Where did the 'Fractional Reserve Banking' meme begin?

[drkitten]

Fractional reserve banking allows a certain group of people to create phantom money. If i own a rental store, all i could do is rent what i have. If i rent a cement mixer, all i could do is rent a cement mixer. I cannot rent and IOU cement mixer.

Except that you could, and people do.

Have you ever flown "standby"? Airlines do, in fact, sell IOU tickets, based on the belief that not everyone who has bought a ticket for a particular flight will show up. In fact, they'll even overbook flights for the same reason -- if it turns out that a particular flight is over capacity, they will simply move the passenger to a different flight (usually giving them a voucher or something in exchange).

In fact, any business that takes reservations -- restaurants, hotels, car rentals, &c. -- will routinely overbook. Many is the time I've reserved ("rented") an economy car, only to be told at the time of pickup that they're all out of the type of car I reserved, so they're giving me a "free upgrade." It works out to be more profitable to overbook the compact cars and to sometimes rent out a mid-size sedan at a compact rate than it is to turn down reservations because you don't have enough compacts on the lot.

Renting an IOU cement mixer is not a problem if the customer decides not to pick it up. It's not even a problem if the customer picks it up, as long as you can beg borrow or steal a cement mixer from someone else. ("I'm sorry, I don't have the six cubic foot model available, so I'm giving you an eight cubic foot model instead. Is that all right?" Or even more accurately, "I'm sorry, I don't have the six cubic foot model available right now, so I'm ordering one from the warehouse, and it should be here in about fifteen seconds... Ah, there it is.")

It's only a problem when the warehouse runs out of mixers.

 

[Free Thinkr]

There really isn't much differrence between banking and insurance, despite Tippet's objections.

LOL, what a gem of a quote. There's hardly any difference at all, except the fact that their purposes are totally and completely different!

The only aspect of Tippet's argument I can agree with is that a clear statement of risk and a limitation on withdrawal should be given depositors. Perhaps only the immediately guaranteed part, the reserve assets should be considered part of M3. This has no impact on the transaction but it makes the paranoiac charge that banks mint money disappear.

Sigh. First of all, no one claims that banks "mint" money. Minting is a process of creating currency. If you cannot distinguish between money and currency, probably you should avoid comment on this topic. But more importantly, it doesn't matter a whit how explicit banks make the fractional reserve process; banks create money because money is what is commonly accepted in exchange. As long as the fractional reserve process has an inflationary effect on the money supply, and it always will, banks create money.

The folks who took mortgages and couldn't repay should have failed.

Haha, hooboy!

Instead the Federal goverment is propping up all the losers using money from those who rejected this sort of risk.

Really? Not last I checked! Last I checked, the government is primarily propping up the banks. And it's doing so because it knows what the result of a massive collapse of the money supply would be.

Predatory lending ???? What a complete nonsense term ! Some mean old bankers stalk you and forces you take loan money you'd like but are unable to repay ??? That's an insane scenario.

Insane? No, more like idiotic. An idiotic scenario because you specifically dreamed it up with the purposes of making an idiotic strawman.

It's more like this ... banks wanted to make low quality loans since they could sell these, even to the GSEs, at the same prices as higher quality loans. Greedy, short-sighted individuals agreed to take these loans and live-high until the party ends. It's tortured logic to call the loan-takers victims; they are barnacles on the hull of society.

More likely, they aren't financial experts, and believed the lies the bankers told them. Sure, some are as you described, but many were not.

 

[Francesca R]

In fact, any business that takes reservations -- restaurants, hotels, car rentals, &c. -- will routinely overbook.

It also means--rather happily for the lied-to and defrauded customer--that you can normally cancel a hotel or restaurant reservation or a car rental or a ("flexible") air ticket at under 24 hours notice and--hey presto--get almost all of your money back. I have frequently found that rather useful in comparison with being told "No way, we had a deal, pay up or you're going to jail for violating a contract, you promised!".

And the reason this can happen is that, over a large number of reservations, merchants have a pretty good idea of how many will cancel. Why they even agree cancellation conditions up front with their customers. The forecasting isn't perfect, but it works well enough for everyone to be on average better off than they would be if merchants were legally prohibited from overbooking and cancellation refunds were obliterated.

