Split Thread Fractional reserve credit vs. derivatives

Blue Mountain said:
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.
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Please re-read psion10... that was stated perfectly.
 
Thanks for the compliment ladmo. I sometimes wonder how many people on this forum can actually follow a logical argument. ;)
 
michaelsuede said:
Wow - pretty much exactly what I said!
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Well, except for the part about it not being what you said.
wikipedia said:
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
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michaelsuede said:
Bank A has 100 dollars of fiat money that has been put on deposit with it by savers.

Bank A can now legitimately make 100 dollars of loans.

If Bank A makes MORE than 100 dollars of loans, the bank will be engaging in fractional reserve lending.
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psionl0 said:
Perhaps you want to limit the debate to the original question:
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
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That is a relevant question. Do you think it is morally OK?

Please note--you are not being asked to speculate about a conspiracy about whether the SLV trust operator has not backed the net asset value with silver. Assume that it has. (If you argue that it is not your speculations will have no relevance to this topic)

So assume the NAV is fully backed by underlying.

Is it morally OK for holders of SLV to lend their stock so that non-beneficial owners can borrow it and short it? If this happens then synthetic long positions in SLV will be greater than the trust's NAV and they will not all own underlying silver and this will be nothing to do with the NAV not being fully backed.

Yes or no?
 
ladmo said:
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.
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Blue Mountain said:
No money was created in that transaction.
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psionl0 said:
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?
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Fractional reserve lending certainly creates money out of thin air. That is why higher monetary aggregates are larger than the monetary base. I don't know why this would be in dispute. It's purpose is to multiply money in circulation. (It does not create net wealth out of thin air)

Opponents seem to think that this is some kind of rationale for it being undesirable, or evil, or prone to depress interest rates. And that it should be illegal even though the same mechanism is what permits forward trading, insurance, derivatives and myriad other risk transfer markets.

It is not a rationale by itself. The purpose of the thread is to encourage opponents of fractional reserve banking to provide a coherent justification for their view, not to merely proclaim it.

To date no response in this thread has addressed any of this. The logical conclusion appears to be that the objectors have nothing.
 
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Francesca R said:
Fractional reserve lending certainly creates money out of thin air. That is why higher monetary aggregates are larger than the monetary base. I don't know why this would be in dispute. It's purpose is to multiply money in circulation. (It does not create net wealth out of thin air)

Opponents seem to think that this is some kind of rationale for it being undesirable, or evil, or prone to depress interest rates. And that it should be illegal even though the same mechanism is what permits forward trading, insurance, derivatives and myriad other risk transfer markets.

It is not a rationale by itself. The purpose of the thread is to encourage opponents of fractional reserve banking to provide a coherent justification for their view, not to merely proclaim it.

To date no response in this thread has addressed any of this. The logical conclusion appears to be that the objectors have nothing.
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One of the biggest problems with Fractional Banking is that it encourages the Government to embrace deficit spending but the trouble is that you cannot compartmentalize our financial system and discuss only one element of it. The Feds (private corporation), the dollar (not backed by anything other than the good intent of the government to honor it), repeal of the Glass-Steagall Act, intertwining of international banks, insurance companies acting like Bookies,and private institutions that are too big to fail. Putting all of these components together (and there are many more that could be added) is a recipe for disaster.

If we eliminated fractional banking and had the Glass-Steagall Act in place, we would not be in this predicament.
 
ladmo said:
One of the biggest problems with Fractional Banking is that it encourages the Government to embrace deficit spending
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1--Show how fractional reserve banking does this. If you don't provide the mechanism, there is nothing behind your statement.

2--What other problems are there with it? If none, then your objection hinges on your rationale for (1). If there are others, be specific about what they are


but the trouble is that you cannot compartmentalize our financial system and discuss only one element of it.
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Untrue. You may not want to. That may be because you don't have a legitimate reason to oppose fractional reserve banking. But it is perfectly possible to separate.

I don't even know what you mean by "our" financial system. I am not speaking of the US system specifically. All developed economies have fractional reserve banking but they are most certainly not all identical in other respects. Hence one most definitely can compartmentalise.

Do you oppose derivative trading in private markets? Do you oppose catastrophe insurance? Do you oppose overbooking of airline tickets?
 
Francesca R said:
1--Show how fractional reserve banking does this. If you don't provide the mechanism, there is nothing behind your statement.

2--What other problems are there with it? If none, then your objection hinges on your rationale for (1). If there are others, be specific about what they are


Untrue. You may not want to. That may be because you don't have a legitimate reason to oppose fractional reserve banking. But it is perfectly possible to separate.

