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FRB & Life-insurance

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Koen Swinkels posted on Sun, Nov 9 2008 3:50 PM

don't want to start a FRB debate again, but I was wondering about one particular question: with life insurance companies make calculations about the premium they have to ask to have enough funds to pay out possible claims. There is a risk that their calculations are incorrect in which case they cannot pay out, at which point they can be sued/go bankrupt etc.

How is this categorically different from FRB'ing in which calculations are made to determine how much in reserves the banks should have to pay out possible claims? I understand the principle of 'two claims to the same property at the same time' but how does this not at least in some sense apply to life insurance too?

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nirgrahamUK:
you say breach of contract only becomes fraud when one can prove intent.

Yes, intent is an essential element. Fraud is theft by means of intentional deception.

nirgrahamUK:

further one might say that we can label this fraud, if we have intent to sell potatoes 'as apples'. but not otherwise.

If anyone intentionally lies to you about what they are doing in order to get your money then they are committing fraud. Your example doesn't address any of my arguements about FRB and the weakness of the anti-frb arguement.

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Maxliberty:
The whole anti-frb arguement hinges on the belief that a demand deposit is immediately available.

Right.  That is why it is called a "demand deposit".

Maxliberty:
So if there is an emergency delay agreement then this negates your entire arguement.

But then it is not FRB.  It is a loan, not a deposit.  There is a fundamental misunderstanding about what FRB is and is not.  FRB relies on a reserve ratio.  If I loan you money with the agreement you will pay me back in 30 days, and you loan that to scineram for 29 days, no new money is created.  FRB allows the creation of new money out of thin air by requiring less than 100% in reserves.

Maxliberty:
Also, deposits can be insured to povide emergency liquidity as well which could eliminate the need for any delay at all.

In order for the insurance to be "solid" it would have to make up the difference between fractional and full reserve.  Tack on overheads and management costs, and you have it costing more to insure than it would to full reserve bank.  Or are you suggesting that insolvent banks could be propped up with insolvent insurers?

Maxliberty:
So with very simple mechanisms the functinality of FRB can continue and would not be fraud by any reasonable defintion.

FRB could continue, I just doubt it would be profitable or desirable in a free market.  The entire purpose of storing your money in a bank is to not store it on your person or in your home.  If you lend it to an institution that is bankrupt if there is a run, it's not safe.  In fact, this is no different than gambling.

"When you're young you worry about people stealing your ideas, when you're old you worry that they won't." - David Friedman
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liberty student:

Right.  That is why it is called a "demand deposit".

So any delay would make it not a demand deposit. Thus a 60 emergency delay agreement would allow me to do all of the activity of FRB but would negate the anti-frb arguement because now technically your money is available only on demand provided the bank does not have an emergency. So by classifying everything as a loan even if the loan is for microseconds then the anti-FRB arguement collapses.

You are providing an artifcial distinction between loans and demand deposits based on the length of the loan. Is it possible to loan money for ten minutes? How about 1 minute?

liberty student:
In order for the insurance to be "solid" it would have to make up the difference between fractional and full reserve.  Tack on overheads and management costs, and you have it costing more to insure than it would to full reserve bank. 

 Like all insurance, the rates would be based on the probability of failure of the bank. Banks would earn money and pay premiums just like any other insurable risk. Would you say that insurance against the bank being robbed is impossible, clearly not. Loan defaults can certainly be insured against.

 

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liberty student:
FRB could continue, I just doubt it would be profitable or desirable in a free market.

The issue is whether FRB is inherently fraud and therefore should be outlawed. I say it is not inherently fraud.

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Because we all know that only MaxLiberty ever does anything to advance the cause of liberty. Everyone just sits around while he does something.

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Maxliberty:
The issue is whether FRB is inherently fraud and therefore should be outlawed. I say it is not inherently fraud.

Well, outlawing is ridiculous anyways.  The market will regulate who is a winner and who is a loser.  if people want to deal with fraudulent businesses, who are we to stop them?

My point is that FRB today only exists due to special privilege.  In a free market, I would be absolutely amazed if the same model could survive on it's own.  Maybe with tweaking, but I feel fairly certain not as it is today as the beneficiary of special privilege.

 

"When you're young you worry about people stealing your ideas, when you're old you worry that they won't." - David Friedman
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Maxliberty:
So any delay would make it not a demand deposit. Thus a 60 emergency delay agreement would allow me to do all of the activity of FRB but would negate the anti-frb arguement because now technically your money is available only on demand provided the bank does not have an emergency. So by classifying everything as a loan even if the loan is for microseconds then the anti-FRB arguement collapses.

there seems to be some cognitive dissonance here.

it seems you hold that

1)FRB demand deposit accounts , currently, in the form that they exist, are not fraudulent.

2)if FRB deposit account accounts terms and conditions were altered so as to specify 'emergency delay' clauses, they would be not fraudulent.

3)that its not necessary to add emergency delay clauses to these accounts, as they arent fraudelent anyway

4)the fact that 'its possible to add such clauses and hence put the practice of FRB demand deposit accounts beyond reproach' should convince us that (1),(2),(3).

 

Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid

Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring

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Maxliberty:
If anyone intentionally lies to you about what they are doing in order to get your money then they are committing fraud. Your example doesn't address any of my arguements about FRB and the weakness of the anti-frb arguement.

the bank is lying to me to get my money. it tells me it will hold my deposit, so that i can get it back whenever i like. it then lends it out. this works well if the bank isnt caught out. the fraud isnt in the being caught out, its in the act of doing things that they can be caught out at. example. the fraud in selling apples as potatoes is not fraud only when the customers that get potatoes catch out the shopkeeper, but rather when the shopkeeper switches out apples for potatoes in some orders, {and hopes that he will not be caught out - that the few customers who get potatoes have false memory of their orders and assume they placed an order that they now regret, for example}

p.s. thanks to conrad for reviving the FRB debate

Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid

Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring

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Frak.  I lost my whole post.

