• It has come to our attention that some users may have been "banned" when they tried to change their passwords after the site was hacked due to a glitch in the old vBulletin software. This would have occurred around the end of February and does not apply after the site was converted to Xenforo. If you believe you were affected by this, please contact a staff member or use the Contact us link at the bottom of any forum page.

How To Fix The Banking System


R3volution_R3ady

Well-known member
Joined
Sep 17, 2012
Messages
2,370
When it comes to fixing the failed banking system, there exists two groups with two very different approaches.

One group believes that there is a need for further regulation. The other group calls for less regulation. Now even though these are two very different approaches, both groups share something in common; the understanding and awareness that there is a fundamental flaw that needs attention. We all want stable banking and no matter how we arrive at that is irrelevant. The main thing is that we do. This is something we can all agree on.

So let's tackle that right now.

There is a sense among most people that banks are just "too big to fail" and playing such an important role in the economy, it only makes sense that the government must step in with taxpayers money to fund private gambling losses (they say). Both groups on this issue would wish this wouldn't be the case as it's morally wrong, that much everyone can agree on. So how do we change the "too big to fail" situation?

Firstly, banks are "too big to fail" because of the government. This much is clear. Now you might say that banks are a "special case" and you'd be right, they are. They are because they're not restricted by the same laws that, say a grain silo are. Banks of course have a special legal privilege. It's called Fractional Reserve. When a depositor deposits €10 into a bank, the bank is only obliged to keep €1 of the depositors money. The other €9 is used to gamble on let's say a mortgage. Now what happens when the new house owner has empty pockets? It's clear where the problem arises. The banks do not have your money in their vaults. They have gambled with it. It's not there. It never was. If everyone withdrew their cash at the exact same time, people would simply get nothing back. The banks have grown to such an unnatural size, not because of the market, but because they're allowed to continue this practice of obtaining that extra €9 to gamble with. The market didn't give the banks this opportunity, the government did.

Not only does this incredible funding source that would otherwise not be available to them if they conducted themselves by the same laws of other businesses allow the banks to grow beyond scope what they couldn't do naturally in the free market, but it makes them more risky. Every time a deposit is not backed 100%, the depositor is exposed to not getting his deposit back in full. If we end the legal privilege banks have over other businesses, the landscape would be totally different.

How do we do this? Certainly not by regulation. If we regulate further, the banks will only cement and further solidify their legal status. Because out of all of the people calling for further regulation, not one of them have even whispered the fundamental problem here, Fractional Reserve Banking. Alternatively, if we deregulate we get the best of both worlds without the headaches. New banks will spring up overnight as there won't be any hurdles for them to jump through and of course they'll be successful if they offer the customer a 100% reserve on all deposits (with a small annual fee).

The solution to the banking problem is deregulation.
 

parentheses

Well-known member
Joined
Aug 26, 2011
Messages
13,815
When it comes to fixing the failed banking system, there exists two groups with two very different approaches.

One group believes that there is a need for further regulation. The other group calls for less regulation. Now even though these are two very different approaches, both groups share something in common; the understanding and awareness that there is a fundamental flaw that needs attention. We all want stable banking and no matter how we arrive at that is irrelevant. The main thing is that we do. This is something we can all agree on.

So let's tackle that right now.

There is a sense among most people that banks are just "too big to fail" and playing such an important role in the economy, it only makes sense that the government must step in with taxpayers money to fund private gambling losses (they say). Both groups on this issue would wish this wouldn't be the case as it's morally wrong, that much everyone can agree on. So how do we change the "too big to fail" situation?

Firstly, banks are "too big to fail" because of the government. This much is clear. Now you might say that banks are a "special case" and you'd be right, they are. They are because they're not restricted by the same laws that, say a grain silo are. Banks of course have a special legal privilege. It's called Fractional Reserve. When a depositor deposits €10 into a bank, the bank is only obliged to keep €1 of the depositors money. The other €9 is used to gamble on let's say a mortgage. Now what happens when the new house owner has empty pockets? It's clear where the problem arises. The banks do not have your money in their vaults. They have gambled with it. It's not there. It never was. If everyone withdrew their cash at the exact same time, people would simply get nothing back. The banks have grown to such an unnatural size, not because of the market, but because they're allowed to continue this practice of obtaining that extra €9 to gamble with. The market didn't give the banks this opportunity, the government did.

