L.A. Liberty

On Fractional Reserve Banking

… The Fed is the foundation of our economic system. It keeps inflation down, interest rates moderate, prices stable, regulates and provides financial services to our entire banking system, and thereby ensures the system doesn’t collapse. It needs more regulating, not abolishing.

The Fed is vital to setting Monetary Policy; otherwise, we’d have to return to Fiscal Policy, which requires Congress and the White House to make taxation and budgetary changes through the legislative process — a process that can’t keep up with our rapidly-moving economy. Further, Monetary Policy — unlike Fiscal Policy — is not subject to the whims of a political party.

Your demand that banks no longer engage in fractional reserve banking means that you oppose banks lending money. No more business loans, home loans, student loans, car loans, credit cards. Your ignorance — and your willingness to parrot discredited right-wing talking points that you clearly don’t understand in an attempt to co-opt progressives — is astounding. — Ryking

First, the Fed has accomplished essentially none of what you claim it has. The Fed’s only tool is to inflate - and it has persistently used this tool to the great detriment of the value of our currency. Money printing is inflation. Though I honestly can’t fault your misunderstanding when the world’s leading inflationist doesn’t himself know what inflation is.

But as to your contention that ending fractional reserve banking would put an end to loaning money: this is absolutely incorrect.

Let’s consider a car rental business. When it procures a vehicle to rent out, it cannot rent it simultaneously to five different people at the same time. Not only would this be irresponsible, it would be impossible. But this is what fractional reserve banking is: an essentially legitimized pyramid scheme - and why, along with it being a debt-based system (every dollar represents the incursion of debt), among other criticisms, it is considered fraudulent.

Those of us wary of fractional reserve banking simply want banks to function like responsible businesses with real holdings, and not grant them the magical ability to multiply their supply of rentable assets. Also, doing so would allow the interest rates (the price to rent money, as it were) to be set through the natural mechanism of supply and demand. The more people save, the more there is available to loan, the lower the interest rates (to entice people to borrow). The less people save, the less there is available to loan, the higher the interest rate (to entice people to save). This organically pushes the system to maintain stability by allowing for greater risk and entrepreneurship during times of plenty and fostering prudence and thriftiness during times of want.

Would there be less available for people to borrow? Absolutely. But this accomplishes a number of positive things: loans made would be demonstrably less risky (and less ‘predatory’) which in turn prevents the malinvestment bubbles that precede crashes and recessions like the one we are in now; those who made bad loans or unsound investment decisions are not strung along to continue to do the same; the money in existence would not be weakened by the circulation of magical, farcical money and thus the strength of the currency would be better maintained; many financially unhealthy businesses would necessarily liquidate or declare bankruptcy thereby clearing the way for responsible businesses to make better use of previously wasted resources; those with debt up to their eyeballs would not be motivated to make their financial situation more dire; etc.

So, again: when it comes to banks, those of us wary of fractional reserve banking simply want less fraudulent sorcery and more tangible reality.

(Source: riverofliberty, via diadoumenos)

Posted November 10, 2011 at 10:54am in ∆ ryking the fed riposte austrian economics | comments || home