Fractional reserve banking is fraud, period.

[rpwi]

I think you're confusing FRB with central banking. There would only be liquidity crises if banks took on an insane amount of bad debt-highly unlikely in the absence of a central bank because if the banks take that much risk they're very likely to go under in cases of default.

Because the banks have promised more deposits than they have reserves...this constantly puts pressure on reserves. Fractional banking survives now because of FDIC guarantees and because the Fed constantly adding more water to the pool using the open market to make the growing sharks (banks) happy. Without a stead stream of MB being injected into market...the primary dealers wouldn't be able to lend to banks to satisfy their reserve requirements. Banks would have to borrow from each other which would drive up the rate for reserves. As this would happen, reserves would become scarce and bankruns would ensue...this would REALLY jack up the demand for reserves and because no bank can have a proper credit rating...nobody would lend to each other. Liquidity would be a major problem.

My solution would be to transition from bank money to an expanded base money system where individuals had the one time chance to convert the deposits into base money or deposits at a 100% backed deposit. So this would result in an increase in MB but a decrease in M1. After this...no more more bailouts. With this action, reserves would be not be something the banks could control and market, so liquidity would not be an issue.

 

[Travlyr]

In a full-reserve banking system, banking is separated into its two natural functions. Banks would, first, warehouse or store money for its customers. It would provide a vault for which bank depositors would pay a small monthly fee. Second, banks would invest money in business projects. Banks would encourage investment by inviting their depositors to put some of their savings toward business ventures that they believe will produce a return (interest). Individual depositors would have a say in exactly where their money is invested, they would claim the benefits of investing wisely but they would also take full responsibly for business ventures that fail. Innocent depositors would not be on the hook for the poor decisions of investors and the banks would not flood the market with credit artificially increasing the price of essential industries (housing, business, education, medicine, etc.)

You must spread some Reputation around before giving it to Gumba of Liberty again.

Please read this carefully. Gumba of Liberty explains it perfectly.

 

[cubical]

There is a difference.

Scenario A:

Non-bank loans a 10 year 100k loan to person A. Non-bank has 100k loan asset that matures in 10 years and the person has a 100k loan liability that matures in 10 years.

Scenario B:

Bank Z loans a 10 year loan worth 100k to person A like before, but finances it with a 10 day loan worth 100k.

The difference between the two, is that bankers work by mismatching short term debt with long term assets. You're making promises in the aggregate that you can't keep.

As long as bankers don't mismatch the maturities from assets to liabilities...I wouldn't have any problem with them. But then they wouldn't be considered a bank.

If your bank is doing this, why would you bank with them? Would you loan money to someone who was using it to go spend a weekend in Vegas on some "can't lose" gambling scheme?

Fractional reserve banking offers a good way to get a return on your money while spreading out risk. For a better return go with a bank that has a 10% reserve(probably non-existent in a Fed-less world) or for pure safety you go with a bank that offers 100% reserve banking.

 

[hazek]

If your bank is doing this, why would you bank with them? Would you loan money to someone who was using it to go spend a weekend in Vegas on some "can't lose" gambling scheme?

Fractional reserve banking offers a good way to get a return on your money while spreading out risk. For a better return go with a bank that has a 10% reserve(probably non-existent in a Fed-less world) or for pure safety you go with a bank that offers 100% reserve banking.

You still haven't explained how your statements make the facts presented in the OP invalid and therefor FRB not fraud.

 

[Gumba of Liberty]

You must spread some Reputation around before giving it to Gumba of Liberty again.

Please read this carefully. Gumba of Liberty explains it perfectly.

Thank you. I teach high school economics and I get these type of questions all the time. BTW Is it bad that Austrian Economics isn't in the curriculum but I teach it anyway?

 

[heavenlyboy34]

In a full-reserve banking system, banking is separated into its two natural functions. Banks would, first, warehouse or store money for its customers. It would provide a vault for which bank depositors would pay a small monthly fee. Second, banks would invest money in business projects. Banks would encourage investment by inviting their depositors to put some of their savings toward business ventures that they believe will produce a return (interest). Individual depositors would have a say in exactly where their money is invested, they would claim the benefits of investing wisely but they would also take full responsibly for business ventures that fail. Innocent depositors would not be on the hook for the poor decisions of investors and the banks would not flood the market with credit artificially increasing the price of essential industries (housing, business, education, medicine, etc.)

Problem with that is the depositors who don't allow their deposits to be invested don't earn interest and don't have much incentive to make a deposit at all. (why let the money sit in a vault when it could be earning interest in the form of some investment instrument?) Also, there is no way to know that enough depositors will allow their money to be lent to meet demand for loans. Another thing is you're assuming the presence of a central bank to make your claim about vast misallocations of capital in the form of bad loans. FRB is not the same as central banking, and the possible crises you describe aren't a symptom of FRB, but of central banking.

 

[cubical]

You still haven't explained how your statements make the facts presented in the OP invalid and therefor FRB not fraud.

Would it be fraud if someone defaults on a loan?

 

[Travlyr]

How do loans come from savings in a 100% reserve system?

Banks must have the money on hand to loan through their business plan or else not loan it.

 

[rpwi]

Interest rates wouldn't go from 2% to 35% overnight... it would raise gradually as more and more people take out loans.

Actually...when it comes to the money market for bank reserves...this is absolutely one sector that can go from 2% to 35% in one day (without government intervention). It's just that volatile because it is a big confidence game.

