Who actually runs our economy?

[SaulOhio]

Explain in what way they are a cause at all. Aren't they just a symptom?

They cannot be a symptom because they were FOUNDED by an act of government for the purpose of providing mortgages to people the banks considered too great a risk.

It is not fraud. If you disagree with it, saying why you think it is unwise (and what would be better) is a better way to go than to incorrectly label it.

No it isn't telling them any such thing.

Yes it is. If you check your balance, you will see that you have a certain amount of money in the bank. That is everything you have deposited in the bank, minus withdrawls. Add up the balances of everyone who has deposited money in the bank, and compare it with how much money the bank actually has, and you will see a discrapancy. That is the very definition of fractional reserve banking.

And the problem with it is the money multiplier effect, which is one cause of inflation. Also, it makes more money available for lending than there would be otherwise. Banks can feel more free to lend than they would be otherwise.

I only mentioned that part about it being fraud because my experience arguing for free markets leads me to expect someone to blame the effects of fractional reserve banking on free markets, when the practice is inconsistent with free markets.

 

[geni]

Geni: I didn't say Fannie and Freddie were the only cause.

There is the Federal Reserve setting interest rates low, encouraging more people to borrow money. That affects markets everywhere, including Europe.

High interest rates on the other hand make a mess of the economy.

I am for laissez-faire capitalism,

I'm not. To start with it becomes problematical to organise strikes (since any organisation that does so is open to a civil case for damages).

and one of the things government SHOULD do in a free market is act to prevent fraud. I believe that fractional reserve banking is a kind of fraud, which is actually promoted by government instead of criminalized. The bank is telling people they have money in the bank that the bank doesn't actually have.

No bank pretends they have enough money to pay back all their depositors.

This is another easy money policy that encourages a vast amount of credit expansion. Fractional reserve banking is allowed almost everywhere.

Of course because if you don't allow it bank charges are likely to become unreasonably expensive.

Government sponsored deposit insurance such as the FDIC and bailouts reduce risk of lending. Its like you have a rich uncle that owns a casino, and promises to make good any money you lose gambling. How much are you going to gamble?

In order to qualify the risks have to be fairly low. The problem is that without the insurance a) you see a lot more banking colapses and b) you see less saveing.

Local governments often impose all sorts of housing regulations, such as "open space" laws, which run up the cost of housing.

Define "cost of housing"

All these policies encourage banks to lend more money than they otherwise would, to people who are poorer risks. And then people blame the predictable problems that result on the "greed" of the bankers, and ask for more regulation and intervention to control the problems caused by regulation and intervention.

Not really. Left to themselves banks tend to become Ponzi schemes see Albania. Reason is anything else will be wiped out in the short term being unable to find depositors.

Ultimately most people are not going to be able to understand what their banks are up to. That includes a fair chunk of bankers. However it is useful for the goverments to have people save. In order to encourage that you need some fairly inflation proof method of saveing idealy with some level of incentive on top of that coupled with fairly low risk.

The only ways to get that are goverment run banks (which risk corruption issues japan is the best know example) or regulated sections of the banking industry (what a bank can do with your investments and what they can do with hedge fund investments are somewhat different).

ServiceSoon: Yes, our economy IS driven by speculation. It serves an important function. Its what makes people look to the future. (In fact, thats sort of what the word means.) In the article you linked to, people are concerned that a hurricane might damage our capacity to acquire oil resources, which would restrict supply. People are thinking and acting ahead, conserving and stockpiling oil for the future that might otherwise see a shortage.

Can you show that there has been a significicant increase in US stockpile capacity?

 

[balrog666]

Explain in what way they are a cause at all. Aren't they just a symptom?

[snip]

The Fed made money available to banks by loaning it to them at very low interest rates for a variety of reasons, all more or less complete nonsense.

Bank policy was changed informally to encourage (or threaten, as needed) the banks to re-loan it out on home mortgages, particularly to those previously excluded based on poor credit scores, bad neighborhoods, presumed racist policies, or utter lack-of-income.

At the same time Freddie and Fannie promised those same banks that they would purchase those completed mortgage instruments with no scrutiny of the details of the borrowers.

Freddie and Fannie then turned around and bundled those mortgages into various packages and sold them to investment houses, mutual funds, and banks, guaranteeing the "investments" with the full faith and credit of the US Treasury.

Lots of people failed in spectacular ways to make all that idiocy happen.

