Swiss vote to end fractional reserve banking

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BlueNote
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Re: Swiss vote to end fractional reserve banking

Post by BlueNote » Sun Jun 24, 2018 9:23 pm

trfie wrote:
Sun Jun 24, 2018 3:02 pm


@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.

I probably don't understand all of the nuance of FRB vs. the Australian system but each system produces a multiplier effect.

So in your example Australian banking allows banks to loan out .5x deposits and an FRB bank allows 2x, I don't understand how that example supports any sort of argument or position.
trfie wrote:
Sun Jun 24, 2018 3:02 pm


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.
If people are really worried about losing money in the event of a bank run, and not being covered by insurance schemes, they should buy government bonds or bills with terms matching their spending plans (T-Bills for example). If people are worried about the value of those T-Bills then they're going to need to think of another strategy , like investing in commodities, securities, other countries currencies etc. Maybe they can find a place to store hard cash. I guess if you lived in Venezuela or some other economic basket case country this is something that you would spend a lot of time worrying about. Bankruptcy law defines bankruptcy and I don't think all banks are effectively bankrupt at all times. In fact its quite the opposite as far as I can tell.

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BRUTE
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Re: Swiss vote to end fractional reserve banking

Post by BRUTE » Mon Jun 25, 2018 1:34 am

BlueNote wrote:
Sun Jun 24, 2018 9:23 pm
So in your example Australian banking allows banks to loan out .5x deposits and an FRB bank allows 2x, I don't understand how that example supports any sort of argument or position.
hypothetically, if the Australian banks were not allowed to lend out more money than was deposited (i.e. the "reserve" had to be 100% and therefore "whole" or "not fractional"), then there could never be a bank run.

interestingly, while Australia apparently doesn't technically have a fractional reserve system, they have the equivalent - Australian banks are NOT required to keep 100% reserves, from what brute has read (https://www.quora.com/Does-Australia-ha ... ing-system).

apparently there is an 8% capital adequacy rule, which is effectively very similar to FRB. so any criticism of FRB is probably still valid for the Australian system.

@trfie

there is some discussion among Austrian economists regarding the role of FRB in absence of government regulation. some strongly believe that FRB is inherently prone to creating bubbles, even in absence of regulation or a central bank, due to the propensity to create the appearance of an increase in the money supply without a corresponding increase in the supply of goods and services, leading to misallocation of resources, i.e. bubbles.

many Austrians think that government regulation of FRB exacerbates the problem, because in free market competition of monies and banks, customers would be able to choose the security of a higher reserve bank, or even a bank that simply acts as a money warehouse, not lending the money out to other customers, instead charging a fee. other Austrians think that there would probably exist a FRB system even amongst competitive, free market banks, but that the reserve fraction might be higher (or at least be calibrated to what markets tolerate, instead of mandated by government regulation like it is now).

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Riggerjack
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Re: Swiss vote to end fractional reserve banking

Post by Riggerjack » Mon Jun 25, 2018 9:36 am

I guess folks didn't read my links. Fair enough, I came in late, and didn't read the OPs links, since the election was over. :oops:

But if you still think that reserves and banking are somehow related, required, or have a "multiple", your model may still comply with the undergrad teaching model, but has nothing to do with how banks work in real life. Or at least that's what I got from the Fed study I linked to.

Though to be honest, the better I understand this, the less intuitive any of it seems to be. That's not usually how this works... :geek:

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Re: Swiss vote to end fractional reserve banking

Post by BlueNote » Sat Jun 30, 2018 11:53 am

Riggerjack wrote:
Mon Jun 25, 2018 9:36 am
I guess folks didn't read my links. Fair enough, I came in late, and didn't read the OPs links, since the election was over. :oops:

But if you still think that reserves and banking are somehow related, required, or have a "multiple", your model may still comply with the undergrad teaching model, but has nothing to do with how banks work in real life. Or at least that's what I got from the Fed study I linked to.