99% of the population wouldn't be able to afford to buy a house or open up a business if they couldn't take out a loan.

Not talking about removing loans. Just long term loans mismatched/financed by short term liabilities (loans that should not have been created). Will rates go up...I think so. But will prices go down without funny bank money? I think so... People always want low interest rates so they can buy their homes...what about the price of the home itself? Isn't that important? Bank money creates inflation which drives up home mortgages.

There might be a little shock to the market as the economy adapts to living without bank loans (like getting off of a drug). I'm sure accounts payable/accounts receivable would be a lot more important for businesses.

 

[hazek]

Would it be fraud if someone defaults on a loan?

How does anything you've said so far include this last question invalidate the facts I outlined in the OP?!

If you aren't willing to answer this question I cannot have a conversation with you because you are either trolling me or just unwilling to face the facts for neither of which I have patience for.

 

[heavenlyboy34]

Yes. If you understand Bitcoin then you know what that person is doing is taking deposits, paying interest on them to the depositors and lending them out to borrowers at 100% reserve meaning no new bitcoins are being created in this process unlike in FRB.

The scheme in this example goes like this:

A -> depositor
B -> lender
C -> borrower

A relinquish his possession of bitcoins and gives to B for which B pays an interest, B then relinquishes his possession of these same bitcoins lending them to C charging an interest, once C repays, B gets the bitcoins + interest back and can now pay A the bitcoins + interest back.

Where in here do you see any fractional reserve banking?!

Gotcha. Sorry I didn't have time to read a wall of text at the time.

 

[Travlyr]

Thank you. I teach high school economics and I get these type of questions all the time. BTW Is it bad that Austrian Economics isn't in the curriculum but I teach it anyway?

It is not bad, but I am surprised that you are still employed. Sound money should be mandatory teaching in the school system.

 

[heavenlyboy34]

Banks must have the money on hand to loan through their business plan or else not loan it.

This is what happens in FRB. Money on hand exists in the form of direct deposits.

 

[Travlyr]

Would it be fraud if someone defaults on a loan?

Not fraud, but very few bank loans would go bad because due diligence would be completed before the loan. Bank profits would be more like shoe store profits... honestly earned. There would not be a CEO making $23 Million for losing $2 Billion .. it just wouldn't happen.

 

[hazek]

Problem with that is the depositors who don't allow their deposits to be invested don't earn interest and don't have much incentive to make a deposit at all. (why let the money sit in a vault when it could be earning interest in the form of some investment instrument?)

Ah yes because having millions in bullion at home is such a bright idea.. It doesn't cross your mind that some people would like to simply preserve their purchasing power and would be willing to pay a fee for safekeeping?

Also, there is no way to know that enough depositors will allow their money to be lent to meet demand for loans. Another thing is you're assuming the presence of a central bank to make your claim about vast misallocations of capital in the form of bad loans. FRB is not the same as central banking, and the possible crises you describe aren't a symptom of FRB, but of central banking.

Bullshit twofold:

FIRST: There's no way to know bakers will sell enough of their supply of bread in order to meet the demand for eating. -> can you see where you FAIL?!

SECOND: FBR creates money out of thin air robbing those who already hold this money, increasing the supply of money and inevitably fueling bubbles and causing busts, central bank or no central bank. YOU CANNOT ESCAPE THE 3 FACTS I OUTLINED IN MY OP. PERIOD.

 

[cubical]

How does anything you've said so far include this last question invalidate the facts I outlined in the OP?!

If you aren't willing to answer this question I cannot have a conversation with you because you are either trolling me or just unwilling to face the facts for neither of which I have patience for.

Because its not fraud. Are you trolling me?? If you deposit your money with a bank expecting a return, there will be risks associated with it. If you bank comes up short when you try to withdraw your money, you picked a bad bank.

Bank A says they will take my money and give me x% in a year by loaning it out(maybe there are time restrictions, maybe not, all associated in risk/reward). They fail to deliver, they default. Person A says they will take my money and give me x% in a year. They fail to deliver, they default.

 

[Travlyr]

This is what happens in FRB. Money on hand exists in the form of direct deposits.

Modern banks don't store money. The money does not exist. It is all based on faith.

 

[cubical]

Not fraud, but very few bank loans would go bad because due diligence would be completed before the loan. Bank profits would be more like shoe store profits... honestly earned. There would not be a CEO making $23 Million for losing $2 Billion .. it just wouldn't happen.

I agree.

 

[hazek]

Gotcha. Sorry I didn't have time to read a wall of text at the time.

Finally some rationality out of you in this thread, I must say I'm surprised by your statements in this thread when I have this reasonable image about you from the philosophy section..

 

[rpwi]

If your bank is doing this, why would you bank with them? Would you loan money to someone who was using it to go spend a weekend in Vegas on some "can't lose" gambling scheme?

?? We do all the time. Deposits are very short term liabilities to the bank and in some cases finance the majority of assets in a bank.

Fractional reserve banking offers a good way to get a return on your money

My checking account yields 0%. I have an option for 'performance checking'...but that yields less than 1%. Good for the banks to get a yield on my money...but not for me. When you count all the inflation they create, it's quite the drain on the economy.

while spreading out risk.

But they don't spread-out the risk. Banks are inherently risky...and in fact the only risk distribution is done by the Fed...from the banks to the taxpayers.