Fractional reserve lending is NOT inherently fraudulent

[nayjevin]

Fractional reserve banking is scenario B, not scenario A.

Hope that clears it up for everyone.

It should.

OP makes thread titled ' Fractional reserve lending is NOT inherently fraudulent' without knowing the definition of 'ractional reserve lending'.

 

[tmosley]

Giving the impression (and making it a temporary reality
via the reserve system) that there's still $10 deposited
at that bank (always available to the depositor),
and/or showing $19 as assets in the accounting,
falls somewhere between fraud and a Ponzi scheme.

It's institutionalized counterfeiting, it's the Creature!

Using this system to create even more money out of thin
air is also immoral - epecially when it's used to reward friends
and punish enemies.

No, in that case, the balance sheet would show $10 is assets. $1 in deposits, and $9 in loans. In such a case, money is not created out of thin air, it is merely invested, where the individual delegates the responsibility for those investments to the banker in exchange for a portion of the profit.

 

[nayjevin]

Yes, I believe your Scenario A would be considered Full Reserve Banking. They haven't created money out of nothing. If the entire business can be conducted with gold coins, I believe that everything is kosher...

There ya go, nothing wrong with any system that has all actors voluntarily lending/leveraging/bartering a real commodity such as coins. This is not fractional reserve.

The problem comes with using notes to represent those commodities and loaning based on non-existent wealth/commodity, which is fractional reserve.

 

[axiomata]

Rofl, wtf? If the depositor is told he cannot cash it at any time, then it's not fractional reserve banking.

What if the depositor is told that he can cashout at any time if he pays an insurance premium? If he elects to not pay the insurance premium he consents that most likely he will be able to cash out at any time, but there is a small chance that he won't be able to.

 

[tmosley]

There ya go, nothing wrong with any system that has all actors voluntarily lending/leveraging/bartering a real commodity such as coins. This is not fractional reserve.

The problem comes with using notes to represent those commodities and loaning based on non-existent wealth/commodity, which is fractional reserve.

Even that is fine, when it is based on full knowledge and consent of all involved. That is to say that individual banks operating in an unregulated free market can do such things, though it would likely lead to their bankruptcy eventually.

In the same way, it is legal to give away your money to a beggar on the street. It is neither theft nor fraud. Even if the beggar is wearing a nice business suit, and gives you a piece of paper you know is worthless (whether it be a receipt, an IOU, or a fractional reserve note from a failed bank with no remaining assets).

 

[Soca Taliban]

How is the fact that more than one individual having claim to the same money not fraud? The only reason we're not having bank runs daily is because the general public don't know didly squat about banking!

 

[shocker315]

As we discussed in many previous threads, there's a difference between

A. Taking $10 in, lending $9, keeping only $1.
vs.
B. Taking $10 in, claiming to have $100, and lending out $90.
vs.
C. Taking $10, keeping it all.

A. Is the typical bank operation of fractional reserve
B. Is outright printing money, increasing money supply, "lending money that doesn't exist"
C. Simply depositing money and doing nothing with it.

The act of A in and of itself is NOT fraudulent, it ONLY is fraudulent if the depositor of the original $10 was told he can cash it at any time, and it won't be lent out without his consent (it which case, it's a broken promise or breach of contract). It's also fraudulent if a borrower was told the $9 he borrows wasn't originally borrowed from somebody else, and isn't aware can be asked back any time.

http://www.market-ticker.org/archives/1019-Rebuttal-To-Mish-FRL.html

WHAT'S WRONG WITH FRACTIONAL RESERVE AND LENDING IF EVERY PERSON AFFECTED AGREES TO EVERY PART OF IT?

Fraud means somebody was lied to, somebody was not told the whole story, but what if DEPOSITOR KNOWS, BANKS KNOWS, BORROWER KNOWS, ALL AGREE?

This issue can get even more confusing when you consider money as cash and money as checkbook ledgers. But you left out a description of what really happens:


When a depositor puts $10 cash into a bank....supposedly the bank then uses a portion of that deposit to lend out. But, does the bank deduct that amount from the original depositors account? No, of course not. Why? Because it doesn't have to...its creating money in a ledger.

