hjmaiere:The claim is that fractional-reserve banking won't happen under free-market conditions. Nothing you have written addresses this point.
My claim is that it will happen under free-market conditions, and everything I've written addresses that point. The prior bulk of your post is on a subject nobody here, including me, has any argument with.
The state won't go away once enough people want the state to go away, the state will effectively disappear once enough people no longer care that much whether it stays or goes. We don't need a revolution, we need millions of them.
Juan:Oh, but such an opposition is older than the internet =]
Of course.
Juan:I'm not sure what kind of refutation you expect.
If I knew that, I wouldn't need to look for it here.
Juan:I do believe it is a fact that FRB creates bogus property titles.
And that may be the start of a viable refutation, but I'll have to work on it some more...
Juan:FRB extends credit wich is not backed by 'real' savings - such faux credit is the cause of the business cycle
...but not from a consequentalist angle. The fact that it may lead to something considered bad is not itself enough to refute it.
Juan:I do agree it is for markets to decide. Mises and others seem to believe that in a free market the kind of system you have in mind would not last very long.
I'm still getting through HA, so I have yet to see in detail what Mises wrote. I can only hope that his analysis has more depth to it than what I've seen here.
BlackSheep: A dumb question: are you guys talking of two fractional reserve systems? It seems to me like a bank that creates banknotes for which they have no backing is a different practice than working out short-time deposits to provide for long-term loans... Originally, the issue with the Federal Reserve was that they provided more bank notes than they had gold, right? But nowadays, the issue is they take the risk away from this business, irresponsibly creating money in the process, correct?
A dumb question: are you guys talking of two fractional reserve systems? It seems to me like a bank that creates banknotes for which they have no backing is a different practice than working out short-time deposits to provide for long-term loans...
Originally, the issue with the Federal Reserve was that they provided more bank notes than they had gold, right? But nowadays, the issue is they take the risk away from this business, irresponsibly creating money in the process, correct?
Yes, there are two main strains at issue here, bank deposits and currency issuance. I haven't been distinguishing between the two because they are closely related, the main functional difference being whether the receipts are circulated to third parties as money or not. The issues involved are basically the same, though at some point, if the conversation ever gets deeper than dogma, it may be necessary to distinguish the two.
Any FRB scheme impies issuance of more reciepts, or notes, than there is physical gold backing them, but not necessarily a pure fiat note that has no backing at all. That is still the main issue with the Federal Reserve (although the issuance of "notes" is virtualized to entries in an electronic ledger), but they've expanded their mandate to include things like the Bear Stearns bailout. It's a predictable, but nasty consequence of the premises they operate under.
Most everybody here is arguing that FRB iteself is the cause of these problems, my counterpoint is that it is the monopolization of currency issuance that allows them to abuse FRB without any market discipline that is the cause of the problems, not FRB itself.
Jon Irenicus: You do agree though that government protection allows banks to keep far less money on reserve than what would prevail on a market, right? And it is still the case that government-aided FRB is a form of price control, setting the price too low in most cases. -Jon
You do agree though that government protection allows banks to keep far less money on reserve than what would prevail on a market, right? And it is still the case that government-aided FRB is a form of price control, setting the price too low in most cases.
-Jon
Absolutely.
DriftWood: Nice explanation.
Juan: Thanks for the links, I will listen to them as soon as I have a chance, probably later today at work.
fsk: I've got your article series up in my browser, and will read it, but it might be a few days till I have time.
FRB is not bad at all. It is central banking that is bad. Prior to the Federal anti-Reserve system in the US, banks were locked in a dog eat dog world of trying to keep their reservers high enough to pay off runs on the bank while at the same time lend out enough money to maintain a profit. Also quite a few organizations acted as fractional reserve banks. It is the central bank that mucks it up. Without the Federal anti-Reserve the largest banks would be Microsoft, Walmart and Exxon as these have the largest reserves. But the central bank stops these organizations from participating in giving borrowers cheap loans. Instead they steal money through inflation and give it to their friends. Absent the central bank lending would be much better for the borrowers.
There's one key point that people are missing. I can't legally boycott the Federal Reserve.
If I want to set up my own private monetary system based on gold or silver, that's practically illegal. It's theoretically legal, but the taxes and regulations I would need to follow make alternate monetary systems effectively illegal. The cost of complying with all the taxes and regulations would make such a business unprofitable.
