Swiss vote to end fractional reserve banking

[Jean]

Maybe some of you know, but we (the swiss) are going to vote on abolishing fractional reserve banking on the 10th of june.
If I don't get any new information, I will vote yes. But I would be curious to ear what you think about it. I would be especialy curious to read an opinion from someone who knows switzerland and finance well, but as no current financial interest in it (mh mh, Jacob, cough cough).

here are a few link to read about it.


https://www.vollgeld-initiative.ch/english/

https://blogs.cfainstitute.org/investor ... e-banking/

The strongest argument for me, is the unfairness of the situation between those buying cash, and those able to create money. (like when you buy a house or land)

[jacob]

Wow! Traditionally money was the signal/nervous system of governing alongside with government edicts. It was changed from mining precious metals to reserve banking because economies grew to fast to match the mining output. Currently gold mining output is somewhere between stagnant at 0% or declining. It's really hard to find more gold because we, humans, already found everything there is to find. Basically we're breeding new humans faster than we can find new gold. The consequences are obvious?

So I see this as an attempt to go from a virtual reality that doesn't match reality to a reality that no longer exists. Ugh!

It's gonna fail. People prefer illusions as long as they're available.

The current beneficiaries are those benefiting from leverage. If you have more than $100k in the bank, check your mirror. You're it. This always ended in mean-reversion. The question is how. The last time we were at this level was the 1920/30s. That ended badly. The particular method depended on who you were and where you lived. One thing that's quite clear presently is that people have forgotten those lessons of history.

PS: FWIW, I do read German, so feel free to post links.

[BRUTE]

brute is against fractional reserve banking, certainly in its current form.
https://www.youtube.com/watch?v=UDLCa7maGZA

the swiss seem to have done well when they refused to join the Euro. why not this?

[Seppia]

The current beneficiaries are those benefiting from leverage. If you have more than $100k in the bank, check your mirror. You're it. This always ended in mean-reversion. The question is how. The last time we were at this level was the 1920/30s.

Would you mind elaborating a bit on that?
Most of the explanations for the Great Depression include too much easy money and over indebtness, which seem very common today too.
What I really do not like, especially for us Europeans, is that in case of a crisis, central banks and governments have very little room to help.

What concrete actions can be taken to protect oneself?

DW and I are doing some of the obvious stuff:

We have zero debt
We are trying to diversify our skills
We are trying to build a structure that can be sustained with low inputs (ie: buy a new, small place in cash with a minuscule plot of land attached, build a potentially car-free life)
We have a slightly larger than usual cash buffer
I am tilting my stock purchases towards anti cyclical sectors and companies with lower debt

Are there other actions that I am missing?

[Jean]

My mid term financial plan is to exchange my house for 15-30 hectares (35-70 acres) of woodland.

[jacob]

@Seppia - The Gini index is at a cycle high again (at least in the US). Last time it was this high was the 1920s. The Soviets sent wealthy people and professionals to the gulags. The Americans raised the capital gains tax. I'd expect a reaction somewhere in between. What can one do to avoid this?

[Seppia]

Moving somewhere with a lower gini index could be a solution. Starting to apply flag theory another. In a year or so I should be able to start working on the latter.

I am convinced taxes will have to be dramatically increased relatively soon to cover for the upcoming pension/retirement crisis.
In italy the option of a "patrimoniale" tax (meaning a one off tax on your financial assets) is often discussed, even if for now talks have never gotten serious.
In reality we do have one already*, but I suspect they imagine a much larger one



*we pay 0,2% every year on whatever financial asset we own

[RealPerson]

I am convinced taxes will have to be dramatically increased relatively soon to cover for the upcoming pension/retirement crisis.
In italy the option of a "patrimoniale" tax (meaning a one off tax on your financial assets) is often discussed, even if for now talks have never gotten serious.
In reality we do have one already*, but I suspect they imagine a much larger one

*we pay 0,2% every year on whatever financial asset we own

Then again, my understanding is that Italy's new government is planning to blow off the EU's austerity requirements. Maybe less taxes in your future?

[Seppia]

In Italy, breaking past budgetary constraints always comes in the form of government overspend, never lower taxation.

The one thing past governments kinda fixed was the retirement system, where payouts for the individual are now* based on the amount that he/she contributed, and retirement age has been postponed.

