Fractional reserve lending versus.... what?

[Domalais]

Just because that is how they do it now doesn't mean that is how they have to do it. If the money was not available to the customer while in the CD then no new money would be created out of thin air and no business cycle would result.

Business cycles existed before modern banking.

 

[The Gold Standard]

Business cycles existed before modern banking.

Not before fractional reserve banking and/or currency debasement.

 

[GeorgiaAvenger]

One question I get is how are large projects going to be funded without large banks?

 

[The Free Hornet]

you notice how you keep asking the wrong question? Why do you assume we NEED loans and credit?
What happens, if starting tomorrow, we had no car loans, home loans, credit cards?
Don't you think one or few of these things will happen?
Demand for goods drop, costs and profits drop, production drops, waste drops. It'll hurt lots of people who want to profit off loans, houses, cars and credit cards, but is that a bad thing? Isn't a good society one which less people are employed to finance loaning, and more people are employed to either produce good or reduce wasteful products?

Demand might drop temporarily if the Fed was unable to loan out more money. However, private companies and private capital would quickly flow in to create new financing opportunities. It might be less glitzy, better background checks, higher downpayment, higher APRs (most likely). More people would be turned away for having bad or no credit or bad finances or no down payment.

Why we "NEED loans and credit" is of zero relevance. In Economics 101, needs and wants are unlimited. Whether essentials or luxuries, their nature is the same: un-effing-limited. It is resources that are limited and the free market, not the Fed, is supposed to be the allocator (e.g., determine the cost of money).

 

[newbitech]

consumer loans need to go.

 

[gerryb]

One question I get is how are large projects going to be funded without large banks?

Sandbox vs. Beach.

How do you get a beach without beach sized sandboxes?

I can't think of a single project the local community can't do.

 

[gerryb]

If I need $200, I borrow from a friend? If I need $20,000, I borrow from a rich friend?

In a Ron Paul world, what would a system of 'sound money' be like?

The person who holds an asset(like a house) and is trying to sell it would create a note, and hold it. The purchaser would make payments. There's no reason to get a banker involved.

 

[Steven Douglas]

One question I get is how are large projects going to be funded without large banks?

The time-honored old fashioned way: only with money that actually exists, the usage of which banks acquire from others, and pay to use, with no competing malinvestments in the mix.

 

[thoughtomator]

The radical idea is the legalized counterfeiting of the fractional reserve system.

A person should not be allowed to lend that which he does not have - that's called fraud. Being a banker is no excuse!

 

[Zippyjuan]

Not before fractional reserve banking and/or currency debasement.

Busniess cycles have existed under all economic and monetary systems throughout history.

 

[Zippyjuan]

The radical idea is the legalized counterfeiting of the fractional reserve system.

A person should not be allowed to lend that which he does not have - that's called fraud. Being a banker is no excuse!

Banks lend from what they have. They cannot loan out money they don't have. Under our Fractional Reserve system they can lend out up to 90% of the money they have been given in the form of deposits. If they are loaning out more than that, they are in violation of banking laws.

 

[The Gold Standard]

Busniess cycles have existed under all economic and monetary systems throughout history.

Surely you can point one out then where they didn't debase their money or have fractional reserve banking.

 

[cubical]

Banks lend from what they have. They cannot loan out money they don't have. Under our Fractional Reserve system they can lend out up to 90% of the money they have been given in the form of deposits. If they are loaning out more than that, they are in violation of banking laws.

While I don't understand the loans and auctions the fed has in which they loan out money, but I basically agree. Fractional reserve banking on its own should not be illegal nor is it immoral.

 

[enoch150]

One question I get is how are large projects going to be funded without large banks?

Very large projects are not generally funded by banks under the Anglo-American economic model even today. If a corporation needs a large amount of money it issues corporate bonds or has a stock offering. It doesn't borrow money from a bank.

 

[Steven Douglas]

Banks lend from what they have. They cannot loan out money they don't have. Under our Fractional Reserve system they can lend out up to 90% of the money they have been given in the form of deposits. If they are loaning out more than that, they are in violation of banking laws.

If that was all there was to it, then bank runs shouldn't have even been a problem. And yet, for some reason, they were, and still are. Why?

Actually, you can lend 90% of the money taken in as a deposit, having met the reserve requirement. The very next day, the original depositor may withdraw 100% of that deposit - the money that was loaned out already - because both the depositor and the borrower are given the same RIGHT NOW claim on the same money. Meanwhile, the money that was loaned gets deposited into another bank, 90% of which gets lent out as well. AND...the money that the depositor withdrew can be deposited into another bank, where it can be lent out as well. And the very next day, that depositor can withdraw 100% of his deposit. And so on.

The only criteria the NOW INSOLVENT banks are concerned with is having enough cash on hand to handle daily requirements.

So yes, you are correct. Banks can not lend what they do not originally have. But the loan is not where the counterfeiting happens. Follow the slight-of-hand, as the bank CAN (and must) give back to someone money that has been deposited, but has already been lent out! How is that possible? That is counterfeiting -- creating the same money in two places at once, or multiple contradictory claims on the same existing wealth.

 

[Zippyjuan]

Surely you can point one out then where they didn't debase their money or have fractional reserve banking.

Pick a time and system where you think it has not occured. We can take a look at it.

