FED: RP's House Subcomm to Examine Fractional Reserve Banking and High-Powered Money

[Matt Collins]

June 25, 2012


House Subcommittee to Examine Fractional Reserve Banking and High-Powered Money


WASHINGTON, DC – Congressman Ron Paul, Chairman of the Domestic Monetary
Policy and Technology Subcommittee, announced today that the subcommittee will hold
a hearing this week to examine fractional reserve banking.


“Fractional reserve banking underpins the entire banking system, yet its effects on society
are completely ignored,” Paul stated. “Our financial system consists of vast amounts of
credit pyramided on top of very small amounts of real savings-- all backstopped by
explicit and implicit government guarantees. This poses significant risks to the stability
of the economy and monetary system, which ought to give pause to any serious observer
of financial markets.”

“Hopefully this hearing will create a greater understanding among
the American people about the nature of the banking system, and begin the movement
towards serious systematic reform,” Paul continued. “The American people deserve a
financial system that is stable and efficient; one that operates without taxpayer subsidies
and bailouts.”


The hearing, entitled “Fractional Reserve Banking and the Federal Reserve: The
Economic Consequences of High-Powered Money,” will be held on Thursday, June 28,
at 2:00 p.m. in room 2128 of the Rayburn House Office Building.



Witnesses scheduled to testify:

- Dr. John Cochran, Emeritus Professor of Economics and Emeritus Dean, School
of Business, Metropolitan State College of Denver

- Dr. Joseph Salerno, Professor of Economics, Lubin School of Business, Pace
University

- Dr. Lawrence H. White, Professors of Economics, George Mason University

 

[Origanalist]

“Hopefully this hearing will create a greater understanding among
the American people about the nature of the banking system, and begin the movement
towards serious systematic reform,”

Hope springs eternal.

“The American people deserve a
financial system that is stable and efficient; one that operates without taxpayer subsidies
and bailouts.”

The American people deserve what they are willing to demand, I applaud Ron Paul on his nonstop never ending mission to educate the public on this issue.

 

[PatriotOne]

Bump for the eve crowd....

 

[rpwi]

This is TERRIFIC news! Ron actually has decent amount power and influence as the chair of the 'Monetary Policy and Technology Committee'. Practically nobody knows what FRB is or why it is bad. If he can use his position to expose a little light on how this works and the media catches wind of this, it could start a chain reaction that would lead to ending the monstrosity known as FRB. Unfortunately the media is largely financed by banks and most the big banks sit on the board of directories of the major media companies...so expect a news blackout on this one. We'll see though... I am anxiously waiting to see how these proceedings pan out.

 

[rpwi]

I just did a quick scope of Ron's three Witnesses and am quite disappointed. All three are Austrians and seem to understand FRB and are critical to a degree...but they seem to advocate FOR free-market FRB...the opposite of what we want and the opposite of what Rothbard tried to warn us about. I wish Ron had vetted these witnesses a little better...there ARE Rothbard style Austrians scholars available that he could have found if he dug harder. These witnesses will be asked tough questions (at least by Ron) and unfortunately will just defend FRB but in the context of free market FRB (an oxymoron...FRB CAN NOT exist without government support!). In essence they will talk about the benefits of de-regulating banks...the opposite of exposing FRB as a fraud, as Rothbard would have done as a witness. The focus of these hearings can't be on regulation...but has to be on how banks work. How they create money/inflation, instability, liquidity problems and are constantly dependent on bailouts that happen constantly with fed funds targetting. If we just talk about getting rid of banking rules, we will just be going backwards. Have to educate the public on FRB and not focus on irrelevant regulatory side issues...

 

[GeorgiaAvenger]

I just did a quick scope of Ron's three Witnesses and am quite disappointed. All three are Austrians and seem to understand FRB and are critical to a degree...but they seem to advocate FOR free-market FRB...the opposite of what we want and the opposite of what Rothbard tried to warn us about. I wish Ron had vetted these witnesses a little better...there ARE Rothbard style Austrians scholars available that he could have found if he dug harder. These witnesses will be asked tough questions (at least by Ron) and unfortunately will just defend FRB but in the context of free market FRB (an oxymoron...FRB CAN NOT exist without government support!). In essence they will talk about the benefits of de-regulating banks...the opposite of exposing FRB as a fraud, as Rothbard would have done as a witness. The focus of these hearings can't be on regulation...but has to be on how banks work. How they create money/inflation, instability, liquidity problems and are constantly dependent on bailouts that happen constantly with fed funds targetting. If we just talk about getting rid of banking rules, we will just be going backwards. Have to educate the public on FRB and not focus on irrelevant regulatory side issues...

http://www.ronpaulforums.com/showth...is-ended-Free-Banking-or-Full-Reserve-Banking

I don't know if "we" are all against free banking. In fact, it is likely the opposite.