Maxliberty:
So any delay would make it not a demand deposit. Thus a 60 emergency delay agreement would allow me to do all of the activity of FRB but would negate the anti-frb arguement because now technically your money is available only on demand provided the bank does not have an emergency. So by classifying everything as a loan even if the loan is for microseconds then the anti-FRB arguement collapses.

No.  The difference between a demand deposit and a loan, is that the demand deposit could sit for 2 minutes or 200 years.  The bank has no control of when that deposit must be surrendered, and thus cannot determine what length of time it can make loans from it's deposits.  A proper loan is for a fixed period of time or some other milestone event.  The bank can plan how long it can loan the deposit, and have it available again for redemption of the loan to the depositor.

The issue with FRB is entirely related to the bank creating multiple instances of the same property title, when the ownership and quantity of the title has not changed.

Maxliberty:
You are providing an artifcial distinction between loans and demand deposits based on the length of the loan. Is it possible to loan money for ten minutes? How about 1 minute?

No.  You are trying to homogenize loans and demand deposits.  A loan can be for less time than a demand deposit of course.  The difference, is that the length is known.  In order to do this to demand deposits, they would stop being available "on demand" and thus become a fixed term loan.

Maxliberty:
Like all insurance, the rates would be based on the probability of failure of the bank. Banks would earn money and pay premiums just like any other insurable risk. Would you say that insurance against the bank being robbed is impossible, clearly not. Loan defaults can certainly be insured against.

The probability of failure is 100%.  A competitor could trigger the failure by demand depositing, waiting for loans to go out, and then demanding full redemption.  You're trying to insure a burning house against fire.

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nirgrahamUK:
the bank is lying to me to get my money.

So if the bank tells you exactly what they are doing then there is no fraud. So the system is not inherently fraudulent.

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no, im afraid the terms and conditions of my bank account do note state that they will loan out my money, and not have it avaialable for me on demand anytime, whilst simultaneously having it avaialble for me on demand at anytime.

they simply state that they will hold my money for me in a demand deposit account where i can get it whenever i want to.

 

please shed some light on this connundrum for me

http://mises.org/Community/forums/p/4765/64619.aspx#64619

Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid

Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring

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liberty student:

No.  The difference between a demand deposit and a loan, is that the demand deposit could sit for 2 minutes or 200 years.  The bank has no control of when that deposit must be surrendered, and thus cannot determine what length of time it can make loans from it's deposits.  A proper loan is for a fixed period of time or some other milestone event.  The bank can plan how long it can loan the deposit, and have it available again for redemption of the loan to the depositor.

Your fixation with the length of time of the loan is missplaced. In the mordern era with technology it is quite possible to loan money for very short period s of times.......like overnight, a couple of hours, just for one trade on the stock market...etc.etc.. So if a bank loaned out money overnight when it was physically impossible for you to go to the bank and get it then there is no more chance of default than on any other loan. This is why the artificial distinction between timed deposits and demand deposits doesn't make sense.

liberty student:
No.  You are trying to homogenize loans and demand deposits.

No, I just understand that you can have a bank that makes no distinction between the two and that this is not fraud.

liberty student:
The difference, is that the length is known.
 

The definite length of time is irrelevant. You can loan money with a call option, which is to say that you can loan money with the stipulation that whenever you ask for it back that the person has to give it to you. There is nothing fraudulent about that.

liberty student:
In order to do this to demand deposits, they would stop being available "on demand" and thus become a fixed term loan.

I have already said there are two very simple ways to avoid this problem, 1. the use of an emergency agreement or 2. insured deposits. Both of these things do not the system of having fractional reserves nor would either be a requirement in a free society. I should be able to bank where I want and as long as the bank is being honest about it's activities I have seen no arguement how that is fraud.

liberty student:

The probability of failure is 100%.  A competitor could trigger the failure by demand depositing, waiting for loans to go out, and then demanding full redemption.  You're trying to insure a burning house against fire.

The insurance company is only worried about recovering its commitment so insuring deposits that are being loaned out has only one concern and that is what is the probability that the loans will default. I see no difference between insuring loans/deposits and insuring anything else.

You have not come even close to demonstrating what exactly the fraud is. If the customer knows the risk and the bank is honest about its business where is the fraud?

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Knight_of_BAAWA:

Because we all know that only MaxLiberty ever does anything to advance the cause of liberty. Everyone just sits around while he does something.

Having been consistently defeated by me in our various debates, you are left with pointless insults completely off topic.

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nirgrahamUK:

no, im afraid the terms and conditions of my bank account do note state that they will loan out my money, and not have it avaialable for me on demand anytime, whilst simultaneously having it avaialble for me on demand at anytime.

they simply state that they will hold my money for me in a demand deposit account where i can get it whenever i want to.

 

This is a problem with your bank. You openly admit they are lying to you and yet you continue to bank there. This does not address the idea of whether the idea of having fractional reserves is inherently fraudulent. If you disagree that having an emergency waiting period is still fraud please explain why.

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there is a problem with my bank. and with all the other banks. it comes with the banking license.

i dont suppose i can move this discussion forward until you address this

Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid

Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring

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