Of course, eventually, the *** hits the fan and

 

[Chaos]

*snip*
Yes it is. If you check your balance, you will see that you have a certain amount of money in the bank. That is everything you have deposited in the bank, minus withdrawls. Add up the balances of everyone who has deposited money in the bank, and compare it with how much money the bank actually has, and you will see a discrapancy. That is the very definition of fractional reserve banking.

Just because you don´t like something, that doesn´t make it fraud. Fraud has a definition. Fractional reserve banking does not meet that definition. Therefore fractional reserve banking is not fraud.

And the problem with it is the money multiplier effect, which is one cause of inflation. Also, it makes more money available for lending than there would be otherwise. Banks can feel more free to lend than they would be otherwise.

So, fractional reserve banking makes more money available for lending. You got that part right.

But, did you think even one tiny step further? Did you consider that, if the "fraudulent" fractional reserve banking were replaced by full reserve banking, money available for lending would DRASTICALLY decrease, imploding the credit supply and letting interest rates skyrocket? Did you also consider that, if that happened, the economy would go into a depression that would make the Great Depression look like flowers and cute fluffy bunnies?

I only mentioned that part about it being fraud because my experience arguing for free markets leads me to expect someone to blame the effects of fractional reserve banking on free markets, when the practice is inconsistent with free markets.

Wrong. The fact that there are any reserves at all, even fractional ones, is due to government regulations. Banks hold exactly the minimum reserve they are required to hold, which shows that they would hold even less reserve if they were allowed to. Ergo, without the evil government enforcing fractional reserve, we would have even-less-reserve banking or no reserve banking.
NOTHING prevents banks from holding full reserves. If holding less than 100% reserves were "inconsistent with free markets", it would not happen, because nothing prevents it.

 

[SaulOhio]

No bank pretends they have enough money to pay back all their depositors.

But they do promise to be able to repay.

Of course because if you don't allow it bank charges are likely to become unreasonably expensive.

Define "unreasonably". Nothing is free. You have to pay for what you get.

In order to qualify the risks have to be fairly low. The problem is that without the insurance a) you see a lot more banking colapses and b) you see less saveing.

a) would be part of correcting the problem. Painful, but necessary. But also less likely to happen without fractional reserve banking.
b)

Define "cost of housing"

The price of buying a new home or renting an appartment.

Not really. Left to themselves banks tend to become Ponzi schemes see Albania. Reason is anything else will be wiped out in the short term being unable to find depositors.

By "left to themselves" I get the impression you mean with no government at all, anarchy. I have already explained that government has an important role to play in the economy, that part of it is to prevent or punish fraud. A Ponzi scheme is fraud. And in some ways, fractional reserve banking does resemble a Ponzi scheme.

Ultimately most people are not going to be able to understand what their banks are up to. That includes a fair chunk of bankers.

If bankers can't understand everything that happens in a bank, how is the government supposed to?

However it is useful for the goverments to have people save.

And this is where we see a fundamental difference between your view of the world and mine. What is useful to the government doesn't concern me much. What I care about is how government is of use to its people, or can harm them. Its the people that are important.

In order to encourage that you need some fairly inflation proof method of saveing idealy with some level of incentive on top of that coupled with fairly low risk.

I agree with you there, we do need inflation proof money, and that would be a gold standard with a ban on fractional reserve banking. As far as risk, government should not try to deal with that. How do you decide what risk is too high or low?

People need to be motivated to take risk into account. Government action doesn't take away the risk, it just spreads it out so nobody feels the full effect directly.

The only ways to get that are goverment run banks (which risk corruption issues japan is the best know example) or regulated sections of the banking industry (what a bank can do with your investments and what they can do with hedge fund investments are somewhat different).

Government run banks mean a government run economy. Government is unable to run economies. The Fed was founded in order to prevent recessions and depressions by providing liquidity and regulating the supply of capital. Its founding was followed in just a couple of decades by the worst depression in history. It FAILED to do what it was supposed to do. In fact, many economists blame the collapse that set of the Great Depression directly on the Federal Reserve. Read Alan Greenspan's "Gold and Economic Freedom". There are a number of other sources out there on the subject. I'm new here, so I can't post links, but look up what the Austrian economists say about the Great Depression. The cause is exactly what you prescribe as the cure.

As for speculation, I suggest looking up an article called "The Benefits of Speculation" at the Foundation for Economic Education.

 

[Tippit]

Just because you don´t like something, that doesn´t make it fraud. Fraud has a definition. Fractional reserve banking does not meet that definition. Therefore fractional reserve banking is not fraud.

