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A World Without Fractional Reserve Banks And Central Planning
Submitted by John Rubino via The Dollar Collapse blog,
Excerpted From The Money Bubble: What To Do Before It Pops by James Turk and John Rubino:
In a very real sense, it is fractional reserve banking and not money itself that is the root of so many of today’s evils. Whenever fractional reserves are permitted, the banking system – including the one that exists today throughout the world – comes to resemble a classic Ponzi scheme which can only function as long as most people don’t try to get at their money.
A Better System
Now, is this critique of the current monetary system just impotent ideological whining over something that, like the weather, can’t be changed? Or could fractional reserve banking and the resulting need for economic central planning actually be replaced by something better? Specifically, how could a banking system without fractional reserve lending accommodate depositors’ demand that their money be there when they want it and borrowers’ desire for 30-year mortgages which would tie up those deposits for decades? And could this market operate without the need for government oversight and management?
The answer to that last question is yes. A better financial system is possible, and here’s how it would work:
First, today’s commercial banks would split into two types. “Banks of commerce” would take deposits and keep them safe for a fee, like the goldsmiths of old. “Banks of credit” would pay interest on deposits and lend out depositor money, but would have to match the duration of deposits with the duration of loans. Deposits that can be withdrawn anytime (a checking account for instance) could only be used to fund a loan which the bank can “call” on demand, while longer-term deposits (say a 5-year CD) would be matched to longer-term loans like a business term loan or 5-year mortgage. Really long-term loans like 30-year mortgages would be funded with deposits for which the bank would have to pay up in order to convince a depositor to part with his or her money for such a long time.
The resulting mortgage would carry a high enough rate to provide the bank with a small profit, which would make 30-year mortgages both expensive and hard to get. But the case can be made that they should be hard to get. Buying a house – or anything else that requires capital for extremely long periods – should require a hefty down payment, other liquid assets as collateral and a solid income stream. This coverage would give the bank the ability to foreclose and realize more than the value of the loan, which would protect its ability to repay its depositors, thus making depositors more willing to tie up their money for long periods.
Such a society would be a lot less prone to excessive debt accumulation and inflation, bank runs would be far less frequent and government deposit insurance would be much less necessary. It would, in short, be a saner world in which individuals managed their own finances, saved with confidence and borrowed only for highly-productive uses, while two sharply-differentiated types of banks facilitated wealth protection and real wealth creation rather than paper trading.
Today’s investment banks and hedge funds, meanwhile, would be set free to speculate with their investors’ money to their hearts’ content, making fortunes when they succeed and collapsing when they fail, with no public stake in either outcome. They would be seen as high risk/high reward propositions and their customers and investors would participate with eyes wide open. No entity would be “too big to fail” because the banking system would be insulated from the vicissitudes of more volatile investment markets.
Central banks in such a 100-percent reserve world would either be completely unnecessary or serve a sharply-defined, very limited function of issuing paper currency 100-percent backed by gold/silver reserves and standing ready to exchange one for the other upon request. No need to be a lender of last resort because the banking system is sound and stable. No need to intervene in currency markets to fool citizens into treating valueless paper as a savings vehicle because paper, as a warehouse receipt for real assets, will have intrinsic value. Booms and busts would be fewer and less devastating, reducing the need for government programs in response. Debt levels would be miniscule by today’s standards, and therefore easily serviced from profitable activities. This hypothetical world, in short, is more modest and far more sustainable. All in all, it’s an attractive, completely feasible vision.
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Guillotine the Fed!
An American, not US subject.
And all who work for it, support it, or worship it.
This really IS the answer. Is anybody listening? When the great "reset" comes, will there be anyone with backbone and backing to propose this win/win system? Will the wealth of the international usurers be confiscated and returned to the public from whom it was stolen? Let's pray that the answers are yes.
The 'Gold Standard' system of paper money backed with gold/silver and issued by central banks has always been abused and will always collapse.
Allow competitive currencies and get out of the way.
The more decentralized the monetary system is, the more stable it will be.
So ummmm....hey, did anybody catch onto this little tidbit yet???
