[UncleEntity]

> Well, it's simple: risks are supposed to be (and are) handled by insurances.

So the banks charge a 5.75% “risk premium” and we’re back where we started.

And just because some cultures and religions are anti-usuary doesn’t invalidate it’s value. All interest does is price the value of money (ignoring all the shenanigans the central banks get up to). Money today is worth more than money tomorrow so you have to pay a premium to both access it and compensate the owner for the lost utility.

Yeah, fractional reserve lending is fraud but it’s legal fraud so what are you going to do?

[mikea1]

> fractional reserve lending is fraud

I don't understand how it's fraud. Banks could not lend at all if they must retain 100% of deposits.

On the lending side, it would hurt everyday people and the economy if banks could not lend. Loans are important for homeowners (mortgages) and for businesses of all sizes (research and development).

On the savings side, your community bank provides incredible guarantees with your deposit that are difficult to find elsewhere: deposits are very liquid, principle is virtually guaranteed, and convenience in routing the money wherever you direct it.

What would a better system look like?

[loup-vaillant]

> What would a better system look like?

More democracy.

Yes, banks couldn’t lend as much money if they couldn’t create it, and the way we’re making the economy work needs money to be created for those loans. So they definitely fill a need. However they are printing money and decide who can borrow and who cannot, without democratic oversight.

We tend to reduce democracy down to restrictive laws & regulations. Whether we want guns or not. Whether we want to allow abortion or not. How heavy the penalties are for murder or theft. How a given industry should be regulated. But resource allocation is arguably even more important.

How we allocate our resources determine pretty much everything in our lives. It’s the choice between more roads or new train tracks, which industry should be prioritised, basically what direction our whole economy should take. And that, instead of being subjected to democratic oversight, is currently left to private interests, with a vague hope that it will somehow be okay, because "invisible hand" or something.

Damn, I’m just asking for more democracy, and there we are, way outside the Overton window.

[NikolaNovak]

>>banks couldn’t lend as much money if they couldn’t create it

I feel there's shifty language and moving posts all the time.

Fractional reserve banking, to my limited understanding and your previous post, is lending some of the money that got deposited to. Where is this "creating money" (for non central banks) coming from? The phrase comes in and out of various conversations about banking system and it's the most slippery thing I've ever seen. Can you please elaborate on your understanding of how "banks create money" so we can have a discussion from same basic understanding and principles?

And it's not "banks couldn't lend as much money". If we didn't have fractional reserve banking, it feels banks could not lend AT ALL. This is not shades of gray, it feels like a basic principle. If a bank gets deposits, and can't do anything with deposits, and has to keep all the deposits in a vault, then it cannot do any loans. SImplified and all, but again, I want to see if our basic understanding is in line.

Also, what does "more democracy" concretely mean here, as nice as the phrase is? Aren't regulations by government the spear of the democracy, in practical sense?

[loup-vaillant]

https://www.youtube.com/watch?v=4AC6RSau7r8

More or less. Long story short, when money is lent in a bank, it’s then deposited elsewhere, and then it can be lent again, such that with a fractional reserve of 10% you can ultimately multiply the amount of money in all deposited accounts by 10. In other words, a whole bunch of money just got created. It’s not central money, but it’s still money.

You could maybe try to counter with "but but but bank runs", but if this happens the state tend to print central money to compensate, thus actualising the money creation that happened with fractional reserve banking alone.

> If we didn't have fractional reserve banking, it feels banks could not lend AT ALL.

They could lend their own money.

> Also, what does "more democracy" concretely mean here, as nice as the phrase is?

In this particular instance I’m thinking of full reserve banking (deposit banks turn back into glorified vaults), print central money for mortgages (and burn that money when it’s paid back), and democratically (with congress, referendum, whatever) define clear criteria about who can contract mortgages, and what for. Criteria which would then be enforced by mortgage clerk, on behalf of the state.

The point here is that instead of letting private interests that want to make money decide, the people decide (possibly through elected officials) of the applicable criteria.

[mikea1]

> this particular instance I’m thinking of full reserve banking (deposit banks turn back into glorified vaults), print central money for mortgages (and burn that money when it’s paid back), and democratically (with congress, referendum, whatever) define clear criteria about who can contract mortgages, and what for.

This is an interesting idea. The problem with a single lender is that it removes incentives for good customer service and (sometimes) good products. Monopolies, whether public (DMV) or private (your local cable company) are universally hated. It would be difficult to design the right incentives for the government to provide a good product.

I think the main disconnect is that deposit banks never operated as a glorified vault. Lending against deposits is supposed to be understood by anyone entering that agreement. I understand why it may be a surprise when you first learn about fractional reserves because it may not fit an existing mental model. Instead, it seems unfair that a bank can create money. But it's not. Money supply and money velocity is a term used by economists to describe how much and how quickly money exchanges hands. The world's accounting books, with all debits and credits, always sum to the same total: however much money the central bank has printed.

