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

[Traden4Alpha]

Quote from jueco2005:
FRL= The banks lend the people their own money. You owe them..........they own you. They have the gold.........they make the rules. AND YOU CALL THAT MODERN ECONOMY. Good lord.

But the relationship is much more symmetric than you think -- depositors and investors "own" the bank as much as the bank "owns" it's borrowers. If enough depositors flee, then the bank, other depositors, and future borrowers are screwed. And if the borrowers can't repay, the bank and it's depositors are screwed. Moreover, given the asymmetries in the contracts, the depositors are the ones with the most power because they are the greatest freedom to demand their money at any time.

It's the supreme power (and folly) of depositors that drives the banking system and it's use of fractional reserve methods. If the banking system cannot provide a decent rate of return on deposits, then people take their money elsewhere.

Quote from jueco2005:
I do not see how you can’t end fractional reserve behavior by consumers and companies once it is illegal to engage in such practices.

As long as it is legal for people to give/deposit/invest their money into an entity that gives/deposits/invests some significant fraction of that money to others, we will have institutions are de facto fractional reserve. Yes, we can make it illegal for banks to offer fractional reserve accounts, but that's not the only way that a consumer can participate in a fractional reserve economy. Buying mutual funds, stocks and bonds, with the assumption that such instruments are liquid, is a fractional reserve activity.

Quote from trefoil:
I still have no idea where this moronic stupidity about the eeevuuls of fractional reserve banking came from. You can't have a modern economy without it.

Exactly! I think all this talk against fractional reserve banking and the desire for hard currencies is just a "flight to quality" response. People want to return to what they imagine was a simpler time and what they imagine was a more tangible money system.

And if people don't like what's happening with the current modest de-leveraging of the financial system, wait til they experience a full de-leveraging require by de-fractionalizing the system. Defractionalizing would require a total cessation of all lending for any purpose until most of the loans on banks' balance sheets were paid-off (5 to 10 years). I wonder what housing prices would do if buying a house was a 100% money down basis?

Moreover, hard currency is just an illusion, and is no proof against financial crises. Worse, the most cited hard currencies aren't even feasible anymore. Gold, in particular would require a fractional reserve system even more so than does the current fiat currency system. There is simply not enough physical gold in human hands to back everyone's deposits -- the modern economy is simply too large for gold to handle. And if people don't like what their own central banks is doing in controlling the money supply, wait until the money supply is controlled by foreign gold producers. Finally, gold is also a fiat currency in the sense that it's "value" is defined by human beings who can (by a wide range of centralized or decentralized means) decide that the value has changed. Yes, gold is much harder than paper, but gold has no true intrinsic value, only the value that governments, consumers, and merchants say it does.

 

[jueco2005]

You are the best example of our society. So used to the system you can't picture a different one.

As I said before: FRL is just a nominal effect in the money supply which ending is to lend people their own money (assuming no new money is created) to own them.

Without FRL there would be investment, savings, lending, borrowing...............as there was under FRL.

What's different??..............people will own their own money, there would be many investors, and many savers.

ASSET PRICES WILL BE LOWER.................FRL CREATES ASSET INFLATION.

We don’t save anymore because every incentive to do so has been destroyed by creating artificially low interest rates.

Why buy a house to pay 1,000 in mortgage when you can rent it for 800????

Quote from Traden4Alpha:

But the relationship is much more symmetric than you think -- depositors and investors "own" the bank as much as the bank "owns" it's borrowers. If enough depositors flee, then the bank, other depositors, and future borrowers are screwed. And if the borrowers can't repay, the bank and it's depositors are screwed. Moreover, given the asymmetries in the contracts, the depositors are the ones with the most power because they are the greatest freedom to demand their money at any time.

It's the supreme power (and folly) of depositors that drives the banking system and it's use of fractional reserve methods. If the banking system cannot provide a decent rate of return on deposits, then people take their money elsewhere.


