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Prominent Economists Call for End to Fractional Reserve Banking
Excessive leverage by the banks was one of the main causes of the Great Depression and of the 2008 financial crisis.
As such, lower levels of “fractional reserve banking” – i.e. how many dollars a bank lends out compared to the amount of deposits it has on hand – the more stable the economy will be.
But economist Steve Keen notes (citing Table 10 in Yueh-Yun C. OBrien, 2007. “Reserve Requirement Systems in OECD Countries”, Finance and Economics Discussion Series, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board):
The US Federal Reserve sets a Required Reserve Ratio of 10%, but applies this only to deposits by individuals; banks have no reserve requirement at all for deposits by companies.
So huge swaths of loans are not subject to any reserve requirements.
Indeed, Ben Bernanke proposed the elimination of all reserve requirements for banks:
The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.
Economist Keen informs Washington’s Blog that about 6 OECD countries have already done away with reserve requirements altogether (Australia, Mexico, Canada, New Zealand, Sweden and the UK).
But there is a growing recognition that this is going in the wrong direction, because fractional reserve banking can destabilize the economy (and credit can easily be created by the government itself.)
It was big news this week when one of the world’s most prominent economics writers – liberal economist Martin Wolf – advocated doing away with fractional reserve banking altogether… i.e. requiring that banks only loan out as much money as they actually have on hand in the form of customer deposits:
Printing counterfeit banknotes is illegal, but creating private money is not. The interdependence between the state and the businesses that can do this is the source of much of the instability of our economies. It could – and should – be terminated.
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What is to be done? A minimum response would leave this industry largely as it is but both tighten regulation and insist that a bigger proportion of the balance sheet be financed with equity or credibly loss-absorbing debt. I discussed this approach last week. Higher capital is the recommendation made by Anat Admati of Stanford and Martin Hellwig of the Max Planck Institute in The Bankers’ New Clothes.
A maximum response would be to give the state a monopoly on money creation. One of the most important such proposals was in the Chicago Plan, advanced in the 1930s by, among others, a great economist, Irving Fisher. Its core was the requirement for 100 per cent reserves against deposits. Fisher argued that this would greatly reduce business cycles, end bank runs and drastically reduce public debt. A 2012 study by International Monetary Fund staff suggests this plan could work well.
Similar ideas have come from Laurence Kotlikoff of Boston University in Jimmy Stewart is Dead, and Andrew Jackson and Ben Dyson in Modernising Money.
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Opponents will argue that the economy would die for lack of credit. I was once sympathetic to that argument. But only about 10 per cent of UK bank lending has financed business investment in sectors other than commercial property. We could find other ways of funding this.
Our financial system is so unstable because the state first allowed it to create almost all the money in the economy and was then forced to insure it when performing that function. This is a giant hole at the heart of our market economies. It could be closed by separating the provision of money, rightly a function of the state, from the provision of finance, a function of the private sector.
(The IMF study is here.)
In fact, a lot of experts have backed this or similar proposals, including:
- Bank of England Chief Mervyn King
- Prominent conservative economist Milton Friedman
- Prominent liberal economist Irving Fisher
- Prominent conservative economist Lawrence Kotlikoff
- Prominent liberal economist James Tobin
- Prominent conservative economist John Cochrane
- Prominent liberal economist Herman Daly
- Prominent conservative economist Murray Rothbard
- Prominent British economist John Kay
- Conservative Spanish economics professor Huerta de Soto
- German economist Thorsten Polleit
- Conservative French economist Jörg Guido Hülsmann
- Head economics writer at the Guardian Ambrose Evans-Pritchard
- Bloomberg columnist Matthew C. Klein
Interestingly, the Chicago Plan for full reserve banking came very close to passing in 1934. But the unfortunate death of one of its main Congressional sponsors – Senator Bronson M. Cutting – in a plane crash reversed the momentum for the bill.
