The Case Against Fractional Reserve Lending

[Bloo Loo]

"Unfortunately, in their inflation predictions, most of the Austrian economists only consider money supply and not the collapse in credit and the value of that credit on the books of banks"

another myth, often quoted by those opposed to the evil Austrians.

Watching the bust phase video often published here, all those factors are there as players in the Austrian BUST. Excess Credit, the printing "Cure" and the reasons why Governments like the idea..the Central Banks role, collapses of banks, values of assets...all there....amd all derived from what happened in the BOOM...therefore all predicted, plotted and analysed.

[Errol]

See Detlev Schlichter's new book 'Paper Money Collapse' for an excellent case against FRB.

www.papermoneycollapse.com.

[Bloo Loo]

what bust phase video?

from 2007.

[Guest spp]

from 2007.

Section 8 Appropriate government policy -

The UK Gov/BOE is doing everything it shouldn't be...everything!

[mfp123]

how do you loan money out without a fractional reserve?

[MrB]

how do you loan money out without a fractional reserve?

Bonds, debentures etc. The 'time' element of assets and liabilities is kept in tandem, and all investments are someone else's savings, rather than conjured into existence magical credit.

[mfp123]

all a time deposit does is slow the system down, and prevents people from accessing their money.

however if you loan money out via a time deposit it is essentially a 0% reserve ratio.

you could loan the same bit of money out over and over again without having it stored in the bank i.e a £1 coin could turn into £1billion worth of assets and liabilities, however only 1 person could spend that £1 at a time.

but, in context of the overall system whats the difference between a deposit account, and a rolling time deposit that ends each day or after every 10 seconds?

under both systems, at the end of the day the person that controls the money supply is the same - its the central bank.

preventing banks from creating broad money in a 100% reserve system, doesnt prevent a central bank from creating and printing real money, so the effect is the same.

Edited February 20, 2012 by mfp123

[mfp123]

there's a big difference and that's to do with the political will that enables CB's to print.

no there isnt. if the central bank couldnt print money, a fractional reserve banking system would have maxed out ages ago and no new money could be created

yes normal banks create broad money, but their capacity to keep increasing this is dependant on the creation of new money by a central bank.

if there is £1000 in the system £10,000 of broad money can be created in the total banking system but it can never create any more. the only way it can do so is the creation of new money by central banks.

the only way you can get from £1000 to a £1trillion over a series of decades is the printing of new money by a central bank.

so ultimately everything still revolves around the central bank.

Edited February 20, 2012 by mfp123

[MongerOfDoom]

how do you loan money out without a fractional reserve?

You just give up the certainty of getting it back, or alternatively the interest :-)

I am amazed these nutters get so much publicity. Money is being printed left, right, and center, yet somehow it must be FRB that is the problem.

[Traktion]

IMO, it's not FRB that is the source of the problem, but rather the fraud involved in it [EDIT: in its current implementation, with a central bank, state backed fiat money etc].

If both savers and borrowers were informed in the fullest sense what is going on, then there wouldn't be so much confusion. In turn, this would lead to people being able to properly assess the risks involved.

It really boils down to whether you want your money safely stored somewhere or whether you want to swap your money for IOUs. There may be a few different options for the latter, with different risks (time deposit being at the lower end and fractional reserve being at the top end), but these primary options are easy to define.

Ofc, it would mean less credit in the economy, as many people would want to keep ownership of their money (custodial banking). In turn, the more risky banks could be allowed to fail, as there would be no need to provide state backed deposit insurance, as safe alternatives would exist.

As Mervyn King admits himself, we currently have a high risk system, when people have been told it is completely safe. It's a daft system, which doesn't reflect reality. That doesn't mean that there is no place for risky banking though - it just needs to be clearly sign posted, without the risk being obscured through bad/fraudulent contracts.

Edited February 20, 2012 by Traktion

[mfp123]

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

steve keen says no.

for those who can't be @rsed readin g it all,he basically argues that the FRB system of credit creation ran well ahead of CB printing over the last however many years.

that simply talks about what mechanism leads the other not what creates the other.

in it, it says:

If the entire banking system is at its reserve requirement limit, then the Federal Reserve has three choices:

refuse to issue new reserves and cause a credit crunch;

create new reserves; or

relax the reserve ratio.

i.e as broad money created by banks reaches its limit, the central bank needs to pump new money in to keep it growing.

so the power is fully with the central bank to expand or contract the money supply.

