Fractional reserve banking is fraud, period.

[hazek]

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.

That's now where the fraud comes from.

The fraud comes from a bank doing FRB when:

• when a bank steals from savers by charging interest on purchasing power it created out of thin air
• when this bank protects their ass from bubbles and busts their fraud caused with the pledged collateral

Depositing money with an investment fund and losing on a bad bet by this investment fund or bank or whatever is not fraud. I never said it was.

 

[thoughtomator]

In a fractional reserve system, one party gets something of value for effectively zero work, which is entirely due to a legal privilege extended to some parties and not others. It has no benefits that exceed the risks of moral hazard inherent in this process.

 

[cubical]

?? 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.

Where in the world are you depositing with a bank free from the fed? They don't exist.

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.

No one is forcing you to keep your money there, but this is off topic. Again you are calling out a fed lead banking system and then complaining about a free market system.

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.

AGAIN you are looking at the current system and making judgments on a free market system.

 

[Gumba of Liberty]

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?)

I completely agree. Why let your money sit there when you can make a return? The incentive would be to make investments. Most people would make investments. Granted, if you have limited funds you might opt out of the banking system but that is your choice to make. Any smart individual with substantial savings will want a secure place to keep their money (especially in an urban area) and will put their money in a bank.

Also, there is no way to know that enough depositors will allow their money to be lent to meet demand for loans.

Isn't this a contradiction of your previous point? Why would you let your money sit there when you can make a return? It defies logic (for those educated enough to make good decisions). Also, how do you know when the demand for loans has been met? Doesn't Economics 101 each that supply meets demand? You can only demand a good or service is you 1. desire the good or service and 2. Have the ability to purchase the good or service. Right now I would love to have a $100,000 loan at 0.5%. Does that mean a bank should provide it? Doesn't Austrian Economics preach that no one person, group, or government knows exactly when demand (or supply) is actually met?

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.

Fractional-Reserve Banking does not produce a national crisis the way Central Banking does but it does produce an individual crisis for each bank that participates in the practice. All fractional-reserve banks are destined to fail. What goes up must come down and when these banks produce more loans than would naturally occur in a free-market economy the loans go into the industries that people most value (housing, business, education, medicine, etc.) increasing the price.

 

[rpwi]

Would it be fraud if someone defaults on a loan?

To an extent ALL defaults are dishonest. However...IMO there is a world of difference between Joe Shmo who defaults on his house loan because he gets laid off...and a banker who defaults on his deposit to the depositor...because he promised more deposits than he had in reserves. Using your logic...a ponzi scheme shouldn't be that bad because when popped, defaults are just part doing business and we should just accept that.

 

[cubical]

?? 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.

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.

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.

That's now where the fraud comes from.

The fraud comes from a bank doing FRB when:

• when a bank steals from savers by charging interest on purchasing power it created out of thin air
• when this bank protects their ass from bubbles and busts their fraud caused with the pledged collateral

Depositing money with an investment fund and losing on a bad bet by this investment fund or bank or whatever is not fraud. I never said it was.

It does not create purchasing power out of thin air. There can only be 1 person holding a deposited dollar at a time. Unless you are insinuating the bank counterfeits its money.

 

[hazek]

BTW everyone just calm down a little bit, realize that we are all human subject to human nature and cognitive dissonance, realize that reality clearly is true only in one way and we would all be best served if we can figure which way is the right way.

So stop for a few, take a few deep breaths, don't just fall in a loop of repeating yourselves but actually read and listen to the arguments and facts presented.


Let's display some rationality people, it's not that hard.

 

[hazek]

It does not create purchasing power out of thin air. There can only be 1 person holding a deposited dollar at a time. Unless you are insinuating the bank counterfeits its money.

That's what fractional reserve banking is, they lend more than what they have on reserve. Where do they get this "more" from if not out of thin air?

 

[Travlyr]

In a fractional reserve system, one party gets something of value for effectively zero work, which is entirely due to a legal privilege extended to some parties and not others. It has no benefits that exceed the risks of moral hazard inherent in this process.

Yes, this is very similar to a contractor who builds a house. First he must buy the land, contract for design, framing, roofing, siding, electric & plumbing, interior and finish. Then he must find a buyer. The contractor has an investment of $100k+ and then the banker steps in without any money but he has the "privilege" of creating money out of nothing. So the banker "creates" $100k+ out of nothing and earns $200k+ through interest over a 30 year time period. The people who did all the work earned peanuts while the banker made out like a bandit because that is what they are. Counterfeiting thieves.

 

[cubical]

To an extent ALL defaults are dishonest. However...IMO there is a world of difference between Joe Shmo who defaults on his house loan because he gets laid off...and a banker who defaults on his deposit to the depositor...because he promised more deposits than he had in reserves. Using your logic...a ponzi scheme shouldn't be that bad because when popped, defaults are just part doing business and we should just accept that.