"Of course, they [banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created."
(Modern Money Mechanics last paragraph..page 6)

http://www.scribd.com/doc/3990690/Modern-Money-Mechanics

What actually happens is...$10 cash is deposited by a fellow named John. Based on this amount (but not taken from it), the bank "creates" an additional $10 in a ledger and loans our $9...$1 is kept in reserve (in actually, the amount loaned vs held in reserve is not important to the example..see threads on "zero reserve" banking). The important part is the original $10 remains untouched in John's account.

http://www.ronpaulforums.com/showthread.php?p=2094149#post2094149

The $9 in checkbook money that is loaned, is used by a borrower to purchase a tangible asset (such as a house). If John (the original depositor) withdraws his $10 in cash from his checking account and hour after the home loan was made...no problem, its still in his account. However, if the seller of the house goes to the bank and asks to "cash" the $9 check which was just used to purchase the house...there is a potential problem for the bank. The bank doesn't have any cash.

The bank must now scramble for cash reserves to cover all its obligations caused by it creating more checkbook money than it has cash..... It can sell its tangible asset (house or mortgage note) for the cash, assuming the value of the tangible asset hasn't dropped .( If the value of all the bank's tangible assets are less than its cash obligations it can cause problems. IE: real estate crash leading to bank closure.) Bank runs are when large numbers of people demand "cash" from the bank at once, and there isn't enough sellable assets to back the demand for cash.

So in other words...the bank creates and lends (at interest) more checkbook money than it actually has been deposited in cash reserve (some call this fraud). Then... if it is called upon to to meet its cash obligations, it goes searching through its assets, (that the bank previously purchased with this "fraudulent" checkbook money), and trys to liquefy them into cash.

---------------------------------------------
Some on this board and at the Market Ticker claim that since the bank can potentially cover its duel obligations created by its money creation, by selling its tangible assets, that means the process of money creation by the bank is not fraudulent.

It may not be fraudulent in the sense that it has been made legal... But they ignore that fact that the bank is allowed to create more money than previously existed in cash (inflationary) to purchase the tangible assets to begin with...and allowed to charge interest on it. That IMO gives the banking sector an unfair advantage over the rest of society. And big surprise... banks own nearly everything of tangible value as a result...homes, cars, factories..etc.

 

[Brian4Liberty]

Brian, if scenario B was true, and every bank can literally multiply money in every transaction, EVEN BY 2 (not 10), would we have "inflation" or occassional, historical, hyperinflation?

Unfortunately, I believe that is the way it works. You deposit $10, the bank can now lend $100.

There was a really good video on money creation via loans. Might be able to find it...anyone else?

 

[Brian4Liberty]

How is the fact that more than one individual having claim to the same money not fraud? The only reason we're not having bank runs daily is because the general public don't know didly squat about banking!

Bank runs are always a problem, even with full reserve banking. They only have so much liquid cash at any one time. The rest of the money is on the books, but it is out as loans to other people. Everyone can not withdrawal everything at the same time. So when everyone panics, it always collapses.

 

[ghengis86]

Unfortunately, I believe that is the way it works. You deposit $10, the bank can now lend $100.

There was a really good video on money creation via loans. Might be able to find it...anyone else?

I thought they could only lend $9?

 

[tmosley]

How is the fact that more than one individual having claim to the same money not fraud? The only reason we're not having bank runs daily is because the general public don't know didly squat about banking!

Because the depositor trades that risk for interest on his money.

The free fractional reserve banks in Scotland circa 1800's only very rarely had runs. Their banking system was the envy of the world, until the English shut them down, since they were a threat to the power of the Bank of England.

http://en.wikipedia.org/wiki/Free_banking

 

[Feenix566]

At least with a 100% reserve system, borrowers could repay the bank in cash and then the bank could pay all its depositors. In a fractional reserve system, that's not possible. There's more debt than there is cash, so it's mathematically impossible for the borrowers to pay off all their debt in cash.

 

[Brian4Liberty]

Found it. 5 parts. Pretty interesting.

YouTube - Money As Debt 1-5

 

[Zippyjuan]

In a 100% reserve system, a bank must keep 100% of deposits on hand. In that case, they have no money they can lend out aside from their own. By definition, a reserve requirement is a percent of deposits they must keep on hand and not lent out. With a ten percent reserve requirement, a bank can loan out $9 on a $10 deposit- keeping the ten percent required or $1.

