Keynesian: Wikipedia definition of Fractional Reserve Banking is misleading

[StilesBC]

The way I thought the 9:1 ratio worked was Customer A deposits $100 then the bank can loan $900 (out of thin air) to Customer B. The original $100 stays in the bank which is why Customer A can always withdraw it at any time.

No. This confusion comes from people that only look at the balance sheet and see the leverage. They then conclude, erroneously, that is how it works. Read the article I referenced above.

 

[scooter]

This topic has been done a hundred times, but it's interesting to talk about so I always chime in. These people who whine about fractional reserve banking are really wasting their time. There has never been a full reserve system ever and there never will be. Full reserves are if you take your own money and store it somewhere yourself. Even the sheep who have no clue how banking works are smart enough to know that a bank loans out their money while they're not using it.

You are pointing your anger in the wrong direction. Fractional reserve banking has its risks, and it has its positive sides. But the fact of the matter is that any inflation generated by it is temporary in nature. As a loan gets paid off, the money is returned to the bank. In the intermediate term, there is supposed to be an asset that backs the loan that will protect the depositors money. Sure, the money can be expanded to 9 times if it went completely through the loan mechanism, but there would also be 9 times the assets attached to the banking system's books. There would be that many houses, or cars, or whatever that the bank has a lean on rather than just holding the original depositor's cash.

Where the banking system goes wrong is when the criminals get greedy and start taking shortcuts. They make too many risky bets with their depositors money or lay out a bunch of money with unsecured or low secured debt. Perhaps the reserves could be higher, or we could go back to a system where banks could only do specific things with the deposit money, but in the end the practice of loaning that money out is not wrong at all. In fact, it is the PURPOSE of a bank existing. If you really have a problem with it, go exchange your money for some hard asset and store it yourself, and be prepared to take on the risks of doing such a thing.

Too many of the noobs get on here and start wondering about fractional reserve banking because they've watched so many retarded films like Money as Debt and believe that this conspiracy drabble is the real way it works.

The money system is screwed up, for sure. But it is being screwed by the government and its far-reaching hand, not by the market and its method of banking which has existed for thousands of years and has been implemented freely by the open market.

 

[RCA]

It appears that the comments to this thread are split down the middle in regards to for/against fractional reserve banking and as to how it actually works. Interesting.

 

[danberkeley]

It appears that the comments to this thread are split down the middle in regards to for/against fractional reserve banking and as to how it actually works. Interesting.

In other words, some people are for fraud (for FRB) and some of us are against fraud (against FRB).

 

[gilliganscorner]

This topic has been done a hundred times, but it's interesting to talk about so I always chime in. These people who whine about fractional reserve banking are really wasting their time. There has never been a full reserve system ever and there never will be. Full reserves are if you take your own money and store it somewhere yourself. Even the sheep who have no clue how banking works are smart enough to know that a bank loans out their money while they're not using it.

What is the primary source of confusion about fractional reserve is muddled in the fungibility of money with property ownership.

• If you deposit a work of art for safekeeping (paying a fee of course) in a secure warehouse, and you come back in 1 years time to retrieve it, you would, quite rightly cry "Foul!" if the owners of the warehouse either (a) tried to give you a different piece of art or (b) were not able to produce the chair as agreed. The courts would agree with you.
  
• If you were a farmer, and deposited 100 bushels of wheat at an agreed upon quality at the grainery in return for receipts equal to 100 bushels of wheat with said specified quality. If you (a) saved those receipts to cash in wintertime or (b) traded those receipts in whatever denomination to others for the acquisition of others goods, you would, quite rightly, cry "Foul!" if you attempt to redeem those receipts if (a) the grainery did not return the wheat at all or (b) attempted to redeem your receipts in wheat of inferior quality. Again, the courts would agree with you. It was termed "abailment".

In the above cases, if the warehouse/grainery or any other entity entrusted to safeguard your property either redeemed your receipts or defaulted/repudiated on returning property to you or any other Customers, you would cry "Thief!" and the courts would agree with you.