As Wikipedia notes:
Cutting played a key role in the political struggles over the reform of banking which Roosevelt undertook while dealing with the Great Depression, and which resulted in the Banking Reform Acts of 1933 and 1935. As a supporter of the Chicago Plan proposed by economist Irving Fisher and others at the University of Chicago, Cutting was among a handful of influential Senators who might have been able to remove from the private banks their ability to manipulate the money supply by enforcing a 100 percent reserve requirement for all credit creation, as stipulated in the Chicago Plan. His unfortunate death in an airliner crash cut short what may have been his most enduring legacy to the nation.
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Not in defense of the "private" banking system, but I worry about the State having full control over money. Look at things now, the govt (US, but pretty much the same for most) pays no attention to deficits because it can just "print" more money.
As I understand it the State currently has a say-so over how much money is printed. The mechanism (again, in US-speak) is USTs.
"Stark proof of this was provided by Vitali Glattfelder and Battiston (2011) who found that a singlle secret entity linked to the private individuals that control the right to issue money had managed to accumulate around 80% of the wealth in the western world"
I think it's more about what others don't have than what someone else has. Let me explain... If people that don't seek controlling everything are happy with a "little" (assumption being that they don't feel like they are deprived) then of what benefit is it to take from those who do have more?
I believe that it comes down to whether there are adequate resources. If I have enough to do what I wish to do then should I care that others have more? Should I go up the road and tell my neighbor in his expensice house that since my house is WAY "less" than his that I should be compensated?
It's all a distraction away from the core of the problem. We have an entire system that is based on perpetual growth. It doesn't matter how we tweak the existing system, if the core premise is bad then failure is assured.
Your thesis about how one man should have no concern about how much another has is all fucked up. See, any future goods, or properties the poorer man may wish for and even save for, will be unobtainable without him becoming a debt slave in perpetuity. The man with the wealth already has the title to those properties.... And by properties, I mean real as well as consumables. Why in the fuck do you think food, energy, rents, virtually anything you actually need to exist is inflating rapidly whilst the poorer man's income is stagnated, or lessened? Its because the one with the wealth is driving those prices higher through speculation. So, before you play Marty Armstrong anymore, please consider all things.
Yup, your are right. Private banks issue government certified receipts for gold. Now the individual banks cannot be held accountable for the underlying collateral for the receipts. Thus they are free to issue receipts for any garbage that they can convince a regulator is good. collateral. and collect interest on the issued notes. Government guaranteed receipts thus socialize all accountability for each bank.
Abanker would have to be an epic fuck up not to get fabulously rich from this arrangement. The use of uniform receipts not traceable to on individual bank means that he can lend out more than he has on hand as assets. His risks are socialized.
His rewards are privatized. great gig, if you can get it.
Bit coin makes everyone a banker.They can save the bitcoin. They can lend it out> They can invest it. All the books of the people they lend it to can be seen if both parties choose to use the network that way.
Thanks for making those points. You reminded me:
Back in the early days prior to the American Revolution when King George tried to enforce dependence on their sponsors back in England by limiting the availability of coin of the realm, colonists took it upon themselves to write their own script; their surname became their currency. Those whose word was literally as good as gold became focal points of trade and prosperity. Their written promises to pay were accepted and honored as valuable as any commodity and tradeable good or service in most ports of call and by foreign banks and merchants, in spite of what their governments dictated was acceptable legal tender. People like Ben Franklin and William Pepperrell, the first person knighted in the colonies, were revolutionaries, and in Franklin's case, anarchists.
As was pointed out to me by a long time ZHer, I've only been hanging around here for a few months so I have little cache. What I see are lots of very bright minds mired in frustration with the current status quo. The fact of the matter is that all of us here have lost our way and we don't know how to get back to the garden. I think it may start with becoming familiar with Proudhon's Dicta and familial agrarian jurisprudence.
Pierre Joseph Proudhon's Dicta was simply stated, property is theft. Today we've taken it much further - today intellectual property is theft.