September 2,3, and 4, 2014:
Bretton Woods 2014: The Founders and the Future
Honoring the 70th anniversary of the original conference, Bretton Woods 2014: The Founders and the Future will be held at the Mount Washington Resort in New Hampshire from Sept. 3rd to Sept. 4th. The hotel will be exclusively available for the conference, just as it was in 1944. The event will gather prominent leaders from government, business, and academia in a working-group environment to focus on the FUTURE of finance and the international monetary system.
Topics will include prospects for the world’s foreign exchange system; future of finance and financial institutions; technology and the future of the international financial system; how to better anticipate and manage future crises; the future of sovereign debt restructuring; the future role of the IMF and World Bank; and history and leadership at Bretton Woods in 1944.
J*sus F**king Chr**t ... this shit on ZH annoys me.
Three points for fight club folks!
Regards,
Cooter
Glass-Steagall... its repeal led to the proof of its efficacy.
3. Make the officers of the bank or financial organisation personally liable.
The Glass Steagall ship has sailed. Sorry. Consider that GS was the plug for the banksters tub. When that plug was pulled the tub emptied. Replacing the plug now simply leaves us with an empty tub.
...a good start:
1. eliminate conduit funding
2. eliminate movement of risk-assets to off-balance sheet spvs
3. enforce true match funding ($1 of 30 year asset funded by $1 of 30 year liability...simple right?) or its risk equivalent (permit short funding but require cash/equivalent reserve on-balance sheet to cover the liquidity risk...and yes, it is unattractive but gives new meaning to 'fortress balance sheet').
(1.) and (2.) solve much of the moral hazard associated with credit bubbles - now infamous liar loans etc - since there is no passing the buck to non-consolidating BK-remote structures that securitize with the imprimatur of assumption driven AAA ratings and 100's of pages of deal docs that obfuscate the otherwise obvious end-to-end rep & warrant issues until it's too late.
(3.) solves liquidity risk - plain and simple.
Prudential regulation focuses - as always, but more effectively - on the balance sheet of the single risk-bearing institution i.e. without the labyrinthine 3-card monty of conduits/spvs, ABS, and maturity transformation which is itself, fundamentally, liquidity risk.
He lost me at "In a very real sense".
I mean, as opposed to what? A very unreal sense? A slightly or moderately or averagely real sense?
And is he sure that he doesn't mean a very very very real sense? These gradations of reality can be hard to pin down.
A ponzi scheme of this magnitude in the beginning is like a perfectly dim lite gang bang after the perfect amount of drugs and alcohol!!
Waking up from it when it collapses, feels like your crotch is on fire, and your laying around with a bunch of ugly out of shape people with the harshly lite sunlight pouring in, and nothing but regret and why did i do this repeating over and over in your mind, as you look for your cloths!
Its a bad idea to begin with, but its a nightmare to wake up from!
......everything you just said but taken from the context of a blind man/woman....... ahhhhhhh seem like not so bad idea now hmmmm correct or no correct yeah different perspective changes everything ........ and so, getting back to central banking FSA mentality you see the problem we face, population blind and delusional.....
(crotch on fire from friction burn try any of a variety of superlubes next time)
"Imagine"
Imagine there's no heavenIt's easy if you try
No hell below us
Above us only sky
Imagine all the people
Living for today...
Imagine there's no countries
It isn't hard to do
Nothing to kill or die for
And no religion too
Imagine all the people
Living life in peace...
You may say I'm a dreamer
But I'm not the only one
I hope someday you'll join us
And the world will be as one
Imagine no possessions
I wonder if you can
No need for greed or hunger
A brotherhood of man
Imagine all the people
Sharing all the world...
You may say I'm a dreamer
But I'm not the only one
I hope someday you'll join us
And the world will live as one - John Lennon
We all know the lyrics
It's easy to be for any political system when you have the money and a part of it.
... I tried to delete it, sheeesh
I always wonder how one explains the depressions and wars before fractional reserve banking.
---
Answer government.
Human nature
Humpty Dumpty
I have never met a fractional criminal. That seems sort of a binary element: you either are a criminal or you are not a criminal.