 

[rpwi]

Those in favor of free banking do not understand how the money market or reserve banking works. There CAN'T be a market for reserves without government assistance. With no money market, the money center banks fail, volatility from check clearing destroys the higher monetary aggregates and insolvent banks sell assets to avoid bankruptcy. This lowers asset values mean the banks have to sell more assets...and this leads to bankruptcy. It's simple logic that this happens. You can't make more promises than you can keep without consequences. With free FRB one of two things would happen...inflation or insolvency. The last is guaranteed as what is to stop a bank run without the FDIC? Without the discount window? Without indirect lending from the open market? Without TT&L? Without bank deposits being legal tender? It would not be a matter of if the banking system would collapse without government assistance, but when and who would get hurt.

Those who defend 'free' banking need to read more Rothbard eg http://mises.org/money/2s12.asp

 

[Sola_Fide]

Gotta love that Ron has never stopped teaching.

 

[Matt Collins]

I just did a quick scope of Ron's three Witnesses and am quite disappointed. All three are Austrians and seem to understand FRB and are critical to a degree...but they seem to advocate FOR free-market FRB...the opposite of what we want and the opposite of what Rothbard tried to warn us about. I wish Ron had vetted these witnesses a little better...there ARE Rothbard style Austrians scholars available that he could have found if he dug harder. These witnesses will be asked tough questions (at least by Ron) and unfortunately will just defend FRB but in the context of free market FRB (an oxymoron...FRB CAN NOT exist without government support!). In essence they will talk about the benefits of de-regulating banks...the opposite of exposing FRB as a fraud, as Rothbard would have done as a witness. The focus of these hearings can't be on regulation...but has to be on how banks work. How they create money/inflation, instability, liquidity problems and are constantly dependent on bailouts that happen constantly with fed funds targetting. If we just talk about getting rid of banking rules, we will just be going backwards. Have to educate the public on FRB and not focus on irrelevant regulatory side issues...

Perhaps that lends them more credibility if they are there on the Fed's side, but yet exclaiming about how the Fed needs a good full unrestricted independent audit? I dunno, just a thought.

 

[mello]

I just love watching youtubes of Peter Schiff when he gets invited to these things.

 

[GeorgiaAvenger]

Those in favor of free banking do not understand how the money market or reserve banking works. There CAN'T be a market for reserves without government assistance. With no money market, the money center banks fail, volatility from check clearing destroys the higher monetary aggregates and insolvent banks sell assets to avoid bankruptcy. This lowers asset values mean the banks have to sell more assets...and this leads to bankruptcy. It's simple logic that this happens. You can't make more promises than you can keep without consequences. With free FRB one of two things would happen...inflation or insolvency. The last is guaranteed as what is to stop a bank run without the FDIC? Without the discount window? Without indirect lending from the open market? Without TT&L? Without bank deposits being legal tender? It would not be a matter of if the banking system would collapse without government assistance, but when and who would get hurt.

Those who defend 'free' banking need to read more Rothbard eg http://mises.org/money/2s12.asp

The amount of reserves a bank decides to hold determines the risk involved.

It would be stupid for somebody to put their money into a 10% reserve bank, but an 80% reserve bank should have no problems.

Rothbard is wrong to call something fraud unless the bank is refusing to tell the truth. Hayek is right that we need market competition without government regulation of their practices(but regulation of true fraud).