When it comes to money, property ownership concepts are muddled, possibly (I might come to that later as to why) because of the fungibility (interchangeability) of it. Since money is a universal intermediary of exchange, if you deposit $100 (your property) at a bank, you do so with the expectation that you can retrieve your $100 within the duration you and the bank agree on, either (a) at any time (demand deposit) or (b) at a specified time interval i.e. in 1 years time (term deposit). Term deposits typically have higher interest charges on them than demand deposits as a mechanism to reward the depositor for allowing the bank to use their money (property) for the duration of the term. Theoretically, the money in a demand deposit should be payable to the borrower at any time (although if you look at your agreement with the bank, it reserves the right to take up to N days to redeem your money).

This is where it gets interesting.

If the bank cannot return its money to you when you want it as a result of them making bad loans or hyper extending itself somehow, and breached the terms of its contract with you (i.e. after N+1 days it still cannot redeem your money, you cry "Thief!" as your property has been stolen. With fiat money, a central bank, and the government (i.e. the taxpayers) instituting the FDIC to bail out the bank, this is not likely to happen as fiat money can always be printed and loaned to the banks to return your money. This in of itself creates a MASSIVE moral hazard where banks are encouraged to approach the maximum loan creation to the federally mandated fractional reserve ratios.

As the banks benefit from fractional reserve banking, your money (property) is affected in a different way. When times are good and loan demand is high, all this new loan money is added to the economy causing inflation. Inflation does not hit all sectors equally, at the same time, and at the same rate. It takes a while for it to ripple out into the economy. This causes the money you had on deposit at the bank to lose its purchasing power, unless your interest rate on your account equals the rate of inflation. My demand deposit pays out 0.25% per year. Inflation is running at, according to official statistics (YMMV) between 2-3% depending on your personal basket of goods. The purchasing power of my dollar is falling when I leave it in the bank. Where is it going? It goes to the central bank/banking cartel who print the new money into circulation, diluting the old money already in circulation.

In otherwords, although I get my $100 back sometime later, the purchasing power, the very property of my money I value it for, has been taken from me. As you know, this is something not 1 in 100,000 people understand. They are satisfied as they think they have their property returned to them in the same condition they entrusted it with - the bank. It clearly is not. Oh, you may argue it is a very small amount if I deposit it on day 1 and take it out on day 14, but add that up for every deposit in every bank....

Another way to think of fractional reserve banking and whether or not it is fraud is to use this analogy:

Let's suppose I worked for you and I knew that you kept a petty cash drawer with $1000.00 in it. Furthermore, I knew that you only inventoried that drawer once a month and did not use the cash.

I took it.

I blew it on the racetrack, and won $5000.00. Woo hoo! On the last day of the month, I sneak back into your office and replace the $1000.00. The next day, you check it as usual, see it is fully accounted for, and are none the wiser.

I do it again.

This time I lose $5000.00. Uh oh. I panic. I can't pay you back. I don't have anyone I can borrow it from like a central bank, another bank who will lend to me, and I can't force my relatives to give it to me (the FDIC).

You catch me and are FURIOUS. You fire me and report me to the police.

My question to you is this, "At what point in time did the theft take place. The moment I took the money (property) or the moment I was caught?"

You are pointing your anger in the wrong direction. Fractional reserve banking has its risks, and it has its positive sides. But the fact of the matter is that any inflation generated by it is temporary in nature. As a loan gets paid off, the money is returned to the bank.

The principle PLUS the interest is returned to the bank, actually creating a deficit in the money supply. The interest had to be paid back with the principle of ANOTHER loan created AFTER yours which has interest attached to that. This is why we have a spiralling debt problem. All fiat money is backed debt. 3% is in the form of Federal Reserve Loyalty or Permission to Live Points (sometimes called dollars) and the other 97% is bank credit created from thin air via the loan process. Should our money be privatized? Is it right for the private banking industry to require all other sectors depending on its manufacturing of debt-based money to require infinite economic growth (i.e. the rate and quantity of new loans must be greater that the rate of the quantity of old loans (principle PLUS interest) being retired or the dollar will collapse in hyper-deflation - Rome would burn.)? If I were evil I would say, "Fuck owning bank stocks, how do I get to be a bank?".