Whether you are a religious person or a secularist, it behooves you to study the theories and conclusions Proudhon reached. At the very minimum it offers us a sense of direction. I'm not a religious person. I would characterize myself as a moral relativist. I believe every culture has a right to exist in freedom and harmony with every other culture.
"As was pointed out to me by a long time ZHer, I've only been hanging around here for a few months so I have little cache."
And I resemble that remark and am willing to stand behind my claims of you being a fresh punk. Yes, coming in here and name-calling when you have not established yourself deserves a whole shit-load of crap thrown back at you. Now, with that said, it is nice to see you behving in a more respectful manner, and, believe it or not, your ability to provide for meaningful discussion and thought is welcomed (by myself, though that should matter little as I don't proclaim to be any gatekeeper).
"I believe every culture has a right to exist in freedom and harmony with every other culture."
I would like to believe this as well. Unfortunately, however, the history of humankind doesn't show us as being all harmonic with each other*. The skirmishes that we run into are nearly always (I tend to say "always") about/over resources. "Freedom" cannot survive overpopulation. At some point the will to live is going to be exhibited through people beating other people over the head.
* Peter Kropotkin's Mutual Aid suggests that we're more cooperative than competitive, as otherwise it wouldn't have been possible to achieve the sheer numbers in population that we now see. I agree that this has been the case, but I believe that it can/would only hold up when there is sufficient resources available: this graph shows the affect of energy increase/decrease on population size (US)- http://www.financialsense.com/sites/default/files/users/u673/images/2012...
When there are ample resources people tend to get along better. Pretty basic animal behavior.
Property is theft? Then you have no right to the fruit of your labor.
And I would recommend reading the article first, as in fuedal society property was real property and the crops harvested from the land were the fruits. And beating a dead horse bloody, those who weren't landowners had to pay to rent farming plots.
Everyone's decrying the injustice of the Federal Reserve System. Currency is representative of a person's net worth to society. It's what he or she is paid for his work product. The Fed is devaluing our worth to our families and ourselves. If that isn't theft I don't know what is. There are complexities in the moral and philosophical issues. I'm just stirring the pot, trying to stimulate discussion around solutions. Proudhon's I find apply today.
"Currency is representative of a person's net worth to society. It's what he or she is paid for his work product."
"The Fed is devaluing our worth to our families and ourselves. If that isn't theft I don't know what is."
I separated these because they need to be looked at apart.
The first is certainly a valid way of looking a things. But, context is everything. And today's context is, as most here would agree, pretty fucked up. Given that this is the case I have to wonder about the comments in the second quote above. The assumption is that there is theft occurring. While no defender of the Fed am I, I could make the argument that much of what is being "stolen" was based on fraud to begin with (bubbles; financial pocus-pocus to make things look better).
Our "grow-or-die" society is collapsing. What it had once valued will be greatly devalued. The mechanisms that act on this, be they by the Fed or by Mother Nature, will come out the same. Our notion of what constitutes an "asset" is going to rapidly change...
"I'm just stirring the pot, trying to stimulate discussion around solutions."
I love to stir pots! And, I like to make people think. Do note, however, that the very word "solution" denotes permanance, and given that time doesn't stand still solutions are but a mirage: it's about the ability to adapt to constant change.
If you are addressing me, I did read the article and I was addressing real property as opposed to IP, but in that case the same applies. I invest time and capital to invent a useful product and market it while assuming the possible risk of loss of my investment and someone does nothing more than copy that product, it is theft of that time and capital invested by me accruing to the copycat.
Making use of other peoples property without permission or right is theft.
The only hindrance to someone acquiring capital is the ability to produce more than they consume.
Well today they're copying the claims to patents which like nuggets in a stream have lain fallow. The laws changed in Jan of 2013. I was researching two claims I wanted to make on curation for an on-line newspaper, and ran into Zuckerberg's 15,000 recent patent applications, some with nearly a hundred different claims per patent on IP no one had previously filed for ownership on. I'll be long dead before I could ever finish reading them, forget researching, filing or developing mine to fruition. What's his goal? Simply monopolizing the social media market. I could accept licensing but now the ISPs are moving to shut out the small competitors and of course the latest FCC protectionist schemes IMO will eventually lead to and guarantee the end of free speech on the internet.
