Arguments for Fractional Reserve Banking?

[ClayTrainor]

I just got finished watching "Money as Debt" for the 2nd time, and as far as i can tell, Fractional Reserve Banking is a corrupt system.

I know i've seen some arguments in here in favor of FRB, but I can't figure out how this can be a good thing?

 

[Pennsylvania]

I don't see a problem with it as long as it is not state-insured. It would be a gamble, and should be treated as such by those interested in it, but should not be abolished.

 

[Agent CSL]

It's easy money, for those who know how to use the system. For debtors it can be beneficial, however, this is how they got into debt in the first place, so they end up paying off debt with more debt. And of course if interest rates spike or the debt adjusts, you can really never get out of it.

I guess the biggest plus would be easy money for people who know the system. It is horribly, horribly corrupt.

I'm not even close to beginner when it comes to understanding any good in this system. :o

 

[Acala]

I don't see a problem with it as long as it is not state-insured. It would be a gamble, and should be treated as such by those interested in it, but should not be abolished.

It is based on a misrepresentation to depositors about the availability of their money and it also causes fluctuations in the money supply. If the banks were required to disclose to depositors that they might not get their money back when they want it and also disclose that the paper notes they issue are not backed by actual deposits, then it would be okay.

 

[sratiug]

Fractional reserve banking is immoral and should never be allowed. Here's an idea, how about banks only loan money that belongs to them. Then they would never fear a run on the bank and they could use real money instead of the imaginary kind.

A banking license is a Title of Nobility. Commoners cannot loan money they don't have by counterfeiting without risking serious jail time.

 

[Pennsylvania]

It is based on a misrepresentation to depositors about the availability of their money and it also causes fluctuations in the money supply. If the banks were required to disclose to depositors that they might not get their money back when they want it and also disclose that the paper notes they issue are not backed by actual deposits, then it would be okay.

So if casinos were required to tell people they might lose their money those would be okay too right?

 

[wizardwatson]

The way to fight FRB's is like this:

Don't put your money in one.
Don't accept checks for payment.
Don't accept credit cards as payment.
Immediately cash the check you receive from your employer with their bank.

Unfortunately, today, this is practically impossible to do.

 

[Agent CSL]

For "Results 1 - 10 of about 6,500,000 for why the federal reserve is good." there are like 0 results on why the Federal Reserve is good.

 

[Acala]

Yup

So if casinos were required to tell people they might lose their money those would be okay too right?

Casinos are fine with me as they are. They don't pretend that the money you give them is being held for you. And they don't circulate paper promises they know they can't keep.

 

[Pennsylvania]

Casinos are fine with me as they are. They don't pretend that the money you give them is being held for you. And they don't circulate paper promises they know they can't keep.

I don't believe a Fractional Reserve Bank would pretend either without FDIC

 

[nate895]

I don't believe a Fractional Reserve Bank would pretend either without FDIC

They did before the Federal Reserve, why not after?

 

[enjerth]

As long as bank issued notes are not legal tender, I have no problem with fractional reserve banking in the legal sense. I still don't think it's good.

Fractional reserve banking manipulates the value of the bank notes it deals in, affecting everyone who holds those bank notes. The fact that you carry a bank note means that they have their hands in your pocket. In the long term, I don't see how this can benefit anyone except the banks which collects interest on a promise it could never fulfill.

The bank relies on perpetual and ever growing debt, of which it is the sole beneficiary. Yes, it can stimulate economic growth. But debt rises faster than the economy does and the only way to perpetuate that growth is by debasing the currency and ramping up inflation to create a demand for more debt. Such a system makes us slaves to the bank.

If we did not have fractional reserve banking, we wouldn't have an economy as well developed, but it also would not have the unsurmountable debt we have. Lending would be at high interest rates due to real risk, borrowing would be greatly discouraged. Trade would move slower, but it would not be subject to booms and busts as greatly as it is today.

Without fractional reserve banking, growth would be sustainable.

 

[nate895]

As long as bank issued notes are not legal tender, I have no problem with fractional reserve banking in the legal sense. I still don't think it's good.

Fractional reserve banking manipulates the value of the bank notes it deals in, affecting everyone who holds those bank notes. The fact that you carry a bank note means that they have their hands in your pocket. In the long term, I don't see how this can benefit anyone except the banks which collects interest on a promise it could never fulfill.

The bank relies on perpetual and ever growing debt, of which it is the sole beneficiary. Yes, it can stimulate economic growth. But debt rises faster than the economy does and the only way to perpetuate that growth is by debasing the currency and ramping up inflation to create a demand for more debt. Such a system makes us slaves to the bank.