Well YOUR OPINION is just that. You can say an individual defaulting is worse than a bank, but assuming you know the risks going in, there is no difference. If the bank lies about their assets and liabilities or if an individual lies about their income or other debts, then yes there is fraud, but that doesn't mean we should stay away from fractional reserve banking, only that we should stay away from crooks.

 

[rpwi]

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.

The problem is that 99% of the population does not know how banking works. They do not know what happens to their money they deposit...and if they did they would not deposit their money in the bank. The banks are taking advantage of their ignorance and that IMO is a form of fraud.

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.

A bank doesn't properly tell you that your 'deposit' is actually an investment in the bank that yields an infinitesimally small amount of interest and has an infinitesimally small maturity period. If they did that might wake people up.

You've brought up the competitive lending aspects multiple times...that's not how banks work. They're source of financing isn't really from CD's that they acquired because they offered 5% instead of 4% compared to bank X. Although that is part. It is mostly from the deposits that you and I have in the banks. And this is NOT competitive. Indeed a competitive market could never really exist for banks because their model is fraudulent...how would ponzi schemes compete for example? They couldn't...

 

[thoughtomator]

To an extent ALL defaults are dishonest.

Default is not inherently dishonest unless the intent to default was present at the time the contract was signed. No person can account for all possibilities in the future. An honest man may run up a credit card bill which he could normally pay, then lose his income and/or encounter an unavoidable expense. An honest business could take out a loan to expand, and then fail to be successful. Both cases would lead to an honest default.

An honest loan contract takes default into account, so default on the loan can occur while the contract itself remains intact. In the case of a secured loan, the lender then claims the collateral. In the case of an unsecured loan, the lender gets nothing. An unsecured loan is a very risky one and no lender has an excuse not to be fully aware of those risks. Those risks are the natural limitation to the issuance of the most risky types of loans.

 

[cubical]

That's what fractional reserve banking is, they lend more than what they have on reserve. Where do they get this "more" from if not out of thin air?

When I make a loan to an individual I have 0 money in reserves. That doesn't mean I don't want to go through with it. I know that going into it I won't be able to access the money for a while or if I do want to I might have to take a haircut. But rather than going to that extreme, why not pool my money with other lenders and borrowers to spread the risk? That is what the bank is for.

 

[heavenlyboy34]

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?

Then you're not talking about banking at all-you're just leaving your bullion in a big safe deposit box.

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.

No BS at all. Rothbard points out in "Taking Money Back":
http://mises.org/daily/2882

Banking is a particularly arcane part of the economic system; one of the problems is that the word "bank" covers many different activities, with very different implications. During the Renaissance era, the Medicis in Italy and the Fuggers in Germany, were "bankers"; their banking, however, was not only private but also began at least as a legitimate, noninflationary, and highly productive activity. Essentially, these were "merchant-bankers," who started as prominent merchants. In the course of their trade, the merchants began to extend credit to their customers, and in the case of these great banking families, the credit or "banking" part of their operations eventually overshadowed their mercantile activities. These firms lent money out of their own profits and savings, and earned interest from the loans. Hence, they were channels for the productive investment of their own savings.To the extent that banks lend their own savings, or mobilize the savings of others, their activities are productive and unexceptionable. Even in our current commercial banking system, if I buy a $10,000 CD ("certificate of deposit") redeemable in six months, earning a certain fixed interest return, I am taking my savings and lending it to a bank, which in turn lends it out at a higher interest rate, the differential being the bank's earnings for the function of channeling savings into the hands of credit-worthy or productive borrowers. There is no problem with this process.

The same is even true of the great "investment banking" houses, which developed as industrial capitalism flowered in the 19th century. Investment bankers would take their own capital, or capital invested or loaned by others, to underwrite corporations gathering capital by selling securities to stockholders and creditors. The problem with the investment bankers is that one of their major fields of investment was the underwriting of government bonds, which plunged them hip deep into politics, giving them a powerful incentive for pressuring and manipulating governments, so that taxes would be levied to pay off their and their clients' government bonds. Hence, the powerful and baleful political influence of investment bankers in the 19th and 20th centuries: in particular, the Rothschilds in Western Europe, and Jay Cooke and the House of Morgan in the United States.​

 

[cubical]

The problem is that 99% of the population does not know how banking works. They do not know what happens to their money they deposit...and if they did they would not deposit their money in the bank. The banks are taking advantage of their ignorance and that IMO is a form of fraud.

People are ignorant because they rely on the government/fed system to do their thinking/due diligence for them.