Dead end Utopianism.
The ability to acquire and dispose of property as one sees fit is the very definition of a man's sovereignty.
The idea that intellectual property patents belong to one assignable party IMO gets to the root of most of society's problems with financial disparity and social stratification today. The greatest irony is that it forces those who lack sufficient capital to spend on patent applications and maintainence to relinquish control of the products they might have derived from their ideas, and ever more so now that the US laws were changed over to "first to file" from "first to invent." Now people like Zuckerberg can usurp the intellectual property of others because he has the lawyers and cash to file the claims and maintain those patents once awarded.
At least under the old system the inventor always held the right to file a posteriori, or not. He could elect to go on and manufacture and earn from his ideas without committing valuable seed money to securing patent rights. Regardless, even if you disagree, twenty years is too long to hold exclusive rights to an idea. It stifles innovation. Ten years max. If we are stuck with the patent system then I don't think patents should be allowed to be transferable either. That would offer universities some protection for the intellectual capital they have invested in their faculties, staff and facilities. At least they'd enjoy licensing fees.
The broad statement "property is theft" is self contradictory. If all property is theft, how can there be theft? No one has been deprived of legitimate ownership because there could be no legitimate ownership. What is property then? It means nothing apart from ownership.
Now a state may define property rights that are not legitimate and are theft but that does not mean that all property is theft.
If patents were non-transferable, they would just be held by shell corporations and other corporations would just buy and sell them, the same way corporations avoid increases in property taxes in California.
Intellectual Property Reform (or a new foundation, post-collapse) would really help; perhaps exponentially rising annual renewal fees, to ensure that at some point it stops being viable to maintain exclusivity, in exchange for very low or zero initial cost. For both patents and copyrights.
Any IP that is developed using taxpayer money should be property of the State; citizens of that State (meaning government, regardless if it is a City, State, Nation whatever) should get to use the IP Freely, while foreigners should have to pay licensing fees.
The problem with having a time limit on a patent is, what if it takes longer than X amount of years for the investment to break even? Should we only invest in ideas that will pay for themselves within 5 years, otherwise it is too risky?
The oil companies have been buying up and squelching patents for decades. Check out the video, Who Killed the Electric Car, or Stanford Robert Ovshinsky's Wikipedia page.
It's not happenstance nothing viable has emerged to compete with standard ICEs or diesels or coal-fired electrical generation. Its cleaner and far more efficient by orders of magnitude to disburse NG via pipeline and convert it into locally distributed electricity and HVAC via turbine, versus electricity sent over long distance high voltage distribution networks requiring intermediate supplemental backup generation. I worked for a subsidiary of Westinghouse Electric as a factory rep for a few years and saw some amazing stuff.
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Nothing has changed? My mind was stuck in the Nineties. Sorry about that.
Combined Heat & Power (CHP) is coming along and maturing, may become a big deal in colder regions soon, starting to pop up in new developments.
Some good stuff to cogitate on.
Spot on.
"Intellectual property" is an oxymoron, and IP laws have become just another entitlement/rentier framework.
"The fractional reserve banking system and fiat monopoly money it creates has always had an end date built into the fatally flawed model..."
^ ^ ^
http://stateofthenation2012.com/?p=4993
You make a false statement. Fractional reserve banking doesn't create any kind of money; it operates in the monetary system in which it is immersed.
" Fractional reserve banking doesn't create any kind of money; "
To the extent that credit is created, money is created. You can spend credit and banks indeed do create credit.
With no reserve requirement credit can be created to infinity. And for our financial criminals, who have claimed they are Too Big Too Fail they can always count on the Fed to backstop their lack of liquidity.