[R K]

Zanu, you may be interested in this summary of Aldy Haldane's 'Debt Loop'.

http://www.lrb.co.uk...e/the-doom-loop

Documenting the change from personal liability of the bank owners through joint stock banks through limited liability banking and laterly the perverse incentives created since the 70s (Thatcher and Reagan's deregulation of the sector and so on, carried on by Major and Blair).

Interestingly he says Basel III isn't enough and considers other capital and ownership structures to prevent perverse incentives for boards, higher or contingent capital and better regulation.

Whether politicians will do any of this stuff of course is moot.

As we've seen with Cameron and his 'we must get behind the bankers' rhetoric, and the move towards longer-term equity incentives (again part of the problem!) it may be a long slog!

Diamond and his cronies won't give it up without a fight and nobody seems willing to take them on, least of all the Tories.

At first, limited liability status was not taken up enthusiastically by banks: they were reluctant to give up unlimited liability, which they regarded as a badge of prudence. But the collapse of the City of Glasgow bank in 1878, caused by speculative lending and false accounting practices, ended that. Eighty per cent of the bank’s shareholders were made destitute. The opinions of bankers, Parliament and public alike shifted quickly. By 1889, only two unlimited liability British banks remained.

It seems what goes around comes around.

Edited February 20, 2012 by Red Knight

[Traktion]

Zanu, you may be interested in this summary of Aldy Haldane's 'Debt Loop'.

http://www.lrb.co.uk...e/the-doom-loop

Documenting the change from personal liability of the bank owners through joint stock banks through limited liability banking and laterly the perverse incentives created since the 70s (Thatcher and Reagan's deregulation of the sector and so on, carried on by Major and Blair).

Interestingly he says Basel III isn't enough and considers other capital and ownership structures to prevent perverse incentives for boards, higher or contingent capital and better regulation.

Whether politicians will do any of this stuff of course is moot.

As we've seen with Cameron and his 'we must get behind the bankers' rhetoric, and the move towards longer-term equity incentives (again part of the problem!) it may be a long slog!

Diamond and his cronies won't give it up without a fight and nobody seems willing to take them on, least of all the Tories.

It seems what goes around comes around.

That sounds a very good read - thanks for the link.

Limited liability is a beast of the state and it gives the corporation protection at the expense of the individual. IMO, many of the problems of the corporations running the world are due to this legal identity they are given.

When it is your own house and your own freedom on the line, you tend to be a bit more responsible than when it is someone else's.

The thing is, I can't see any of this being reversed. I just can't see any government doing it. It seems that a voluntary rejection of the current system is the only feasible route away from fascism... either that or the eventual collapse of the current system, followed by the black hole left in its wake.

[easy2012]

sweet .cheers bloo

Hi Bob...

The book mentioned in the lecturer: American Great Depression by Rothbard

http://mises.org/Rothbard/AGD.pdf

[Game_Over]

Yes, we could avoid any chance of economic stagnation due to a collapse in credit by abolishing banks altogether

BUT we would have to return to the type of economy AND population levels we had in the middle ages

so essentially the cure would be worse than the disease.

Also while I agree Europe is f*cked for decades - the reason is the creation of the EUSSR - not the banking system

All socialist systems inevitably fail catastrophically so why anyone expected the European project to turn out any differently is beyond my understanding.

[Game_Over]

The point of limited liability is that without it no one other than the state would risk starting a business.

It seems peverse to adopt systems that avoid a depression every 70 years by putting the economy into a permanent depression.

[Traktion]

The point of limited liability is that without it no one other than the state would risk starting a business.

It seems peverse to adopt systems that avoid a depression every 70 years by putting the economy into a permanent depression.

Nonsense... as Red Knight's link showed, even banks were prepared to run businesses with unlimited liability.

In fact, limited liability companies have only been with us a century or so. There were many companies before 1855 too (http://en.wikipedia.org/wiki/Limited_liability).

[Georgia O'Keeffe]

Nonsense... as Red Knight's link showed, even banks were prepared to run businesses with unlimited liability.

