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.