Though to be honest, the better I understand this, the less intuitive any of it seems to be. That's not usually how this works... :geek:
I'll admit that I partially read and partially skimmed through the articles you posted. I think what I learned was that FRB isn't as important as people think. There is a money multiplier effect from letting banks lend out more than they hold in reserve. I think some people are confusing FRB with letting banks lend out more hard cash than they keep in the "safe". Ending FRB doesn't cause a money supply issue per se, however forcing banks to keep more (or all) deposits in hard cash would shrink the money supply (and could cause a huge deflationary economic shock). I think I have shown that people have alternatives to keeping their money safe and that FRB isn't a threat to their choice for keeping their cash safe. The benefits of FRB seem to diminish greatly during a deflationary financial crisis as the bankers would rather invest newly available funds in the safest possible way (to prop up their balance sheet) rather than lend out at higher rates to riskier borrowers who in turn would spend in the wider economy and perpetuate the vaunted money multiplier effect. I think economic performance is largely based on the expectations of the participants which to a large degree boils down to their trust in each other and the state of the underlying economic institutions (legislators, banks, legal enforcers, etc.). When banks are failing it undermines trust but when government is involving itself, to essentially reward bad behaviour (saving banks, cranking down interest rates, etc.) , that also seems to undermine trust.


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Re: Swiss vote to end fractional reserve banking

Post by trfie » Sat Aug 11, 2018 3:29 pm

Riggerjack wrote:
Mon Jun 11, 2018 12:57 pm
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.
The statement above does not make sense. FRB IS centralized. If it were removed, then how could decisions become even more centralized? The profit motive of banks, in a FRB system with FDIC-type insurance, leads them to loan out to the limit that FRB allows. In a system without FRB and FDIC-type insurance, bank failures suddenly become much more likely, and hence reserve amounts vary dramatically by bank, at their individual discretion.
Riggerjack wrote:
Mon Jun 11, 2018 12:57 pm
But if you still think that reserves and banking are somehow related, required, or have a "multiple", your model may still comply with the undergrad teaching model, but has nothing to do with how banks work in real life. Or at least that's what I got from the Fed study I linked to.
I agree with you and it should be clear from my posts that I do not believe in FRB systems, which are defined by a specific kind of money multiplier. I think this is aimed at the points by @BlueNote, who believes that the essential quality of a bank is to have a "money multiplier" ability. @BlueNote, perhaps you can explain what you mean by this.
BlueNote wrote:
Sun Jun 24, 2018 9:23 pm
trfie wrote:
Sun Jun 24, 2018 3:02 pm


@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.

I probably don't understand all of the nuance of FRB vs. the Australian system but each system produces a multiplier effect.

So in your example Australian banking allows banks to loan out .5x deposits and an FRB bank allows 2x, I don't understand how that example supports any sort of argument or position.
As @BRUTE pointed out, that example is the very definition of FRB. If you do not understand the distinction, then you do not understand FRB.
BRUTE wrote:
Mon Jun 25, 2018 1:34 am
BlueNote wrote:
Sun Jun 24, 2018 9:23 pm
So in your example Australian banking allows banks to loan out .5x deposits and an FRB bank allows 2x, I don't understand how that example supports any sort of argument or position.
hypothetically, if the Australian banks were not allowed to lend out more money than was deposited (i.e. the "reserve" had to be 100% and therefore "whole" or "not fractional"), then there could never be a bank run.

interestingly, while Australia apparently doesn't technically have a fractional reserve system, they have the equivalent - Australian banks are NOT required to keep 100% reserves, from what brute has read (https://www.quora.com/Does-Australia-ha ... ing-system).

apparently there is an 8% capital adequacy rule, which is effectively very similar to FRB. so any criticism of FRB is probably still valid for the Australian system.