That basically means that all Banksters are Criminals.
No one would buy a house with a 30 year mortgage. And that would be a great thing.
Prices would be much much lower. And this property taxes would be much much lower. IT'S TIME FOR THE GREAT RESET !!!
am i taking crazy pills is or is the entire bottom solution to this 'crisis' just "let's go back to glass steagal with investment banks separated from real banks that don't gamble your money away'.
hahahaha, yea, go back to glass steagal, that's fix everything!
fixing money/credit/political systems isn't quite like the simplicity of being an electrician. you don't just put things back to the way they were by taking the frayed copper wiring and installing the same exact , but new, wiring .
sorry, but money systems are more like a vase. you broke it, you keep it.
perhaps, the old time, and near forgotten japanese art of fixing broken vases is a better analogy for fixing a broken money system. a long time ago vases and pottery of certain types were valuable enough to FIX when they shattered. hey kintsugi isn't origami, but it anologizes better to the art of accepting how fucked things are!
http://en.wikipedia.org/wiki/Kintsugi
i'm not saying it's impossible to fix a monetary system. but just LOOK at argentina. ONCE YOUVE BORROWED THE MONEY THAT INDEBTED YOU, PRINTING MORE OF YOUR OWN MONEY TO FIX THINGS INTERNALLY, IS GOING TO COME AT THE MAJOR POLITICAL COST OF PISSING OFF THE POLITICAL SYSTEMS , WHOSE MILITARIES BACK THE CREDITORS YOU OWE MONEY!.
We'll be coming for the falklands soon bitches. real soon.
GOVERNMENT BACKED fractional reserve.
If individual banks do it and blow up, I don't see the big deal. When it's government backed, the bankers, ultimately, end up owning the government.
This article combines hubris, ignorance and rigid thinking.
As a fofoa follower we have been looking at the structure of the euro for 6 years (at least the blog is now 6 years going).
It was designed by at least one Nobel winner. Rueff had a hand in it as did some of the best monetary minds of the time including Triffin and Duesenburg as well as the great minds of several of the EZ countries. The Euro may be just a currency but it was designed ground up for a new monetary system, one where fiat currency, borrowing and evil bankers would all be limited in the amount of damage they could do.
I ordinarily try not to be hostile here at ZH but for this pair to suggest some cute little system when they haven't even begun to look at the euro and the structure of the ECB balance sheet...it is all 3 charges as stated. I know they haven't done the work because they have never even mentioned that they understand the difference between the ECB and Fed.
Once you get there a lot of light bulbs start going off.
When the proverbial hits the other proverbial will be a little late for thought.
The simple message of freegold is 'buy physical'....no different than any other hard money PGAs. Understanding how physical gold will function along side currencies that hold gold marked to market on their balance sheets however...that leads to some very different actions at key turning points.
It has taken most of us a long time to get to where we sleep at night with our decisions. Not all agree with the conclusion we (that mostly means fofoa) have come to but it is certainly worth a look. Then if you can mount a solid argument against what we have come to believe...well you'd be a hero. Most of us are adults trying to protect real wealth and understand what is going on. It is easy to sprout the ZH creed/screed, I see it everywhere. I'm convinced it is wrong and will lead to incorrect action at several points in the history that is now unfolding.
the price you value your gold, on your balance sheet, doesn't mean shit, when your gold is in someone else's vault.
"Not all agree with the conclusion we (that mostly means fofoa) have come to but it is certainly worth a look. Then if you can mount a solid argument against what we have come to believe...well you'd be a hero. "
turk puts his out there in the open, allowing criticism of particular items that he stated succinctly and clearly
perhaps it would be helpful to clearly and succinctly state "the conclusion" you (that mostly means fofoa) have come to
what is it you have come to believe? perhaps turk can respond to it.
In a world without fractional reserve lending, you wouldn't *need* a 30 year mortgage. Assets would be correctly priced. The presence of fraudulent leverage begets the need for further leverage.
"Such a society would be a lot less prone to excessive debt accumulation and inflation, bank runs would be far less frequent and government deposit insurance would be much less necessary."
Jekyl Island.
