[Video] Fractional Reserve Banking is NOT Fraud

[Bohner]

I think you may be a bit confused.

Well, if I ive them 10, they don't just lend out 100.

I deposit 10 (bank as $10 asset and $10 of liabilities = 100%)

Good so far

Makes $9 loan (bank $10 of assets and $19 of liabilities)

Ummm... Loans are assets (eg. If you buy a bond, that IOU you receive from the government is considered an asset, not a liability).

Therefore, if the bank makes a $9 loan, it still has $10 in assets ($9 loan + $1 in reserves), and $10 in liabilities (ie. what the bank owes the initial $10 depositor).

This is not taking into account the interest the bank would receive from that loan, in which case, the banks assets > the banks liabilities.

Then makes an $8.10 ( Bank has $10 of assets and 27.10)

I'm assuming you mean the bank makes an $8.10 loan because the initial person who that $9 was loaned to deposited it back in the bank.

Well, not including interest, the bank actually has $19 in assets ($9 loan + $8.10 loan + $1.90 reserves), and $19 in liabilities (initial $10 deposit + the new $9 deposit).

THe end result as this continues each $1 will become $10

No, the end result as this continues is that the bank will have $100 in assets, $100 in liabilities, and $10 in reserves (assuming the bank didn't collect interest on their loans). The money supply has not increased. Money =/= assets. Its essentially an oversimplification that the hippies use in a pathetic attempt to prove that banks are evil.

 

[Bohner]

Just so this doesn't get sidetracked too much, go back to the fundamental nature of fractional reserve. In fractional reserve, banks lend money that they do not actually possess in reality.

The definition of fraud:

In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual

FRB is intentional

+ FRB is deceptive

+ FRB is for the personal gain of the lenders

= FRB is fraud

Bolded: Of course they possess it... What the hell do you think they are lending you??? Are they drawing Ben Franklin portraits on little pieces of paper using crayons and telling you they're $100 bills?

 

[hazek]

My thoughts on this:

1. If a bank can not redeem a customer's demand deposit, at that point the bank committed fraud. I don't think anyone is disputing that.

Not fraud, but default, the risk you take when you lend.

2. If instead of denying the customer's demand deposit, the bank creates more notes to satisfy both the customer and the borrower, that is the same exact default, and therefore fraud. It is exactly the same as the U.S. government printing up $16 trillion to pay off the national debt.

In a by strictly market consumers regulated FRB (i.e. in free market FRB) there is no FED to print money, the FRB operator has to go to another FRB operator and get a short term low yield loan in order to prevent a default and be able to pay demand deposits. No new money is created in this process without a central bank.

3. If banks inform customers that they may not be able to access their money, then it really isn't a demand deposit, and therefore really isn't fractional reserve banking.

Demand deposits are really investments and as investments carry risk of loss. It's only because of the FDIC, the FED and the monopoly on violence that is the government legitimizing and forcing this practice upon us that people hold the mistaken believe of equating demand deposits with money. It is not. It's an investment just like a CD but with on demand liquidity.

4. I do agree that we don't need the government to regulate reserve requirements. Just eliminate deposit insurance, let the insolvent banks fail, and prosecute them for fraud. That would be incentive enough to keep the quality of money relatively sound.

How about just let them fail and go bankrupt? Again, there is no fraud, they simply defaulted on their promises, happens every day in any other business.

5. Whether or not fractional reserve banking in itself is fraudulent, it is undeniable that is causes the business cycle. The act of consumers saving money in time deposits is what signals to the market what their time preference for consumption is. Consumers putting money in a checking account has no such effect, because people expect to be able to use that money immediately. If banks can lend demand deposits as well as time deposits, that increases the pool of loanable funds, lowering interest rates below what the time preference of the consumer would dictate, bringing about a boom-bust cycle.

The business cycle is unavoidable, because the supply/demand equilibrium of money just like with anything else isn't static. The problem is the FED that perpetuates and deepens the cycle by manipulating interest rates lower than the market equilibrium is and does so for a longer period of time. Without it the business cycle would be short and not a big deal and as liquidity increases and more time passes the supply/demand equilibrium of money would eventually almost stabilize. Bitcoin is an awesome example of this right now for the past 5 months.

 

[hazek]

In a free market system, where anyone and everyone could start their own FRB, would you seriously deposit your money in someone else's fractional reserve bank?

If the yields warranted the risk, and if the risk was low due to a good reputation, of course!

 

[Travlyr]

If the yields warranted the risk, and if the risk was low due to a good reputation, of course!

