Dead rats and dopamine - a new publication
9 months ago
Saturday, January 31, 2009
New Banking
The Seeker writes:
Also, I just want to understand how a bank can make a profit on lending money (or even cover costs) without fractional reserve banking. The entire banking system collapses without the ability to make money on borrowing and lending, because without that liquidity will dry up, and you have yet to suggest a means for a traditional "bank" to make money under this new system.
The government (via the Federal Reserve) will pay interest to banks. The banks will subtract an amount to cover their costs and profits and pay the rest to depositors. Fractional reserve banking got its start when "money" was a commodity currency (ie gold) and so this method wasn't available. Now with fiat currency, it's possible.
Followup: Won't that cause inflation? Yes, but no more than it does currently. We're already doing this.
The second part of your question is the availability of lending. It's true that there will be a lot fewer loans available. At the same time, there will be new investing institutions that will take the place of banks. Savers who seek yield and can afford risk can dabble in that new market without jeopardizing the new safe banking system.
Followup: In the transition to this new paradigm, won't there be a lot of draining of liquidity?
Yes, but in the transition, the government will be able to retire large amounts of its debt forcing the market that currently invests in the Treasury to invest elsewhere. Essentially, we are bringing those who cannot afford risk to safety and encouragint hose who can afford risk to invest.
Also, I just want to understand how a bank can make a profit on lending money (or even cover costs) without fractional reserve banking. The entire banking system collapses without the ability to make money on borrowing and lending, because without that liquidity will dry up, and you have yet to suggest a means for a traditional "bank" to make money under this new system.
The government (via the Federal Reserve) will pay interest to banks. The banks will subtract an amount to cover their costs and profits and pay the rest to depositors. Fractional reserve banking got its start when "money" was a commodity currency (ie gold) and so this method wasn't available. Now with fiat currency, it's possible.
Followup: Won't that cause inflation? Yes, but no more than it does currently. We're already doing this.
The second part of your question is the availability of lending. It's true that there will be a lot fewer loans available. At the same time, there will be new investing institutions that will take the place of banks. Savers who seek yield and can afford risk can dabble in that new market without jeopardizing the new safe banking system.
Followup: In the transition to this new paradigm, won't there be a lot of draining of liquidity?
Yes, but in the transition, the government will be able to retire large amounts of its debt forcing the market that currently invests in the Treasury to invest elsewhere. Essentially, we are bringing those who cannot afford risk to safety and encouragint hose who can afford risk to invest.
Winning Economies Don't Do Drugs
First!!!!
Has anyone noticed that the only difference between the majority and minority political agendas before and after the announcement of recession is any conception of fiscal constraint?
That the government can somehow "stimulate" the economy in the short term with legislation has become the conventional wisdom. Democrats and Republicans now argue about which "stimulus" is better, coke or speed, without stopping to realize maybe it's ok if the economy takes a nap in the middle of the day every one in a while.
The government has a chance to realign the financial infrastructure of the national economy, a chance not seen since Hoover, but instead they have somehow convinced themselves that spending and taxcuts can magically solve the problem.
The US economy produces over $13 trillion in goods and services each year. Even if the government could do something, why does the political establishment believe that spending less than 3% of that amount can somehow make everything better?(Http://www.cbo.gov/ftpdocs/99xx/doc9968/hr1.pdf)
Instead they should:
1. Eliminate Fractional Reserve Banking
2. Rationalize Taxation of Capital
3. Provide unemployment benefits, job training, education subsidies, and national health insurance
The problem is and always has been fractional reserve banking. It caused the stock market crash in 1929 to become the Great Depression and it as been an accelerant in every recession ever since.
Fractional Reserve Banking is the idea that a bank can take a deposit from you and lend it to someone else while telling you that they still have it and it's safe. (http://en.wikipedia.org/wiki/Fractional_reserve_banking)
When that someone else can't pay back, whether due to a stock market crash or a housing bubble pop, the bank can't pay you back. If you try to get your money out early before the crash, then you cause a bank run since the bank doesn't have enough money for everyone.
FDR and company tried to fix this with various measures to increase confidence in banks, including the FDIC. (http://en.wikipedia.org/wiki/Fdic) While these measures "worked" in that that the public (including me) was fooled into believing that banks were now safe, all they did was perpetuate the fraud, now with the backing of the United States government.
With the mortgage "crisis" the fraud is laid bare. Will our leaders fix the problem or punt it to the next generation?
Has anyone noticed that the only difference between the majority and minority political agendas before and after the announcement of recession is any conception of fiscal constraint?
That the government can somehow "stimulate" the economy in the short term with legislation has become the conventional wisdom. Democrats and Republicans now argue about which "stimulus" is better, coke or speed, without stopping to realize maybe it's ok if the economy takes a nap in the middle of the day every one in a while.
The government has a chance to realign the financial infrastructure of the national economy, a chance not seen since Hoover, but instead they have somehow convinced themselves that spending and taxcuts can magically solve the problem.
The US economy produces over $13 trillion in goods and services each year. Even if the government could do something, why does the political establishment believe that spending less than 3% of that amount can somehow make everything better?(Http://www.cbo.gov/ftpdocs/99xx/doc9968/hr1.pdf)
Instead they should:
1. Eliminate Fractional Reserve Banking
2. Rationalize Taxation of Capital
3. Provide unemployment benefits, job training, education subsidies, and national health insurance
The problem is and always has been fractional reserve banking. It caused the stock market crash in 1929 to become the Great Depression and it as been an accelerant in every recession ever since.
Fractional Reserve Banking is the idea that a bank can take a deposit from you and lend it to someone else while telling you that they still have it and it's safe. (http://en.wikipedia.org/wiki/Fractional_reserve_banking)
When that someone else can't pay back, whether due to a stock market crash or a housing bubble pop, the bank can't pay you back. If you try to get your money out early before the crash, then you cause a bank run since the bank doesn't have enough money for everyone.
FDR and company tried to fix this with various measures to increase confidence in banks, including the FDIC. (http://en.wikipedia.org/wiki/Fdic) While these measures "worked" in that that the public (including me) was fooled into believing that banks were now safe, all they did was perpetuate the fraud, now with the backing of the United States government.
With the mortgage "crisis" the fraud is laid bare. Will our leaders fix the problem or punt it to the next generation?
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