 

[CCTelander]

The whole point of fractional reserve banking is to commit fraud. Saying it isn't inherently fraudulent is like saying water isn't inherently wet.

 

[fgd]

As we discussed in many previous threads, there's a difference between

A. Taking $10 in, lending $9, keeping only $1.
vs.
B. Taking $10 in, claiming to have $100, and lending out $90.
vs.
C. Taking $10, keeping it all.

A. Is the typical bank operation of fractional reserve
B. Is outright printing money, increasing money supply, "lending money that doesn't exist"
C. Simply depositing money and doing nothing with it.

The act of A in and of itself is NOT fraudulent, it ONLY is fraudulent if the depositor of the original $10 was told he can cash it at any time, and it won't be lent out without his consent (it which case, it's a broken promise or breach of contract). It's also fraudulent if a borrower was told the $9 he borrows wasn't originally borrowed from somebody else, and isn't aware can be asked back any time.

http://www.market-ticker.org/archives/1019-Rebuttal-To-Mish-FRL.html

WHAT'S WRONG WITH FRACTIONAL RESERVE AND LENDING IF EVERY PERSON AFFECTED AGREES TO EVERY PART OF IT?

Fraud means somebody was lied to, somebody was not told the whole story, but what if DEPOSITOR KNOWS, BANKS KNOWS, BORROWER KNOWS, ALL AGREE?

I'm on Denninger's side. Basically, it's not "it isn't fraud because you told the depositor and he agreed", it isn't fraud because the loan is a secured and not an unsecured loan.

Take in $10. Lend out $9 to buy an asset. Keep $1. You get a mortgage note, worth $9 plus interest. Lend out 90 cents to buy an asset...

Now the depositor wants their money. In fact, they ALL do. So what do you do? You go into your vault and get your pile of mortgage notes and sell them on the open market and get $10 for all of them plus interest. You hand the depositors their money and they go back out the door satisfied.

Where there becomes a problem is for unsecured debt - credit card debt and the like. There's no property to back the debt, so if you go and issue notes against that, you'd be lucky to get 10c on the dollar. So if you're lending unsecured and your depositors want their money back, you blow up your bank.

I tire of all the "FRL = FRAUD!" posts. It's not, the loans are secured, and the market for asset-backed securities is liquid. Unsecured FRL is fraud.

 

[Feenix566]

In a 100% reserve system, a bank must keep 100% of deposits on hand. In that case, they have no money they can lend out aside from their own. By definition, a reserve requirement is a percent of deposits they must keep on hand and not lent out. With a ten percent reserve requirement, a bank can loan out $9 on a $10 deposit- keeping the ten percent required or $1.

There's a lot of confusion on this issue. It turns out we're both right.

If you read this article: http://en.wikipedia.org/wiki/Fractional_reserve_banking, there's a chart explaining how central bank money gets passed around. It shows how $100 from the central bank becomes $457.05 in deposits under a 20% reserve requirement.

 

[axiomata]

Regarding the confusion between A) banks getting $10 in deposit and loaning out $9 and B) banks getting $10 in deposit, claiming to have $100, and loaning out $90.

Feel free to correct me if I'm wrong but what actually happens is A) but the net effect of A) assuming the credit is recirculated back into the banking system is essentially B).

A bank gets $10, it keeps $1 in its vaults and loans out $9. However, if we assume that the loaned $9 gets reinvested in the banking system then whatever bank gets it must keep 0.1*$9=0.90$ in its vaults and can loan out 0.9*$9=$8.10. Continuing on this series and summing up the accounting of what is created it is approximate as if the original bank had done B), but in actuality it only did A) which was compounded over time through the banking system.

see: http://en.wikipedia.org/wiki/Fractional-reserve_banking#Money_creation

 

[LibertyRevolution]

If you deposit money in a bank, then you are part of the problem.
STOP INVESTING IN YOUR OWN OPPRESSION!

 

[Optatron]

Anti free-bankers are statists. (That should piss Conza off to no end.)

why do you think I created this thread?