As long as it is legal for people to give/deposit/invest their money into an entity that gives/deposits/invests some significant fraction of that money to others, we will have institutions are de facto fractional reserve. Yes, we can make it illegal for banks to offer fractional reserve accounts, but that's not the only way that a consumer can participate in a fractional reserve economy. Buying mutual funds, stocks and bonds, with the assumption that such instruments are liquid, is a fractional reserve activity.
Exactly! I think all this talk against fractional reserve banking and the desire for hard currencies is just a "flight to quality" response. People want to return to what they imagine was a simpler time and what they imagine was a more tangible money system.

And if people don't like what's happening with the current modest de-leveraging of the financial system, wait til they experience a full de-leveraging require by de-fractionalizing the system. Defractionalizing would require a total cessation of all lending for any purpose until most of the loans on banks' balance sheets were paid-off (5 to 10 years). I wonder what housing prices would do if buying a house was a 100% money down basis?

Moreover, hard currency is just an illusion, and is no proof against financial crises. Worse, the most cited hard currencies aren't even feasible anymore. Gold, in particular would require a fractional reserve system even more so than does the current fiat currency system. There is simply not enough physical gold in human hands to back everyone's deposits -- the modern economy is simply too large for gold to handle. And if people don't like what their own central banks is doing in controlling the money supply, wait until the money supply is controlled by foreign gold producers. Finally, gold is also a fiat currency in the sense that it's "value" is defined by human beings who can (by a wide range of centralized or decentralized means) decide that the value has changed. Yes, gold is much harder than paper, but gold has no true intrinsic value, only the value that governments, consumers, and merchants say it does.

 

[Traden4Alpha]

Quote from jueco2005:
You are the best example of our society. So used to the system you can't picture a different one.

I can picture all manner of systems, most of which either perform very poorly or do not accomplish what they claim to accomplish. For example: please explain the following facets of a non-FRL system:
1. Where does the money come from to be lent in a non-FRL system?
2. Where does lent money go to in a non-FRL system?
3. Why won't some (maybe most) of the money lent in step 2 be cycled back into step 1 (thus recreating a fractional reserve system)?

Quote from jueco2005:
As I said before: FRL is just a nominal effect in the money supply which ending is to lend people their own money (assuming no new money is created) to own them.

But my bank does not own me at all. I have far more power in the relationship than they do. I can leave them anytime I want, they have extremely limited recourse to make me repay my mortgage, and, if absolutely necessary, I could repay that mortgage.

The only people "owned" by their banks are imprudent people who refuse to wean themselves from the teat of debt. They put themselves over a self-made barrel because they think they can't survive without borrowing more and more. Yet one quick tour of their house, garage, and closets proves they willingly overspent their borrowed money on cheap consumer crap.

Quote from jueco2005:
ASSET PRICES WILL BE LOWER.................FRL CREATES ASSET INFLATION.

Yes, and nonFRL creates deflation. We need balance! The danger of FRL isn't in its existence but in the fraction chosen. In recent years, banks (and bank regulators) clearly chose far too low a reserve ratio which created far too much liquidity and induced the massive cycle of asset inflation that we experienced. In creating an asset bubble and all the boom times for citizens, the banks sowed the seeds of their own destruction.

Quote from jueco2005:

We don’t save anymore because every incentive to do so has been destroyed by creating artificially low interest rates.

On this point, I heartily agree with you! We need to repeal all taxes on interest, dividends, and capital gains. Taxes on savings mean that one inevitably loses money unless one invests in the riskier asset classes (which most people do a very poor job of). Governments effectively use the combination of inflation and taxes on savings to slowly seize those savings.

 

[HomoSalmon]

Quote from Traden4Alpha:

please explain the following facets of a non-FRL system:
1. Where does the money come from to be lent in a non-FRL system?

