Swiss vote to end fractional reserve banking

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suomalainen
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Re: Swiss vote to end fractional reserve banking

Post by suomalainen »

BRUTE wrote:
Fri Jun 08, 2018 11:30 am
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.
Isn't this idea of "good for the economy" pretty narrow? Basically in either case (consumption vs saving), the desired goodness is more consumption? More consumption equals more consumption on the one hand, but doesn't more productivity also equal more consumption? Else why produce more? For it to rot on the docks?

Maybe I don't really get the Keynesian vs supply side nuances, but to me they're really the same (more consumption!) with an expressed preference for what group should obtain the benefits of said increased consumption.

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Re: Swiss vote to end fractional reserve banking

Post by jacob »

Consumption and production exist in pairs. There's no having one without having the other lest you stock up excess production in a warehouse (full of overproduced shoes?).

Fiddling with the money system essentially tweaks the flows in an economy. It's not really any different than taking drugs. It alters the pathways benefiting some bodyparts while hurting other bodyparts.

Arguments over interest rates essentially have to do with which bodyparts should benefit at the expense of others.

If exponential growth of the total size of the economy is desired, it would seem that inflation on the consumer side is desired. This way consumers try to buy as much as they possibly can and as soon as they can do it. The only way for producers to get at this money would be to produce accordingly. If producers could actually hold monopolies, they could hold off on supply and drive higher prices that way. But monopolies are illegal.

trfie
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Re: Swiss vote to end fractional reserve banking

Post by trfie »

BlueNote wrote:
Fri Jun 08, 2018 5:54 am
trfie wrote:
Thu Jun 07, 2018 7:24 pm


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.
No. I am not sure why you are conflating fractional reserve banking with the money supply. Central banks can, and have, printed out as much money as they want. So there does not have to be a decrease in the money supply. If you believe that fractional reserve banking causes an increase in the money supply, then you must also believe that fractional reserve banking causes a DECREASE in the money supply. Because when loans are repaid, the money that was created before gets destroyed, causing an actual decrease in the money supply. Fractional-reserve banking has no net effect on the money supply.

Central banks use a variety of mechanisms to control the money supply, including setting interest rates and open-market operations.

trfie agrees with brute's analysis.

BlueNote
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Re: Swiss vote to end fractional reserve banking

Post by BlueNote »

trfie wrote:
Thu Jun 07, 2018 7:24 pm



Fractional-reserve banking has no net effect on the money supply.

Fractional reserve banking has a large effect on the money supply.

Most of the mathematical support is in this wikipedia entry: https://en.wikipedia.org/wiki/Money_multiplier

In particular the table showing the re-lending process is quite easy to understand and educational.

BRUTE
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Re: Swiss vote to end fractional reserve banking

Post by BRUTE »

suomalainen wrote:
Fri Jun 08, 2018 1:25 pm
More consumption equals more consumption on the one hand, but doesn't more productivity also equal more consumption?
or just work less/with fewer inputs. higher productivity * fewer inputs = same outcome.
suomalainen wrote:
Fri Jun 08, 2018 1:25 pm
Maybe I don't really get the Keynesian vs supply side nuances
for the record, brute is not a supply-sider (Chicago School), but an Austrian. the Austrian view is to leave the money supply alone and to the market.

BRUTE
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Re: Swiss vote to end fractional reserve banking

Post by BRUTE »

trfie wrote:
Fri Jun 08, 2018 3:25 pm
If you believe that fractional reserve banking causes an increase in the money supply, then you must also believe that fractional reserve banking causes a DECREASE in the money supply. Because when loans are repaid, the money that was created before gets destroyed, causing an actual decrease in the money supply. Fractional-reserve banking has no net effect on the money supply.
the way most modern central banks "print" money is actually a pull-based "printing" of credit via FRB. so to print money, they need consumption to increase credit and therefore money supply expansion.

yes, this also means that if all loans got repaid at the same time, the supply of money would shrink back down. of course the goal is to have an ever-expanding credit bubble, because that will solve the problem once and for all.