In fact, limited liability companies have only been with us a century or so. There were many companies before 1855 too (http://en.wikipedia.org/wiki/Limited_liability).

Strange how the industrial revolution happened without limited liability (and that the industrial revolution spent as much time in deflation as inflation but thats another point), and lest any more proof be needed there are still a number of banks in the UK that arent Limited Liability, all private (its a very strong marketing tool for them) and funnily enough they waltzed through the crisis untouched, its rather comedy gold for Game Over worrying about the removal of socialism however when it comes to Risk, he must be going for the Hypocrite of the year award, i dont even think Tahoma could challenge him with the above beauty

Edited February 20, 2012 by Tamara De Lempicka

[Bloo Loo]

The point of limited liability is that without it no one other than the state would risk starting a business.

It seems peverse to adopt systems that avoid a depression every 70 years by putting the economy into a permanent depression.

I started one last June.

[easy2012]

Strange how the industrial revolution happened without limited liability (and that the industrial revolution spent as much time in deflation as inflation but thats another point), and lest any more proof be needed there are still a number of banks in the UK that arent Limited Liability, all private (its a very strong marketing tool for them) and funnily enough they waltzed through the crisis untouched, its rather comedy gold for Game Over worrying about the removal of socialism however when it comes to Risk, he must be going for the Hypocrite of the year award, i dont even think Tahoma could challenge him with the above beauty

Exactly. If we are all on unlimited liability then the insurance market and the judicial system would have adapted (no such things as £1m compensation for hurting one's feeling - ok I exaggerate).

Even then, contracts can include clause to limit such liabilities in most cases.

[Game_Over]

I started one last June.

And how many thousands of people do you now employ?

Limited liability is now essential to large scale economic activity IMHO

I may be wrong of course but my guess is that

it is an idea that has been so successful it will never by 'uninvented'

Same as FRB

[Game_Over]

Strange how the industrial revolution happened without limited liability (and that the industrial revolution spent as much time in deflation as inflation but thats another point), and lest any more proof be needed there are still a number of banks in the UK that arent Limited Liability, all private (its a very strong marketing tool for them) and funnily enough they waltzed through the crisis untouched, its rather comedy gold for Game Over worrying about the removal of socialism however when it comes to Risk, he must be going for the Hypocrite of the year award, i dont even think Tahoma could challenge him with the above beauty

Well I don't agree with bank bail outs so I don't see where the hypocrisy comes in.

And limited liability seems a fair concept as it allows everyone in a society to participate in and share the dividends from wealth creating activity.

Not just the rich.

[Georgia O'Keeffe]

Well I don't agree with bank bail outs so I don't see where the hypocrisy comes in.

And limited liability seems a fair concept as it allows everyone in a society to participate in and share the dividends from wealth creating activity.

Not just the rich.

Limited liability is mathematically undeniably socialism, state mandated redistribution of losses amongst non participants, you of all people cant espouse socialist (state mandated via anti laissez faire state mandated legal definition) redistribution without completely giving up your position of being against central planning, you are Gordon Brown and i claim my five pounds,

Bank bailouts, welfareism, royalty, the BBC, limited liability, the state, these are interchangeable forced redistribution via central planning, you are either for it or against it, you have revealed you are very much for it, dont start complaining if your Nirvana isnt the chosen one, the state decides what is right and you fundamentally agree with that

Edited February 20, 2012 by Tamara De Lempicka

[Game_Over]

For anyone who is actually interested in facts - rather than just childish ad hominem

the concept of limited liability has existed in English law since the 15th Century

The earliest recognised Company was chartered in London in 1553

[Game_Over]

Limited liability is mathematically undeniably socialism, state mandated redistribution of losses amongst non participants, you of all people cant espouse socialist (state mandated via anti laissez faire state mandated legal definition) redistribution without completely giving up your position of being against central planning, you are Gordon Brown and i claim my five pounds,

Bank bailouts, welfareism, royalty, the BBC, limited liability, the state, these are interchangeable forced redistribution via central planning, you are either for it or against it, you have revealed you are very much for it, dont start complaining if your Nirvana isnt the chosen one, the state decides what is right and you fundamentally agree with that

And that is also b*llocks.

Anyway - I had forgotton why I stopped posting here

Now I remember