Plus, the income tax effectively bans alternate monetary systems. If I use an alternate monetary system, income taxes must still be paid in Federal Reserve Notes. I can't boycott the Federal Reserve unless I also boycott the income tax.
If you follow the full trail, the immoral agent is the government violence that bans alternate monetary systems. For example, the Liberty Dollar had their assets seized by the FBI. People who attempt to set up alternate monetary systems find themselves the victim of government violence. (The Liberty Dollar is a bad example, because that has its own issues, but e-Gold vendors have come under similar regulation/seizures.)
If there were no government violence backing the Federal Reserve, people would just boycott it and use sound money instead. Similarly, back in the days of the gold standard, government violence protected banks from the consequence of their misconduct. Government violence and regulation of banking prevented sounder banking models from competing with fractional reserve banking.
There's really two separate fractional reserve banking systems that are being cricitized. There's the present system of fiat debt-based money, which is totally fraudulent. There's the pre-1913 system of fractional reseve banking based on a gold standard.
In the present, I'm legally barred from boycotting the Federal Reserve. Government violence prevents sound banking systems from existing. The people who say "Fractional Reserve Banking isn't immoral" are ignoring the fact that violence prevents me from using alternate forms of money.
I have my own blog at FSK's Guide to Reality. Let me know if you like it.
DriftWood: [...] Banks exist to connect borrowers and lenders. Its the middle man, so that borrower dont have to go looking for lenders and vice versa.
[...]
Banks exist to connect borrowers and lenders. Its the middle man, so that borrower dont have to go looking for lenders and vice versa.
Banks can and have done exactly this without fractional reserves. And back when they did this without fractional reserves, the economy was much more stable, and prices tended to go down over time, not up.
DriftWood: Banks are not warehouses. A warehouse can not lend out anything, it can only store stuff. If you stored gold with a warehouse, you can get out the gold on request, but you would have to pay it a storage fee. If you payed the storage fee, with some of the gold you had stored.. it would work like a negative interest, your stored gold would grow smaller and smaller. This is why warehousing gold or money is not a popular option.
Banks are not warehouses. A warehouse can not lend out anything, it can only store stuff. If you stored gold with a warehouse, you can get out the gold on request, but you would have to pay it a storage fee. If you payed the storage fee, with some of the gold you had stored.. it would work like a negative interest, your stored gold would grow smaller and smaller. This is why warehousing gold or money is not a popular option.
Then why is the government actively trying to make this supposedly unpopular option illegal?
DriftWood: The free market came up with a better way.. it came up with the concept of a bank. What do savers want? To be able to get back their gold on request, and not pay much of a storage fee. What do borrower want? To get to borrow money on the long term, and not pay much of a fee for doing so. Fractional reserve banking is the method that makes all short term savers, into long term lenders. Its a wonderful free market innovation. [...]
The free market came up with a better way.. it came up with the concept of a bank. What do savers want? To be able to get back their gold on request, and not pay much of a storage fee. What do borrower want? To get to borrow money on the long term, and not pay much of a fee for doing so. Fractional reserve banking is the method that makes all short term savers, into long term lenders. Its a wonderful free market innovation. [...]
Study your history. Markets came up with banks. They didn't come up with fractional-reserve banking, which is only possible when governments do specific thing to force people to use the notes of the politically-favored banks. People may want to be able to get back their gold on request, and not pay much of a storage fee, but in 1913, after years of political maneuvering and propaganda, the banks got the federal government to grant the Federal Reserve a government-enforced monopoly on bank note issue. And in 1929, when people called the banks on the fact that there were twice as many bank notes in circulation as there was gold on deposit, the government's response was to outlaw gold:
http://www.presidency.ucsb.edu/ws/index.php?pid=14509
Now days the ratio of debt-based money to 'real' money is something like 100-to-1, only now 'real' money is Federal Reserve notes, created electronically at the whim of the Treasury. This is a massive transfer of wealth from the economy to the banks and the government. They can only get away with it because people know next-to-nothing about economics and history, and the government controls education to make sure it stays that way.