Not only does this incredible funding source that would otherwise not be available to them if they conducted themselves by the same laws of other businesses allow the banks to grow beyond scope what they couldn't do naturally in the free market, but it makes them more risky. Every time a deposit is not backed 100%, the depositor is exposed to not getting his deposit back in full. If we end the legal privilege banks have over other businesses, the landscape would be totally different.

How do we do this? Certainly not by regulation. If we regulate further, the banks will only cement and further solidify their legal status. Because out of all of the people calling for further regulation, not one of them have even whispered the fundamental problem here, Fractional Reserve Banking. Alternatively, if we deregulate we get the best of both worlds without the headaches. New banks will spring up overnight as there won't be any hurdles for them to jump through and of course they'll be successful if they offer the customer a 100% reserve on all deposits (with a small annual fee).

The solution to the banking problem is deregulation.
Excellent post.

It ain't gonna happen though. The fractional reserve privilege is the elephant in the room that nobody who has power will talk about
 

Dan_Murphy

Well-known member
Joined
Feb 22, 2010
Messages
3,811
Wouldn't a better alternative be to force a split of mortgage and investment banking from deposit and current account banking?

If, for example, the Hypothetical Mortgage Bank was in danger of collapse but the Hypothetical current account Bank was a separate legal entity, then only bondholders would stand to lose and there would not need to have been a bank rescue to save depositors.
 
Last edited:

farnaby

Well-known member
Joined
May 15, 2006
Messages
1,967
Is it right to call your solution "deregulation" when it involves governments exercising considerable power, to strip banks of their current 'flexibility' in the provision of credit and thus reducing their power considerably? The common understanding of 'deregulation' is giving private enterprises more freedom to do what they want, not less.

Maybe that's just semantics. My main question is - wouldn't this have to occur globally or at least in the major financial centres of power (US, Frankfurt, London etc.) to succeed? Wouldn't countries doing this individually be put at a disadvantage (at least short-to-medium term)?
 
M

MrFunkyZombaloo

And what if, in such a de-regulated scenario, banks buy up other banks and become "TBTF" again?

Would a new bank, offering 100% reserve on deposit, deign to operate in this de-regulated market or would it try and maximise it's profits by using the FR model?
 

R3volution_R3ady

Well-known member
Joined
Sep 17, 2012
Messages
2,370
Is it right to call your solution "deregulation" when it involves governments exercising considerable power, to strip banks of their current 'flexibility' in the provision of credit and thus reducing their power considerably? The common understanding of 'deregulation' is giving private enterprises more freedom to do what they want, not less.

Maybe that's just semantics. My main question is - wouldn't this have to occur globally or at least in the major financial centres of power (US, Frankfurt, London etc.) to succeed? Wouldn't countries doing this individually be put at a disadvantage (at least short-to-medium term)?
I'm not calling for the government to exercise power in telling banks what to do. What I am asking is that governments get out of telling banks what to do. The consumers should tell the banks what to do and that's what happens in the market.

And what if, in such a de-regulated scenario, banks buy up other banks and become "TBTF" again?

Would a new bank, offering 100% reserve on deposit, deign to operate in this de-regulated market or would it try and maximise it's profits by using the FR model?
It's entirely possible that they would want to maximise profits but the market will tear them apart. How can a bank break a contract with it's consumers? If the bank has signed a contract with the consumer saying that 100% of their deposits are safe and on hand should the consumer wish to withdraw it...then how can the bank loan out the depositors cash? But that's just one problem. There are more, not least where deregulation would see the rise of new 100% reserve banks in which consumers would wish to buy their services over the fractional reserve banks. Would you keep your money in a bank that indulged in FRB or a new bank guaranteeing your money in their vaults? This is the market. But it's not being allowed to work in the current situation.
 

Sync

Well-known member
Joined
Aug 27, 2009
Messages
28,845
Jesus.