In my opinion, from savings specifically assigned to long-run (as today we do with bonds or CD or any kind of financial "investment". Of course, any investment should have its market and should be sold/bought before due date).
The only positive effect of FRL system is to multiply interest rate, so savers can have the desidered interest rate without burdening too much to borrowers. A way to give more credit, if you wish. Drawbacks is that this "easy money" can inflationate any assets to which it is applied (as mortgage and RE bubble in US shows). The only credit really important for the system is credit to entreprenuers, precisely to that innovations that raise efficency or effectiveness. This kind of credit make a "bigger cake", makes the whole system more rich, more slices of cake to divide between people.
The real difference between a gather-hunter and a modern man is efficiency: one hour of the latter has more value (more output) than an hour of the former because he, by tecnology and organization, he is more productive.
Any credit to efficency innovations create more richness.
At the same time, credit to any kind of consume, including RE, is useful but not indispensable. It is a moving in time of wealth, I spend today something I will earn tomorrow. This type of time-shifiting of value should be balanced from other people who wants to time-shift in the other way, as young people do for their retirement, save something earned today to spend it tomorrow.
This is the way the system should be balanced, in my opinion. Banks are only one of many ways to facilitate moving of wealth between people and times. The most important part, in my opinion, is insurance: spreading the risk betweeen a wider range, so any investor have a risk very near to the average (of the chosen kind of investment, of course I expect market will have different types with different returns and different risks).

2. Where does lent money go to in a non-FRL system?

Move. That's the intended job of money as means of exchange, IMHO.

3. Why won't some (maybe most) of the money lent in step 2 be cycled back into step 1 (thus recreating a fractional reserve system)?

Because no-one is creating money from void. The total amount of money in time (in the long run) is costant.
Prices adapt to market conditions, and not other way round (market slow down? more credit and more money, moving today the earnings of tomorrow, which must be repaid or lost by someone tomorrow). If someone do not repay it, someone else lose it. No money creation, only exchange.

But my bank does not own me at all. I have far more power in the relationship than they do. I can leave them anytime I want, they have extremely limited recourse to make me repay my mortgage, and, if absolutely necessary, I could repay that mortgage.

The only people "owned" by their banks are imprudent people who refuse to wean themselves from the teat of debt. They put themselves over a self-made barrel because they think they can't survive without borrowing more and more. Yet one quick tour of their house, garage, and closets proves they willingly overspent their borrowed money on cheap consumer crap.

I agree on this. But in the short-run, they're shifting you. Willingly to pay more than you, they can win competition for scarce goods (as a specific RE) inflating their value with money they do not really have. At the end, they should pay for their behaviour, not you or a third one, IMO.
But their stupid behaviour is often a consequence of exogenous stimulus from FRL ("easy money").

Yes, and nonFRL creates deflation. We need balance!

I not follow. Why should create deflation living between their means?
It avoid overspending, that's true, but this means avoid busts which always follow booms, as some economic schools said long ago.

The danger of FRL isn't in its existence but in the fraction chosen. In recent years, banks (and bank regulators) clearly chose far too low a reserve ratio which created far too much liquidity and induced the massive cycle of asset inflation that we experienced.

More leverage means bigger risks, more boom and more bust. Sure. But as any control engineer could say, it is the feedback who decide the system behaviour. More than 1, and it is unstable. In this system we're speaking of, any fraction bigger than 1 (any fractionary system, even if you may overlend only 10% more than money you really have, i.e. 1.1 feedback coefficient) is inherently unstable. (See http://en.wikipedia.org/wiki/Control_theory)

There is only one big drawback I can see, but I'm unsure of it. No money creation means more friction to changing economic conditions (real conditions: population growth, efficiency improvement, scarce resources). More precisely, using money creation you (regulator? government?) can quickly adapt the system to more output (more people should means more output, assuming all are productive) even when prices adapt too slowly (means higher unemployement).
But I'm unsure this really happen for long time in a system well regulated (none of which exist, afaik, so I have no clue about it).

 

[jueco2005]

Quote from Traden4Alpha:

I can picture all manner of systems, most of which either perform very poorly or do not accomplish what they claim to accomplish. For example: please explain the following facets of a non-FRL system:
1. Where does the money come from to be lent in a non-FRL system?
2. Where does lent money go to in a non-FRL system?
3. Why won't some (maybe most) of the money lent in step 2 be cycled back into step 1 (thus recreating a fractional reserve system)?.