Actually, any reasonable person who understands the system might take issue with that. First of all, demand deposits are so-called because the funds within them are available upon demand. Obviously if you made a deposit with the full intention by the bank that the money would be lent to your neighbor, it wouldn't be available to you on "demand", and thus the promise was incapable of being fulfilled at the time it was made. One might argue any such promise is fraudulent by nature. Certainly if public storage loaned out the items in my storage room, they would not be available on my demand, and this would obviously be a crime. Yet, due to the fungibility of currency, the inability of any bank's claim to pay all of its depositors on demand is obfuscated by the fact that they can use other units of currency to pay some of the depositors.

If you're going to argue that most bank depositors understand the intricacies of fractional reserve banking and therefore have fully consented to this fraud, you will probably fail to convince me of this. However, I do agree that it is possible for an individual to specifically consent to such an arrangement that exists commonly today, and in that context there would be no fraud, just a similarly unstable and exploitative system.

So, fractional reserve banking makes more money available for lending. You got that part right.

But, did you think even one tiny step further? Did you consider that, if the "fraudulent" fractional reserve banking were replaced by full reserve banking, money available for lending would DRASTICALLY decrease, imploding the credit supply and letting interest rates skyrocket? Did you also consider that, if that happened, the economy would go into a depression that would make the Great Depression look like flowers and cute fluffy bunnies?

That's ridiculous. This assumes that there is no way to return to 100% reserve banking without some catastrophic economic consequence, and of course there is. In fact such a system was endorsed by none other than Milton Friedman, the Monetary Reform Act, which consisted of simultaneously raising the reserve requirement ratio while paying down the national debt with government issued, credit-based fiat money.

Wrong. The fact that there are any reserves at all, even fractional ones, is due to government regulations. Banks hold exactly the minimum reserve they are required to hold, which shows that they would hold even less reserve if they were allowed to. Ergo, without the evil government enforcing fractional reserve, we would have even-less-reserve banking or no reserve banking.
NOTHING prevents banks from holding full reserves. If holding less than 100% reserves were "inconsistent with free markets", it would not happen, because nothing prevents it.

In fact, you are wrong. Banks do not always hold the minimum they are required to by law, and often they hold much more. How much banks hold depends on a lot of other factors beside what the Fed requires, even if there is an opportunity cost associated with doing so.

 

[Francesca R]

They cannot be a symptom because they were FOUNDED by an act of government for the purpose of providing mortgages to people the banks considered too great a risk.

And yet the housing downturn and subsequent default/foreclosure situation (in the US) was not triggered by the activities or assets of FNMA or FHLMC.

Yes it is. If you check your balance, you will see that you have a certain amount of money in the bank. That is everything you have deposited in the bank, minus withdrawls. Add up the balances of everyone who has deposited money in the bank, and compare it with how much money the bank actually has, and you will see a discrapancy. That is the very definition of fractional reserve banking.

It is also a definiton of credit expansion, or leverage. But not fraud. Ability to lend need not be constrained by titled assets unless somebody enforces the restriction. Is that what you favour? Why?

Also, it makes more money available for lending than there would be otherwise. Banks can feel more free to lend than they would be otherwise.

Yes. You make it sound like some unwanted side-effect or operational hazard, rather than the objective of the exercise.

 

[SaulOhio]

Thanks to Tippit for covering most of Chaos's points.

Ergo, without the evil government enforcing fractional reserve, we would have even-less-reserve banking or no reserve banking.
NOTHING prevents banks from holding full reserves. If holding less than 100% reserves were "inconsistent with free markets", it would not happen, because nothing prevents it.

Your attempt at, I think sarcasm, referring to the government as evil, implying that I think everything government does is bad, just shows exactly how bad your understanding of what I am saying is. I clearly explained that government has an important role to play in a free market, and that is to prevent force and fraud.

Your argument against my claim that fractional reserve banking is fraudulent is very weak. You claim its just something I don't like, entirely ignoring my entire argument.

Since it IS fraud, and in a free market, government would make it illegal. Full reserve banking doesn't have to happen on its own to be consistent with free markets. Police go after and arrest thieves and con men. In the absence of government thieves and con men would be free to operate, so does that mean theft is consistent with a free market? No. Government has an important role to play to protect free markets.

And the conversion to full reserve banking could take place gradually, as Tippit described Friedman's proposal. As the reserve rate approached 100%, people would be motivated to move their excess cash, which they don't expect to use anytime soon, to non-demand savings instruments, like CD's. Checking accounts would not earn interest, but other savings instruments would. That is where people would be motivated, by a desire to earn interest, to put more money. There would be no shortage of investment funds. We would simply not have the money multiplier effect from people thinking they actually have spendable money in the bank that isn't actually there.