So with a $4.5 Trillion dollar balance sheet now, the question is- can the Fed pump in another $5Trillion or $10 Trillion when the next inevitable crisis presents itself ? Who will save the Fed?
Why does the fractional reserve banking system create fiat monopoly money? We had a fractional reserve banking system back when U.S. coin was gold or silver. As long as banks are required to keep adequate reserves, there is little danger from real fractional reserve banking. What has really happened is that the emergence of fiat money has unhinged banking from the idea that it needs to keep reserves at all. If money can just be conjured out of the air at will then why are reserves necessary? Why not leverage 50-1? Fractional reserve banking does not create money. It creates credit, and it is the existence of fiat money which has clouded the difference. But again, this is discussed in more detail in Localism, a Philosophy of Government.
Credit is money in the future time frame ie. consuming in the present value that won't be realized until a later date.
You can 'create' money out of thin air but you cannot create the corresponding 'value added' labor from thin air.
Present holders of wealth get cheated by the artificially created wealth unbacked by any tangible good or service by dilution of the money supply.
You have to 'do something' to create a surplus wealth of 100K beyond that which you consume.
Banks don't, beyond entering data.
Counterfeiting money should be illegal for everyone. Period.
"You can 'create' money out of thin air but you cannot create the corresponding 'value added' labor from thin air."
That is what is being forgotten. Money is work traded for work. The underlying value is what's important, not the numbers games.
One step beyond Rome! Ben is really going the full monty on this one.
The reserve ratio is a laughing stock anyway, it was going out the door globally eventually under this regime, fiat money creation will never be easier.
First it was backed by gold, then it was backed by printed money and now it wil be backed by literally nothing. Happy inflation everyone.
I remember in undergrad studies in economics in late 80s, in Introduction to Monetary Economics my favorite prof described the tools of the central banks. Among those tools, she described changing the 20% reserve margin as the equivalent of "the atomic weapon" in monetary policy, I.e., not likely to be used. Times they have'a changed.
Very good; so you have a fixed reference from reality and from your youth to illuminate for you the depths of madness into which we have descended.
Believe it or not, we actually spent a lot of time studying the "social contract" in B'School in the 60's, and what obligations businesses had to society for the privelge of being corporate entities.
Yes, times have really changed.
Back in August 2006 I predicted a coming Global Dark Age
and I haven't changed my mind, in fact, as everyday passes, it should become obvious to all.
But we love others to do our thinking for us: Green Shoots, Recovery, blah, blah, blah.
Neitzsche said correctly that faith is not wanting to confront the truth (Paraphrased)
There is a collective front arriving that will devour all; it is the Cosmic Winter and it has been here before.
Why?
Men refuse to confront themselves and grasp their Humanity and by doing so, dedicate your souls to the souless State.
http://verbewarp.blogspot.com.au/2006/07/global-economic-collapse-new-gl...
If you still believe in a recovery now, there is no hope for you at all.
If you believe that your "Government" is going to help you, there is no hope for you.
If you believe that the Global Bankers can be "reformed", there is also no hope for you.
Ho hum
Neitzsche was wrong, human ego was his God
Neitzsche is dead.
and god killed him.
(in the form of humor)
He was very wrong about that, but he said some really cool stuff. However, in the end, true wisdom is humble before God.
There isn't any God; you're babbling the nonsense of school children.
First cause, baby. First cause. And infinite. Not understandable, but knowable.
no god, just a creative force that cares not a wit about human beings or the planet earth. Knowable? are you serious? the creative force of the universe can be experienced moment to moment, but never truly knowable to our puny little minds. On the other hand, the experience of transcendence is a function of brain circuitry.
Knowledge - meaning you are aware of something, you see the effect or result. Understanding - meaning you know all about it, how it works.
I know TV screens exist. I do not understand how they work, I couldn't build one.
Everything we do is a function of brain circuitry.
Aristotle said that "...wisdom is knowledge about certain principles and causes." (Metaphysics, I -1) and went on to prove that Plato was wrong and debunked his theory of Forms. Therefore all subsequent derivatives of Plato must be wrong too, such as Nieztche.