I don't even know what you mean by "our" financial system. I am not speaking of the US system specifically. All developed economies have fractional reserve banking but they are most certainly not all identical in other respects. Hence one most definitely can compartmentalise.

Do you oppose derivative trading in private markets? Do you oppose catastrophe insurance? Do you oppose overbooking of airline tickets?
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You create a false dichotomy with your statements. You make so many comments that are patently false, a rebuttal starting point could be anywhere and exhaustive.

As an aside, when I said "our" financial system, I am referring to what we have in the United States. I made a comment about the intertwining of the financial systems as a problem... and you just highlighted it.

I care not to spend my Sunday (or any day for that matter) on educating your sorry state of mind. Clearly you have no grasp of economics. So if you wish to claim victory go right ahead as your continuing to spew worthless comments does not make them correct.
 
Francesca R said:
Is it morally OK for holders of SLV to lend their stock so that non-beneficial owners can borrow it and short it? If this happens then synthetic long positions in SLV will be greater than the trust's NAV and they will not all own underlying silver and this will be nothing to do with the NAV not being fully backed.

Yes or no?
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There is nothing wrong with short-selling shares as long as the short seller actually posesses the shares he is selling and the original owner of the shares has no access to the shares while they are on loan.

It would be no different if I were to borrow silver bullion from somebody and sold it in the market.

Of course, if all SLV shares are fully backed by silver then this does not resemble a fractional reserve banking situation.
 
Francesca R said:
The purpose of the thread is to encourage opponents of fractional reserve banking to provide a coherent justification for their view, not to merely proclaim it.

To date no response in this thread has addressed any of this. The logical conclusion appears to be that the objectors have nothing.
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Francesca R said:
Don't conflate it with government borrowing or central bank balance sheets, else I shall conclude you also do not understand the subject.
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If you try to limit the scope of the debate like this then it is no wonder that you are getting so little "coherent justification" for anti-FRB views.

Government debt is a demonstrable consequence of FRB. Although it is much harder to demonstrate, FRB is also considered responsible for magnifying the effects of booms, busts and asset bubbles. Under FRB, the collapse of a major bank would be considered a catastrophe so the government (ie taxpayer) feels compelled to stand by ready to bail the bank out if it gets into trouble.

I don't know why you love FRB so much.
 
psionl0 said:
There is nothing wrong with short-selling shares as long as the short seller actually posesses the shares he is selling and the original owner of the shares has no access to the shares while they are on loan.
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But the owner almost always does. Standard terms for securities lending is that they are callable on demand. Check here. Lent securities are analagous to demand deposits. The only difference is that settlement periods vary--for equities and bonds they are 3 days but bonds can be same day. But whatever the settlement is, once called the borrower has to effectively cough up instantly.

Still perfectly OK to borrow and short SLV? And if so, why not borrow and "short" (exchange for goods/services/assets) money?

It would be no different if I were to borrow silver bullion from somebody and sold it in the market.
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I don't know who would arrange that for you. If it was an off-market deal you could agree what you want. If you borrow SLV through a broker, you're callable on demand.

Of course, if all SLV shares are fully backed by silver then this does not resemble a fractional reserve banking situation.
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All long SLV exposures are not fully backed. All shares in issue are. But whether the latter is true or not does not change the former.
 
psionl0 said:
Government debt is a demonstrable consequence of FRB.
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Continuing to say this does not advance your argument.

But although you have not demonstrated the consequential effects, is this the only "reason" to oppose FRB? ETA: You have not yet identified another.

Although it is much harder to demonstrate, FRB is also considered responsible for magnifying the effects of booms, busts and asset bubbles.
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Leverage (of any kind--including the kinds you have no issue with) increase the ability for asset price extremes to propagate, as leverage can sometimes build in a correlated and (subsequently proven to be) mistaken direction. But leverage in asset markets does not require fractional reserve banking--it only requires derivatives. And it doesn't even require derivatives. And you don't want to outlaw derivatives anyway, so why (again) does fractional banking get singled out?

Another school of thought is that ease of establishing short positions is a check on asset price extremes forming in the first place. I don't know about that, but I do think it is bananas when price corrections happen and politicians or regulators rush to blame (and restrict) shorts, having blessed longs all the while.

Under FRB, the collapse of a major bank would be considered a catastrophe so the government (ie taxpayer) feels compelled to stand by ready to bail the bank out if it gets into trouble
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Under full reserve banking the collapse of a major bank would also be a catastrophe and the government would bail out depositors. Governments do not let despositors lose their savings where governments are democratically elected. Even if the depositors were in dodgy Icelandic banks
 
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