But this is mises.org. There is tons of material on the topic here. Start with this:
http://mises.org/money.asp
hjmaiere:And in 1929, when people called the banks on the fact that there were twice as many bank notes in circulation as there was gold on deposit, the government's response was to outlaw gold:
The gold confiscation and default on the dollar occurred in 1933, not 1929. In 1929, the Federal Reserve jacked up interest rates, causing a money supply crash.
fsk: hjmaiere:And in 1929, when people called the banks on the fact that there were twice as many bank notes in circulation as there was gold on deposit, the government's response was to outlaw gold: The gold confiscation and default on the dollar occurred in 1933, not 1929. In 1929, the Federal Reserve jacked up interest rates, causing a money supply crash.
The default on the dollar began in 1929. It was merely made official in 1933. It wouldn't have happened at all were it not for the Federal Reserve's artificial expansion of the money supply, only made possible by its monopoly on bank note issue. And the official story is that the Great Depression happened because the Federal Reserve didn't expand the money supply fast enough. The truth is that the Fed desperately tried to expand credit but couldn't.
hjmaiere: The default on the dollar began in 1929. It was merely made official in 1933. It wouldn't have happened at all were it not for the Federal Reserve's artificial expansion of the money supply, only made possible by its monopoly on bank note issue. And the official story is that the Great Depression happened because the Federal Reserve didn't expand the money supply fast enough. The truth is that the Fed desperately tried to expand credit but couldn't.
If you're going to be really technical, the default on the dollar occurred in 1913, when the Federal Reserve was created. Before 1913, the paper dollar was a warehouse receipt for gold in the US Treasury. Every 20 paper dollars correlated with an ounce of gold in the Treasury. After 1913, the Federal Reserve was allowed to print more Federal Reserve Notes than actual gold was in the Treasury. Legal tender laws meant that Federal Reserve Notes traded at parity with gold.
Allowed to print more paper dollars than it had physical gold, the Federal Reserve caused an inflationary boom in the 1920s. The Federal Reserve was 100% responsible for the Great Depression. The Great Depression was a massive loot and pillage operation by politically connected insiders. It wasn't an accident or incompetence. They knew exactly what they were doing.
histhasthai: Any FRB scheme impies issuance of more reciepts, or notes, than there is physical gold backing them, but not necessarily a pure fiat note that has no backing at all.
February 17 - 1600 - Giordano Bruno is burnt alive by the catholic church. Aquinas : "much more reason is there for heretics, as soon as they are convicted of heresy, to be not only excommunicated but even put to death."
Juan:In which case the receipts will be traded at a discounted rate, reflecting how much backing they have.
So you can apply a formula to an inflated currency and know the exact level of prices it would produce? If I'm not mistaken, that runs counter to Mises.
Anyway, the fact that they are redeemable means that the discount would not be to the amount of backing, but a percentage based on the perceived risk of default.
Juan:when bankers realized they could not really cheat the public
Enough already. Fraud and cheating are off the table, and you're simply lying every time you refer to what I have been talking about as fraud or cheating.
So you can apply a formula to an inflated currency and know the exact level of prices it would produce?
Fraud
Wouldn't the question of fraud depend on the specific contract?
Maybe I'm missing something, but if one has a contract with a bank stipulating that gold is redeemable on demand would not failure to produce that gold result in breach of contract? And wouldn't a representation by a bank that gold is redeemable on demand contstitute fraud in such a case where the bank knows full well they may not be able to produce the gold?
On the other hand, if the contract stipulates or implies that gold may not be immediately redeemable, or if the bank makes it clear that they use the fractional reserve system, then there would be no breach of contract and no fraud. Why anyone would want to trade in dollars/pounds/whatever that would not be backed by 100% gold, I don't know.
(**Just the two cents of someone who knows nothing about econ)
On the other hand, if the contract stipulates or implies that gold may not be immediately redeemable, or if the bank makes it clear that they use the fractional reserve system, then there would be no breach of contract and no fraud.
Exactly, and goes to my point that such note/receipts would be lottery tickets. Sometimes you can redeem them, sometimes they are worthless.
And I have no idea how in trade with said notes/receipts, we could accurately price in the statistical chance that the note will turn out to be irredeemable.
Juan:My next sentence, which you didn't quote was : "That would be the free-market at work." - so stop pretending that I want to regulate banking or anything like that.
That wasn't my point at all, it was only that you seemed to be implying that the rise in prices would be based deterministically by the inflation of the currency, and that that is, as far as I know, counter to Austrian theory.
Juan:I think the word fraud aptly describes the phenomenon in a 'value-free' way - I don't see why you don't like.