1. In today's system money is created by debt. Federal Reserve Notes belong to the Fed and they only LEND it out. To the govt, to you and me.
In a non FRL system when money is created by govt or other institutions, they do so no by debt, but backed by something............we used to use gold, silver and real production.

2. To lend money in a non FRL reserve system we need to rethink what a bank would be like. To lend money in a non FRL a bank needs investors, who would deposit money at the bank to earn a certain interest. All other individuals putting their money in checking and savings accounts will have their funds 100% untouched and ready to be withdrawn at any time they wish.

3. There will be mechanisms in step 2 to prevent cheating in the system. For example: When a bank lends you money, it will issue you a checking account ...............you can write checks against your borrowed funds but you can not take it to another institution. Auditions to banks available funds to be loaned.

 

[Traden4Alpha]

Quote from HomoSalmon:

Quote from Traden4Alpha:
1. Where does the money come from to be lent in a non-FRL system?

In my opinion, from savings specifically assigned to long-run (as today we do with bonds or CD or any kind of financial "investment".

Yes, and a CD or bond is a fractional reserve instrument -- the bank holding the CD only holds a fraction of that CD in the vault and lends most of the CD to others. In many situations, the money lent from the CD is then redeposited in the bank, some of which is relent again. That's FRL.

If you want full reserve, then you CANNOT lend any of the deposits. Yes, we can make the banks hold 100% reserves, but then I doubt that most people would choose banks to hold their money.

Quote from HomoSalmon:
At the same time, credit to any kind of consume, including RE, is useful but not indispensable. It is a moving in time of wealth, I spend today something I will earn tomorrow. This type of time-shifiting of value should be balanced from other people who wants to time-shift in the other way, as young people do for their retirement, save something earned today to spend it tomorrow.

This is the way the system should be balanced, in my opinion. Banks are only one of many ways to facilitate moving of wealth between people and times.

Exactly! This is the basis of ALM (Asset-Liability Management) which attempts to provide this type of duration matching between loans and deposits. But ALM is imperfect because the bank does not know the true duration of a deposit or the true duration of a loan (e.g., the majority of "30-year" mortgages are repaid within 7 years when homeowners move or refinance). And in a downturn, the rate of withdrawals increases (even CDs and IRAs can be prematurely liquidated) and the rate of repayments decreases. But as long as the bank has sufficient reserves, the system can be stable.

Quote from HomoSalmon:

Quote from Traden4Alpha:
Yes, and nonFRL creates deflation. We need balance!

I not follow. Why should create deflation living between their means?

One of the advantages of "easy money" is that it allows people, companies, and government to smooth-over downturns in income. If someone has an unexpected decrease in income, then easy credit lets them handle that.

If people have no access to credit, then they must liquidate assets to handle a downturn. And, in a downturn, liquidating assets creates deflation because being forced to sell an asset when demand for assets is low creates a spiral of decline asset prices. Borrowing from the future lets people avoid selling assets at the worst possible time.

What makes the situation unstable is when people use so much credit during the good times, that they have no remaining credit during the bad. This crisis is as much about imprudent borrowers (i.e., consumers, companies, and government that over borrowed) as it is about imprudent lenders (depositors, bond holders, shareholders, and sovereign funds that failed to do adequate due diligence)

 

[HomoSalmon]

Quote from Traden4Alpha:
CD or bond is a fractional reserve instrument -- the bank holding the CD only holds a fraction of that CD in the vault and lends most of the CD to others. In many situations, the money lent from the CD is then redeposited in the bank, some of which is relent again. That's FRL.

Not follow. I buy a CD or a bond. It will have a due date. My money is blocked into it until due date. Any $$ of bond that the bank is lending is a $$ I gave to it. No money is created from thin air. If they lend it for a longer period, that's a fraud (or at least, mismanagement). If they lend it for a shorter one, they're making a poor work. It's their work to match emissions.

