Some Fed shill defending fractional reserve banking (surprise) anyone got a response?

dennis dujac said:
have you ever tried to withdraw money from a checking account and the bank said they couldn't let you have your money?




bank runs, for all practical purposes, are a thing of the past




slow steady growth is healthy
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I don't care if I personally never had this problem. Its still wrong (its called embezzlement) and its happened before.

Growth in m1 is not needed.

The whole system is more simplified, more stable, and more honest this way.
 
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dennis dujac said:
what is it about fractional-reserves that you disapprove of?
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Here's the core of the issue:

I deposit $100 in a demand deposit to a fractional reserve Bank that has 10% reserve requirement. I can withdraw it at any moment.
The bank lends out $90 of my $100. What happens now is that I have $100 on my account, and the borrower has $90 on his account. Poof, $90 more money.
 
dennis dujac said:
that's ridiculous
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Not really, they are only warehousing the money. You can't lend out grain that you have warehoused, thats illegal.

If someone were to warehouse some grain, and the warehouse started to print deposits for it to get loaned out it would be illegal.

Same idea, except substitute grain for gold.

Even if you don't disagree with the morality of the system, it still eliminates the need for demand deposit insurance and bank runs. It also stabilizes the money supply.
 
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dennis dujac said:
you're wrong about that, lending deposits means you aren't holding a 100% reserve, it's fractional
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But it's not called fractional reserve banking. I deposit $100 to a time deposit at the bank for 1 year. The bank then lends $100 to another person for 11 months. I now have $0, but I have and IOU from the bank for $100 + interest. The bank has $0 but is liable to be for $100 + interest, and has an IOU from the other guy for $100 + interest. The other guy has $100, and a liability to the bank for $100 + interest.

No new money was created.
 
dennis dujac said:
what's wrong with that?
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Well there is only $100 of actual money, but there's an illusion of a total of $190 of money.

Imagine if you deposited 100 ounces of gold in a bank. The bank gives you a instant demand certificate for 100 ounces of gold. The bank then lends out 90 ounces of your 100 ounces to another person. This person keeps his 90 ounces in the bank and withdraws an instant demand certificate as well, because it's more convenient shop with certificates. There is now 190 ounces worth of certificates in circulation, but only 100 ounces of gold.
 
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matt0611 said:
Not really, they are only warehousing the money. You can't lend out grain that you have warehoused, thats illegal.

If someone were to warehouse some grain, and the warehouse started to print deposits for it to get loaned out it would be illegal.

Same idea, except substitute grain for gold.

Even if you don't disagree with the morality of the system, it still eliminates the need for demand deposit insurance and bank runs. It also stabilizes the money supply.
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what bank runs? and grain isn't money

matt0611 said:
There's multiple people with the same claim on the money deposited for immediate use at their demand. That's dishonest.
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no, everybody gets their money
 
dennis dujac said:
what bank runs? and grain isn't money



no, everybody gets their money
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So what? Its still a physical object. Same thing.

There's multiple claims on the same cash. This is a fact. Its dishonest.

And yes, it eliminates the need for deposit insurance.
 
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dennis dujac said:
most of it is insured
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Yes, by the FDIC. The ultimate creator of moral hazard. FDIC essentially removes any incentives for a depositor to value the safety of the bank. No matter how unsafe, you'll always get your money. So your only real way to judge a bank is by how high the interest it provides is.

Which banks provide the highest interest? The risky one's ofcourse. Thus you'll choose the banks that have high risk & high interest rates over those with low risk & low interest rates. This inturn leads to the banking sector having to take on more and more risk to compete for customers.
 
Diurdi said:
Yes, by the FDIC. The ultimate creator of moral hazard. FDIC essentially removes any incentives for a depositor to value the safety of the bank. No matter how unsafe, you'll always get your money. So your only real way to judge a bank is by how high the interest it provides is.

Which banks provide the highest interest? The risky one's ofcourse. Thus you'll choose the banks that have high risk & high interest rates over those with low risk & low interest rates. This inturn leads to the banking sector having to take on more and more risk to compete for customers.
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show me a link to the source of that information
 
There's nothing fraudulent about a fractional reserve demand deposit, assuming the bank does not lie to the customer about it. If you think that somehow demand deposit is a separate category from time deposit, then fine, how about allowing a time deposit account with 1 second maturity, where the principal is reinvested unless otherwise requested? In a free society one person can pay to put all her money in a safe deposit box and another can choose to lend it under whatever terms she and the borrower agree to. Chances are most people will prefer fractional reserve demand deposits with reputable well-capitalized banks.

I think what many people who are interested in Austrian school economics worry about is that this leads to malinvestment, but that's only true when there's government deposit insurance, generating the moral hazard which prevents the market from working by subsidizing risky behavior by the banks. Without government interference, the supply of money/credit will be kept in check by competing banks receiving each others' notes or checks or electronic payments and redeeming them for base money. There is a branch of the Austrian school, the so-called free banking school, that advocate for allowing fractional reserve banking. In particular you can search for Larry White and George Selgin and find very good books, blog posts, and videos describing the virtues of permitting freedom in banking.
 
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