"ALL men by nature desire to know."
Plato began with what is not and devised a system around attempting to know something that is not. Of course something that is not is unknowable. So much for Plato and Nietzche.
Aristotle began with what is and went on to define what is true, what is false, and how we verify which is which.
Raphael's School of Athens paints the two most influential men in recorded history at the center of everything and depicts them both at odds with one another. Plato points up as if to say that what we know is supernatural and comes from out of this world; Aristotle holds his hand down to the earth as if the say, "No, wait, we start with what is real, right here before us, and proceed accordingly."
This is a great thread! I was always partial Nietzche,Husserl, Heidegger, and Derrida but only because what is known as "fact" isn't as interesting to me as what it means to be human. Of course, some people already believe they know why they make the choices they do and this may not be so important to them. In my experience, admittedly limited, people are often either inclined to seek answers objectively through the external or from within through transcendental reflection. I rarely meet the individual that realizes answers reside in the questions asked and that the formation of the question itself can be far more interesting. I do not agree with you that Aristotle was right and that Plato was wrong but that doesn't make you wrong. Sometimes intuition (Plato) is necessary in order to uncover a new truth in the objective visible world (Aristotle).
Yes, Aristotle often negated an argument simply by not accepting the premise by identifying why the presumption of a question of proposition was wrong. It is from Aristotle where Rand is often quoted as saying, "check your premises."
Tossing Aristotle and Plato aside, would you agree that we understand in order to believe and not vice versa?
"ALL men by nature desire to know."
Correction: Most men by nature are afraid to know.
"...An indication of this is the delight we take in our senses; for even apart from their usefulness they are loved for themselves; and above all others the sense of sight. For not only with a view to action, but even when we are not going to do anything, we prefer seeing (one might say) to everything else. The reason is that this, most of all the senses, makes us know and brings to light many differences between things."
Actually, I would say that they do still desire to know but given that they have been raised that "no one can really know anything" that they are afraid, bewildered, and discouraged to try. Maybe they want to know but just don't know how to know?
You all know nothing of my work. It soars above your heads like a hawk.
"You need eagles wings to get over things."
Very good. The Author of the Nicomachean Ethics was the last sane philosopher in the Western World. I maintained this as a thesis in Uni. Fortunately, I had a conservative professor from Cambridge who could accept this thesis.
Very, very, fortunate! Aristotle is often glossed over as quackery in the 101 classes as they focus on his theory of the solar system which if you read it you would have to conclude that it was not written by him but instead inserted centuries later to smear his other works. I had to discover A on my own long after schooling... Did you know that just at the dawn of any inkling of a Renaissance that his Metaphysics was banned by the University of Paris? The establishment sincerely feared reason.
The stupidity of "Fractional Reserve Banking" is only part of the problem. The main thing to discuss is abolishing the debt-based system itself.
As Thomas Edision said: (roughly quoting)
"If the government can issue a bond (to pay interest)...
then it can simply issue a dollar bill (without the interest)."
Brilliantly simple... and practical. Imagine that... all we have to do is obey the Constitution by demanding that Congress (not the Federal Reserve) issue our nation's money at the same rate that the economy grows - WITHOUT INTEREST. This would reign in runaway spending and hold our legislatures accountable for every penny they spend by the necessity to raise taxes for said spending as opposed to borrowing it from our childrens' future.
Of course, wrenching the insatiable pigs from the trough is not an easy task. It may require their being slaughtered first.
Who then is to say or account for at what "rate the economy grows?" The government?
Why not start at the Coinage Act of 1792 and enforce the penalty for counterfeiting?
Why not return to the Gold Standard and remove completely the intervention of government in the money supply specifically and thereby the economy in general?
We're headed towards spring. Just gotta get thru winter.
I'll slice open a boomer stomach and crawl inside to keep warm.
Got plenty of boomers around in winter. I should make it to spring no problem.