 

[TheNcredibleEgg]

I just did a quick scope of Ron's three Witnesses and am quite disappointed. All three are Austrians and seem to understand FRB and are critical to a degree...but they seem to advocate FOR free-market FRB...the opposite of what we want and the opposite of what Rothbard tried to warn us about. I wish Ron had vetted these witnesses a little better...there ARE Rothbard style Austrians scholars available that he could have found if he dug harder. These witnesses will be asked tough questions (at least by Ron) and unfortunately will just defend FRB but in the context of free market FRB (an oxymoron...FRB CAN NOT exist without government support!). In essence they will talk about the benefits of de-regulating banks...the opposite of exposing FRB as a fraud, as Rothbard would have done as a witness. The focus of these hearings can't be on regulation...but has to be on how banks work. How they create money/inflation, instability, liquidity problems and are constantly dependent on bailouts that happen constantly with fed funds targetting. If we just talk about getting rid of banking rules, we will just be going backwards. Have to educate the public on FRB and not focus on irrelevant regulatory side issues...

FRB would be fine in a free market so long everyone is not forced to use dollars. Forcing everyone to use dollars and allowing banks control of creating new money through FRB is where the problems occur.

If tho, for instance, JPM wanted to be a FRB and used "JPM bucks" as the currency being issued - then that would be fine. If enough people trusted that currency - then it might work.

But since JPM does FRB with dollars - that's the problem. Since they are diluting dollars and able to offer cheaper interest rates through the FRB - it basically forces all other banks to do the same. Or else go out of business.

So the key to FRB is to make sure the banks that choose to do it - do not do it with dollars. If you want to issue dollars then the bank needs to be a full reserve bank (at least on demand deposits.)

 

[rpwi]

The amount of reserves a bank decides to hold determines the risk involved.

It would be stupid for somebody to put their money into a 10% reserve bank, but an 80% reserve bank should have no problems.

This is not true. An 80% reserve bank will absolutely have serious problems. FRB is only very safe now because the government is propping up the banks ability to meet withdrawals and check-clearing. An 80% reserve bank would fail just as easily. Just that the first 80% of deposits would be satisfied instead of the first 10%. Nobody wants to be the last to withdrawal...so the first sign of a liquidity fire...and depositors would panic and the bank would be dead. Each withdrawal would further hurt the bank's credit rating and would feed on itself.

Rothbard is wrong to call something fraud unless the bank is refusing to tell the truth.

Rothbard is 100% correct to call out banks as frauds. People don't understand how banks work or where they deposits go. Banks take advantage of this ignorance to rob them (either through inflation or through bankruptcy). The surest measure that the people understand the system would be if they did not participate. Since they do participate this is the surest way to demonstrate that they don't how the ponzi scheme works. That a bank may detail in small print the horrible things they do makes no difference philosophically or legally (as far as fraud laws go which unfortinite banks are exceptions there of).

 

[echebota]

The amount of reserves a bank decides to hold determines the risk involved.

It would be stupid for somebody to put their money into a 10% reserve bank, but an 80% reserve bank should have no problems.

Rothbard is wrong to call something fraud unless the bank is refusing to tell the truth. Hayek is right that we need market competition without government regulation of their practices(but regulation of true fraud).

I was on a fense on this one, but actually I can see a free-market soluion to how 1) avoid any governmnet involvement in the banking 2) and limit the risks of the RB while not banning it at the governmenet level (again to avoid government involvement):

1) allow competition in money (honest money), dollar can be left as is even with the FED. let it be.
2) remove ALL government regulations and guarantees and any involvement from the government in banking

So if the bank wants to take a risk and offer RB with any reserve requirement with $ or any other money, they do it. But the depositors and the bank clearly understand that both take risk. Depositors also are aware that any of them can be the one pushing Enter putton on ATM and geting no money But if they are willing to take a risk for a promise of higher returns (it's like buying options or going double short) - let them do it. If the bank fails, some depositors and bank investors lose money. No bail outs or guarantees.

I'm pretty sure that after a couple of bank runs, by itself RB as a practice would die or will scale down to a very small % of the banking market. For sure it would not present a risk as inflator for a money supply.

This solution is something along the lines of the GeorgiaAvenger position but it also take care of the RPWI concerns, which I agree with.

 

[rpwi]

FRB would be fine in a free market so long everyone is not forced to use dollars. Forcing everyone to use dollars and allowing banks control of creating new money through FRB is where the problems occur.

If tho, for instance, JPM wanted to be a FRB and used "JPM bucks" as the currency being issued - then that would be fine. If enough people trusted that currency - then it might work.

But since JPM does FRB with dollars - that's the problem. Since they are diluting dollars and able to offer cheaper interest rates through the FRB - it basically forces all other banks to do the same. Or else go out of business.

