Economics Questions

Re: fractional reserve banking :: really a problem?

Mibu Clan — Thu, 05 Mar 2009 20:20:48 GMT

A question is why would people save money, when inflation will rob them of their value?

and so, if their is no powerful motivation o savings, then individual investments is the only counter to FRB.

There was a recent Bank run too... it was stopped by the Goverment.

http://www.youtube.com/watch?v=pD8viQ_DhS4&feature=related

Re: fractional reserve banking :: really a problem?

Joe Garceau — Thu, 05 Mar 2009 19:33:50 GMT

Juan,

Could you give me your opinion on this? My belief is that the mere act of FRB whether it be voluntary or not is fraud because it is essentially counterfeiting. FRB loans out money which does not really even exist. The people then buy goods and services that do exist with this phony money. Is it not similar to me paying for a new Suit with a 1 oz. gold coin that is no really gold at all but is just an inferior metal, say aluminum with some gold finish on it. Wouldn't I be defrauding the Tailor in the same manor that a recipient of FRB money would? Because I was paying for something with money that wasnt real money. It is just a counterfeit.

Re: fractional reserve banking :: really a problem?

Saiphes — Thu, 05 Mar 2009 17:30:21 GMT

Deposit types: The rules on paper do not apply when it is different in practice. As prices arise from the values individuals place on things, and the "How much money do you have" question calls into examination bank account numbers, it affects the final value you're willing to pay. The FACT that CD deposits have higher interest rates than checking accounts demonstrates clearly that there *IS* a difference.

The ambiguous use of the word bank is a problem here. Some are arguing "IS" in an "OUGHT" discussion. Let's clean it up - Deposit Banking and Loan Banking. If my 10 friends, after accumulating savings, wished to pool some funds and start a "Loan Bank", we could do so. We would not consider funds loaned out as part of our own money, it would not influence our valuation of prices. Reserve requirement would be absurd because reserve requirement merely satisfies the possibility of one of us wanting out of the bank.. and the Bank association, we assume, is contractual.

Re: fractional reserve banking :: really a problem?

scineram — Thu, 05 Mar 2009 17:14:03 GMT

I am not surprised. Freedom of contract was always such a burden.

Re: fractional reserve banking :: really a problem?

szh — Thu, 05 Mar 2009 13:18:45 GMT

Right in theory but are you sure that term deposits are really locked like bond. Rothbard wrote that in 30s its term deposits were demanded during bank runs and bank themselves did not consider them truly term. Savings account had formal 1 month notice but again banks paid on demad. In my country all types of bank deposits are demandable according to civil law. The only penalty is loss of interest. Russia recently tried to legally ban early withdrawal of term deposits but failed due to central bank resistance.

Re: fractional reserve banking :: really a problem?

Maxliberty — Wed, 22 Oct 2008 16:26:11 GMT

Jon Irenicus:

There's no way I could know where the threshold is. I'm not a bank nor am I the market. These kind of things are contingent facts depending on the market's current circumstances. It'll be at the level where banks aren't ravaged by bank runs (it doesn't take much to cause one...) and consumers are willing to accept a certain level of risk. If consumers want no risk, 100% (or something close to it) will be the dominant type of firm, and it'll be contractually obligated to keep its reserves at this level, or be prosecuted for fraud. The nice thing is, is that consumers will not be forced to deal with banks that keep say only 10% on hand. And yes, I am basically saying it's for the market to decide. I don't think FRB should be illegal, regardless of its wisdom.

-Jon

Yes, well said. Let the market decide.

Re: fractional reserve banking :: really a problem?

MikeK — Wed, 22 Oct 2008 13:32:25 GMT

Guys, thanks a lot for explanations and pointers. Back to reading...

-Mike

Re: fractional reserve banking :: really a problem?

Juan — Wed, 22 Oct 2008 06:29:59 GMT

Yep.

Re: fractional reserve banking :: really a problem?

Jon Irenicus — Wed, 22 Oct 2008 06:15:29 GMT

Yeah, my point is simply that it's a political ploy not a market phenomenon.

-Jon

Re: fractional reserve banking :: really a problem?

Juan — Wed, 22 Oct 2008 06:11:08 GMT

Jon Irenicus:
No, CB is the facilitator of FRB. Not its inevitable consequence.

Well, CB can be regarded as a consequence of FRB in the sense that FR bankers and politicians had to come up with it in order to prop up a flawed system.

Re: fractional reserve banking :: really a problem?

Paul — Wed, 22 Oct 2008 05:48:41 GMT

MikeK:

Can you guys recommend any reading on this (monetary policy, theory of cycles)? The amount of literature on this site is somewhat overwhelming...

Money, Bank Credit, and Economic Cycles (dead tree version)

Re: fractional reserve banking :: really a problem?

Jon Irenicus — Wed, 22 Oct 2008 05:40:11 GMT

No, CB is the facilitator of FRB. Not its inevitable consequence. This is a good place to start on all things monetary, especially the bits on the business cycle and books by Rothbard, like The Mystery of Banking.

-Jon

Re: fractional reserve banking :: really a problem?

MikeK — Wed, 22 Oct 2008 05:19:27 GMT

If A owns a full reserve bank, A will make sure that people know that's the case. So A's competitors will be forced in turn to explain how they run their banks -- they can choose not to disclose the amount of reserves they keep, and people will trust them accordingly. That's just one mechanism - there are others.

Nice, I missed that.

So, in a free market economy FRB will die naturally (possibly, after few boom-and-bust cycles). I thought that CB is the inevitable consequence of FRB (as an attempt to "fix" the money crunches). Apparently I was wrong here.

Can you guys recommend any reading on this (monetary policy, theory of cycles)? The amount of literature on this site is somewhat overwhelming...

Thanks

-Mike

Re: fractional reserve banking :: really a problem?

Jon Irenicus — Wed, 22 Oct 2008 05:00:54 GMT

There's no way I could know where the threshold is. I'm not a bank nor am I the market. These kind of things are contingent facts depending on the market's current circumstances. It'll be at the level where banks aren't ravaged by bank runs (it doesn't take much to cause one...) and consumers are willing to accept a certain level of risk. If consumers want no risk, 100% (or something close to it) will be the dominant type of firm, and it'll be contractually obligated to keep its reserves at this level, or be prosecuted for fraud. The nice thing is, is that consumers will not be forced to deal with banks that keep say only 10% on hand. And yes, I am basically saying it's for the market to decide. I don't think FRB should be illegal, regardless of its wisdom.

-Jon

Re: fractional reserve banking :: really a problem?

MikeK — Wed, 22 Oct 2008 04:53:00 GMT

Jon Irenicus:

Why would it fail? That's ridiculous. Read what I say, not what you think I said.

-Jon

Oh, I misanderstood your "who cares" statement - my bad. Next question then. If (you say) 95% reserve is sound, where is the threshold that makes FRB unsound? 75% ? 50% ?

Are not you saying that FRB is just fine, and free market will find the "right" reserve ratio, probably other than 100%?