Could this be the beginning of the end of Fractional Reserve Lending??? A major .....

[Anaconda]

Quote from neutrino:

The problem with the fractional reserve banking is that you have the right to withdraw your money at any time. We know that we can't do that all at the same time, and we know that we take a risk of a bank run. But noone forces you to keep your money in an interest earing account. You can put it in a safe deposit box, pay the annual fee, and you can feel secure about your holdings.

Correct me if I am wrong, but you can't write checks against cash held in your safety deposit box. Hence it is illiquid.

I think most of you have no idea how a non-fractional reserve bank would operate. On-demand deposits are charged a fee and simply held for safekeeping. The money that the bank lends out is the money given to the bank by investors. For example, investors would give money to a bank and have it locked up, like a CD, for a certain return. The bank would then lend that money out for a higher return. Pretty much hard money lending.

 

[jueco2005]

Excellent....you could not put it any better.

Quote from Anaconda:

Correct me if I am wrong, but you can't write checks against cash held in your safety deposit box. Hence it is illiquid.

I think most of you have no idea how a non-fractional reserve bank would operate. On-demand deposits are charged a fee and simply held for safekeeping. The money that the bank lends out is the money given to the bank by investors. For example, investors would give money to a bank and have it locked up, like a CD, for a certain return. The bank would then lend that money out for a higher return. Pretty much hard money lending.

 

[ByLoSellHi]

This isn't that complicated.

Anytime you have a banking system that is allowed to create something (whether a credit or deficit, depending on whether you're the loan maker or borrower) out of nothing, you are using leverage in a way that will always exacerbate trends.

The trend to the upside will always be unwarranted and without a firm footing (bubble), and the trend to the downside will always be far more catastrophic (bust) than had leverage not been utilized.

The only way to ensure leverage can't or won't be used is to require that each credit and deficit be matched against something of equally inherent value.

 

[neutrino]

Quote from Anaconda:

Correct me if I am wrong, but you can't write checks against cash held in your safety deposit box. Hence it is illiquid.

I think most of you have no idea how a non-fractional reserve bank would operate. On-demand deposits are charged a fee and simply held for safekeeping. The money that the bank lends out is the money given to the bank by investors. For example, investors would give money to a bank and have it locked up, like a CD, for a certain return. The bank would then lend that money out for a higher return. Pretty much hard money lending.

You are 100% correct. It is not convenient to keep the federal reserve notes as cash in a vault, because you can't pay by wire transfer or check. But then this is the answer to the original question - what will be the change in the current banking model? How about a bank, that has only on-demand deposits and checking accounts and keeps a 100% reserve - either in actual cash in the vault or as federal reserve deposit. You can keep your money in such bank, it will be 100% backed by FRN, and you can also make payments (but you will receive 0% interest rate). Sort of like PayPal but the money has to be in the central bank, rather than in a commercial bank. Such bank will make money only from transaction fees, but it will also have a very low cost structure. What is the problem to create such bank? It won't even need protection by the FDIC. And there is no need to abolish fractional reserve banking. Competition should solve the problem.

 

[jueco2005]

I think the new way of doing business is gone. The present financial system has collapsed and a new one will be created.

Quote from neutrino:

You are 100% correct. It is not convenient to keep the federal reserve notes as cash in a vault, because you can't pay by wire transfer or check. But then this is the answer to the original question - what will be the change in the current banking model? How about a bank, that has only on-demand deposits and checking accounts and keeps a 100% reserve - either in actual cash in the vault or as federal reserve deposit. You can keep your money in such bank, it will be 100% backed by FRN, and you can also make payments (but you will receive 0% interest rate). Sort of like PayPal but the money has to be in the central bank, rather than in a commercial bank. Such bank will make money only from transaction fees, but it will also have a very low cost structure. What is the problem to create such bank? It won't even need protection by the FDIC. And there is no need to abolish fractional reserve banking. Competition should solve the problem.

 

[4444CJones4444]

And if we go away from fractional reserve lending, what will replace it? Full reserve banking? Get real.

Why don't we just carry around little satchels of gold and pay for merchandise and service with gold shavings? That's sure to fix the banking system—move it back 1000 years.

 

[achilles28]

Quote from 4444CJones4444:

And if we go away from fractional reserve lending, what will replace it? Full reserve banking? Get real.

Why don't we just carry around little satchels of gold and pay for merchandise and service with gold shavings? That's sure to fix the banking system—move it back 1000 years.

Those gold shavings are gonna be worth a hella 'uv a lot more than your fiat dollars, after Bernacke is through, Einstein

 

[neutrino]

Quote from 4444CJones4444:

And if we go away from fractional reserve lending, what will replace it? Full reserve banking? Get real.

Why don't we just carry around little satchels of gold and pay for merchandise and service with gold shavings? That's sure to fix the banking system—move it back 1000 years.

Exactly! In fact, no one force the banks to keep only a fraction of their assets as reserves. The reason there are no 100% or even 20% reserve banks is because the marketplace won't sustain them for long - there are not enough customers willing to forgo the interest they can earn in their fractional reserve account in exchange for greater safety. Probably everyone thinks they can get off the boat before the party is over...

 

[achilles28]

Competing currencies is the way to go.

Let the market decide what form of exchange it favors, then run with it.

Any one medium has proven easily manipulated, either via counterfeit (fractional reserve lending) or reporting (goldsmith demand notes).

Whether its demand notes for cattle, gold, silver, land, oil, wheat, whatever.

The market will trend towards metals and energy, initially, then competition will emerge..

The answer to all Humanities problems is bottom-up innovation.

Historically, our approach to Government problem solving has followed the top-down, "20 wise men" model.

20 of the smartest guys in the room cook up an idea and dictate to everyone else.

Thats ass backwards.

What we need to do is leverage humanities collective intellect to arrive at the best solution polled from MILLIONS of the brightest minds. Not a handful.

In essence, this creates a free market for intellectual capital - our biggest asset.

Ron Paul is RIGHT.

Open up the Market to competing currencies and the brilliant creativity unlocked will put us all to shame, and surprise us all!

There are other ways of doing things. Innovation and creativity is the answer to a new currency.

Not the tried-and-true Fractional Reserve model where the Bankers Fuck Us All!!!

 

[Traden4Alpha]

Quote from neutrino:
Exactly! In fact, no one force the banks to keep only a fraction of their assets as reserves. The reason there are no 100% or even 20% reserve banks is because the marketplace won't sustain them for long - there are not enough customers willing to forgo the interest they can earn in their fractional reserve account in exchange for greater safety. Probably everyone thinks they can get off the boat before the party is over...

And the problem is worse than that because its not just the reserve ratios of banks, but the reserve ratios of all financial service companies and the range of choices available for companies and consumers.

One of the rationale for loosening regulations on the banks (e.g. repeal of Glass Steagall) was because the banks were losing market share in the financial world -- it was becoming too easy for consumers to put their money in brokerage accounts and too easy for companies to raise capital without borrowing from a tradition FDIC-chartered bank. Some even wondered if the trend would reduce the effectiveness of monetary policy if banks became marginalized elements of the financial system and the Fed's "overnight rate" became nothing more than a suggestion. If banks aren't central to the economy, what power does a central bank have?

Although we can end fractional reserve banking, we can't end fractional reserve behavior by consumers and companies. To the extent that consumers and companies are free to direct money away from risk-conservative banks and into higher return assets, the economy will still have financial crises. That is, we could make the banking system safe but it would consign banking to a marginal role in the economy.