[Video] Fractional Reserve Banking is NOT Fraud

[jmdrake]

I'm not sure you're actually talking about fractional reserve banking. It's one thing if the bank lends out my 10 dollars. I could have done that. The issue is when the bank has my 10 dollars and lends out 100 dollars. My understanding is that's why it's called "fractional reserves" because they only have a fraction (in this case 1/10th) of reserves to cover liabilities. What am I missing?

 

[LimitedGovernment]

I'm not sure you're actually talking about fractional reserve banking. It's one thing if the bank lends out my 10 dollars. I could have done that. The issue is when the bank has my 10 dollars and lends out 100 dollars. My understanding is that's why it's called "fractional reserves" because they only have a fraction (in this case 1/10th) of reserves to cover liabilities. What am I missing?

As I understand it:

You're missing the difference between banks using currently in-use funds versus printing new money for use.

Consider a "gold only" nation. A person can give ten gold coins to the bank. If the bank uses fractional reserves, it can loan out a percentage of those ten coins (say 7) and keep them in circulation - thus only having 3 in the bank's vault that it could give back to you immediately if you wanted to withdraw your 10 coins.

FRB works because not everyone goes to the bank to ask for their coins back immediately.

To not use an FRB standard, the bank would have to raise money before making loans.

 

[AlexMerced]

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%)

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

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


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

If the reserve requirement was 50% like Reg T for securities

Each $1 would become $2

Much of the 1800 the normal amount of reserves bank was generally in the 30s but this was a result of the instability from Unit Banking.

If you had multiple currencies, stability of value would be part of what makes a certain currency valuable, so the issuer would have an incentive to manage the stability of their product.

 

[jmdrake]

As I understand it:

You're missing the difference between banks using currently in-use funds versus printing new money for use.

Consider a "gold only" nation. A person can give ten gold coins to the bank. If the bank uses fractional reserves, it can loan out a percentage of those ten coins (say 7) and keep them in circulation - thus only having 3 in the bank's vault that it could give back to you immediately if you wanted to withdraw your 10 coins.

FRB works because not everyone goes to the bank to ask for their coins back immediately.

To not use an FRB standard, the bank would have to raise money before making loans.

But we don't live in a gold only nation. Let's say a nation without a central bank had a bank that had 10 gold coins in it, then lent out "bank notes". It lent out 100 "bank notes" for the 10 gold coins. As long as everyone is happy trading bank notes everything is cool. But then if people decide "I really want gold"....?

 

[AlexMerced]

As I understand it:

You're missing the difference between banks using currently in-use funds versus printing new money for use.

Consider a "gold only" nation. A person can give ten gold coins to the bank. If the bank uses fractional reserves, it can loan out a percentage of those ten coins (say 7) and keep them in circulation - thus only having 3 in the bank's vault that it could give back to you immediately if you wanted to withdraw your 10 coins.

FRB works because not everyone goes to the bank to ask for their coins back immediately.

To not use an FRB standard, the bank would have to raise money before making loans.

FRB works when a Bank is good at matching up the deposits from someone with a low time preference ad lends it to someone with a high time preference, which incetivizes banks to learn more about these arrangements.

I'm not saying this the ideal or only possible system, I'm sure if we got of the dichotomy of FRB vs 100% reserve we could actually think of plenty of alternatives that have their own benefits and costs, but we're stuck acting like their is only two choices.

In my opinion, soon enough banking will become peer to peer like file sharing and most everything latley, rending the old middleman way of doing thing irrelevant.

It's already started with Prosper.com

 

[thoughtomator]

Again confusing central banking with FRB.

Not at all. Fractional reserve banking is a naked short on the currency, and naked shorting is a fraudulent act.

 

[LimitedGovernment]

But we don't live in a gold only nation. Let's say a nation without a central bank had a bank that had 10 gold coins in it, then lent out "bank notes". It lent out 100 "bank notes" for the 10 gold coins. As long as everyone is happy trading bank notes everything is cool. But then if people decide "I really want gold"....?

But that wouldn't just be FRB. That's be printing new currency + FRB.

Here's what happens with plain FRB on a set monetary amount: http://en.wikipedia.org/wiki/Fractional_reserve_banking#Money_creation

 

[jmdrake]

Except that's not what's happening. Banks aren't lending out a fraction of the 10 dollars you gave them. They're lending out 10 times that amount. Now they can do that thanks to a central bank. But they could do that anyway if people were willing to accept the bank's IOUs and trade them as "money". It would work as long as nobody tried to cash in the IOUs. So under that scenario, fraud or not?

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%)

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

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


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

If the reserve requirement was 50% like Reg T for securities

Each $1 would become $2

Much of the 1800 the normal amount of reserves bank was generally in the 30s but this was a result of the instability from Unit Banking.

If you had multiple currencies, stability of value would be part of what makes a certain currency valuable, so the issuer would have an incentive to manage the stability of their product.