Ok let's keep it simple:
When a depositor deposits €10 into a bank, the bank is only obliged to keep €1 of the depositors money. The other €9 is used to gamble on let's say a mortgage. Now what happens when the new house owner has empty pockets?
Now....it shouldn't be gambling. It should be lent out to appropriate sources who then repay the amount. If it's not lent out to appropriate sources (Or as Dan touches on, if it's used for investment banking) then that's a regulatory issue, not a conceptual issue with FR.

If you don't have the concept of fractional reserve then only the rich will ever be able to get a loan. Do you get that? You use the example of 10:1, if you halve that then 5 euro won't be lent into the economy. So the bank is going to be far more reticient in giving out loans. I.E: The people who have a decent job, pull together a 15% deposit for their house, isn't going to get that loan now because the risk of them becoming a bad debt now poses more of an impact to the bank (Because they're lending less).

If you get rid of FR then all you're left with is a stagnant very high interest market where the lower/middle classes can't get access to funds for private and business use.
 

Ribeye

Well-known member
Joined
Jul 12, 2011
Messages
26,306
Wouldn't a better alternative be to force a split of mortgage and investment banking from deposit and current account banking?

If, for example, the Hypothetical Mortgage Bank was in danger of collapse but the Hypothetical current account Bank was a separate legal entity, then only bondholders would stand to lose and there would not need to have been a bank rescue to save depositors.
no, that in itself would be regulation,
 
D

Dylan2010

its a case of matching risk and reward. the hypothetical granny with 200K in Anglo should never happen. Speculative lending should be financed by shareholder capital and depositors should have the option of having their money ring fenced for certain activities or if our granny wants to lend 200k into 20 year home lending to chase yield she should not have free state insurance and instead accept potential losses in the future.
the current system seems to want everyone "standing up at the cinema" to get a view which means higher house prices and retail rents then there ought to be.
 

Ribeye

Well-known member
Joined
Jul 12, 2011
Messages
26,306
And what if, in such a de-regulated scenario, banks buy up other banks and become "TBTF" again?

Would a new bank, offering 100% reserve on deposit, deign to operate in this de-regulated market or would it try and maximise it's profits by using the FR model?
i would have no objection to a bank being using the FR model in a free market situation, however it would be fraudulent and illegal for such a bank to tell depositors that they can withdraw their deposits "on demand",

and, without the backstop of a Central Bank, only an idiot, or someone with intimate knowledge of granular detail of the bank's balance sheet would deposit money in it,
 

Andycap

Well-known member
Joined
Feb 22, 2012
Messages
1,277
i would have no objection to a bank being using the FR model in a free market situation, however it would be fraudulent and illegal for such a bank to tell depositors that they can withdraw their deposits "on demand",

and, without the backstop of a Central Bank, only an idiot, or someone with intimate knowledge of granular detail of the bank's balance sheet would deposit money in it,
Can't believe this is still being discussed.

Assume we follow this line of thinking and Bank's have to ring fence depositors money - keep it all in cash.

Why would the Bank bother taking customer deposits? If they can't use the money what use is it to them? Or, would you be happy to pay a fee to a bank to hold your money? note there is no incentive for a bank to take your money.
 
Last edited:

hiding behind a poster

Well-known member
Joined
Mar 8, 2005
Messages
48,276
And what if, in such a de-regulated scenario, banks buy up other banks and become "TBTF" again?

Would a new bank, offering 100% reserve on deposit, deign to operate in this de-regulated market or would it try and maximise it's profits by using the FR model?
How could a bank offering 100% reserve on deposit make any money?
 

Ribeye

Well-known member
Joined
Jul 12, 2011
Messages
26,306
Jesus.

Ok let's keep it simple:


Now....it shouldn't be gambling. It should be lent out to appropriate sources who then repay the amount. If it's not lent out to appropriate sources (Or as Dan touches on, if it's used for investment banking) then that's a regulatory issue, not a conceptual issue with FR.