In the intermediate term, there is supposed to be an asset that backs the loan that will protect the depositors money. Sure, the money can be expanded to 9 times if it went completely through the loan mechanism, but there would also be 9 times the assets attached to the banking system's books. There would be that many houses, or cars, or whatever that the bank has a lean on rather than just holding the original depositor's cash.

And the value of those assets are static? Would you like the ability to print out money in your basement to people that asked you to monetize their assets? Would those people be quite so thankful to you if they knew that you sacrificed nothing to front the money other than a trivial costs of administrating the loan? Would those people coming to you be quite so happy that the inflation you create is putting the cost of housing further and further out of their reach requiring them to work more and more, just cuz you have the legal privilege of counterfeiting money, licensed to you by a monopoly on violence, their government?

Where the banking system goes wrong is when the criminals get greedy and start taking shortcuts. They make too many risky bets with their depositors money or lay out a bunch of money with unsecured or low secured debt.

If I were a banker and I knew I had a 5% of making $100M dollars on a transaction but had a 95% chance of losing $1B dollars on the same transaction, BUT I could count on a central bank and the FDIC to bail me out, what would I choose to do?

Picture this.

I am at a circus watching a tightrope act. However, there is an obstruction blocking me from seeing further than 10 feet below the wire.

The act commences. At some points on the wire, the tightrope artist does amzing flips, somersaults, pirouettes and other manoeuvres that makes the audience gasp. On other points of the wire, the tightrope artist is cautious and conservative.

The act ends. To make way for the next act, the obstruction in front of you is removed. You now see the safety nets that were below the wire and places where their were none. Where their wasn't any, that corresponds to the exact points where the artist was conservative and where the nets were corresponds to the exact points where s/he was risky.

The central bank, fiat money that can be printed at will, and taxpayers on the hook to provide the bailouts through various mechanisms creates the environment of corresponding risk.

Perhaps the reserves could be higher, or we could go back to a system where banks could only do specific things with the deposit money, but in the end the practice of loaning that money out is not wrong at all. In fact, it is the PURPOSE of a bank existing. If you really have a problem with it, go exchange your money for some hard asset and store it yourself, and be prepared to take on the risks of doing such a thing.

The central bank cartelized all other banks into implementing the fractional reserve banking model. Taxes and legal tender laws make gold or silver used as money impractical/illegal. In a free market, what would banking look like? I don't have the answer to that, as there is no true free market I can point to for examples. However, you might, on one end of the spectrum have a 100% reserve ratio warehouse banks that stores gold and silver and depositors pay a storage fee to the bank and deal with each other exchanging receipts (ownership of property) with each other and boycott Federal Reserve Points. They can't do that as all exchanges have to be valued in Federal Reserve Points for taxation purposes, and all taxes have to be paid in FRPs, creating an artificial demand for FRPs. On the other end of the spectrum, you might have a bank that practises some form of fractional reserve banking with full risks disclosed (via ratings companies that might spring into existence ranking banks solvency/prudence) and interest paid out accordingly.

Too many of the noobs get on here and start wondering about fractional reserve banking because they've watched so many retarded films like Money as Debt and believe that this conspiracy drabble is the real way it works.

It's good to see those "noobs" willing to learn it. They sure have been exposed to a lifetime of coincidence drabble.

The money system is screwed up, for sure. But it is being screwed by the government and its far-reaching hand, not by the market and its method of banking which has existed for thousands of years and has been implemented freely by the open market.

We don't have a free and open market. A central bank and a free market are opposite ideas. In a true free market, what would give Federal Reserve Points any value at all? If I opened Gilligan's Money Printers shop and printed off pretty pieces of paper with different inks and designs on them indicating varying denominations, and told everyone to use them, what would happen? They'd laugh me out of town. However, if I was the guy in town with the biggest guns and told everyone you had to pay protection money (taxes) to me in my form of money or else, what would happen? Once I have a monopoly on violence and eliminate all my competition, I could pull it off ... like the government did.

A free market would only use commodity based money which evolved in MANY forms over time but generalized in gold and silver, although in a free market, people can make exchanges in whatever they wish, as gold and silver met a number of desirable characteristics (portability, durability, fungibility, divisibility, etc).

Sorry about the length.