 

[Francesca R]

As the reserve rate approached 100%, people would be motivated to move their excess cash, which they don't expect to use anytime soon, to non-demand savings instruments, like CD's. Checking accounts would not earn interest, but other savings instruments would.

You do at least hint at the outcome there--namely no current (checking) accounts. It is not just that they would pay no interest. They would likely attract charges that made everyone opt for the mattress or a bond. How exactly is the abolition of free banking a step forward?

 

[PadainFain]

A great book to read on speculation is Liar's Poker by Michael Lewis. Whilst it is autobiographical and therefore somewhat anecdotal it does detail the creation of Freddie and Fannie and the invention of the Bonds market. And at the same time it's a very amusing read.

I think fractional banking (not something the book talks about at all but it was mentioned above) is a terrible thing but worse I feel is that banks and the government borrow money from the various 'national banks' and have to pay it back with interest. That interest IS inflation. Before you can even get your money it's worth less than it's face value! And the only way to get the interest to pay it back is to borrow more which has another interest amount to pay. And the vicous cycle continues.

However even worse than this is that those 'national banks' are private corporations who make profit from that interest! They actually have no reason to want to make our lives better or our finances more sensible. They just want to make profit.

Is it any wonder that there is no official list of the shareholders in the Fed for example?

 

[Chaos]

Actually, any reasonable person who understands the system might take issue with that. First of all, demand deposits are so-called because the funds within them are available upon demand. Obviously if you made a deposit with the full intention by the bank that the money would be lent to your neighbor, it wouldn't be available to you on "demand", and thus the promise was incapable of being fulfilled at the time it was made. One might argue any such promise is fraudulent by nature.

One might also argue that the moon is made of green cheese - but that doesn´t make it so.

People make demand deposits, knowing that the bank will lend that money to someone else. Everybody knows what is happening. Fraud, on the other hand, implies a deception, which is not the case here, ergo this is not fraud - get that into your head already.

Certainly if public storage loaned out the items in my storage room, they would not be available on my demand, and this would obviously be a crime.

Yet you do not deposit specific items with the bank, you deposit amounts of a specific category of items. If you deposit one $100 bill with the bank, by your definition it would be fraud if they returned ten $10 bills when you withdraw your money.

Yet, due to the fungibility of currency, the inability of any bank's claim to pay all of its depositors on demand is obfuscated by the fact that they can use other units of currency to pay some of the depositors.

Nothing is obfuscated here. The information is there, for everyone to see. Customers accept the bank´s modus operandi, knowing exactly what the bank does with their money, in return for free or nearly free banking.

If you're going to argue that most bank depositors understand the intricacies of fractional reserve banking and therefore have fully consented to this fraud, you will probably fail to convince me of this.

I know I won´t convince you, because your ideology demands that you see massive fraud and extortion and protection rackets wherever you look.

However, I do agree that it is possible for an individual to specifically consent to such an arrangement that exists commonly today, and in that context there would be no fraud, just a similarly unstable and exploitative system.

Except that it is neither as unstable as you claim, nor exploitative at all.

That's ridiculous. This assumes that there is no way to return to 100% reserve banking without some catastrophic economic consequence, and of course there is. In fact such a system was endorsed by none other than Milton Friedman, the Monetary Reform Act, which consisted of simultaneously raising the reserve requirement ratio while paying down the national debt with government issued, credit-based fiat money.

Oh, suddenly you guys are all in favor of fiat money - at least when you can dump it on someone else.

Besides, can you show me - without resorting to Libertarian wishful thinking - how this scheme of yours will avoid the evaporation of the vast majority of the credit supply?

In fact, you are wrong. Banks do not always hold the minimum they are required to by law, and often they hold much more. How much banks hold depends on a lot of other factors beside what the Fed requires, even if there is an opportunity cost associated with doing so.

Why should they hold so much more? There is no reason for that.

 

[69dodge]

And the conversion to full reserve banking could take place gradually, as Tippit described Friedman's proposal. As the reserve rate approached 100%, people would be motivated to move their excess cash, which they don't expect to use anytime soon, to non-demand savings instruments, like CD's.

But they do expect to be able to use their money eventually. There is some risk that those who borrow that money from the bank won't repay it. Is the bank guilty of fraud because they promised to return depositors' money at the CD's maturity date though there's a chance that they might not be able to, the same way that you think current banks are guilty of fraud because they promise to return demand deposits on demand though there's a chance that they might not be able to?