I would start my own bank and look for suckers. Not that you would be a sucker, but a lot of people don't do their due diligence. Unfortunately, in FRB, somebody always loses when the piper comes calling.

 

[thoughtomator]

Bolded: Of course they possess it... What the hell do you think they are lending you??? Are they drawing Ben Franklin portraits on little pieces of paper using crayons and telling you they're $100 bills?

They're lending you money which is the legal property of someone else, while at the same time promising that someone else that they can have their money anytime they want. They may as well be drawing those little portraits you describe, that would be a step up in honesty.

 

[thoughtomator]

90% capital lending is effectively unlevered. The law is 10x leverage. The reality is 30x+ leverage for the TBTF's and 80x+ leverage for GSE pseudo-banks like Fannie and Freddie.

Every person who thinks that FRB means lending out 90% of a bank's capital doesn't understand the system. The aggregate effect of FRB is that the banks can lend out 1000% of their existing capital, a 10x multiplier.

http://www.chrismartenson.com/crashcourse/chapter-7-money-creation


What this discussion has shown me is that there are a lot of people with an academic interest in economics who are wholly unfamiliar as to the reality of the capital markets. The phrase "forest for the trees" is staggeringly appropriate here.

Try posting the original video on any serious capital markets site, e.g. zerohedge.com, and you'll get laughed out of town.

 

[dancjm]

It is a fraud in that what we are led to believe is money, is in fact not money.

It is the deception that is fraudulent. It's a confidence trick.

And expanding an economy this way is building a house of cards.

Fraud is as good a word for it, so too is evil.

 

[Travlyr]

It is a fraud in that what we are led to believe is money, is in fact not money.

It is the deception that is fraudulent. It's a confidence trick.

And expanding an economy this way is building a house of cards.

Fraud is as good a word for it, so too is evil.

For sure. It is a myth that it expands the economy too. It expands the economy of the FRB at the expense of everybody else. Wealth can not be 'created' out of nothing. It is either mined, grown, or sewn. Everything else is slight of hand.

 

[hazek]

It is a fraud in that what we are led to believe is money, is in fact not money.

It is the deception that is fraudulent. It's a confidence trick.

This would not be possible in by strictly market consumers regulated(i.e. free market) FRB. Hence FRB is not fraudulent.


In by strictly market consumers regulated(i.e. free market) FRB demand deposits would be correctly seen as investments with on demand liquidity that carry a certain risk of loss if the FRB operator should run out of reserves and default.

 

[thoughtomator]

FRB would not exist in a free market because people wouldn't accept those terms if honest terms were available.

 

[Bossobass]

90% capital lending is effectively unlevered. The law is 10x leverage. The reality is 30x+ leverage for the TBTF's and 80x+ leverage for GSE pseudo-banks like Fannie and Freddie.

Every person who thinks that FRB means lending out 90% of a bank's capital doesn't understand the system. The aggregate effect of FRB is that the banks can lend out 1000% of their existing capital, a 10x multiplier.

http://www.chrismartenson.com/crashcourse/chapter-7-money-creation


What this discussion has shown me is that there are a lot of people with an academic interest in economics who are wholly unfamiliar as to the reality of the capital markets. The phrase "forest for the trees" is staggeringly appropriate here.

Try posting the original video on any serious capital markets site, e.g. zerohedge.com, and you'll get laughed out of town.

^This^ (and every one of your posts in this thread)

I would like to add (as I have numerous times since 2008 in many threads) that since the passage of the The Emergency Economic Stabilization Act banks are required to have reserves [WHICH MAY BE ZERO].

That means, in a nutshell, that your demand deposit is no longer a demand deposit, yet it's still called a demand deposit, and that banks can lend at X infinity, fully backed by citizen's future earnings, whether they like it or not.

FRB has gotten to this extreme, but arguing that some other version of FRB is somehow more betterer is a brain fart and how we got here in the first place.

Bosso

 

[thoughtomator]

Arguing this topic I am getting flashbacks to 2005-2006 when I was questioning the assertion that housing prices could never go down

so let me pose one last question to the doubters of the self-evident:

In a 10% fractional reserve system, what happens to the system if 11% of deposits are withdrawn?

 

[hazek]

Arguing this topic I am getting flashbacks to 2005-2006 when I was questioning the assertion that housing prices could never go down

so let me pose one last question to the doubters of the self-evident:

In a 10% fractional reserve system, what happens to the system if 11% of deposits are withdrawn?

Under by strictly market consumers regulated FRB (i.e. free market FRB) either:

1) FRB defaults

2) FRB borrows from perhaps another FRB for a short term low yield loan until the FRB in trouble can unwind his assets and shore up his reserves

No new money is created in this process.

