• BullionStar
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Fraction ... Er ... Fictional Reserve Banking

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Mon, 03/22/2010 - 17:04 | 272638 Never_Put_Down
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so if the financial businesses can inflate the money they have on reserve by 10 times or more, doesn't that mean when the reserves start declining, the loses will inflate by the same proportion?

Mon, 03/22/2010 - 21:19 | 272819 moneymutt
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I don't think reserves matter, either a bank wants to lend or doesn't, either they have creditworthy customers that the bank expects to grow and be able to pay their interest and principle or they don't see anyone they want to risk lending to...so I think the contraction comes from pessimism and fear from crashing economic cycle, not reserve requirements, they basically don't exist in real world...

Mon, 03/22/2010 - 16:23 | 272610 Blithering ORSA
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0% reserves gives you infinite M1.  What could go wrong?

Mon, 03/22/2010 - 15:01 | 272493 Madcow
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Mon, 03/22/2010 - 16:16 | 272599 Duuude
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Mon, 03/22/2010 - 14:10 | 272423 Duuude
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So tha Squid and tha Dancing Hippos are untouchable...problem is Mickey is having a helluva time mopping up his deluge of debt...Tha Squid and tha Hippos simply arrange their dance accordingly...Fantasiastic...

Mon, 03/22/2010 - 13:26 | 272371 Stranger
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Who needs reserves when you can borrow unlimited liquidity from the Fed at 0%?

Mon, 03/22/2010 - 13:20 | 272366 Goldmember
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Next post should be: Is inflation an increase in prices as the pundits argue, or is it an increase in the money supply, causing distortions/malinvestment and prices to stay level when they would otherwise fall?

Mon, 03/22/2010 - 12:30 | 272315 AnAnonymous
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Entrepreneurship is directly related to the management of the level of accountability. To get a high level of entrepreneurship, it is required to reward the positive consequences of an action while lessening the consequences of negative actions. Having people suffering from the bad consequences of their actions get them to confine to well under controlled course of actions, routine work and suppress entrepreneurship.

The removal of the reserves requirement flows logically in a society that looks at entrepreneurship.
Banks need to find back their entrepreneurship spirit.

Mon, 03/22/2010 - 12:03 | 272279 Duuude
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So WTF, tha Squid as a bank has unlimited reserves?

Mon, 03/22/2010 - 12:08 | 272270 BlackBeard
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Well.  If I could borrow 1 dollar @ 0.25% and lend 10$ out @ an average of 13% and I'd be.....in jail..wait.

Mon, 03/22/2010 - 11:08 | 272213 Rick64
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Whats next? Abolish all accounting rules.

Mon, 03/22/2010 - 11:51 | 272263 mikla
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Whats next? Abolish all accounting rules.

We already pretty much did that -- revised FASB suspending mark-to-market accounting, no reserve requirements on commercial deposits and the entire derivatives markets, enabling overnight sweeps from all demand deposit accounts so banks can day-trade your checking account (that theoretically had a reserve requirement), etc.

So, there literally are no rules anymore.  Secured creditors take a back seat to unsecured creditors.  The illegal fraud is huge, but the legal fraud is so much larger.  There is no contract, no law, no rules, no precedent.

No sane person could possibly trust any statistics or performance report by any financial institution, nor sovereign, in today's world.

That's saying a LOT.

Mon, 03/22/2010 - 10:15 | 272166 Ripped Chunk
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Pedal to the metal!

Mon, 03/22/2010 - 09:02 | 272105 moneymutt
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Gw- nice summary once again. I go with Steven Keen on this, basically loan/credit/debt comes first and reserves, what little or non-existent they might be come second, this is what the facts of the ground and money "stats" always show. If folks are in expansive moods and want credit and banks in good  mood and think they can lend money and get paid back, they make what they see as any viable loan, increase credit, reserves MIGHT follow later.  I think monetary reality in the stats proves the banks essentially get to create money/credit for next nothing.

