Split Thread Fractional reserve credit vs. derivatives

[Francesca R]

This is why you rarely see libertarian economists, because few libertarians actually understand even the most simple fundamentals.

There are a lot of libertarian economists and a lot with a sound understanding of fundamentals. They are not united in opposition to fractional reserves in the banking system though. That is a fringe position IMO.

 

[Sceptic-PK]

There are a lot of libertarian economists and a lot with a sound understanding of fundamentals. They are not united in opposition to fractional reserves in the banking system though. That is a fringe position IMO.

Yeah, I was referring to forum warriors. I have "met" so many and despite their avid interest in economics and the evils of governance, none of them actually understand the fundamentals of the system(s) they despise and none of them have ever held a degree in economics.

 

[psionl0]

In a 100% reserve system, a bank cannot loan any of the depositor's funds at all. It can only loan money that belongs to the bank. IOW, it can only loan out the bank's equity.

Banks can also lend out money that has been invested with them (eg: term deposits) for that purpose. The only difference is that under full reserve, banks can't lend money that is in demand deposit accounts.

 

[psionl0]

There are a lot of libertarian economists and a lot with a sound understanding of fundamentals. They are not united in opposition to fractional reserves in the banking system though. That is a fringe position IMO.

If you think that opposition to FRB is a fringe position then I suspect you don't understand the consequences of fractional reserve banking.

Because of fractional reserve banking, governments can't print their deficits without creating massive inflation. They have to borrow to fund their deficits instead.

The national debt stands as testament to the evils of fractional reserve banking.

 

[Francesca R]

Of course it is a fringe position. That's why no OECD country adopts it. That's why it has next to no chance of being legislated in the developed world.

Name some mainstream political organisations that wants to abolish fractional reserve banking. Do you think the Tea Party movement wants to abolish it?

Don't conflate it with government borrowing or central bank balance sheets, else I shall conclude you also do not understand the subject.

 

[psionl0]

Don't conflate it with government borrowing or central bank balance sheets, else I shall conclude you also do not understand the subject.

If you think you can discuss fractional reserve banking without considering its consequences then you are the one who does not understand the subject.

 

[Francesca R]

Cop out. Like all the other objectors in the thread. Never mind.

Which are those mainstream political organisations opposed to it, again?

 

[ladmo]

Any financial system that does not have all the money to pay off what is owed... is flawed.

 

[Blue Mountain]

Any financial system that does not have all the money to pay off what is owed... is flawed.

Does that include the loan I took out from the bank to buy a nice car because I didn't have enough cash on hand (or in deposits) to buy it when it showed up on the used car lot?

 

[michaelsuede]

Any financial system that does not have all the money to pay off what is owed... is flawed.

Indeed.

While Francesca huffs and puffs about how great fractional reserve banking is, the fact of the matter is real libertarians don't even care what kind of system is used as long as it is voluntary.

Francesca knows that when people are free to chose, they chose a 100% reserve gold standard. It is the least fraudulent, most constrained, best preserver of wealth that man has yet devised.

Only through a violent State imposed monopoly on the issuance of currency can the current fraud maintain itself.

Edited by jhunter1163: 

Edited for Rule 12.

 

[NewtonTrino]

Indeed.

While Francesca huffs and puffs about how great fractional reserve banking is, the fact of the matter is real libertarians don't even care what kind of system is used as long as it is voluntary.

Francesca knows that when people are free to chose, they chose a 100% reserve gold standard. It is the least fraudulent, most constrained, best preserver of wealth that man has yet devised.

Only through a violent State imposed monopoly on the issuance of currency can the current fraud maintain itself.

Edited by jhunter1163: 

Moderated content removed.

So your main theory here is that the united states government doesn't represent the actual will of the the people? I would argue that it carries out their will all too well.

 

[Francesca R]

when people are free to chose, they chose a 100% reserve gold standard.

This is a claim that nobody wants fiat money or fractional bank reserves, and it is contrary to everyone's wish.

Please provide (extraordinary) evidence of this claim. While you are at it, prove that I am voluntarily opposed to fiat currency and FRB as well.

 

[michaelsuede]

This is a claim that nobody wants fiat money or fractional bank reserves, and it is contrary to everyone's wish.

Please provide (extraordinary) evidence of this claim. While you are at it, prove that I am voluntarily opposed to fiat currency and FRB as well.

I suppose you are correct that not everyone hates fiat money. Bankers, politicians, welfare addicts, corporatists, fascists, communists, etc.. etc.. love fiat money.

Of course, the market hates it and refuses to use it unless forced to do so at the point of a gun.

 

[michaelsuede]

It does. Moreover you contradicted yourself in a subsequent post. Do you think others cannot see this?

I thought I already did, in post 33. Thus:
Then in post 49 above, you state it correctly:


Your first example was a zero reserve bank, and you didn't even think it was reserving fractionally; you apparently thought it was a full reserve example (it was not reserving at all). Your second example is correct but it is as plain as day that you have changed the explanation.

I am happy if the Khan academy has educated you. Before you posted it, you evidently did not know what FRB was, nor what full reserve banking was.

This prior lack of knowledge is beside the point that you have been able to give no justifiable objection to fractional reserve banking and credit creation, given the prevalence of derivative exposures across broad areas of finance, commerce and production--all of which you are fine with.

It does go some way towards explaining your illogical opposition though.

What a bunch of nonsense.

I love how you claim I have no idea what I am talking about when it is YOU who have no idea what you are talking about.