 

[AlexMerced]

I think you may be a bit confused.



Good so far



Ummm... Loans are assets (eg. If you buy a bond, that IOU you receive from the government is considered an asset, not a liability).

Therefore, if the bank makes a $9 loan, it still has $10 in assets ($9 loan + $1 in reserves), and $10 in liabilities (ie. what the bank owes the initial $10 depositor).

This is not taking into account the interest the bank would receive from that loan, in which case, the banks assets > the banks liabilities.



I'm assuming you mean the bank makes an $8.10 loan because the initial person who that $9 was loaned to deposited it back in the bank.

Well, not including interest, the bank actually has $19 in assets ($9 loan + $8.10 loan + $1.90 reserves), and $19 in liabilities (initial $10 deposit + the new $9 deposit).



No, the end result as this continues is that the bank will have $100 in assets, $100 in liabilities, and $10 in reserves (assuming the bank didn't collect interest on their loans). The money supply has not increased. Money =/= assets. Its essentially an oversimplification that the hippies use in a pathetic attempt to prove that banks are evil.

this is what I meant sorry, it was late and I was rsponding to lots of things t the same time so my brain as a little fried

 

[AlexMerced]

FRB would not exist in a free market because people wouldn't accept those terms if honest terms were available.

Ok, that's fine, this is not what the debate is about.

The debate is not about whether FRB is good, Stable, Sound, desirable, etc.

The question is FRB fraud and should automatically be considered illegal or should a free market weed it out naturally, I'm of the latter opinion, which again would be a lot less problematic with COMPETING CURRENCIES. Right now with Monopoly money I totally see racket that is FRB, but that doesn't make the practice itself evil in all scenarios.

It's like when people argue Marijuana souldn't be legal cause it's a gateway drug, even if it is, peole have a right to make shitty decisions

 

[LimitedGovernment]

Ok, that's fine, this is not what the debate is about.

The debate is not about whether FRB is good, Stable, Sound, desirable, etc.

The question is FRB fraud and should automatically be considered illegal or should a free market weed it out naturally, I'm of the latter opinion, which again would be a lot less problematic with COMPETING CURRENCIES. Right now with Monopoly money I totally see racket that is FRB, but that doesn't make the practice itself evil in all scenarios.

It's like when people argue Marijuana souldn't be legal cause it's a gateway drug, even if it is, peole have a right to make shitty decisions

FYI to all: Marijuana isn't a "gateway drug" in the old sense of the words. Using marijuana tends to put people in social circles with other people who also use other drugs. This might be changed if marijuana were legalized - yet another reason to make it so.

FYI, I've never smoked anything; I have no use stake in the issue.

 

[Seraphim]

Yes, essentially this.

If you park your savings, bank notes etc in a FRB you are essentially investing in their business model of lending. If they lend in a well levered manner and choose good, productive businesses to lend to, then the capital appreciation you received in interest is DESERVED. If you pick a bank that levers itself up to the eyes balls by choosing too many subprime borrowers (short term greed over long term rational investing) then you ALSO deserve to go bust because you fed that greedy beast.

Capital, the non coersed type, has a way of punishing the greedy and rewarding the virtuous. Always and forevermore.

In a market regulated environment (as opposed to government regulated) two primary things occur: enough rope is given to human beings to run free and prosper and ALSO hang themselves.

This way, you get the benefits of setting the good and creative free as well as the benefits of having the greedy pigs choke themselves.

Governments that used force/taxation/regulation to maintain a FRB system give the rope to the pigs, shackles to the debtors and then cut the pigs loose when they get tangled in their web of over leveraged deceit.

Under by strictly market consumers regulated FRB (i.e. free market FRB) either:

1) FRB defaults

2) FRB borrows from perhaps another FRB for a short term low yield loan until the FRB in trouble can unwind his assets and shore up his reserves

No new money is created in this process.

 

[thoughtomator]

The question is FRB fraud and should automatically be considered illegal or should a free market weed it out naturally

A free market would terminate FRB immediately and with extreme prejudice.

If you look into the history of FRB it is inextricable from central banking. You cannot plausibly consider FRB in the absence of central banking because no such thing exists, or has ever existed.

 

[teacherone]

Wow. people on thiso board are still arguing that a single bank can loan out 10 times its deposits.

This is completely erroneous. A bank must keep a percentage on reserve. That's why they're called reserves.

If the reserve rate is 10% percent and you deposit 10$ the bank keeps a dollar on reserve and loans out nine.

NOT 100.