Business cycles can be emotional. Say I invent a cool widget. People hear about it and want one. They buy one and their friends see it and think it is cool and want one as well. Demand grows and prices start to rise. I see that I can make more so I increase my production. I hire people to help me so jobs grow. More people can and do now buy. But eventually another cool item comes along and they stop buying my widget as much as they used to so now I have to cut back on production and lay off people. I went through a business cycle- started small, grew, and eventually shrank. What we were using for money or banking was completely irrelevant. The economy is the sum of all businesses so the economy too will experience growth and retractions.

 

[Zippyjuan]

If that was all there was to it, then bank runs shouldn't have even been a problem. And yet, for some reason, they were, and still are. Why?

Actually, you can lend 90% of the money taken in as a deposit, having met the reserve requirement. The very next day, the original depositor may withdraw 100% of that deposit - the money that was loaned out already - because both the depositor and the borrower are given the same RIGHT NOW claim on the same money. Meanwhile, the money that was loaned gets deposited into another bank, 90% of which gets lent out as well. AND...the money that the depositor withdrew can be deposited into another bank, where it can be lent out as well. And the very next day, that depositor can withdraw 100% of his deposit. And so on.

The only criteria the NOW INSOLVENT banks are concerned with is having enough cash on hand to handle daily requirements.

So yes, you are correct. Banks can not lend what they do not originally have. But the loan is not where the counterfeiting happens. Follow the slight-of-hand, as the bank CAN (and must) give back to someone money that has been deposited, but has already been lent out! How is that possible? That is counterfeiting -- creating the same money in two places at once, or multiple contradictory claims on the same existing wealth.

Yes, it is possible that all of the people in the bank can try to withdraw their money. The bank then has to borrow money to get their reserves back up. They have to replace that money. Or they can try to call in their loans.

 

[enoch150]

Pick a time and system where you think it has not occured. We can take a look at it.

Business cycles can be emotional. Say I invent a cool widget. People hear about it and want one. They buy one and their friends see it and think it is cool and want one as well. Demand grows and prices start to rise. I see that I can make more so I increase my production. I hire people to help me so jobs grow. More people can and do now buy. But eventually another cool item comes along and they stop buying my widget as much as they used to so now I have to cut back on production and lay off people. I went through a business cycle- started small, grew, and eventually shrank. What we were using for money or banking was completely irrelevant. The economy is the sum of all businesses so the economy too will experience growth and retractions.

The situation you describe could happen and cause trouble for one particular company. But it does not explain why the same mistake could be committed by thousands of companies simultaneously. It's the clusters of mistakes that need to be explained.

I could see a 90% agricultural based economy having major problems during a drought. But absent some catastrophic event, it's hard to see how a huge chunk of a diversified economy could simultaneously display mal-investment problems without monetary shenanigans.

 

[The Gold Standard]

Pick a time and system where you think it has not occured. We can take a look at it.

Business cycles can be emotional. Say I invent a cool widget. People hear about it and want one. They buy one and their friends see it and think it is cool and want one as well. Demand grows and prices start to rise. I see that I can make more so I increase my production. I hire people to help me so jobs grow. More people can and do now buy. But eventually another cool item comes along and they stop buying my widget as much as they used to so now I have to cut back on production and lay off people. I went through a business cycle- started small, grew, and eventually shrank. What we were using for money or banking was completely irrelevant. The economy is the sum of all businesses so the economy too will experience growth and retractions.

Minor fluctuations can happen for any number of reasons and in any monetary environment. Widespread business cycles are caused by one thing, inflation of the money supply.

As for examples where they didn't have business cycles, I can't think of any. Of course I can't think of any people who were allowed sound money. The Assyrians debased their coins and brought down their empire. So did the Romans. The entire history of the United States has had a fractional reserve banking system.

So no I can't think of any examples of a society with sound money and 100% reserve banking that did not experience business cycles. Of course, I'm not the one claiming they exist. You are claiming such societies existed and did experience business cycles.

 

[Steven Douglas]

Yes, it is possible that all of the people in the bank can try to withdraw their money. The bank then has to borrow money to get their reserves back up. They have to replace that money. Or they can try to call in their loans.

Or, they can sit tight and hope that nobody notices - that nobody tests their insolvency - and to that extent they can simply rinse and repeat. New deposits become BOTH forms of money - the money to replace that which was withdrawn, as well as new reserves upon which to lend. That's the Ponzi nature of fractional reserve lending.

The important thing to note is the until that money is replaced (and it never is fully replaced), an act of counterfeiting has taken place, since you cannot have the same wealth in two places at once. One of them is fake. It is also tantamount to embezzlement in that moment, no differently than if you started a Ponzi scheme and sold 100% of shares in the same company to two different parties.

As for money replacements, banks now have a nifty trick at their disposal that enables them to transfer money internally on a given date, even for an instant, to show that they meet the reserve requirements - which effectively removes the reserve requirements altogether.

As for the business cycle, kick in the multipliers, as loans from one bank become deposits in others, and you eventually you have a full, economy-wide web of MULTIPLE instances of contradictory claims or paper representing the same original wealth, and you get an explanation for the economy-wide boom to bust business cycle. That's not the same thing as a cool widget fad cycle, which is usually isolated to a particular industry, the effects of busts of which are short-lived, and do not tend to substantially affect the rest of the economy. The actual business cycle driven by fractional reserve lending is economy-wide, and while the triggers for collapse can be emotionally driven (e.g., one bank fails and a domino effect of bank runs result), the fundamentals that made the insolvency web ripe for a collapse are very real, and not emotionally driven. It is a case where no bank, as you put it, replaced that money or called in their loans.