But some day there's bound to be a massive slip up with thousands of people bumped from airlines, hotels, restaurants and car rentals, so maybe we better start up some anti fractional-reserve-air/hotel/restaurant/rental car activism!

 

[Francesca R]

I heard not so long go that Airbus takes orders for jumbos without actually having a finished model in their showroom. Sometimes they might not have even sourced all the parts and labour to build to order. Such fractional reserve plane building is a complete scam. As for those South Koreans and their vacuous promises to supply ocean going oil tankers without having them available already, it makes my blood boil. They are all using those pesky mean-variance risk models too which everyone knows are a crock when you get black swans.

 

[drkitten]

I heard not so long go that Airbus takes orders for jumbos without actually having a finished model in their showroom. Sometimes they might not have even sourced all the parts and labour to build to order. Such fractional reserve plane building is a complete scam. As for those South Koreans and their vacuous promises to supply ocean going oil tankers without having them available already, it makes my blood boil. They are all using those pesky mean-variance risk models too which everyone knows are a crock when you get black swans.

Yeah. I even knew a book author who accepted money for a book before it was even written.

Obviously, this lax morality must be stamped out. Down with all economic agreements except for barter!

I will go speak to my congressmen about it, as soon as I can find someone willing to change a goat for me as I need bus fare.

 

[Francesca R]

Have the police standing by to arrest the driver in the event that there is not enough room on the bus. I hate fractional reserve mass transit with a passion fruit.

 

[lomiller]

Isn't realistic. The US federal reserve ratio has been 10% for a long time. Canada has none at all since 1992. The UK, if I understand correctly has about a 3% voluntary rate. The 40:1 and 15:1 type numbers do not refer to US Federal deposity banks. Private lenders and do as they please - buyer beware.

As far as I can tell that 10% number only applies to transactional deposits, everything else is 0%. City and BoA were running leverage ratios of just over 5% and the investment banks like Merrill Lynch, Lehman Brothers, etc were frequently running in the 2%-4% which must now be brought up as they are no longer classed as investment banks.

 

[Aepervius]

ABout right, we already had that discussion in a previous thread, and that came to a stop when the proponent of certain right to be natural were requested to give an example. The reality is that a society give the right those which belong to it think they should have. For example for a long time black people had no right in certain US state and were called "slave". The right to property is like the right to health care. A right which is octroyed by a governement.

This thread is not the place to discuss it again I think.

 

[Michael Redman]

To allow a certain industry to be privileged is unconstitutional.

Citation?

 

[The Central Scrutinizer]

Citation?

LOL!!! Good one!

In other words, don't hold your breath.

Come to think of it, the answer might prove to be quite entertaining.

 

[Michael Redman]

With just-in-time inventory, business routinely sell thing they have not yet acquired or produced. If they were suddenly prohibited from selling things they didn't actually possess, that would cause an economic catastrophe.

But I'm no economist. Is lending somehow categorically different than selling in this regard?

 

[se7ensnakes]

"The people complaining about fractional reserve banking are essentially suggesting we limit economic activity to the amount of available money. They usually go a step further and say we should have a gold standard, so that economic activity is limited to the amount of gold in existence."
The system is not self-sustainable, and lot of interest money is being made. The Federal Reserve is not the lender of last resort...we are. We pay for it thru inflation and taxes. This indicates an industry that is directly priviliged. As far as money liquidity, there are other monetary systems out there that should be discuss and made an issue among the voting public. Crying out that only a debt money system is the ONLY alternative is ignorance at its best.

 

[The Central Scrutinizer]

"The people complaining about fractional reserve banking are essentially suggesting we limit economic activity to the amount of available money. They usually go a step further and say we should have a gold standard, so that economic activity is limited to the amount of gold in existence."
The system is not self-sustainable, and lot of interest money is being made. The Federal Reserve is not the lender of last resort...we are. We pay for it thru inflation and taxes. This indicates an industry that is directly priviliged. As far as money liquidity, there are other monetary systems out there that should be discuss and made an issue among the voting public. Crying out that only a debt money system is the ONLY alternative is ignorance at its best.

I'm sorry, I wasn't listening. Could you repeat that?