They say this new government is willing to roll this reform back, giving more benefits and anticipating retirement age.

Regardless of what may happen, nobody can win a war with math, and the math with some retirement systems just doesn't work.
The Calpers situation for example is so absurd it would be laughable if not for its dramatic implications.
They are ridiculously underfunded even with their completely unrealistic assumptions about future returns (I think they built in 7% forward returns - keep in mind a lot of their money has to be in bonds so to get a 7% average they need to get double digit numbers on the rest)
Same for the NJ pensions.

Politicians know, everybody knows (it's basic math) yet nobody does anything because no politician wants to be the one to go tell thousands of voters "you know what? we can't keep our promises".
So they will kick the can down the road up until the moment it will hit them in the face

I would assume it's the same or worse in many european countries, only we don't know about it because the data is hidden / there's nobody actually analyzing it

*since the "Fornero" reform

[RealPerson]

Politicians know, everybody knows (it's basic math) yet nobody does anything because no politician wants to be the one to go tell thousands of voters "you know what? we can't keep our promises".
So they will kick the can down the road up until the moment it will hit them in the face

Everybody knows, except voters who a) don't pay attention because they are too busy watching tv, b) don't understand math or finances c) believe that magical solutions such as Trump or some other deus ex machina will solve this mess.

As a side note hijack: when I talk to friends about climate change issues, the answer I always hear is that "technology will fix this". Just recently, a friend told me that the predictions of mass starvation with a world population of 7 billion were all wrong. Not a word about top soil erosion, depletion of essentially irreplaceable water sources such as aquifers, the need for ever increasing genetic modification to make this all happen, etc. We are borrowing from the future in more ways than just financially. These are intelligent, highly educated friends. I would hate to know what the average uneducated voter thinks....

Back to regular programming: if there is no fractional reserve banking, where would entrepreneurs (and consumers!) go to obtain financing for their projects/purchases? It seems to me that growth would be drastically reduced in such a system. I may just be ignorant about this.

[jacob]

Back to regular programming: if there is no fractional reserve banking, where would entrepreneurs (and consumers!) go to obtain financing for their projects/purchases? It seems to me that growth would be drastically reduced in such a system. I may just be ignorant about this.

They would go to the bank, lenders, investors (pension funds, p2p, corporate bonds, ...) just like they do now. The only difference is that the bank would only be allowed to lend out what has been lent in. Bank depositors would probably tick a box and sign a disclaimer (in return for a slightly better rate) that allowed the bank to lend out their deposits. (A similar thing already happens for your shares if you invest with a broker. It's covered in the fine print.)

W/o reserve banking, banks would not be able to expand and contract the money supply. This would have to be done via another mechanism. If gold was used, it would have to be mined or plundered. With bitcoin, it would have to be mined and paid for by expanding the electricity supply. In a secularly growing economy, the money supply tends to expand. Were it to contract or not keep up, the demand for money would outstrip supply and you'd have deflation as people start selling stuff or invest in power plants or mines to create more bitcoin or gold to raise money that they might need for taxes, etc. Deflation would put a damper on the economic churn since you can sit and wait to buy later to get it cheaper. This would be good for consumers and the environment. Obviously not good for producers or government or anyone who relies on debt-financing.

[Kriegsspiel]

They would go to the bank, lenders, investors (pension funds, p2p, corporate bonds, ...) just like they do now. The only difference is that the bank would only be allowed to lend out what has been lent in. Bank depositors would probably tick a box and sign a disclaimer (in return for a slightly better rate) that allowed the bank to lend out their deposits. (A similar thing already happens for your shares if you invest with a broker. It's covered in the fine print.)

Why would a bank give you any interest at all if they couldn't lend out your deposits? I'd assume if banks can't lend out your deposits, they're worse than useless to them and they wouldn't pay you interest. Wouldn't it make more sense that you would have to pay the bank to keep your money safe for you, but they'd pay you if you let them lend it out (with the accompanying risk of loss)?

[RealPerson]

Are there any examples of a modern industrialized economy where fractional reserve banking is NOT in use?

People who put significant amounts of money in a bank are probably risk averse to begin with, therefore not so likely to check off the "lend my money to some risky business" box. I imagine that this would greatly reduce the overall supply of credit, would it not?