If you want full reserve, then you CANNOT lend any of the deposits. Yes, we can make the banks hold 100% reserves, but then I doubt that most people would choose banks to hold their money.

Agree. Exactly what I think. No deposits should be allowed to be lent.
People give their deposit to bank to keep them (as in a safe) and to have it ready for use (payment services).
Not to be invested in any financial operation. That is a bank choice, not understood by most, not authorized by anyone, risky for all, profitable only for the bank (interest rate to depositors is only a decoy).

Sure the bank cannot pay interest on deposits without using it in this way (more probably depositors will have to pay a fee for the "safe" service and/or payments services).
But in this way they will have the risk-free system they believe to have (that thery're discovering NOW they haven't). If depositor want interest, they can chose trasparently a different instrument (like bond or CD) with a due date, or a instrument where they agree to not be able to withdraw their money when a crisis is in progress (and instrument's contract should state how a crisis is defined).
In this way all we can do today could be done, trasparently and without unintended risks. No runs are possible.
The problem is that bank are making profits by opacity, selling "no-risk deposit" when there are not.
This seems to me the intended work of FRL.

One of the advantages of "easy money" is that it allows people, companies, and government to smooth-over downturns in income. If someone has an unexpected decrease in income, then easy credit lets them handle that.

If people have no access to credit, then they must liquidate assets to handle a downturn. And, in a downturn, liquidating assets creates deflation because being forced to sell an asset when demand for assets is low creates a spiral of decline asset prices. Borrowing from the future lets people avoid selling assets at the worst possible time.

Seems wrong to me. Why someone cannot have access to credit IF he has any collateral to guarantee that credit?
This is risk management, the work of lender. Of course, if lender give away money without any collateral, and things go wrong, he should pay the price of its inability to do HIS work. On second hand, his shareholders should pay, and after then who bought his CD or bond should pay (he knows any investment has its risk, he chosen the issuing).
In this way system is stable, and fair.
No money created by thin air. No risk upon unintended recipient. No need to bailout anyone. Wrong-doers pays.

What makes the situation unstable is when people use so much credit during the good times, that they have no remaining credit during the bad. This crisis is as much about imprudent borrowers (i.e., consumers, companies, and government that over borrowed) as it is about imprudent lenders (depositors, bond holders, shareholders, and sovereign funds that failed to do adequate due diligence)

Agree. But you're dodging the main point. This crisis do not involve only imprudents. Involve innocent people, too. People who lived (and lives) between their means, and this is due to a system poorly designed (or stupid or criminal), a system designed to be unstable and unfair (in risk management and allocation).
This is the point, IMO.

By the way, US government is acting like a boy who is trying to hide the (unexpected?) big results of a friend trick (and his trick, too: market regulation is THE work of any government, IMHO).

 

[HomoSalmon]

Just found elsewhere here in ET a link to very interesting article that could be well connected to this thread:

http://www.nakedcapitalism.com/2009/02/steve-keen-roving-cavaliers-of-credit.html

Thanks to sobemark to posting (quoted here: http://www.elitetrader.com/vb/showthread.php?threadid=153156&perpage=15&pagenumber=1)

 

[Traden4Alpha]

Quote from HomoSalmon:
Not follow. I buy a CD or a bond. It will have a due date. My money is blocked into it until due date. Any $$ of bond that the bank is lending is a $$ I gave to it. No money is created from thin air. If they lend it for a longer period, that's a fraud (or at least, mismanagement). If they lend it for a shorter one, they're making a poor work. It's their work to match emissions.