Such a society would only last so long, just as Glass Steagall lasted only so long. Glass Steagall was passed so it would never happen again. It was dismantled so that it would happen again.
Fractional reserve banking is not the problem, the institutions supporting it are. If the banks were actually subject to market forces in terms of how they use depositors' money they would naturally take less risks and leverage.
"Today’s investment banks and hedge funds, meanwhile, would be set free to speculate with their investors’ money to their hearts’ content, making fortunes when they succeed and collapsing when they fail, with no public stake in either outcome."
They were free to do that. All congress had to do was say no to TARP.
What is the real reason congress agreed to TARP? What is the real reason the financial mess still hasn't been fixed yet?
Getting rid of fractional reserve is certainly a huge step in the right direction, but there are other simple changes that can be made that will move in the right direction.
There needs to be a vision, and end goal towards which all changes lead. In my opinion it is this; to maximize personal freedom and liberty while at the same time maximizing the effectiveness and strength of the law.
While I am against all centralized control, there are a couple of simple but fundamental changes that would lead in the right direction.
- deny governments the ability to levy taxes
- make elected officals personally responsible for the debt.
Governments that relied on donations and investments for income, and were personally responsible to pay out any government deficit would be a lot more cautious, and might actually listen to the voters.
Idiot
Fractional Reserve Banking, so they say
Is the root of all evil today.
We've been here before.
And Discarded fractional reserve before.
And here we are again.
Fractional reserve is a feel-good fool's errand, not a solution.
Einstein had a word for this.
Santayana had a word for this.
ZH has two words for this... Rinse, Repeat.
Well, I want a world where the characters from "My Little Pony Friendship is magic" are real but alas....
The free gold guys might be right in a pragmatic sense.
And Mr. Turk has diagnosed the problem.
The problem with his solution is that he thinks the government can fix the system by reorganizing the banking system.
The government broke it.
The fix is to seperate money and state.
The proof that this works was the free banking that existed from 1837 until 1862.
Suffolk Bank was the defacto central bank and developed expertise in discounting country bank notes. Each bank issued it's own depository receipts. Soffolk made sure that most of the gold was there.
Proving that we don't need no government screwing fwith the money.
Lincoln ended individual bank accountability by making the only notes allowed to circulate greenbacks.
This was the permanent death knell of free banking. in the United States.
Ehat folllowed was the guilded age funded by the counterfeiting of the priveledged New York National Banks.
The Fed was just a further consolidation of the National Banks. The problem dates back to the greenback in 1862 that severed the banks accountability for it's gold deposits.
If it all goes south, then it is going to be gold and bit coin, maybe.
<<< We'll never see it
<<< Just a matter of time untill we see it
A world-without-fractional-reserve-banks-and-central-planning. Which will it be?
The reason fractional banking was seen as necessary disappeared long ago. Originally, the (economic)velocity of money was limited by its physical presence. It is theoretically possible now for money to have an 'actual' velocity (not the economic measurement) of .5*c which would correlate to an arbitrarily high economic velocity, which means the same money could be used in thousands or millions of transactions per day. We could in fact go back to 100% reserve banking and do the exact same thing done with fractional reserve with real-time account settlement. The only difference would be that the economic velocity of money would be vastly greater.
In fact, the exact same thing could be done with the gold coin standard, if coins were marked with unique identifiers one could be assured of receiving in one's account the specific coin the buyer paid with. If for some reason one wished to have the actual coin, it would be a simple matter to either move the coin to one's local bank (a service banks could provide, but fairly expensively) or trade the coin (another service banks could proivde much more cheaply) for a local coin with a different identifier.
The reset it reseteth every day.
Would the "Bank of Commerce" be permitted to set up loans on its books simply by creating a deposit account for the borrower? This would mean unlimited expansion of credit. Or if prohibited, from where will come the initial deposits that can, in turn, be loaned out?
I don't really see the problem with mismatch duration so long as depositors are aware of what is happening.
I don't really see the problem with mismatch duration so long as depositors are aware of what is happening.
I don't really see the problem with mismatch duration so long as depositors are aware of what is happening.