BlueNote
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Re: Swiss vote to end fractional reserve banking

Post by BlueNote »

BRUTE wrote:
Fri Jun 08, 2018 11:30 am

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.

Secretly doubling the money supply overnight is probably not a good example. It's really dependent on the state of the underlying economy.If I increased the money supply overnight and we were in a depression (lot's of unemployment, over supply of productive resources etc.) then I think that might actually be a benefit, as long as it was a controlled release.

FRB is a core part of any modern economy and I predict that eliminating it ,without a compensating mechanism in place, would cause a huge decrease in the availability of credit and as a result the multiplier effect would ripple throughout society causing enormous economic hardship. I would predict bank runs, massive bankruptcies, massive poverty and political upheaval.

I honestly don't see why people are so upset about FRB anyways, regulate the banks and the risks are minimal, just look at Canadian banks (heavily regulated) vs. US banks (less heavily regulated) during the last recession. Banks should be boring conservatively run institutions and should be regulated in exchange for the privilege of being able to participate in FRB. I don't think elimination of FRB is the path to a less consumer oriented society, that's probably not something economics alone can achieve.

BRUTE
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Re: Swiss vote to end fractional reserve banking

Post by BRUTE »

BlueNote wrote:
Sat Jun 09, 2018 9:23 am
If I increased the money supply overnight and we were in a depression (lot's of unemployment, over supply of productive resources etc.) then I think that might actually be a benefit, as long as it was a controlled release.
money is just a coupon to get real stuff. if all humans suddenly got 2x the coupons, and they all knew about it at the same time, wouldn't it be pretty obvious that there was no more stuff than before, and they'd all just demand 2x the coupons for the same stuff?

that inflation helps in a depression is of course the Keynesian case, but brute hasn't actually heard a good argument for it. the typical argument is that there is a "multiplier effect", because consumers really want to buy stuff, and producers really want to sell stuff, but they're both a bit shy. so by increasing the money supply (and of course not doubling it for all humans over night), humans get the illusion that they have coupons to more stuff, spending it, before prices rise to match the newly increased supply of money.

brute finds this pretty spurious, and even if it were true, not a tradeoff worth making. because the new riches are just an illusion, and they heavily benefit those who receive the new money first, before prices have adjusted. in a FRB system, those are commercial banks.
BlueNote wrote:
Sat Jun 09, 2018 9:23 am
I honestly don't see why people are so upset about FRB anyways
because of the aforementioned Cantillon effect, FRB facilitates a constant wealth transfer from those who receive newly created money last, to those who received it first. i.e. from wage earners and poor saps to bankers.

in addition, after a theory from Mises' The Theory of Money and Credit, FRB causes misallocation of resources, because humans are constantly misled about the value of their money-coupons. this leads to misallocation of resources, e.g. building too many sports cars and luxury condos that bankers buy, and McMansions, and not enough things that poor humans want to buy. this causes constant bubbles, because humans eventually do realize they've been allocating resources incorrectly.

the Austrian thought is that, without fractional reserve banking, the economy would be much more stable, and grow just as fast. just without the exaggerated boom and bust cycle.

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Re: Swiss vote to end fractional reserve banking

Post by jacob »

The vote was 76% against ending it.

trfie
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Re: Swiss vote to end fractional reserve banking

Post by trfie »

BlueNote wrote:
Fri Jun 08, 2018 9:34 pm
trfie wrote:
Thu Jun 07, 2018 7:24 pm



Fractional-reserve banking has no net effect on the money supply.

Fractional reserve banking has a large effect on the money supply.

Most of the mathematical support is in this wikipedia entry: https://en.wikipedia.org/wiki/Money_multiplier

In particular the table showing the re-lending process is quite easy to understand and educational.
No, that is incorrect. Of course FRB causes an increase in the money supply initially, because the definition of FRB is to create new money from existing money. But when that same loan is repaid, the extra money is destroyed, and the money supply decreases.