Plus, if loans are written by pension funds, investment firms, etc., isn't that just as risky for the economy as the banks doing it? It is the same function of aggregating funds in some manner and lending it to those who need credit. I don't really see why lending by large financial firms of some type or another is inherently safer than if banks do it. It seems to me that the quality of underwriting lending is the critical part, not which large firm does the lending.

[jacob]

@Kriegsspiel - Right. Is that not what I said?/Did I say anything that contradicted that?

@RealPerson - Not as far as I know, but there are banks which do not partake in reserve banking. Those are very solid.

Whether loans are risky or no is a separate matter from whether you can use reserve banking to expand/contract the currency (most importantly, the part of the currency that's circulating) or not.

[Kriegsspiel]

You said 'better' rate... Anything is better than 0, but I wondered if you had a reason they'd get 'any' rate.

[BlueNote]

How does a country operationalize an end to fractional reserve banking without causing an enormous depression? Do the banks have to call most of the loans in or do they just let old loans run their course and not allow new loans. Just wondering how they expect this to play out if it gets legalized.

[trfie]

There is no necessary reason for fractional reserve banking. Individual banks do not need to expand and contract the money supply, central banks can do it. Fractional reserve banking benefits those who get access to the expanded money supply first. Because with their spending, it drives up prices. While that new money is percolating through the economy, the ones who get access to it later experience the higher prices first.
Deflation is considered to be very bad for the economy because historically it has been associated with negative economic outcomes, but that is due to other economic factors. The economy may be built on consumption now, but obviously EREers do not partake in this worldview. Most of the products created in the consumption-driven economy go into landfills after a few years. Decreasing consumption is not a bad thing. But take a look at industries in which technology has caused deflation - computers, cell phones, airlines, etc. No one is concerned about the negative impacts of these. If the money supply did not expand with the increased economic output, the resulting deflation is not necessarily bad. Everyone likes the lower prices and improvements in technology with computers.

I imagine that the monetary system in Switzerland would be more stable after fractional-reserve banking was ended. Many financial interventions which seem to increase stability actually decrease it. Eg, look at FDIC insurance and the equivalents. An academic paper analyzing all the instances of such insurance, absence of insurance, and looking at when it was implemented, found that the countries and time periods with FDIC insurance had more financial panics and crashes than those without it, and the finding was statistically significant. Fractional-reserve banking causes expansions and contractions in the money supply (as money is created and destroyed) which naturally creates more volatility.

[trfie]

How does a country operationalize an end to fractional reserve banking without causing an enormous depression? Do the banks have to call most of the loans in or do they just let old loans run their course and not allow new loans. Just wondering how they expect this to play out if it gets legalized.

Ending fractional-reserve banking would not end loans. Loans happened for thousands of years before fractional-reserve banking.
To end it, they would not call in loans associated with newly-created money, that would cause a sure-fire recession. As those specific loans are repaid, it would slowly end the fractional-reserve system.

Banks would know how much they need to keep in reserves for day-to-day and month-to-month expenses. In addition, public confidence in banks is higher without fractional-reserve, so the chance of a bank run is lower.

[BlueNote]

Ending fractional-reserve banking would not end loans. Loans happened for thousands of years before fractional-reserve banking.

Wouldn't there be a huge decrease in the money supply because banks wouldn't be loaning out as much money? I am assuming that there would be a decrease in loans and/or increase in interest rates to support loans from non-banks. Either way that's going to slow the economic machine down unless some other method is employed of putting money into the economy to compensate.

[BRUTE]

there would likely be a huge decrease in the money supply.

but the economy doesn't run on "more money" - any quantity of money above a certain minimum is enough. as a thought experiment, what if BlueNote secretly doubled every Swiss citizen's money over night? would the economy suddenly run twice as fast? no, prices would simply double and nothing would change.

the argument for why inflation is supposedly good for the economy that Keynesians bring forth is that saving is bad and consumption is good for the economy, because the economy runs on consumption. inflation devalues money, so rational humans will spend it and consume more, which is therefore good for the economy.

brute does not subscribe to the idea that consumption is what is good for the economy, but that saving leads to investments which are good for productivity which is good for the economy.

so brute believes that if this deflationary end of FRB is put into place in a controlled manner, it would not impact the economy negatively, and even make it more stable.