Fractional Reserve Banking : Criminal?

[hawkeye]

Since todays situation already is stocks/bonds/deposits, what's the difference, other than banks misleading people with deposit intentions?

I agree, that is one of the major problems of today. Banks make out that your money is safe and don't give any indication of the risk that you are taking on by lending them money.

Government compounds that by backing them up with taxpayer money, making it seem like Fractional banking is a relatively risk free activity. Bank runs are a thing of the past.

But in reality the risk is still there, it is just hidden. Pushing interest rates down to prevent liquidation of bad loans makes the situation even worse in the long run.

And because of the way the system is setup, bankers as a whole behave like they are some kind of privileged class. They should be allowed to take profits when the market is going well, and then throw the losses onto the rest of society when the worm turns.

The combination of banking and government is toxic. Pretending that Fractional Banking is risk-free is a fools paradise.

Which is why I think, if the bankers were cut adrift and left to fend for themselves in the market, fractional banking would be much more restricted by necessity, due to the risks, and as a result, ongoing persistent inflation would not exist because credit expansion would be restricted by market forces. ie, go too far and the bank gets a run and goes bankrupt.

 

[bordsilver]

The side-effects of the market distortions created by FRB are many and varied (with most bad and immoral) and effectively litter this site since it first started. It's a core part of why I started stacking in the first place.

 

[bordsilver]

(EM's a bad influence )

 

[bordsilver]

Steve Keen article

http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

Have been very busy at work but managed to start reading this (about halfway through). So far it is very good. It builds a lot on Rothbard etc and explains the simple mechanics from a different viewpoint. Importantly, so far nothing really differs from Rothbard (which I believe more people have read) but Keen does skip over any ethical discussion which some people may prefer.
...

Bump.

I've been reading more of the Credit Economy theories discussed by Keen. Have only just started going through his more detailed models (with algebra). I think this may form the seed of a new thread, but there is definitely some attraction to the alternative way of thinking about the way the money is treated in his framework. In the end though I think it needs to be married to Roger Garrison's macroeconomics work (bunch of his video lectures are HERE with THIS and THIS being a couple of good ones). Again, I don't think it is necessarily inconsistent per se rather than changing terminology and basic mechanisms but may change what part of the banking system to focus on and ideas about what is a "sustainable" level of debt.

In the end, I think the insolvency issue is still at the heart of Keen's credit economy and all of the related economic imbalances and distortions and (as we've raised throughout this thread) this is the real problem (but is one that can be readily fixed or substantially reduced).

When I read Keen, I keep thinking about the credit economy that used to run in Lyons (France) back in the 1600's (which was at the centre of a couple of major trading routes at the time). Apparently it was a complicated set of ledgers kept by the club of local and some international merchants and bankers with next to no specie underlying it (since King Louis had nicked all the gold and silver he could get his hands on and spent it on things like Versailles and wars to keep the nobles in check). Any specie that did enter the system rapidly evaporated to pay off hard debts outside of the system of ledgers. (It could be a lie but it seemed to largely come undone in the late 1600's when the French Govt infiltrated it and used to fund an attempted English invasion and defaulted after it failed. Credit crunch?)

 

[bordsilver]

Rather than starting a brand new thread, I thought it is a useful addition to this thread.

This article provides a layman's guide to How Banks Go Bust.

It is essentially Chapter 8 from The Case Against the Fed (free pdf is available at this link).