If you don't have the concept of fractional reserve then only the rich will ever be able to get a loan. Do you get that? You use the example of 10:1, if you halve that then 5 euro won't be lent into the economy. So the bank is going to be far more reticient in giving out loans. I.E: The people who have a decent job, pull together a 15% deposit for their house, isn't going to get that loan now because the risk of them becoming a bad debt now poses more of an impact to the bank (Because they're lending less).

If you get rid of FR then all you're left with is a stagnant very high interest market where the lower/middle classes can't get access to funds for private and business use.
Incorrect I'm afraid Sync,

Firstly, the restriction on lending that you point out would primarily have the effect of bringing down the general price level, much as we are currently seeing with house prices, while the overall quantum of loans would fall, each loan would be far smaller, meaning that the number of loans could remain more or less the same,

Secondly, all a bank would have to do is manage it's term structure better, you wanna give out €1 billion par of 20 year term home mortgages, you go to the market and sell a 20 year bond for €1 billion to fund them,

yes, this will make mortgages more expensive, but remember, the size of the mortgage is much smaller, and, the higher interest rates will further push down house prices, making he mortgages needed even smaller,

More people would become good credit risks, not less,
 
Last edited:
D

Dylan2010

Can't believe this is still being discussed.

Assume we follow this line of thinking and Bank's have to ring fence depositors money - keep it all in cash.

Why would the Bank bother taking customer deposits? If they can't use the money what use is it to them? Or, would you be happy to pay a fee to a bank to hold your money? note there is no incentive for a bank to give you money.
I don't see a problem , the current system is having sleepy bankers and sleepy customers, the ideal situation for pricing risk is to have alert bankers and alert customers. The banks should be under market pressure to depositors to show how them risk adverse they are with depositors money. No one should have a right to be paid more than a risk free return if there is no risk of loss of capital. If a depositor wants to be a semi investor that should be his choice.
 

R3volution_R3ady

Well-known member
Joined
Sep 17, 2012
Messages
2,370
Jesus.

Ok let's keep it simple:


Now....it shouldn't be gambling. It should be lent out to appropriate sources who then repay the amount. If it's not lent out to appropriate sources (Or as Dan touches on, if it's used for investment banking) then that's a regulatory issue, not a conceptual issue with FR.

If you don't have the concept of fractional reserve then only the rich will ever be able to get a loan. Do you get that? You use the example of 10:1, if you halve that then 5 euro won't be lent into the economy. So the bank is going to be far more reticient in giving out loans. I.E: The people who have a decent job, pull together a 15% deposit for their house, isn't going to get that loan now because the risk of them becoming a bad debt now poses more of an impact to the bank (Because they're lending less).

If you get rid of FR then all you're left with is a stagnant very high interest market where the lower/middle classes can't get access to funds for private and business use.
That's ridiculous.

Fractional Reserve Banking is a violation of property rights. If a depositor puts his money in the bank without even having say as to where it's going then he loses his ownership over it and instead of belonging to one person, it now belongs to two. It's a legal impossibility as the depositor and the borrower are now both owners of the same money. This leads to a situation where contractual obligations cannot be fulfilled from the outset. What you're saying is that it is quite correct for Mr. B to do as he wishes with Mrs. Z's money without Mrs. Z's consent. Fractional Reserve Banking did not occur naturally as a consequence of market forces.

But of course what you're arguing for is inflation, I understand that. Because that's a predictable consequences of credit expansion. You want money to be loaned out which is not backed by real savings. Now I know you see FRB in a good light but wouldn't you, at the very least, argue that loans made should be limited as to the size of it's clientele, the confidence of the people in it's solvency. Shouldn't, at the very least, riskier banks be told by the market (which it would) to hold higher reserves in order to attract customers?

How is it physically and practically possible that two owners are entitled to exclusive control over the exact same physical resource? The banks assume demand liabilities in excess of actual reserves. Is that not a straight-forward act of embezzlement? It's trading whilst liquid because it cannot fulfill it's contractual obligations. It's technically insolvent. It cannot pay it's debts.

It seems you're alright with having castles built on sand.
 

ManUnited

Well-known member
Joined
Nov 16, 2009
Messages
5,221
That's ridiculous.