 

[The Central Scrutinizer]

Is it any wonder that there is no official list of the shareholders in the Fed for example?

In the world occupied by the rest of us, there is such a list. Odd, that.

 

[Tippit]

But they do expect to be able to use their money eventually. There is some risk that those who borrow that money from the bank won't repay it. Is the bank guilty of fraud because they promised to return depositors' money at the CD's maturity date though there's a chance that they might not be able to, the same way that you think current banks are guilty of fraud because they promise to return demand deposits on demand though there's a chance that they might not be able to?

That's a good point illustrating the fundamental difference between time and demand deposits. The fact of the matter is that it is physically impossible for banks to pay the claims of all demand depositors at once - without resorting to some form of shell game that depends on the fungibility of currency, and somehow obtaining more of it (money creation). Contrast this with a time deposit where the depositor has consented to being deprived of the funds for the agreed upon duration.

The difference is the difference between a fundamentally stable, and a fundamentally unstable banking system. The chances and risks you portray as being somehow equivalent are anything but.

 

[geni]

But they do promise to be able to repay.

Nope. Limited liability companies.

Define "unreasonably". Nothing is free. You have to pay for what you get.

To the point where people don't use their services.

a) would be part of correcting the problem. Painful, but necessary. But also less likely to happen without fractional reserve banking.

It would be less likely to happen because their would be fewer banks. But look at what happened to Lloyds names.

The price of buying a new home or renting an appartment.

That aproach isn't long term sustainable.

By "left to themselves" I get the impression you mean with no government at all, anarchy. I have already explained that government has an important role to play in the economy, that part of it is to prevent or punish fraud. A Ponzi scheme is fraud.

It is but by the time the goverment can react it has kinda taken out your entire banking system.

And in some ways, fractional reserve banking does resemble a Ponzi scheme.

Nope interest pay on profits from investments.

If bankers can't understand everything that happens in a bank, how is the government supposed to?

Goverments can employ some fairly good bankers. To a large extent though they rely on makeing complex and risky looking things illegal in the context of standard investors.

And this is where we see a fundamental difference between your view of the world and mine. What is useful to the government doesn't concern me much. What I care about is how government is of use to its people, or can harm them. Its the people that are important.

It is generaly better for people to save thus a worthwhile goverment will work to make sure it is posible and good for them to do so.

I agree with you there, we do need inflation proof money, and that would be a gold standard with a ban on fractional reserve banking.

Precious metals are not a reliable value store. I would have thought that the palladium and silver bubbles would have made this clear to anyone paying attention.

As far as risk, government should not try to deal with that. How do you decide what risk is too high or low?

Goverments deal in risk all the time with everything from a minor road project overun to nuclear holocaust. There are various attack lines for calculateing acceptable levels of risk.

People need to be motivated to take risk into account.

The average person can't. They don't have the time, knowlage or information base to make a meaningful assement.

Government action doesn't take away the risk, it just spreads it out so nobody feels the full effect directly.

It spreads some of the risk but far from all.

Government run banks mean a government run economy.

Are you suggesting japan has a goverment run economy?

Government is unable to run economies.

They seem to do a better job than everyone else who has tried probably because they are the one party who actualy has an interest in the economy as a whole growing.

The Fed was founded in order to prevent recessions and depressions by providing liquidity and regulating the supply of capital. Its founding was followed in just a couple of decades by the worst depression in history. It FAILED to do what it was supposed to do. In fact, many economists blame the collapse that set of the Great Depression directly on the Federal Reserve. Read Alan Greenspan's "Gold and Economic Freedom". There are a number of other sources out there on the subject. I'm new here, so I can't post links, but look up what the Austrian economists say about the Great Depression.

Austrian economists provide little in the way of falsifiable claims (which is generally considered to be a fairly important criteria of the scientific method) and fail to provide robust mathematical definitions of their claims. Their usefulness is thus limited at this time.

 

[69dodge]

The fact of the matter is that it is physically impossible for banks to pay the claims of all demand depositors at once

Yes, but why does that matter unless all the depositors actually want to withdraw all their money at the same time, which they might but probably won't?

 

[danch]

This may come across as a rather stupid question, but, under a full-reserve banking system, where would the investment returns come from?
I'm not very good at this.

 

[Francesca R]

Contrast this with a time deposit where the depositor has consented to being deprived of the funds for the agreed upon duration.