I have looked at the mathematics of FRB and the money multiplier. Quoting from the wikipedia article that you cite, the money multiplier "measures an estimate of the maximum amount of commercial bank money that can be created, given a certain amount of central bank money". The money supply doe NOT increase indefinitely in a FRB system with a fixed base, even as the money is loaned out, redeposited in other banks, and new money is created from that.
Last edited by trfie on Mon Jun 11, 2018 12:13 pm, edited 1 time in total.

trfie
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Re: Swiss vote to end fractional reserve banking

Post by trfie »

BRUTE wrote:
Fri Jun 08, 2018 11:12 pm

the way most modern central banks "print" money is actually a pull-based "printing" of credit via FRB. so to print money, they need consumption to increase credit and therefore money supply expansion.
I am not sure what you mean here, of course if a central bank loans or otherwise transfers money to a bank, the money supply will temporarily but initially increase based on the MM and FRB. But if they made a loan or otherwise transferred money to bank, the money supply increases even without FRB.

trfie
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Re: Swiss vote to end fractional reserve banking

Post by trfie »

BlueNote wrote:
Sat Jun 09, 2018 9:23 am
FRB is a core part of any modern economy and I predict that eliminating it ,without a compensating mechanism in place, would cause a huge decrease in the availability of credit and as a result the multiplier effect would ripple throughout society causing enormous economic hardship. I would predict bank runs, massive bankruptcies, massive poverty and political upheaval.

I honestly don't see why people are so upset about FRB anyways, regulate the banks and the risks are minimal, just look at Canadian banks (heavily regulated) vs. US banks (less heavily regulated) during the last recession. Banks should be boring conservatively run institutions and should be regulated in exchange for the privilege of being able to participate in FRB. I don't think elimination of FRB is the path to a less consumer oriented society, that's probably not something economics alone can achieve.
I predict that the financial system is much more stable without FRB. You have not given any reason at all for why there would be decreased availability of credit when the central bank can literally print out (although it is mainly done electronically) as much money as it wants and transfer them to banks. Plus interest rates can be adjusted to encourage lending.

Bank runs can easily be avoided in a system without FRB. All that needs to be done is to create 2 kinds of accounts, one in which the money functions as a bailment, the depositor pays the bank to hold their money securely, and it is available whenever the depositor wants it (is not loaned out). A 2nd deposit account offers an interest rate and is loaned out, and the terms of the agreement specify that the depositor cannot get it back whenever they want (like a CD). Why should a person be able to deposit money in a bank today, have it loaned out, receive interest on it, and assume literally no risk because of FDIC insurance? How do you think that someone is able to get something out of nothing? Doesn't too easy access to credit cause housing bubbles and overly speculative activity that is bad for the economy?

Regarding regulation, it is not clear that that is the cause of the 2008 financial crisis. In fact, evidence shows that government intervention decreases stability:
https://www.sciencedirect.com/science/a ... 320200171X

The cause of the 2008 crisis was pretty clear in my mind: easy access to credit which allows for speculative activity, fannie mae and freddie mac (quasi-governmental agencies) encouraging and guaranteeing loans to ppl who did not have the means or credit to take them in the first place, tax incentives to buy real estate, US government support of the 3 credit rating agencies that gave AAA ratings to all the bad loans (as opposed to the other credit agencies that did not receive government support and did not give these ratings), a history of bailouts to financial institutions so that all the big banks knew they could do anything they wanted (ie risky loans) and not suffer consequences, FDIC insurance so that banks indiscriminately received lots of capital with which to make loans and have no risk, etc, etc. Notice how virtually all these factors were US-centric, which explains why the crisis happened in the US and did not have to affect other countries as much.

You have pointed out that in a FRB, banks necessarily have to be regulated.

BRUTE
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Re: Swiss vote to end fractional reserve banking

Post by BRUTE »

jacob wrote:
Mon Jun 11, 2018 7:38 am
The vote was 76% against ending it.
:(

Riggerjack
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Re: Swiss vote to end fractional reserve banking

Post by Riggerjack »

Eh. As.near as. I can tell, this ending frb would just centralize decisions currently handled by distributed, individual banks. As such, it seems like a bad idea. But life is busy, and I haven't looked into this much lately.