There are a lot of benefits of the current system (liquidity, virtual guarantee of withdrawal, conveniences). Your proposal would replace a system where you receive a small income from your deposits to a system that steadily decreases the size of your deposits; I think that would be a hard sell.

[loup-vaillant]

> Monopolies, whether public (DMV) or private (your local cable company) are universally hated.

I believe that's mostly a US thing. Here in France we love state monopoly on tap water, energy, and trains and snail mail service… Privatising those and opening them to competition generally caused more problems than it solved.

> Lending against deposits is supposed to be understood by anyone entering that agreement.

The only agreement most people understand, at the most basic level, is that money they deposit can be retrieved at any time. The idea that a bank run could even be a thing nowadays feels outlandish (I don't know the particular, but I understand that we have put various mechanims in place to make bank runs very unlikely, if at all possible).

> Your proposal would replace a system where you receive a small income from your deposits

I don't receive any income from my regular bank account. I even pay a small fee for the privilege of having that account. The things that pay interest back are special accounts, some of which I don't have immediate access to. For those the bank is very clear that it will use that money to invest in stuff, justifying why there's a return on interest at all.

Now if we went all the way to forbidding investment accounts, sure, every bit of inflation means your money is evaporating over time. I'm actually okay with that. It's a form of tax, with a flat rate, that rich people with a ton of money will pay more than the small folks. But yeah, it sure would be a hard sell to those rich people.

[mikea1]

> banks couldn’t lend as much money if they couldn’t create it

How could a bank lend _any_ money if it must reserve 100% of deposits as cash?

> they are printing money and decide who can borrow and who cannot, without democratic oversight

I do not understand how regulations are equivalent to democracy. Either way, banks are heavily regulated in the G7 countries. Such regulation was thought to exacerbate the mortgage crisis of 2008 because regulations created incentives to offer mortgages to people who should not have qualified.

Supply and demand of deposits and loans creates a competitive market - banks operate with razor thin margins.

I still do not know how you would improve upon the current system.

[UncleEntity]

> How could a bank lend _any_ money if it must reserve 100% of deposits as cash?

That’s the thing though, they could lend out and pay interest on “savings” with the understanding that the money might not be immediately available for withdrawal as it’s “in the wild”.

And a different class of banking, we’ll call it “checking”, would allow for immediate withdrawal as it’s backed by 100% reserves and doesn’t pay interest because it doesn’t make any money for the bank. Heck, they might even charge for the convenience of warehousing your money and being able to transfer it to any other economic actor you chose through a novel intra-bank clearinghouse.

What this doesn’t allow is for banks to lend out 90% of every dollar they take in — even ones available for immediate withdrawal.

As we’ve seen from the recent SVB[0] catastrophe if people assume their money is immediately available and it isn’t there’s big problems because everyone rushes to get their money right now instead of maybe getting their money at a later date. Big problem…

This is all stuff they figured out centuries ago, the main problem is it cuts into the banks’ profits so it isn’t done this way.

[0] as an illustration of the problem, they didn’t seem to get in trouble due to fractional reserve lending but from the liquidity of their assets.

[mikea1]

> That’s the thing though, they could lend out and pay interest on “savings” with the understanding that the money might not be immediately available for withdrawal as it’s “in the wild”.

Those are Certificates of Deposit.

> they didn’t seem to get in trouble due to fractional reserve lending but from the liquidity of their assets.

It was the opposite. SVB had over-invested in long-term US treasuries, which are extremely liquid, but were falling in price due to the rapid increase of interest rates. If not for withdrawals squeezing their reserve, SVB could hold onto those treasuries until maturity and get back 100% of their principle.

---

I think the disconnect is that savings accounts are not popularly well understood. People are shocked when they understand that the money they deposited is not sitting in a big vault.

You could tweak fractional reserves to be 20% (or 80%) of deposits, but that comes at a cost too. For example, it would create scarcity of money available for lending, which in turn would make loans more expensive (e.g., higher interest rate mortgages could double the cost of home ownership.)

The current system prevents the worst of bank runs by covering a good chunk of assets with insurance (FDIC in the US). It's a system that allows banks to fail and protect customer deposits.

The collapse of SVB was not a "catastrophe" because the banking system is intended to let banks fail. The alternative is far worse.

[loup-vaillant]

> Yeah, fractional reserve lending is fraud but it’s legal fraud so what are you going to do?

Isn’t that obvious? We’re living in an increasingly oppressive regime, and fractional reserve banking is but one of its many symptoms. So we’re going to do whatever people do under oppressive regimes.

First step though is awareness.