You do not appear to have ever been close to a money-market desk in a commercial bank treasury department. There is no fundamental difference between overnight deposits and term deposits. In neither case is any bank able to meet all redemptions under any circumstances. In both cases, once they know (or guess actually) how much money they need, which is right at the last minute, they go and borrow it from someone else. If there is no someone else to be found then it starts costing them more. In the limit they have to go to the lender of last resort, and break promises to holders of time deposits. Why do you think this can only happen with demand deposits? Have you been under a rock for the last 12 months?

The difference is the difference between a fundamentally stable, and a fundamentally unstable banking system. The chances and risks you portray as being somehow equivalent are anything but.

As above. For you to be happy with the banking system--aside from continuing to not understand it--you would need to cancel all forms of credit creation and leverage. I recall you have tried to avoid this conclusion before.

 

[Ron_Tomkins]

Who actually runs our economy?

The IRS.


Now keep those checks coming.

 

[SaulOhio]

One might also argue that the moon is made of green cheese - but that doesn´t make it so.

People make demand deposits, knowing that the bank will lend that money to someone else. Everybody knows what is happening. Fraud, on the other hand, implies a deception, which is not the case here, ergo this is not fraud - get that into your head already.

Someone mentioned Ponzi schemes. People go into those knowing well that the only money coming into the system is from new "investors", but they are illegal for the same reasons fractional reserve banking should be illegal. The money is supposed to be available for withdrawal, but it isn't. The organizers of Ponzi schemes promise continued profits to anyone who joins, but the system cannot continue indefinitely, and eventually collapses. When people lose confidence in the banking system, fractional reserve banking collapses for the same reason. Thats why more government interventions, like the Federal Reserve and FDIC, become to seem necessary. They are there to prop up a system that is inherently unstable. Of course, they cannot prop it up indefinitely, so the system just grows a bit more before collapsing, and the collapse is bigger every time.

Do I have to remind you again that the Fed was founded in , before the Great Depression, and there were even a couple of recessions before that, in the 20's. Clearly there is something wrong with the theory that these supposedly economy-stabilizing institutions are based on.

Nothing is obfuscated here. The information is there, for everyone to see. Customers accept the bank´s modus operandi, knowing exactly what the bank does with their money, in return for free or nearly free banking.

How many people really understand how banking works? And still, people join Ponzi schemes, knowing full well that there is no money coming into the scheme except from new people joining the club. Their desire to make a quick buck lures them in, even if they know everything they need to tell them it won't work.

I know I won´t convince you, because your ideology demands that you see massive fraud and extortion and protection rackets wherever you look.

A strawman and an ad-hominem combined in the same argument. I salute you for your ingeniuty.

Except that it is neither as unstable as you claim, nor exploitative at all.

If it is not that unstable, why does it keep collapsing? If the is it the free market system itself that is unstable, then why don't the institutions which are supposed to stabilize it work? Seems to me there is something wrong with the prevalent theory about why we have this business cycle. If the theory is right, then the measures to stabilize it based on that theory should work. Why don't they?

Oh, suddenly you guys are all in favor of fiat money - at least when you can dump it on someone else.

1: Repaying the government's debts with fiat money could be used as an interim measure before establishing a gold standard. I have stated that I am in favor of a gold standard.
2: It was Milton Friedman who proposed this solution, and he did not believe in a gold standard. However, his idea of repaying the national debt using fiat money could be usefull in getting back to a situation where establishing a gold standard would be more practical.

Besides, can you show me - without resorting to Libertarian wishful thinking - how this scheme of yours will avoid the evaporation of the vast majority of the credit supply?

But the vast credit supply we have is the problem. That is what is causing inflation. That is what is making our economic growth so unstable. There is just too much credit available, too easily, without enough care about wether or not it can be repaid.

Why should they hold so much more? There is no reason for that.

If they ARE holding greater reserves than they are required, then clearly they do have reasons. You can't look at a phenomenon that actually exists and claim there is no reason for it. (Well, maybe you can, but its not very smart.)

Government is unable to run economies.

They seem to do a better job than everyone else who has tried probably because they are the one party who actualy has an interest in the economy as a whole growing.

Seems to me, the more a government runs an economy, the worse things get. Have a look at the most controlled economies in history. The USSR, North Korea, China under Mao, Cuba, Nazi Germany. The less government interferes with the economy, the better it runs.

Government officials have no interest in keeping the entire economy growing. Their only interest is the next election. Thats as far forward as they look.