So the key to FRB is to make sure the banks that choose to do it - do not do it with dollars. If you want to issue dollars then the bank needs to be a full reserve bank (at least on demand deposits.)

That's the trick though...why would anybody trust JPM notes?

Before the Federal Reserve Act prohibited private bank notes...we did have them. They were fractionally backed though...so perhaps the bank would have 5x notes and 5x deposits off of X dollar reserves. They worked because the money was redeemable in dollars. If bank money has no intrinsic, extrinsic, nor convertible value, I can't see how it would catch on.

 

[rpwi]

I was on a fense on this one, but actually I can see a free-market soluion to how 1) avoid any governmnet involvement in the banking 2) and limit the risks of the RB while not banning it at the governmenet level (again to avoid government involvement):

1) allow competition in money (honest money), dollar can be left as is even with the FED. let it be.
2) remove ALL government regulations and guarantees and any involvement from the government in banking

So if the bank wants to take a risk and offer RB with any reserve requirement with $ or any other money, they do it. But the depositors and the bank clearly understand that both take risk. Depositors also are aware that any of them can be the one pushing Enter putton on ATM and geting no money But if they are willing to take a risk for a promise of higher returns (it's like buying options or going double short) - let them do it. If the bank fails, some depositors and bank investors lose money. No bail outs or guarantees.

I'm pretty sure that after a couple of bank runs, by itself RB as a practice would die or will scale down to a very small % of the banking market. For sure it would not present a risk as inflator for a money supply.

This solution is something along the lines of the GeorgiaAvenger position but it also take care of the RPWI concerns, which I agree with.

In the right circumstances this would be a good solution. But first you have to educate the people on what banks do....the people don't have a clue now.

Secondly the transition period would be quite rough. Institutional investors would promptly pull out their money first and Jo public would be left totally ruined, as would the businesses we work for. Compare M3 to MB...the difference is how roughly how bad the public would get hurt and we would have a radical distribution of wealth to early withdrawlers and those that bought super cheap assets from insolvent banks. We need a transition period and plan to get us off of this ponzi-scheme. We also need narrow banking options available or direct access to federal reserve deposits.

 

[echebota]

In the right circumstances this would be a good solution. But first you have to educate the people on what banks do....the people don't have a clue now.

Secondly the transition period would be quite rough. Institutional investors would promptly pull out their money first and Jo public would be left totally ruined, as would the businesses we work for. Compare M3 to MB...the difference is how roughly how bad the public would get hurt and we would have a radical distribution of wealth to early withdrawlers and those that bought super cheap assets from insolvent banks. We need a transition period and plan to get us off of this ponzi-scheme. We also need narrow banking options available or direct access to federal reserve deposits.

Agree with both points: start with education, then transition plan to limit the pain, then execution

 

[tsai3904]

On now:

http://mfile.akamai.com/65722/live/reflector:36166.asx?bkup=36167&prop=n

 

[crhoades]

Thanks for the link! Dr. Salerno is now speaking.

 

[rpwi]

The link above is archived if anybody missed the hearing. Watched the entire hearing... It was kind of disappointing that it was such an important hearing and yet the hearing room was mostly empty and only ~3,4 other members of the committee showed up.

The witness Joseph Salerno was very good. Very well spoken and very knowledgeable. He seemed to be the most critical of the FRB but unfortunately did seem to believe in free FRB like the other two.

John Cochran was very camera shy and not much came out of him. Wasn't totally impressed with him, but did like that he realized the significance and importances of raising reserve requirements to get us off of FRB (those that disagree have not thought the issue through thoroughly).

Lawrence H. White was a disaster... While against FDIC insurance he was EXTREMELY pro FRB. I found myself frequently disagreeing with his comments which were many as he hogged the microphone. White and Salerno did disagree on a number of matters regarding the stability and viability of FRB.

Ron asked some great questions...and the few congressmen that remained actually asked better questions than I expected. Actually think Ron knew quite a bit more conceptually than White and he actually would have made a much better witness himself.

So in summary, I was kind of underwhelmed by the lack of reception the hearing got and the amount of defense 'Free' FRB got while 'regulated/subsidized' FRB got to be the whipping boy. That COMPLETELY misses the point. BOTH forms of FRB are evil. We can not reform the system until this is realized.

But certain advanced ideas were raised...and hopefully seeds will be planted from this hearing that will bear fruit down the road for genuine reform.