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.
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It might work... but I'm still not sure the FDIC doesn't do the same job more safely.
ReplyDeleteIf investors forgo traditional banks for your "new institutions", then the system collapses in on itself, traditional banks are replaced by "new institutions," and there is no FDIC to guarantee loans when the inevitable crisis occurs.
The Seeker
The key difference is that the "new institutions" won't be able to promise that you can take your money out at any time because they'd be regulated by the same prohibitions against fraud that govern any business transaction.
ReplyDeleteFractional reserve banking is government mandated fraud.