"Fraud" is value-free? I object because "fraud" is the only argument I hear here, after explicitly positing a non-fraudulent context. It's a strawman, raised over and over.
mitcjm:if the contract stipulates or implies that gold may not be immediately redeemable, or if the bank makes it clear that they use the fractional reserve system, then there would be no breach of contract and no fraud
Exactly. At least someone gets it. Clarity on the FRB nature of the deposits implies an understanding of the risk of non- or delayed redeemability.
mitcjm: Why anyone would want to trade in dollars/pounds/whatever that would not be backed by 100% gold, I don't know.
I can think of several reasons. At the very least, Gresham. But seriously, The most immediate advantage to depositors is the reduced storage fees, and possible payment of interest on demand deposits, and thus greater personal liquidity by having to keep less of their money in time deposits. The benefit to bankers and borrowers is considerable, and so they would have an incentive to sweeten the pot to depositors. A less tangible benefit is the inflationary nature of it. (Ooh, I'm gonna catch hell for that, ain't I?)
Yes, its the govt intervention that is bad, not the private free market fractional reserve banks. Banks have no effect on prices, as banks only lend money from one person to another. No money is created, only debt is created. And thats not money. People dont need banks as the middle man to create debt, but its easier that way. So the banks dont have an effect on prices, and they sure cant control any prices. Banks and FRB is not to blame anything.
So, any controlling of prices, threw (base) money supply manipulation is done solely by the govts, as only the govt can create money. Monetary infation or deflation is entirely their fault. A govt usually inserts money into the private economy buy lending it on the cehap to banks, but it does not need to do this threw banks. It could just aswell do it threw public spending.. or by creating and selling bonds on the open market. You see? The end results, of an expanded money supply, would be the same.
Cheers
histhasthai: That wasn't my point at all, it was only that you seemed to be implying that the rise in prices would be based deterministically by the inflation of the currency, and that that is, as far as I know, counter to Austrian theory.
"Fraud" is value-free?
I object because "fraud" is the only argument I hear here,
after explicitly positing a non-fraudulent context.
DriftWood: Yes, its the govt intervention that is bad, not the private free market fractional reserve banks. Banks have no effect on prices, as banks only lend money from one person to another. No money is created, only debt is created. And thats not money. People dont need banks as the middle man to create debt, but its easier that way. So the banks dont have an effect on prices, and they sure cant control any prices. Banks and FRB is not to blame anything. [...]
It's not at all clear that you understand what fractional-reserve banking is. When receipts on demand deposits loaned or invested still function as money, they do so fraudulently, and it is inflationary. This is fractional-reserve banking, and it is not a sustainable business practice under free-market conditions.
The banking interests have spent over a hundred years trying to pretend that fractional-reserve banking is a natural product of the free market and is only harmful to the economy when it isn't properly regulated by the government. Any honest study of history clearly shows that this is blatantly false—flat-out backwards even. But the last thing you'll get in a government-financed education is an honest study of history.
One thing I've found extremely education is buying old books on economics. It allows you to see how the propaganda has been consciously shaped and reshaped over the course of time. I already mentioned a book from the 1920s on savings and investment. It describes exactly what some people here claim is the natural function of a bank that supposedly leads to fractional-reserve banking, only in this case nothing like fractional-reserve banking came close to happening. I also have a book from the 1950s put out by the Federal Reserve itself. It describes the function of the Federal Reserve as providing 'elasticity' in the money supply. Nothing about price stability. Nothing about targeted inflation rates. Those only came later as the then-current excuse for the Fed's existence no longer fooled anybody. I also have books by Garet Garrett and others that make it clear that there were plenty of people that weren't fooled for a second by that charlatan John Maynard Keynes. It took a whole lot of deliberate promotion of his theories by the establishment to push asside people's understanding that it is always only government intervention in the markets that causes economic depressions.
No one seems to care that it is the bankers themselves that write the laws on banking. No one seems to notice that, for example, Henry Paulson, former chair and CEO of the freakishly successful investment bank Goldman Sachs, is the Secretary of the United States Treasury, and that this kind of cozy relationship between the banks and the government has been par-for-the-course for the last several hundred years. People know that Bush and Cheney are oil men, but the true parasitic nature of money and banking seems to be beyond everyone's grasp.