There is a vast difference between how a 100% reserve bank operates in a gold standard and how a fractional reserve bank operates in a fiat central banking system.

The 100% reserve bank can not lend out more than its gold reserve holdings - period. This does not entail the practice of fractional reserve lending at all.

Your ignorance of how 100% reserve banking works as compared to how fractional reserve banking works is clearly evident by your statement that I changed my story. No, I simply stated how each type of bank works correctly, while you on the other hand say nonsense like this:

Your first example was a zero reserve bank, and you didn't even think it was reserving fractionally;

While anyone who knows what they are talking about agrees with me:

Full-reserve banking, also known as 100% reserve banking, is a banking practice in which the full amount of each depositor's funds are kept in reserve, as cash or other highly liquid assets. In other words, funds deposited are not lent out by the bank as long as the depositor retains the legal right to withdraw the funds on demand. Alternatively, a saver could entrust their money with a bank for investment in the full-reserve equivalent of time deposits or savings accounts, which in a full reserve system would represent loans made to the bank rather than deposits.[1] This would allow banks to continue to act as an intermediary between investors and borrowers.

Wow - pretty much exactly what I said!

So yeah, go read some more before you decide to criticize others.

 

[ladmo]

Does that include the loan I took out from the bank to buy a nice car because I didn't have enough cash on hand (or in deposits) to buy it when it showed up on the used car lot?

The bank is loaning you money that is not there. The Fractional Banking System creates money out of deposits... I am not talking about a simple loan transaction.

There were a few prior posts that provided what fractional banking entails.

 

[ladmo]

Indeed.

While Francesca huffs and puffs about how great fractional reserve banking is, the fact of the matter is real libertarians don't even care what kind of system is used as long as it is voluntary.

Francesca knows that when people are free to chose, they chose a 100% reserve gold standard. It is the least fraudulent, most constrained, best preserver of wealth that man has yet devised.

Only through a violent State imposed monopoly on the issuance of currency can the current fraud maintain itself.

Edited by jhunter1163: 

Edited for Rule 12.

I concur 100%.

btw, your explanation of fractional banking was concise, direct, and very well put with an economy of words.

 

[psionl0]

Regardless, according to you a bank would still be a constant state of insolvency even if it was utilizing full reserve banking since TIME DEPOSITS are still liabilities of the bank and the money loaned out from those funds would still be owed to the depositor even if the loan went into default. The bank cannot use its reserves to pay back the time deposit because then it wouldn't have enough reserves to cover its entire demand deposit base. IOW, a violation of full reserve banking. In that regard, there is little difference between full reserve and fractional reserve banking.

It would depend on the nature of the time deposit. Fixed term deposits with fixed interest work that way. Cash management accounts work slightly differently. The interest you earn depends on how profitable the bank's lending activities are. If a bank messes up its loan portfolio then the saver could even have a negative return.

In any case, a bank run is impossible with term deposits and because a bank knows in advance how much it needs to pay out to its term depositors, it should not be caught short. The bank is not at risk of folding like it is when it lends out money from demand deposit accounts.

 

[psionl0]

Cop out. Like all the other objectors in the thread. Never mind.

Which are those mainstream political organisations opposed to it, again?

LOL so you are willing to discuss the politics of fractional reserve banking but not its consequences? I guess that's one way to avoid the difficult questions.

Just to humour you, even if there are politicians who understand the system, they are not going to take on the banks for a reform whose benefits are mainly long term. The banks would likely mount a scare campaign that would cause the political candidates to lose votes at the next election. We the people must demand that politicians act if we want the reforms.

Perhaps you want to limit the debate to the original question:

Perhaps another topic, but why are synthetic derivatives in silver, or stocks and bonds OK, but the same derivatives in money (credit expansion via fractional reserve requirements) not?

I take it you are referring to SLVs or trading in silver certificates that are not backed by silver. It is not a question of whether this is morally ok or not. It is a question of what the consequences of such trading would be.

In the first instance, it would depress the price of silver. For any industry that uses silver in its manufacturing process, this is good news.

However, as with money, it creates an unstable equilibrium in which the system works only as long as people have faith in it and are willing to put up with the consequences of the system. Any flight of silver from the system (a "run" on silver) would see the silver market collapse in a heap.

 

[Blue Mountain]

The bank is loaning you money that is not there. The Fractional Banking System creates money out of deposits... I am not talking about a simple loan transaction.

There were a few prior posts that provided what fractional banking entails.

Au contraire. If I took out a bank loan for $10,000 when the fractional reserve requirement is 20%, it means that prior to making the loan the bank must have been holding deposits from one or more depositors in the amount of $12,500. It loans me $10,000 of that and keeps the remaining 20% ($2,500) in its reserve. Its books show it has $2,500 in cash (or gold, if you prefer) and $10,000 owing from me. No money was created in that transaction.

 

[psionl0]

Au contraire. If I took out a bank loan for $10,000 when the fractional reserve requirement is 20%, it means that prior to making the loan the bank must have been holding deposits from one or more depositors in the amount of $12,500. It loans me $10,000 of that and keeps the remaining 20% ($2,500) in its reserve. Its books show it has $2,500 in cash (or gold, if you prefer) and $10,000 owing from me. No money was created in that transaction.

Think a little further. The bank has added $10,000 to the money that is in circulation (reserves are not counted as money in circulation). And if the borrower deposits the money into his account at the bank then the bank has its original $12,500 in reserves but the extra $10,000 is now circulating through bank accounts.

Still say no money has been created?