All of your arguments are coming from a fed banking system POV. Until it is completely removed you will not see the potential of a free market banking system.

 

[hazek]

When I make a loan to an individual I have 0 money in reserves.

Please please please tell me how you do that without being caged by the state because I'd like to make loans like that also. Right now whenever I want to make a loan I always need 100% reserve..

 

[Travlyr]

People are ignorant because they rely on the government/fed system to do their thinking/due diligence for them.

All of your arguments are coming from a fed banking system POV. Until it is completely removed you will not see the potential of a free market banking system.

Not necessarily true. A lot of us are working diligently for sound money, 100% redeemable.

"The Purse & The Sword" by Dr. Edwin Vieira Jr.

 

[hazek]

Then you're not talking about banking at all-you're just leaving your bullion in a big safe deposit box.

Yes precisely, isn't this what traditional banking at first was?

No BS at all. Rothbard points out in "Taking Money Back":
http://mises.org/daily/2882

Are you sure you understand to which one of your question my quote is a reply to?

 

[rpwi]

Where in the world are you depositing with a bank free from the fed? They don't exist.

?? My example implied that the depositing banks in turn were part of the Fed. My statement stands...that individual deposits represent massive amounts of short term lending to banks that use this to acquire long term assets that are illiquid. There is a massive liquidity mismatch on all bank balance sheets.

No one is forcing you to keep your money there, but this is off topic.

Indirectly I do. Say I pull all reserves out of the bank and into paper cash. When I pay my taxes...I have to do so through a bank. The government then through a special program deposits tax receipts with insider banks to give them 0% loans (to ensure 'market stability'). Then before tax time...my pulling the dollars out of the banking system drove up the money market rate because reserves were more scarce in the banking system. The magic of the Fed Funds Rate kicks in and the vacuum of reserves created by my withdrawal is filled by open market operation deposits. So try as I can...I can't really remove dollars out of the banking system.

Again you are calling out a fed lead banking system and then complaining about a free market system.

They're all bad. Fractional banking can exist without government support. That doesn't mean it is good. Murder can exist in a free market too...doesn't mean that is good.

 

[BattleFlag1776]

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

A quote from Joseph G. Baldwin in 1853 (italics his, bold mine):

“In the fullness of time the new era had set in—the era of the second great experiment of independence; the experiment, namely, of credit without capital, and enterprise without honesty. The Age of Brass had had succeeded the Arcadian period when men got rich by saving a part of their earnings, and lived at their own cost and in ignorance of the new plan of making fortunes on the profits of what they owed. A new theory, not found in the works on political economy, was broached. It was found out that the prejudice in favor of the metals (excluding brass) was an absurd superstition; and that, in reality, any thing else, which the parties interested in giving it currency chose, might serve as a representative of value and medium for exchange of property; and as gold and silver had served for a great number of years as representatives, the republican doctrine of rotation in office required they should give way. Accordingly it was decided that Rags, a very familiar character, and very popular and easy of access, should take their place. Rags belonged to the school of progress. He was representative of the then Young America. His administration was not tame. It was very spirited. It was based on the Bonapartist idea of keeping the imagination of the people excited. The leading fiscal idea of his system was to democratize capital, and to make, for all purposes of trade, credit and enjoyment of wealth, the man that had no money a little richer, if anything, than the man that had a million. The principle of success and basis of operation, though inexplicable in the hurry of the time, is plain enough now: it was faith. Let the public believe that a smutted rag is money, it is money: in other words, it was a sort of financial biology, which made at night the thing conjured for, the thing that was seen, so far as the patient was concerned, while the fit was on him—except that now a man does not do his trading under the mesmeric influence: in the flush times he did.”

and

“‘Commerce was King’ −and Rags, Tag and Bobtail his cabinet council. Rags was treasurer. Banks, chartered on a specie basis, did a very flourishing basis on the promissory notes of the individual stockholders ingeniously substituted in lieu of cash. They issued ten for one, the one being fictitious. They generously loaned all the directors could not use themselves, and were not choice whether Bardolph was the endorser for Falstaff, or Falstaff borrowed on his own proper credit, or the funds advanced him by Shallow. The stampede towards the golden temple became general: the delusion prevailed far and wide that this thing was not a burlesque on commerce and finance. Even the directors of the banks began to have their doubts whether the intended swindle was not a failure. Like Lord Clive, when reproached for extortion to the extent of some millions in Bengal, they exclaimed, after the bubble burst, ‘When they thought of what they had got, and what they might have got, they were astounded at their own moderation.’”

Granted, he is critiquing it all (especially "banks" that are operating as banks in name only), but these discussions are not new. Perhaps today's economists should spend less time on proving the validity on their financial models and more time reading their Southern Literature...