@trfie

there is some discussion among Austrian economists regarding the role of FRB in absence of government regulation. some strongly believe that FRB is inherently prone to creating bubbles, even in absence of regulation or a central bank, due to the propensity to create the appearance of an increase in the money supply without a corresponding increase in the supply of goods and services, leading to misallocation of resources, i.e. bubbles.

many Austrians think that government regulation of FRB exacerbates the problem, because in free market competition of monies and banks, customers would be able to choose the security of a higher reserve bank, or even a bank that simply acts as a money warehouse, not lending the money out to other customers, instead charging a fee. other Austrians think that there would probably exist a FRB system even amongst competitive, free market banks, but that the reserve fraction might be higher (or at least be calibrated to what markets tolerate, instead of mandated by government regulation like it is now).
I am not sure why you equate the 8% capital adequacy rule with FRB. The quora post you linked that gave that answer stated unequivocally that Australia does not have a FRB system. The 8% rule refers to assets that the bank can liquidate if needed. It does not refer to invented money like in a FRB system.

It is impossible to have FRB in the current system without any government regulation. If an individual bank could loan out however much money it wanted - 2x,3x, 100x its reserves, then it is literally creating money. Giving printing press ability to banks would lead to chaos, as the money supply would wantonly increase and the federal government could do nothing to stop it.

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Re: Swiss vote to end fractional reserve banking

Post by trfie » Sat Aug 11, 2018 3:32 pm

BlueNote wrote:
Sat Jun 30, 2018 11:53 am
I think some people are confusing FRB with letting banks lend out more hard cash than they keep in the "safe".
That is exactly what FRB is. Allowing banks to lend out more hard cash than they keep in the safe. If you don't agree with this practice, it looks like you have been arguing the wrong side all this time.

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Re: Swiss vote to end fractional reserve banking

Post by BlueNote » Sat Aug 11, 2018 4:23 pm

trfie wrote:
Sat Aug 11, 2018 3:32 pm
BlueNote wrote:
Sat Jun 30, 2018 11:53 am
I think some people are confusing FRB with letting banks lend out more hard cash than they keep in the "safe".
That is exactly what FRB is. Allowing banks to lend out more hard cash than they keep in the safe. If you don't agree with this practice, it looks like you have been arguing the wrong side all this time.
Fractional reserve banking is where a bank is compelled to keep a certain fraction of deposits and can lend out the rest. There are other banking systems where banks can lend out more then they keep in the safe that have similar money multiplier effects, that's all I was trying to say. FRB is just a particular system of banking. In my opinion eliminating FRB but allowing other similar systems, like the Australian one, is not going to change the economic risks and rewards that much.

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Re: Swiss vote to end fractional reserve banking

Post by BRUTE » Sat Aug 11, 2018 5:10 pm

BlueNote wrote:
Sat Aug 11, 2018 4:23 pm
Fractional reserve banking is where a bank is compelled to keep a certain fraction of deposits and can lend out the rest.
err, no. in such a system, even if the "fraction" was 100%, it would only lend out the money that had been deposited.

Fractional Reserve Banking describes a system where the bank can lend out MORE than has been deposited.

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Re: Swiss vote to end fractional reserve banking

Post by BRUTE » Sat Aug 11, 2018 5:16 pm

trfie wrote:
Sat Aug 11, 2018 3:29 pm
I am not sure why you equate the 8% capital adequacy rule with FRB. The quora post you linked that gave that answer stated unequivocally that Australia does not have a FRB system.
the post does state that unequivocally, only to completely disprove that statement in the next paragraph:
That post wrote: Banks are no longer required to keep any specific fraction of their outstanding deposit balance in the form of currency reserves (national banknotes, national treasury bonds and deposits at the Reserve Bank of Australia).
Australia is not a FRB system in the sense that there is NO RESERVE REQUIREMENT AT ALL. the minimum reserve is 0%. insofar as 0% is considered a "fraction" (math?), it is a FRB system, as far as brute understands. it would certainly have all the effects associated with a FRB system, including inducing misallocation of resources aka bubbles.