 

[se7ensnakes]

Have you ever flown "standby"? Airlines do, in fact, sell IOU tickets, based on the belief that not everyone who has bought a ticket for a particular flight will show up. In fact, they'll even overbook flights for the same reason -- if it turns out that a particular flight is over capacity, they will simply move the passenger to a different flight (usually giving them a voucher or something in exchange).
dr kitten Thats not fractional, both service and/or money are available without resorting to the government.
That contains no ticket creation, the customer purchased tickets for the purpose of transportation. If the airlines cannot meet the demand, they are either book to another flight or they are given their money back. There is no danger of a run on the airlines because the airline still has the money or it can, in a timely manner provide the service. If you wanted to compare airlines to banks the airlines will need to sell ten ticket with the hopes that nine customers did not show up, while collecting interest on the other nine tickets.

 

[se7ensnakes]

Michael Redman
Business typically do sell things that they dont have, but at one point they can give the money back to the customer or they can give them the product. If the business cannot do either...it is call fraud. Someone plain-out stole your money.

 

[Francesca R]

Thats not fractional, both serhvice and/or money are available without resorting to the government.

If an airline becomes insolvent, then various governments get involved. If it doesn't, then there is no issue. If a bank would not be rendered insolvent by redeeming a deposit, then there is no issue there either.

There is no danger of a run on the airlines because the airline still has the money or it can, in a timely manner provide the service.

That is not the reason why there is not a "run on airlines". There is not a "run on airlines" in the sense of customers mobbing airports because you can't just go and grab your flight now the moment you hear the company is in distress. You can try to cancel and get a refund and rebook somewhere else and that sort of "run" certainly does happen and can send the airline under.

And when that happens, customers lose money and get stranded, which is sometimes mitigated by consumer protection schemes that tour operators are legally required by government to set up in some countries before they can sell air travel. But get this--if there was a systemic collapse of a whole bunch of airlines at once, there would not be enough money in the kitty to bail them out (or bring them home).

If you wanted to compare airlines to banks the airlines will need to sell ten ticket with the hopes that nine customers did not show up, while collecting interest on the other nine tickets.

If it was routinely the case that 9/10 customers did not show up, then I fully suspect that is what airlines would do, and would be legally allowed to do.

Virtually any business that does not trade exclusively in a spot market has the element of fractionality that you are only protesting about in respect of banks. You need a different rationale for your protest because the one you have offered is invalid.

 

[Francesca R]

Business typically do sell things that they dont have, but at one point they can give the money back to the customer or they can give them the product. If the business cannot do either...it is call fraud. Someone plain-out stole your money.

Incorrect. Insolvency, for example, is not fraud.

 

[drkitten]

If you wanted to compare airlines to banks the airlines will need to sell ten ticket with the hopes that nine customers did not show up, while collecting interest on the other nine tickets.

... which is approximately what they do, except that the "interest" is instead called "change fees," and the percentage of people who don't show up for any given flight is much smaller than the percentage of people who don't show up on any given day to demand their money from a bank.

Which is why the banks are able to operate on only a 10% reserve, while airlines need 90-95% reserve or so, and hotels need 70-80% reserve.

 

[stevea]

LOL, what a gem of a quote. There's hardly any difference at all, except the fact that their purposes are totally and completely different!

Perhaps you don't understand what banks do (a common disease on this thread). I would not loan my neighborA $450k for a home loan, nor would I loan neighborC $30k for a new car, nor would I loan neighborC $1.5Mill for a business loan. I *would* however deposit money at a local bank that makes all of these loans and a lot more. The reason should be obvious, even to a fool - the bank amortizes the risk of default over a much larger pool. So banks are basically consolidators of risk - EXACTLY LIKE AN INSURANCE COMPANY.

Then look at Citibank or Lehman's - they bought mortgages and consolidated these into large pools, and in doing so provided value. The buyers of these mortgage backed securities obviously misunderestimated the risk, but no fault to Lehman's. Again this is EXACTLY LIKE INSURANCE - it's risk reduction via pooling of risk events.

Sigh. First of all, no one claims that banks "mint" money.

Sigh - you need to read this thread again ....

Banks are a problem, they create money each time someone borrows,....

7snakes isn't the only kook here. Look at you ...

But more importantly, it doesn't matter a whit how explicit banks make the fractional reserve process; banks create money ...