For practical concerns, Australia operates without FRB, and seems to be fine. Compare and contrast with them.

And since the links seem to be going to old theory, and we have updated some of this since the Great Recession (a title I expect to soon to be used only ironically), here's a few more up to date links:

Lightweight, journalism approach:https://www.theaustralian.com.au/busine ... 38103822f

And more seriously: https://www.google.com/search?q="Money% ... &ie=UTF-8 the first link is the PDF from the Fed. Sorry, links to PDFs and my phone don't mix.

My thoughts are this is more technical than voters are willing to address, so I doubt it will get enough traction.

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Re: Swiss vote to end fractional reserve banking

Post by BlueNote »

@Riggerjack

I looked into Australia and they still have capital requirements and they can still loan out the money that is deposited so in effect its the same thing, a money multiplier.

@trfie

As long as the banks can loan out a fraction of their deposits there will be a multiplier effect and the creation of credit which spends just like hard currency. If you were to suddenly disallow banks from loaning out deposits, a form of regulation btw, it would slow spending down quite a bit and probably kill a bunch of banks whose credit spreads are like the oxygen they breathe. I think ending FRB also involves replacing it with something that provides the same multiplier mechanism.

Your bailment/deposit scheme is just another form of regulation. Total deregulation and a free market approach would be to just let the banks do whatever they want as long as contractual & basic laws weren't being broken. The problem is one or two big banks can fail and then take down a bunch of other banks and businesses and it just cascades into a huge depression. It would have been interesting, from an experimental POV, to see what happened in 2008 if they just let all the bad banks and businesses fail, go through bankruptcy and re-emerge. Maybe it would have been a short term pain period with much stronger more conversavtive institutions at the end. Unfortunately the political aspect of economics would probably prevent that from ever occurring.

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Re: Swiss vote to end fractional reserve banking

Post by ajcoleman22 »

In my opinion, FDIC Insurance is the reason banks get into trouble with FRB. If there was no FDIC Insurance consumers would have a vested interest in the banks lending practices, the capital requirement of the bank itself, how diversified its loans are among sectors, etc. FDIC Insurance allows me to negate that responsibility and banks take advantage of that by leveraging up. Then it devolves into politics. If the bankers make bets and win they keep the money; if they lose I get a bailout by the government.

In the up-thread discussion on inflation and the money supply: I believe you are forgetting the velocity of the money stock https://fred.stlouisfed.org/series/M2V

If the fed doubles the money supply over night it does nothing if it stays on bank balance sheets.

Riggerjack
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Re: Swiss vote to end fractional reserve banking

Post by Riggerjack »

@ bluenote

The Fed paper was basically pointing out that functionally, we and Australia work on the same principal. That the Fractional part of the FRB model, as taught, is really Fictional, in that the multiple is for all practical purposes infinite.

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Jean
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Re: Swiss vote to end fractional reserve banking

Post by Jean »

@riggerjack
For me, as this currency is what you pay your taxes with, it should be à state privilege, because it's backed by the use of force. It's a kind of subsidy for banks, and it's not acceptable.

trfie
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Re: Swiss vote to end fractional reserve banking

Post by trfie »

BlueNote wrote:
Mon Jun 11, 2018 7:00 pm
@Riggerjack

I looked into Australia and they still have capital requirements and they can still loan out the money that is deposited so in effect its the same thing, a money multiplier.

@trfie

As long as the banks can loan out a fraction of their deposits there will be a multiplier effect and the creation of credit which spends just like hard currency. If you were to suddenly disallow banks from loaning out deposits, a form of regulation btw, it would slow spending down quite a bit and probably kill a bunch of banks whose credit spreads are like the oxygen they breathe. I think ending FRB also involves replacing it with something that provides the same multiplier mechanism.
@Bluenote, based on this post, and some of the posts above, you seem to fundamentally misunderstand what FRB is. The Australian system is NOT effectively the same thing as FRB.