Here's something I've been thinking about for the last few months: What if there were people who understood Austrian economics just as well as the schollars associated with the Mises Institute, but had no interest in its moral implications? What if, instead, they merely wanted to apply this knowledge to their own advantage? What would a predator like that in a position of influence do? But that's for another thread...
There is allot of confusion about fractional reserve banking.. fractional reserve banking is a free market investion, it would work even under a gold coin system, without expanding money supply.
When you deposit money with a bank, and the banks lends out that monet. It might appear that the money supply has increased because two people have claim to the same money. However that is confusing, money with debt. I'll paste the following from another thread i wrote..
You have to remember that this other person that spent your money is now in debt to you. He will pay you back the full amount, and then some (interest). So when he spends your money, your no longer have any money in the bank. What you are left with is a note that says "Hi. I noticed you where not using your money, so I took it and spent it. Dont worry though, I'll give you back the money, and a little for your trouble whenever you want". Ofcourse, that is a simplification.. what really is going on is that all the depositors money is put into the same pool of money, the overall money in the pool stays much the same.. sometimes one depositors take out all their money, but they dont all do it at the same time.. which means that there always is lots of money in the pool gathering dust. So what they do is let borrowers, borrow money from that pool. When the borrowers make mortage payments, they put money back into the pool.. eventually every borrower will have put back all the money they borrowed into the pool and then some (interest). You see? There is always enough money in the pool to cover the random withdrawl request by depositors.
Dont get confused though, no money is created here. Its just a creative and innovative way of lending money. Both lenders and borrowers preferr this way of lending as it is less restrictive, more efficient and therefore cheaper. Imagine if you had $100 you wanted to lend out. Would you rather lend it out signing a contract that read "you will get back your money this time next year, and you will make one years worth of interst." Or would you rather sign a contract that read "you will get back your money whenever you want it, and you will get paid interest depending on however long your money was lent out". You see, the second contract is much better for you. You can decide that you want back your lent out money at any time. This is what happens with your money when you keep it with a bank. All your life savings have been lent out to other people, who have spent it already. However this does not matter as all the borrowers of the bank are paying back their loand to the bank on a regular basis. There are so many of them, that the bank always has enough money in its vaults to pay you back your money whenever you needed it.
But what about bank runs? What happens if all depositors requested their money back at the same time. This is rare, but sound banks have nothing to fear. They can always raise money by selling assets. What assets does a bank have? Its got lots of those borrowers that keep paying back mortages every month. Thats a bond that pays x percent of interest a year. It can sell that on the open market and raise money. It could seel all its mortage backed bonds, and if the bank had not undervalued the price of risk involved with its borrowers, then it could raise enough money to pay back all the depositors at once. A bank only has to fear a bank run if it prices risk incorrectly, that is if it loans out money to risky borrowers at a low interest rate.
You see? This system would work just fine even under a gold coins system. Its just another way to lend out money, no money is created in the process.
DriftWood: Would you rather lend it out signing a contract that read"you will get back your money this time next year, and you will make one years worth of interst."
Or would you rather sign a contract that read "you will get back your money whenever you want it, and you will get paid interest depending on however long your money was lent out".
You see, the second contract is much better for you.
But what about bank runs?
What happens if all depositors requested their money back at the same time.
Juan: DriftWood: Would you rather lend it out signing a contract that read"you will get back your money this time next year, and you will make one years worth of interst." A legitimate contract.
This system actually existed. It was called a "Bill of Exchange". It's also referred to as the "Real Bills Doctrine", which says that new money created in this manner isn't inflationary, if the loans are backed by tangible goods.
If you have a piece of paper that says "I promise to pay 1000 ounces of gold in 1 year", then you can trade that piece of paper as if it were actual money, provided the issuer is trusted. If interest rates are 4%, then "I promise to pay 1000 ounces of gold in 1 year" is worth 961 ounces of gold right now. The interest rate of 4% was known as the "Discount Rate" (which is different than how the Federal Reserve uses it now.) In a free market, interest rates are usually pretty stable.
The Bills of Exchange system worked great until 1913, when the Federal Reserve was created and destroyed the system. The Bill of Exchange system was a great way for small businesses to raise/invest surplus capital. The central bank credit monopoly destroyed this free market financing mechanism. A central bank offers negative real interest rates, which means that it's always cheaper to borrow from a bank than from another individual.
fsk: Juan: DriftWood: Would you rather lend it out signing a contract that read"you will get back your money this time next year, and you will make one years worth of interst." A legitimate contract. This system actually existed. It was called a "Bill of Exchange". It's also referred to as the "Real Bills Doctrine",
hjmaiere: Here's something I've been thinking about for the last few months: What if there were people who understood Austrian economics just as well as the scholars associated with the Mises Institute, but had no interest in its moral implications?