 

[LimitedGovernment]

FRB works when a Bank is good at matching up the deposits from someone with a low time preference ad lends it to someone with a high time preference, which incetivizes banks to learn more about these arrangements.

I'm not saying this the ideal or only possible system, I'm sure if we got of the dichotomy of FRB vs 100% reserve we could actually think of plenty of alternatives that have their own benefits and costs, but we're stuck acting like their is only two choices.

In my opinion, soon enough banking will become peer to peer like file sharing and most everything latley, rending the old middleman way of doing thing irrelevant.

It's already started with Prosper.com

Thanks for the further clarification in text form, though you explained it in the video.

I'm definitely in favor of P2P and non-interest-based FRB practices with a high reserve requirement because of the minimized risk, but I wouldn't tell anyone that they couldn't use a low reserve requirement FRB system.

 

[jmdrake]

FRB works when a Bank is good at matching up the deposits from someone with a low time preference ad lends it to someone with a high time preference, which incetivizes banks to learn more about these arrangements.

I'm not saying this the ideal or only possible system, I'm sure if we got of the dichotomy of FRB vs 100% reserve we could actually think of plenty of alternatives that have their own benefits and costs, but we're stuck acting like their is only two choices.

In my opinion, soon enough banking will become peer to peer like file sharing and most everything latley, rending the old middleman way of doing thing irrelevant.

It's already started with Prosper.com

For the record I'm totally cool with Prosper, Kiva ect. In those cases it's totally transparent what's going on so there's no fraud.

 

[AlexMerced]

Not at all. Fractional reserve banking is a naked short on the currency, and naked shorting is a fraudulent act.

Nakeds Short Selling is fraudulent at the point where settlement comes and I have no securities, the laws have changed recently to tighten that but that's not neccessarily "free market"

Fractional Reserve Banking would not be Fraudulent till the point where a demand of deposits is made which can't be redeemed, but until then no fraud has occured.

For example, Check Kiting, Writing bad checks doesn't get you in trouble until one can't be cashed, same here.

 

[jmdrake]

Nakeds Short Selling is fraudulent at the point where settlement comes and I have no securities, the laws have changed recently to tighten that but that's not neccessarily "free market"

Fractional Reserve Banking would not be Fraudulent till the point where a demand of deposits is made which can't be redeemed, but until then no fraud has occured.

For example, Check Kiting, Writing bad checks doesn't get you in trouble until one can't be cashed, same here.

And counterfeiting doesn't get you in trouble until it does. Not sure if I'm following this line of your argument.

 

[thoughtomator]

Nakeds Short Selling is fraudulent at the point where settlement comes and I have no securities

No it isn't. Naked short selling, like embezzlement, is fraudulent the moment it occurs, not at the moment it is discovered. Hiding the fraud does not displace the act in time.

 

[AlexMerced]

And counterfeiting doesn't get you in trouble until it does. Not sure if I'm following this line of your argument.

My argument is the action is not a fraud until one of two things occur:

1) You enter a contract with no intention of honoring it

or

2) You are not able to meet that obligation


So again if I write a bad check knowing full well it will bounce, fraud

If I Write a check and it bounces, I can be in trouble, but a bank doesn't take action against every check bouncer

Same goes for short selling, most of the time you given time to honor your contract after the initial failure

Plus the counter party risk is the reason things like Clearing Agents exist and Deposit Insurance exist which in a free market would price the risk and would voluntarily act as a control on much of this behavior.

 

[row333au]

deleted re-post else where

 

[thoughtomator]

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

 

[The Gold Standard]

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.

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.

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.

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.

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.

 

[heavenlyboy34]

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

So is 100% reserve banking

+ FRB is deceptive

Only to those who are poor consumers and don't read the readily available information (made available by the bank and by 3rd parties)

+ FRB is for the personal gain of the lenders

So? Rational self interest and profit from providing a service are not bad.

= FRB is fraud

False


As I've said repeatedly, a bank is not a safe deposit box. No reasonable man (the "reasonable man" is a very old and well-known legal doctrine) would treat it as such.

 

[Travlyr]

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?

 

[LimitedGovernment]

For the record I'm totally cool with Prosper, Kiva ect. In those cases it's totally transparent what's going on so there's no fraud.

Actually, that isn't true. Kiva tends to represent itself as making loans directly, but that's not how it operates. It actually makes loans in advance and uses funds from new "loaners" to cover its processes. There are good reasons for doing so - all of which are related to temporal issues. (Here's an old story about it: http://www.nytimes.com/2009/11/09/business/global/09kiva.html )

In other words, Kiva is just as deceptive as banks who try to represent themselves as not using FRB when they actually do (even if the fine print makes the facts clear).

To clarify, I'm not saying that FRB is a fraudulent practice. I'm saying that hiding the fact that a bank uses FRB would be.

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?

I wouldn't.