To the extent that any deposit (even a CD) can be lent out and that lent money redeposited, the system is FRL -- that's the definition of fractional reserve. And FRL does not create money from nothing even if it looks that way. It "creates" money on the cycle of deposit-lend-deposit-lend-deposit-..... If you put $10000 in a 5-year CD and the bank lends $9000 for a 5-year car loan (leaving $1000 of the $10,000 in reserves), some of that $9000 will end up back in the bank. Say the borrower buys the car and the car seller puts the $9000 in their own 5-year CD. Now the bank can make another 5-year car loan for $8000 (leaving $1000 of the $9000 in reserves) to some else who buys from someone else who puts the $8000 in a CD which permits another $7000 loan (leaving $1000 of the $8000 in reserves), which .... In just a few cycles of the system, your original $10000 CD "created" two more CDs and three loans. You deposited $10000, but the bank now shows that it has $27,000 in CDs as the bank's liabilities owed to depositors balanced against the bank's assets of $3000 in reserves and $24,000 in loans. To the extent that your bank lends your CD money and borrower (or anyone that the borrower pays) then redeposits that money, you've created the FRL loop that "creates" money.

And don't forget that even a CD can be withdrawn early -- you just lose some interest (usually a month or a quarter). An interest-bearing checking account or passbook savings is just a continuous CD with slightly lower interest rate that covers the "early withdrawal" penalty.

And even if you entirely prohibit all early withdrawals, the system is still unstable. What if the local factory shuts down and all three car loans go bad? The borrowers can't repay the $24000 back, it's highly unlikely that the bank will get $24000 from the three repossessed used cars and the $3000 in reserves isn't going to cover the $27000 in CDs when they come due.

Quote from HomoSalmon:
Sure the bank cannot pay interest on deposits without using it in this way (more probably depositors will have to pay a fee for the "safe" service and/or payments services).

But what percentage of people's wealth would be in these "safe" accounts? What % of college savings or retirement or house downpayment money will be put in negative interest rate "safe" accounts? Won't most people put most of their money in longer-term instruments that are lent FRL-style?

Quote from HomoSalmon:
Seems wrong to me. Why someone cannot have access to credit IF he has any collateral to guarantee that credit?

But where does the money for this credit come from? If the bank is doing it's job, then a bunch of it's deposits are locked in full-reserve (no relending) accounts and the rest are CDs that have already been lent out.

Quote from HomoSalmon:
This crisis do not involve only imprudents. Involve innocent people, too. People who lived (and lives) between their means, and this is due to a system poorly designed (or stupid or criminal), a system designed to be unstable and unfair (in risk management and allocation).
This is the point, IMO.

I think you will find that the U.S. has remarkably few innocent people in all of this. Anyone who sold a house in the last 5 years for a "high" price is guilty. Anyone who bought a house as a "good investment" is guilty. Anyone who shopped around to find the highest rate on CDs is guilty. Anyone who shopped around to get the lowest mortgage rate is guilty. Anyone who refinanced and spent the money is guilty. Anyone who said to anyone else that real estate was going to keep going up is guilty. Anyone who did not study the financial system, write their Congressman, and vote for people advocating financial prudence is guilty. In a market democracy, citizens are responsible for the consequences of their financial and political actions. I think you will find that the majority were guilty of some combination of negligence, imprudence, and avarice. But then, "everyone was doing it".

 

[HomoSalmon]

It "creates" money on the cycle of deposit-lend-deposit-lend-deposit-..... If you put $10000 in a 5-year CD and the bank lends $9000 for a 5-year car loan (leaving $1000 of the $10,000 in reserves), some of that $9000 will end up back in the bank.

Sure. But only if you can lend deposits. I'm saying a bank should not allowed to. If some of that 10,000$ is converted in long-run deposit (say bond, as you correctly noted CD can be reedemed before due date), then that part can be lent again. It will not create money, because because you have taken back from circulation the same amount.
Say c is money circulating in the system at time t0. To make a lend, you need someone agree to give x money to you, the lender. So c-x is now circulating at time t+1. Lender then give x to borrower. Borrower spend it, so it return to circulating, thus (c-x)+x means c. No creation of money.

And even if you entirely prohibit all early withdrawals, the system is still unstable.