Nope there is no fraud unless the bank actually breaks its contract of redemability on demand. All the contract says is that the bank will pay back the money on request, nowhere in the contract does it say what the bank may or may not do with the money in the meantime. If the bank breaks its contract, you can take it to court, and sue it. Its not your problem how the bank manages to keep its part of the deal. As long as it kees its deal, you dont care. A bank that can not keep its contracts, will nor only loose its reputation and trust, it will also loose its business and fail. Most big banks have been around for over a hundred years, wich means they are good at the balancing act that is fractional reserve banking. The size of their reserves and their pricing of risk has been good enough to avoid failing on its contract of paying back deposited money on request.
Saying that it is a fraud, even if the bank is able to keep its contract of redemability on demand.. is a very unlibertarian idea. (Peoples actions should be judged by its consequences, we dont have the right to regulating other peoples behaviour because we think it might prevent crime. A victimless crime, is no crime at all. A contract that is not broken, is not fraud.)
DriftWood:Nope there is no fraud unless the bank actually breaks its contract of redemability on demand. All the contract says is that the bank will pay back the money on request, nowhere in the contract does it say what the bank may or may not do with the money in the meantime. If the bank breaks its contract, you can take it to court, and sue it. Its not your problem how the bank manages to keep its part of the deal. As long as it kees its deal, you dont care. A bank that can not keep its contracts, will nor only loose its reputation and trust, it will also loose its business and fail. Most big banks have been around for over a hundred years, wich means they are good at the balancing act that is fractional reserve banking. The size of their reserves and their pricing of risk has been good enough to avoid failing on its contract of paying back deposited money on request.
Ok, my turn.
You're missing the reality of free banking competition. I do in fact care how my deposits are handled. Suing an insolvent organization after my savings are lost doesn't help me. You can't squeeze blood from a fradulent stone.
In a free banking environment, I don't know how FRB would be priced, and thus, I doubt it would be easy or cost effective to get deposit insurance. What sort of insurance company would insure against insolvency, when insolvency is the business model of the bank?
To say that it's not my problem how the bank manages my savings is very silly. The only reason why banks have managed fractional reserve banking for the last 100 odd years, are legal tender laws, which make the fiat paper money, the coin of the realm, and true metallic money, illegal.
DriftWood:All the contract says is that the bank will pay back the money on request, nowhere in the contract does it say what the bank may or may not do with the money in the meantime.
Please, for the love of all that is Good, address bailment law which directly applies to this theory of bank control of customer's deposits.
Without showing how money is different than any other goods under a warehouse contract (which a timed deposit isn't) then you are really saying nothing here but are only demonstrating your ignorance of FRB.
DriftWood:Saying that it is a fraud, even if the bank is able to keep its contract of redemability on demand.. is a very unlibertarian idea. (Peoples actions should be judged by its consequences, we dont have the right to regulating other peoples behaviour because we think it might prevent crime. A victimless crime, is no crime at all. A contract that is not broken, is not fraud.)
Except when it is fraud and the customer has to sue the bank.
According to this theory I should be able to fire a loaded gun into a crowd and as long as I don't hit anyone or cause any real property damage I will be free and clear. The 'no harm, no foul' libertarian justice system I suppose which, as you posted in another thread, could only lead to Civil War.
Hmm...I wonder how your Authoritarian Monopoly Justice System would deal with someone who fired a loaded weapon into a crowd but didn't hit anyone?
----edit----
Added a clicky link so you will hopefully quit dodging the question.
All the contract says is that the bank will pay back the money on request,
Its not your problem how the bank manages to keep its part of the deal.
Saying that it is a fraud, even if the bank is able to keep its contract of redemability on demand.. is a very unlibertarian idea.
liberty student: Suing an insolvent organization after my savings are lost doesn't help me.
There's two different conditions here that you are conflating. Insolvency is when liabilities exceed assets. Illiquidity (there's not really a better term for it that I can find, other than "cash-flow insolvency") is when immediate liabilities exceed liquid assets - the typical bank run scenario. A bank can be fully solvent and still experience a run that forces it to default on redeemability of it's demand deposits. In this case, the money is not lost, it is essentially converted to a time deposit. It's a serious issue, but it's not the same as true bankruptcy that loses you all your money.