If we did not have fractional reserve banking, we wouldn't have an economy as well developed, but it also would not have the unsurmountable debt we have. Lending would be at high interest rates due to real risk, borrowing would be greatly discouraged. Trade would move slower, but it would not be subject to booms and busts as greatly as it is today.

Without fractional reserve banking, growth would be sustainable.

My opinion exactly. I should be able to live my life free of the enslavement of debt. I cannot do that in our current fractional reserve banking with a central bank, and since the vast majority of the money supply comes from bank credit, I cannot see how fractional reserve banking without a central bank will do much to alleviate the strain of public debt.

 

[Acala]

They always have

I don't believe a Fractional Reserve Bank would pretend either without FDIC

They have for the last 300 or so years, I don't know why they would stop unless they are stopped by law.

 

[surf]

i think fractional reserve banking gets a worse rep than it deserves. The practice is entirely based on assumptions of loan repayment speeds and the demand for deposits.

in practice, loans of certain duration should be matched with term deposits (CDs) of a similar duration while earnings (or interest rate spread between loans and deposits) should be set aside to weather any defaults in the loan portfolio.

The S&L "crisis" of the early '80s - ignoring the fraud - occured because the above practice was not followed. Long-term (often questionable) loans were being funded by overnight deposits. When short-term liabilities (deposits) repriced at much higher rates, the long-term fixed rate assets (loans) did not. This resulted in massive losses and failures.

My worry is that we will continue to see this on a larger scale this time as loans (particularly long-term loans like mortgages) priced at historically low rates will kill financial institutions as interest rise - as they undoubtedly will have to as banks will need to compete for deposits.

That's my perspective as a former investment portfolio manager for a pretty large financial institution who always argued (unsuccessfully) for a matched duration of assets and liabilities.

Please rip my point of view to shreds if you can. i'll look forward to reading responses.

 

[Pennsylvania]

They have for the last 300 or so years, I don't know why they would stop unless they are stopped by law.

All I am saying here is that it's not really a difficult concept for people to grasp:

When you invest in these, alarm bells should be ringing, you can do it, but at a risk, just like any other facet of a free-market system. If they don't explicitly say it, it's like cigarettes not explicitly saying there is rat poison in your cigarette.

 

[Zippyjuan]

My opinion exactly. I should be able to live my life free of the enslavement of debt. I cannot do that in our current fractional reserve banking with a central bank, and since the vast majority of the money supply comes from bank credit, I cannot see how fractional reserve banking without a central bank will do much to alleviate the strain of public debt.

Yes you can live free of debt- with or without a central bank. You are not forced to borrow against your will. Just pay cash or barter.

If you impose a 100% reserve requirement on banks then you are imposing your own will on people and businesses who may like to have a place to borrow money from once in a while. You can still decide to not borrow money without impunging on their freedom to engage in lending and borrowing. What about the freedom of the market being able to decide if lending is good or not?

 

[Acala]

Whoa

You can have banking and borrowing without fractional reserve. It works like this: I loan the bank an ounce of gold for one year at 2% interest. The bank turns around and loans an ounce of gold for one year at 3% interest. Voila! My saving is rewarded by the interest I receive. The borrower can get capital to invest at an interest rate that reflects actual savings rates. Nobody is mislead. Nobody gets ripped off. The money supply is not expanded. Bubbles don't form. And life is good.

 

[nate895]

Yes you can live free of debt- with or without a central bank. You are not forced to borrow against your will. Just pay cash or barter.

If you impose a 100% reserve requirement on banks then you are imposing your own will on people and businesses who may like to have a place to borrow money from once in a while. You can still decide to not borrow money without impunging on their freedom to engage in lending and borrowing. What about the freedom of the market being able to decide if lending is good or not?

And save for a decade or two to be able to afford a home? It is hard to pay for big ticket items without either saving over an exceedingly long period of time, or getting a loan. I shouldn't have to choose between 15 years of saving for a home, or a thirty year mortgage. A home should only be, maybe, five years of savings.

There are such things as "certificates of deposits," and other timed deposits for people who wish to engage in lending.

 

[surf]

You can have banking and borrowing without fractional reserve. It works like this: I loan the bank an ounce of gold for one year at 2% interest. The bank turns around and loans an ounce of gold for one year at 3% interest. Voila! My saving is rewarded by the interest I receive. The borrower can get capital to invest at an interest rate that reflects actual savings rates. Nobody is mislead. Nobody gets ripped off. The money supply is not expanded. Bubbles don't form. And life is good.

what happens in the case of default? you lose an ounce of gold, i know. what you describe is what good banks do, but they take a portion of that interest spread and put in a loan-loss reserve account in case of default. The mistaken assumption here is that banks create money; not true. a bank that does not borrow can not lend out more than it has in deposits.

a non-fractional reserve bank, in essence, could not lend funds or invest in term securities.