Please prove this statement, because at best of my understanding it is not true.
You say that "What if the local factory shuts down and all three car loans go bad? The borrowers can't repay the $24000 back, it's highly unlikely that the bank will get $24000 from the three repossessed used cars and the $3000 in reserves isn't going to cover the $27000 in CDs when they come due."
First of all, you used a FRL example to prove unstability of an non-FRL system. Very economist-minded
IMO, You should refer to 10,000$ loan (backed by bonds) and no more. Of course that money can be re-impiegated to new loans, but only when specifically "blocked" into some instrument designed to take it back from circulating, like a bond.
Anyway, IMHO the solution is reasoning about circulating money (call it M2 or M3, or even more, I'm still learning about this definitions, and I'm unsure what should I use; but in a non-FRL system have they any sense? Don't they should be all equal to M0 in a non-FRL system?). When you say "And don't forget that even a CD can be withdrawn early" I believe you're disregarding that to pay back it, bank needs to find money somehow. A new CD? A new bond? Anyway, it is taking back money from somewhere else and circulating is still the same (of course, in a non-FRL system).

But what percentage of people's wealth would be in these "safe" accounts?

IMO the point is let people choose. People can choose what they want, what is best for them (or at least, what they believe is best for them).
You cannot make this choice now, in a FRL system. Your money is subjected to unavoidable risk, at the whim of profit-looking imprudents who're gambling on your shoulder, and without your consent. With the consequences we're all living and we're only starting to understand.

But where does the money for this credit come from?

Where it should: from saving of someone else. As I said, the only exception I believe we should discuss is IF legislative branch (in your case, Congress) rationally believe a controlled raising of money stock is justified by economic condition (ie: population growth, for accomodate more quickly an increment of productive people, or to adapt more quickly to big productivity improvements).
Of course, in this scenario should have to be a way to keep innovations running (they need credit).
Probably this system is deeply involved with my belief: credit should be easy for innovations (because when they succeed the system is improved, ie there's more real wealth to divide, a bigger cake) and so justify moderatly high risk. The credit should be dificult to consumers (not impossible, difficult) because it is only a shift of earnings in time (tomorrow earning spent today), and you cannot use it to really improve your wealth condition.
As you can see, my belief leave no space to speculation. I do not believe zero-sum games should be allowed to raise sistemic risk, as we commonly do nowadays (althrough they're legitimate game to play between informed and willingly adult gamers).

I think you will find that the U.S. has remarkably few innocent people in all of this.

To a less extent, all western world has its guilty people, imho. USA was only some years ahead, as usual.
Anyway, I cannot follow on the road "All guilty, no-one guilty". It is a game often played in my country. I believe it is a scam.

Anyone who sold a house in the last 5 years for a "high" price is guilty. Anyone who bought a house as a "good investment" is guilty.

2,500 years ago my ancestors used to say "caveat emptor". "Buyer Beware". I believe it is a right of seller to try to gain best price for is selling. I do not believe it is a right of buyer buying without any chance to pay for. I do not believe it is right of any financial institution to trick people as they did (and do) after repealing of Glass-Steagal Act, and as they're doing using FRL. Illusion, when include deceipt, is a crime (or should be).

In a market democracy, citizens are responsible for the consequences of their financial and political actions.

Sure. But responsible is different than guilty. It's clear to me that we're in a worst shape than ever BECAUSE some market regulations was repealled (in my country as in yours, do you know Italy repealled our equivalent of Glass-Steagall Act about the same time you do? Most EU countries did). And we're nearly broke now because some people started to circumvent regulations and practice suggested by experience and useful to reduce sistemic risk, as who sold most of derivatives did. I believe using deception, as most of derivative selling to institutions strongly suggest (as to communes here) and as people selling clearly prove.
That people, who profitted by most of money created from void should be hanged, IMHO. But I believe taking all money they have may be a sufficient penalty (maybe together serving some forced labour years). Millions a year for organizing/selling pieces of paper in a zero-sum game may be legitimate (but it's not useful at all and legislative branch should limit it to consensual, informed players). But, as we now starting to realize, in a less-than-zero-sum game?. I believe not. You're not available to consider it a crime? What about negligence? Is it enough to be sentenced to repay damages, or at least to go bankrupt trying to? I believe so.