This is a (simplified) example of Australia:
You open a bank and a customer deposits $100, which is the total amount in deposits.
Another customer comes and you loan out $50 for her to start a business.

Fractional reserve banking:
You open a bank and a customer deposits $100, which is the total amount in deposits.
Another customer comes and you loan out $200 for her to start a business.

The question of course is, why should the bank be allowed to loan out $200 when it only has $100. Note that you do not physically need $200 to make the loan because the loan is shown as a $200 increase electronically on the balance of one person's account, while the original lender's online account still shows $100. That's what fractional reserve banking is.
Your bailment/deposit scheme is just another form of regulation. Total deregulation and a free market approach would be to just let the banks do whatever they want as long as contractual & basic laws weren't being broken. The problem is one or two big banks can fail and then take down a bunch of other banks and businesses and it just cascades into a huge depression. It would have been interesting, from an experimental POV, to see what happened in 2008 if they just let all the bad banks and businesses fail, go through bankruptcy and re-emerge. Maybe it would have been a short term pain period with much stronger more conversavtive institutions at the end. Unfortunately the political aspect of economics would probably prevent that from ever occurring.
This has nothing to do with regulation, it is all related to law. Is a bank allowed to loan out more than it has, in other words effectively creating as much money as it wants? Or is that reserved to the central bank/government (which currently sets the limits on reserve requirements in FRB)? If you believe in complete deregulation, then each bank would be able to loan out as much USD as it wants? What happens if a bank with $100 million in reserves decides to make $2 billion in loans?

The bailment/deposit "scheme" is not another form of regulation. Right now, according to law, if you deposit your belongings in a warehouse and pay them to keep it (eg, Public Storage/self-storage), you retain ownership of it, and you pay Public Storage to keep it on your behalf. Your belongings do not get itemized and added to the books of Public Storage. Public Storage is not allowed to loan out your belongings. That is because it is a bailment by law. When you deposit money into a bank, it DOES go on the books of the bank and becomes the property of the bank. The bank could loan it all out, the businessperson could lose everything, and you would be out of luck, except for FDIC insurance (which is not the case in all countries, by the way, nor was it always present in industrialized countries). All legally. But this was not always the case. If you study the history of banking (specifically I refer you to the 1800s, but a little before and after), there were a series of court cases that had to answer the question of whether the money deposited in banks was the property of the depositor or the bank. It was decided that it was the property of the bank. Had it gone the other way (ie the courts decided that money deposited into checking accounts is a bailment), then anyone could deposit money into a checking account and know that it would be there when they came to withdraw it. There would be no bank runs. It would not be added to the bank's balance sheet because it was your money. Of course since the bank wasn't making money on it, you would have to pay for the privilege like in Public Storage.

Of course there is nothing wrong with a bank loaning out whatever money it has and making a profit on it, knowing that only a small % of the money in reserves does it actually need on hand for day-to-day operations. You could have various arrangements with depositors, eg, ability to make interest but a take a risk of loss, or that the money could not be withdrawn at any time. You could have accounts of various risk levels. Eg, if the customer wants to take no risk, they would receive no interest. Explain to me how someone today is able to get a return (interest) by depositing into a bank without taking any risk (FDIC insurance).

All banks using FRB are effectively bankrupt at all times. Because if everyone went to get their money at the same time, there is only a small fraction of the money actually extant.

trfie
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Re: Swiss vote to end fractional reserve banking

Post by trfie »

ajcoleman22 wrote:
Fri Jun 15, 2018 12:57 pm
In my opinion, FDIC Insurance is the reason banks get into trouble with FRB. If there was no FDIC Insurance consumers would have a vested interest in the banks lending practices, the capital requirement of the bank itself, how diversified its loans are among sectors, etc. FDIC Insurance allows me to negate that responsibility and banks take advantage of that by leveraging up. Then it devolves into politics. If the bankers make bets and win they keep the money; if they lose I get a bailout by the government.
I agree. I made this point above, but you explained it much better.

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