Simplified case: you deposit 100 GO on demand deposit, and the bank loans it out on a one year loan. You demand your GO back the next day, the bank is unable to meet that demand, it is illiquid, or cash-flow insolvent. But it is not insolvent, it will still be able to pay you in a year, barring default by their borrower (which risk is the same as on an interest bearing time deposit without FRB). A year from now, you get your 100 GO back, plus at least the interest the bank made on their loan (and perhaps a further penalty if the bank has other assets).
You haven't lost your money, your suit is not fruitless, you have only lost the ability to redeem your money on demand.
So there's two distinct and separate kinds of risk to be aware of: that of delayed redeemability, and that of true bankruptcy in which your money is lost. The latter is not so much an FRB issue as a business failure issue, and the former, in and of itself, is a risk to your personal liquidity, not a risk to the deposited capital itself.
histhasthai: liberty student: Suing an insolvent organization after my savings are lost doesn't help me. There's two different conditions here that you are conflating.
There's two different conditions here that you are conflating.
Uhm, you're the one conflating. I'm not talking about time deposits. I am talking about FRB, which means that receipts EXCEED reserves, not receipts cannot access reserves at this time. The bank cannot become liquid. And so, it's not a liquidity issue, it is insolvency.
histhasthai: In this case, the money is not lost, it is essentially converted to a time deposit.
MINOR DETAIL!
liberty student: I am talking about FRB, which means that receipts EXCEED reserves, not receipts cannot access reserves at this time.
The money that was loaned out is an asset, and the aggregate of assets, reserves plus loans, still exceeds reciepts. There's no insolvency there.
Of course it's still a default to not honor redeemability, as Juan pointed out, and that is a risk that depositors would be taking. And the bank should and would suffer for it, possibly to the extent of having to liquidate the entire bank assets. But the risk is not the complete or even partial loss of capital, it is the loss of having your money now instead of later. To talk of insolvency or the permanent loss of your capital is simply wrong.
histhasthai:The money that was loaned out is an asset
Yeah, an asset of the person who deposited the money in the bank under the promise of 'redeemable upon demand'.
Perhaps you can explain how bailment law doesn't apply to banks and how the managers are morally able to do whatever they want with their customer's property irregardless of their individual wishes.
If someone wanted a time deposit then it should be safe to assume they wouldn't deposit money into their checking account, right?
histhasthai:And the bank should and would suffer for it, possibly to the extent of having to liquidate the entire bank assets.
The bank would 'suffer' by having to liquidate their fraudulently acquired 'assets' in order to return them to their rightful owners?
Isn't that, you know, their job?
histhasthai:To talk of insolvency or the permanent loss of your capital is simply wrong.
Yeah...that's never happened before.
Isn't that the whole point of FDIC? To give the people 'faith' in the system so they won't race to the bank to make sure they aren't the ones who lose their capital when the bank goes titsup?
histhasthai:The money that was loaned out is an asset, and the aggregate of assets, reserves plus loans, still exceeds reciepts. There's no insolvency there. Of course it's still a default to not honor redeemability, as Juan pointed out, and that is a risk that depositors would be taking. And the bank should and would suffer for it, possibly to the extent of having to liquidate the entire bank assets. But the risk is not the complete or even partial loss of capital, it is the loss of having your money now instead of later. To talk of insolvency or the permanent loss of your capital is simply wrong.
100 ounces of gold. Fractional reserving at 10%. 1000 ounces of receipts. Once more than 100 receipts are in circulation, insolvency
It's that simple. If 500 ounces of receipts circulate, and there are only 100 in reserve, 100 receipts come back and claim all of the reserves, how is this not an insolvent situation?
I feel like we are speaking two different languages.
liberty student:100 ounces of gold. Fractional reserving at 10%. 1000 ounces of receipts. Once more than 100 receipts are in circulation, insolvency
You think the bank just gave them away? No, they acquired assets in the form of loans. You're just being obstinate. I pretty much take that as having no real argument, and refusing to admit it.
liberty student:I feel like we are speaking two different languages.
Yup. Yours is called dogma.
AnonymousCoward: You've apparently missed a whole chunk of this thread.