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Re: Swiss vote to end fractional reserve banking

Post by BlueNote » Sat Aug 11, 2018 7:10 pm

BRUTE wrote:
Sat Aug 11, 2018 5:10 pm
BlueNote wrote:
Sat Aug 11, 2018 4:23 pm
Fractional reserve banking is where a bank is compelled to keep a certain fraction of deposits and can lend out the rest.
err, no. in such a system, even if the "fraction" was 100%, it would only lend out the money that had been deposited.

Fractional Reserve Banking describes a system where the bank can lend out MORE than has been deposited.
I think we're splitting hairs here. I'll accept the wikipedia definition "Fractional-reserve banking is the practice whereby a bank accepts deposits, makes loans or investments, but is required to hold reserves equal to only a fraction of its deposit liabilities."

Since we're all playing armchair economist here I'll explain my position a little better.

If we propose to eliminate an important societal institutional process then it behooves us to suggest a replacement. If one were to simply ban FRB then savings and loans banks would simply become savings banks. Banks aren't going to survive unless they can loan out a lot of money for interest so we'd need to allow this. If we propose to use a system where there are minimum capital requirements instead of reserves than that is different albeit not substantially. In the case of minimum capital requirements we're simply substituting one safety valve for a slightly different one that essentially does the same thing. Any system that I have seen to replace FRB either causes massive deflation or creates similar problems that were trying to be avoided in the first place.

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Re: Swiss vote to end fractional reserve banking

Post by BRUTE » Sat Aug 11, 2018 9:01 pm

BlueNote wrote:
Sat Aug 11, 2018 7:10 pm
I think we're splitting hairs here. I'll accept the wikipedia definition "Fractional-reserve banking is the practice whereby a bank accepts deposits, makes loans or investments, but is required to hold reserves equal to only a fraction of its deposit liabilities."
this isn't splitting hairs, this is the entire difference. all of brute's (and the Austrians') criticism of FRB is based in the fact that commercial banks can lend out more than they have in deposits - which is the Wikipedia definition BlueNote has quoted here.
BlueNote wrote:
Sat Aug 11, 2018 7:10 pm
If we propose to eliminate an important societal institutional process then it behooves us to suggest a replacement. If one were to simply ban FRB then savings and loans banks would simply become savings banks. Banks aren't going to survive unless they can loan out a lot of money for interest so we'd need to allow this. If we propose to use a system where there are minimum capital requirements instead of reserves than that is different albeit not substantially. In the case of minimum capital requirements we're simply substituting one safety valve for a slightly different one that essentially does the same thing. Any system that I have seen to replace FRB either causes massive deflation or creates similar problems that were trying to be avoided in the first place.
brute isn't for banning FRB, just for deregulation of banks and dismantling of the Federal Reserve. money should be a product produced by the private market, in competition with other money. the market will then figure out if it is preferable for banks to lend out more than they have in deposits or not.

brute is unconvinced that "massive deflation" is somehow worse than "massive inflation".

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Re: Swiss vote to end fractional reserve banking

Post by Mister Imperceptible » Sat Aug 11, 2018 9:34 pm

Massive deflation is no worse than massive inflation, because society would merely adjust to new prices. If prices of goods and services sold are decreased, so to are the costs to produce and provide said goods and services. Which would reward firms with healthy balance sheets and manageable/no debt.

In an honest society, fractional reserve banking and the Federal Reserve would be abolished.

However, this will not happen because society is corrupt, and people love buying things with money they do not have. Which inevitably leads to the creation of money out of thin air. Fractional reserve banking is a tool the government uses to implement financial repression and the confiscation of wealth. So it isn’t going anywhere.

http://danielamerman.com/va/Repression.html

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Re: Swiss vote to end fractional reserve banking

Post by BlueNote » Sat Aug 11, 2018 10:00 pm

BRUTE wrote:
Sat Aug 11, 2018 9:01 pm


brute isn't for banning FRB, just for deregulation of banks and dismantling of the Federal Reserve. money should be a product produced by the private market, in competition with other money. the market will then figure out if it is preferable for banks to lend out more than they have in deposits or not.

brute is unconvinced that "massive deflation" is somehow worse than "massive inflation".
So in this scenario anyone can try to create 'money' and everyone just chooses what to use for money? What if I issue a currency that I say is backed by a commodity, like a gold standard, and it turns out I don't have the commodity (do people just have to eat the loss because they made the wrong choice)?

