Banks deposits and loans) has STILL not been answered.



    OC
     
  13. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    1. FRB is "natural". It has always happened and always will. Even the hardcore anti-FRB people like Rothbard acknowledged this and highlighted that the benefit of the bank run is that it keeps the level much smaller than in the presence of central banks etc. You are possibly confusing the ethical objections to the practical operation and consequent impacts on the economy objections.

    2. The mortgage thing is a no-brainer and I'm surprised you are even raising it. All it means is that demand deposits are not used for lending. One simple way is for mortgage provider to simply act like a stock market fund. It aggregates small levels of savings (which can happen in many ways) but whose withdrawal conditions are limited. Having the fund listed on a stock exchange (for example) means that they can still be highly liquid but the aggregate level of capital does not change. It happens now (but in a much smaller way than the "normal" banking system because it needs to generate a real return on real money).
     
  14. hawkeye

    hawkeye New Member Silver Stacker

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    I don't disagree with this. What do we disagree on?
     
  15. hawkeye

    hawkeye New Member Silver Stacker

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    OK, so I think fundamentally we don't disagree. It could just be a lack of imagination on my part as to what would arise if it was a free market.

    I guess, I'm just defending FRB as a concept as long as, and this is the critical part, it is open and clear to all participants what is occurring and participation is voluntary. And I believe it would be much more limited by necessity without government involvement.

    I think it is the combination of government and banking that makes banking so toxic and results in the situation we have today. Banking is not fundamentally bad, but I think FRB, in the wrong hands and when it is opaque to the people using it is rife for abuse. I don't think there should be an effective monopoly.
     
  16. willrocks

    willrocks Well-Known Member Silver Stacker

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    Had a look at Westpac's 2012 annual report (http://www.westpac.com.au/docs/pdf/aw/ic/2012_Annual_Report.pdf page 76). Where did you get your figure for deposits?

    Deposits: $394,991,000,000
    Loans: $514,445,000,000
     
  17. Old Codger

    Old Codger Active Member Silver Stacker

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    Hawkeye,


    "I don't disagree with this. What do we disagree on?"


    For quite some time I have been reading claims that under FRB a bank, ANY bank, borrows a zillion dollars as deposits, and lends out 2, 5, or 10 Zillion dollars as loans, the difference being "from thin air" or somesuch claim.

    I have proved that WESTPAC has not exceeded its deposits total, with its loans total.

    I have been asking for an explanation for the claim, as it clearly does not apply to Westpac, and I very much doubt it applies to ANY Australian bank, or indeed any bank. I do not believe that such a situation can exist.



    OC
     
  18. Old Codger

    Old Codger Active Member Silver Stacker

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    willrocks,

    Deposits: $394,991,000,000
    Loans: $514,445,000,000




    From my post above,


    I found that in 2012 WESTPAC had LOANS out to ALL customers, private and business, of about $515 BILLION.

    WESTPAC had DEPOSITS of $394 BILLION, Plus "Debt Issues" (Notes and Debentures etc) of $147 BILLION. A total of $541 BILLION.



    ALL of the Big 4 have borrowed vast sums (Westpac = 147 Billion) on the NY and London markets. They use those funds to augment the deposits taken from customers, so that funds are available to cover demands for finance. In effect they are no different to borrowing by way of 'Fixed Deposit'.

    SO,

    394 + 147 = 541

    (as an aside, I remember Westpac selling on the NY market, an issue of a $1 billion worth of 'Perpetual UNdated Notes' at an agreed interest rate. Those notes NEVER have to be repaid, unless Westpac wishes to. They just keep paying the interest.)




    OC
     
  19. hawkeye

    hawkeye New Member Silver Stacker

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    Maybe you are confusing what I say with what others say.

    I am saying that credit is created, on both the asset and liability side necessarily (a credit is a debt to someone else), whenever a loan is made.

    And you can see that in the way bank's balance sheets expand over time, as well as in figures like M3 from the RBA which tracks this as a whole.

    Every time a loan is created an equivalent deposit is created.

    There is a certain amount of reserves that the bank must have to continue operation. Many people call this the bank creating money, but it depends on how you define money. Credit is cash owed. But many don't see the difference, especially when people commonly refer to what is in their account as cash. How things are defined now in society makes it very confusing for most people, wouldn't you agree?

    EDIT: Deposits can flow out of a bank so they always need to attract deposits as best they can. Deposits are just money that the bank borrows whether from individuals or other groups. They need to keep the balance sheet balanced.
     
  20. Old Codger

    Old Codger Active Member Silver Stacker

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    "Every time a loan is created an equivalent deposit is created.


    WRONG!

    It is the other way round!
     

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