So as long as we have this system, we are at mercy of wickedly self-reinforcing loops of expansion and contraction that get amplified by the ease of creating money for nothing. And then when you add in how derivatives allowed things to be levered up even more... Even if no fractional -non-reserve system, investors can certainly get carried away and throw dumb money at a bubble (see the folks that floated Countryside money, bought craps MBS). 

However, the thing that really irritates me is regular folks paying banks for something that the banks essentially create from thin air and then, in addition to this, banks infinite leverage creates inherently unstable systems. Also irritatign is rampant criminal fraud non-banks engage in to wrest reall money from investors. 

And agree with Keen, cavaliers of credit will always get carried away, who wouldn't, so we must have new system.

Mon, 03/22/2010 - 09:43 | 272137 William Wallace
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What gets to me is the cynical fraudulence of Keynesian propaganda.  Their argument goes like this--

We don't know what causes the business cycle.  It's just a part of nature.  But we do know how to handle the business cycle: it's by deficit spending and reducing interest rates during a recession.

It's all a cover for expanding government and using government to enrich banks.  It's a lie that works for government and banks, but hurts everyone else--and ultimately destroys the nation.

The banks cause the problem, and then government, in purporting to solve the problem, acts to enlarge its own power and create more debt.  The cycle repeats until extinction.

Mon, 03/22/2010 - 21:09 | 272811 moneymutt
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interesting point...i don't have an ideological opposition to govt in general, but our govt has clearly been captured and does not represent the interests of average citizen, when we have a problem, the only reform we get is something the enriches a parastical class of crony businesses, inside investers and bureaucrats, and only throws small crumbs to regaular folks so they can "sell" it.  So to the extent state power is corrupted it can be a powerful force of tyranny, sort of like a corrupt local police force is likely more dangerous than no police force...

so we have banksters and bureaucrats working hand in glove to screw us with most folks ignorant of the many ways they bleed us. As you point out, it only stops with extinction...

Mon, 03/22/2010 - 10:51 | 272197 Hephasteus
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How many keynsians does it take to screw in a feigned ignorance lightbulb?

Mon, 03/22/2010 - 09:01 | 272097 LeBalance
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when within the fractional reserve theivery the practice of loaning from A to B to C to D gives rise to new reserves at each subsequent letter, is it surprising to any one that the reserve would similarly become marginalized?  It is certainly interesting to see how brazen the practice is, but it should not be a cause for shock.

Mon, 03/22/2010 - 15:49 | 272482 Cognitive Dissonance
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"when within the fractional reserve thievery the practice of loaning from A to B to C to D gives rise to new reserves at each subsequent letter,"

I think of it as holographic reserves. The really interesting thing about a holographic picture is that you can cut it in half, and cut each resulting piece in half, and so on and so on and so on. Each resulting piece has the entire original holographic picture in the piece. No matter how many times you cut it in half, you always have all the information of the original in each piece. Sort of like DNA.

So this fractional reserve banking thingy really is like quantum mechanics, sorta maybe like. So by dividing you multiple. Yeah, that's the ticket. :>)


Mon, 03/22/2010 - 05:40 | 272040 wake the roach
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Yep, the party's over... Tomorrow we will wake up and to pay the bill...

And try to explain to pappy why his 58 chevy now smells like cigarettes and vomit ;-)...


Mon, 03/22/2010 - 05:27 | 272037 Bear
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Fictional Reserve System promoted by the Federales Reserve Bank headed by Ben Brankrupto  

Mon, 03/22/2010 - 01:31 | 271983 Shameful
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Excellent piece!  Love the Rothbard reference, he does have a great way of breaking things down.

I'm a little surprised they are so open about having no reserves.  Though I suppose when you are already insolvent and have a gov guarantee why not go for broke.  Leverage level, to inifinity and beyond!!!

Mon, 03/22/2010 - 09:05 | 272107 mikla
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I'm also surprised they are so open about having no reserves.  However, if the ponzi is coming to an end, maybe they think this "disclosure" will help avert the lynch mob?  "Hey, we TOLD you there were no reserves!"

It's turtles all the way down!

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