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BRUTE
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Re: Swiss vote to end fractional reserve banking

Post by BRUTE » Sat Aug 11, 2018 10:27 pm

sounds like fraud.

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Re: Swiss vote to end fractional reserve banking

Post by Mister Imperceptible » Sat Aug 11, 2018 10:32 pm

People would stop using the false currency and exclusively use precious metals.

In the current scenario, people are already eating the loss, but not for making the wrong choice, but by government mandate.

See the article I linked.

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Re: Swiss vote to end fractional reserve banking

Post by BRUTE » Sun Aug 12, 2018 1:25 pm

but who would build the roads


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Re: Swiss vote to end fractional reserve banking

Post by Solvent » Mon Aug 13, 2018 2:52 am

trfie wrote:
Sat Aug 11, 2018 3:29 pm
If an individual bank could loan out however much money it wanted - 2x,3x, 100x its reserves, then it is literally creating money. Giving printing press ability to banks would lead to chaos, as the money supply would wantonly increase and the federal government could do nothing to stop it.
No. Individual banks do create money. This knowledge has only been incorporated into economic orthodoxy recently, but it is true that private banks create money through issuing credit. The Bank of England's note on this is very accessible and informative, it may have been linked already: https://www.bankofengland.co.uk/quarter ... rn-economy. Private banks creating money has not lead to chaos.
trfie wrote:
Sat Aug 11, 2018 3:29 pm
Riggerjack wrote:
Mon Jun 11, 2018 12:57 pm
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.
The statement above does not make sense. FRB IS centralized. If it were removed, then how could decisions become even more centralized? The profit motive of banks, in a FRB system with FDIC-type insurance, leads them to loan out to the limit that FRB allows. In a system without FRB and FDIC-type insurance, bank failures suddenly become much more likely, and hence reserve amounts vary dramatically by bank, at their individual discretion.
I think Riggerjack has the right of it, and this was also one of my concern's about the Swiss vote. Instituting vollgeld would dramatically centralise credit creation. It would remove a lot of the discretion from private banks regarding credit (and hence money) creation and push that power back to the central bank. I think it would look somewhat like credit rationing. Under the current system, yes, the central bank does have a strong influence on money creation, but it is not the only influence - private banks decide how many loans to issue, although the environment they operate in is influenced by variables controlled to a certain extent by the central bank. Vollgeld would move more of this control to the central bank - it would be a centralisation.
trfie wrote:
Sat Aug 11, 2018 3:29 pm
@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.
Central banking and monetary economics is not my speciality, but I was educated in Australia so I think I picked up some things - Australia does not have a fractional reserve system, no, but I think it 'effectively' is pretty much the same. There is no 'reserve requirement' regarding the fraction of deposits Australian banks must retain. But I think Brute has gotten the intuition right. Banks are still required to maintain a certain amount of capital, which restricts how large their balance sheets can grow. This capital can include deposits, but many other things as well. The capital requirements are set and overseen by the Australian Prudential Regulation Authority. I couldn't find a great summary link with a very quick google, but there's some discussion here.

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Re: Swiss vote to end fractional reserve banking

Post by BlueNote » Mon Aug 13, 2018 9:40 pm

@Brute

So I assume you could petition a court or something like that to get the value back or at lease get some justice from the perpetrator of fraud. I think if a society is built on good values like honesty, hard work, integrity, and trust than that is far more powerful than simply changing the structures around, albeit the structures are also important. As long as I can use government money to buy other things without issue than it's possible to avoid things like inflation and deflation by simply exchanging into assets that are resistant. People have that choice in most cases, it can become repressive though if the government triggers hyperinflation or massive deflation.

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