If your major complaint is that I'm blurring M1, M2 and M3, fine - but if you think M3 is inferior to M1, then do I have a trade for you !

The folks who took mortgages and couldn't repay should have failed

Haha, hooboy!

Please explain EXACTLY what you mean. If a bank offered me a $10M loan for a home, I would assess that I could not easily repay the $600k/year interest and so I would reject that offer. If OTOH a bank offered my small business a $10M loan on outstanding orders I might take that loan. Anyone with an IQ approaching 3 digits should be able to reasonably assess their ability to repay a loan. Why on earth wouldn't we give ppl the freedom to say yes/no to a loan ? Given that personal freedom why wouldn't we expect them to take the full consequences of their decisions ? Someone offering me a truly excessive loan does NOT abrogate my obligation to act responsibly and in my own self-interest. Unlike you, I don't believe that the general population is stupid and in need of a paternalistic government hand to control their lives. If some of them make bad decision - that is clearly their responsibility and not my business. It's also the lender's problem. If you say were the Russian gov't buying mortgaged back securities from Lehman's and getting default insurance from AIG - then it is ENTIRELY the responsibility of that government to a/assess the quality of these mortages and b/ assess the ability of the insurer, AIFG to repay. They failed at both and so they should take the consequences.

Really? Not last I checked! Last I checked, the government is primarily propping up the banks. And it's doing so because it knows what the result of a massive collapse of the money supply would be.

Not so fast. The Fed is appropriately injecting liquidity into Fed member banks to avoid a currency collapse. This is loaned money and in the long run costs the taxpayer nothing but the interest reduction. This is separate and different from the US Gov't, (not the Fed) injecting $765Bnl into propping up commercial banks like Citibank. Let's face it, FNMA & FreddieMAC lost too and should be fold.
Yes there are overlap cases, but these aren't the major headlines. IMO the gov't should NOT be propping up badly operated banks. The Fed should use a loose money policy, and the Gov't should be involved in creating an orderly process for the sale of Lehman'.s Citibank and other incompetent banks assets. Your brush is too broad.

Insane? No, more like idiotic. An idiotic scenario because you specifically dreamed it up with the purposes of making an idiotic strawman.

Really - so you don't believe in predatory lending exists either ? Great, we agree. What does "Haha hooboy", mean then ? Perhaps you haven't seen the liberal news in the past 18 months but chock full of claims that "predatory lending", and "greed", the two nonsense terms - so it's certainly not a strawman. How can an offer to loan money be predatory ?

More likely, they aren't financial experts, and believed the lies the bankers told them.

Awww - the po' wittle dumb, peepow, we must protect them from themselves and take away their choices. What a load of BS. What a clear road to fascism !

Can you cite any realistic data that individuals were lied to by bankers; if not it's just slander on your part. I have news for you sunshine - in tort law the contract is abrogated if there is deception. If this was a common case then lawyers & courts would be beating the tar out of the lenders, and the borrowers would be completely protected. The CNBC special on this showed a lot of examples of West Coast house traders who assumed their (zero equity) house would be worth more in the future - gamblers. They also showed a number of the poor; several were full of whiney victmhood, but the majority were quite honest and stated they knew it was wrong to take the loan from the beginning. They knew their income was misstaed and they knew they couldn't repay.

You either declare these ppl as mentally incompetent, make them wards of the state and take away their rights to make individual decisions, to make contracts, and obviously to vote. Otherwise you must admit there are of reasonable intelligence and capable of living their own lives without government "help", and accept that they can make mistakes and can take the consequences of their own decisions. A bail-out just b/c someone offered them more than they could repay and they foolishly took the offer isn't reasonable.

 

[se7ensnakes]

wrong francesca
you are confusing a latency effect for the multiplier effect. The constant borrowing and deposits make phantom accounts. A deposit becomes both an asset and a liability many times over. Once the airline ticket is used it is just an asset, it is not re-borrowed and deposited many times over, while collecting interest. You need to re-read your modern money mechanic booklet again.
If the airlines serviced 1 out 10 tickets they sell, it will come close to what the banks actually do. The airlines, then, could pull a maneuver where they might re-sell tickets someone actually think they have. Unfortunately for airlines, people actually use the tickets, they dont bank tickets.