Fractional Reserve Banking is a violation of property rights. If a depositor puts his money in the bank without even having say as to where it's going then he loses his ownership over it and instead of belonging to one person, it now belongs to two. It's a legal impossibility as the depositor and the borrower are now both owners of the same money. This leads to a situation where contractual obligations cannot be fulfilled from the outset. What you're saying is that it is quite correct for Mr. B to do as he wishes with Mrs. Z's money without Mrs. Z's consent. Fractional Reserve Banking did not occur naturally as a consequence of market forces.

But of course what you're arguing for is inflation, I understand that. Because that's a predictable consequences of credit expansion. You want money to be loaned out which is not backed by real savings. Now I know you see FRB in a good light but wouldn't you, at the very least, argue that loans made should be limited as to the size of it's clientele, the confidence of the people in it's solvency. Shouldn't, at the very least, riskier banks be told by the market (which it would) to hold higher reserves in order to attract customers?

How is it physically and practically possible that two owners are entitled to exclusive control over the exact same physical resource? The banks assume demand liabilities in excess of actual reserves. Is that not a straight-forward act of embezzlement? It's trading whilst liquid because it cannot fulfill it's contractual obligations. It's technically insolvent. It cannot pay it's debts.

It seems you're alright with having castles built on sand.
Foley v Hill (1848):

"Money, when paid into a bank, ceases altogether to be the money of the principal; it is by then the money of the banker, who is bound to return an equivalent by paying a similar sum to that deposited with him when he is asked for it. The money paid into a banker’s is money known by the principal to be placed there for the purpose of being under the control of the banker; it is then the banker’s money; he is known to deal with it as his own; he makes what profit of it he can, which profit he retains to himself, paying back only the principal, according to the custom of bankers in some places, or the principal and a small rate of interest, according to the custom of bankers in other places. The money placed in custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases; he is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of his principal; but he is, of course, answerable for the amount, because he has contracted, having received that money, to repay to the principal, when demanded, a sum equivalent to that paid into his hands.

That has been the subject of discussion in various cases, and that has been established to be the relative situation of banker and customer. That being established to be the relative situations of banker and customer, the banker is not an agent or factor, but he is a debtor."
 

Ribeye

Well-known member
Joined
Jul 12, 2011
Messages
26,306
Can't believe this is still being discussed.

Assume we follow this line of thinking and Bank's have to ring fence depositors money - keep it all in cash.

Why would the Bank bother taking customer deposits? If they can't use the money what use is it to them? Or, would you be happy to pay a fee to a bank to hold your money? note there is no incentive for a bank to give you money.
How could a bank offering 100% reserve on deposit make any money?
Ribeye Bank Inc

Equity - €10

1 Yr Term Deposits - €90 (paying 2% p.a.)

Funds available for lending - €100 for 1 Yr priced at 5%,

Return at end of year - €105,

Cost of deposit capital - €1.80,

Profit - €13.20,

Lets round it down to €10 to allow for the op costs,

Return on Equity - 100% = Nice

Ok, this is a very simplified example, but in essence this is how it would work,
 

Dan_Murphy

Well-known member
Joined
Feb 22, 2010
Messages
3,811
Ribeye Bank Inc

Equity - €10

1 Yr Term Deposits - €90 (paying 2% p.a.)

Funds available for lending - €100 for 1 Yr priced at 5%,

Return at end of year - €105,

Cost of deposit capital - €1.80,

Profit - €13.20,

Lets round it down to €10 to allow for the op costs,

Return on Equity - 100% = Nice

Ok, this is a very simplified example, but in essence this is how it would work,
But if they're lending out the money thats being deposited, how is that full reserve banking?

I thought when people said full reserve banking they meant that the money was just being locked up in a safe to be stored somewhere?
 

PO'Neill

Well-known member
Joined
Aug 1, 2011
Messages
12,425
Website
www.facebook.com
When it comes to fixing the failed banking system, there exists two groups with two very different approaches.

One group believes that there is a need for further regulation. The other group calls for less regulation. Now even though these are two very different approaches, both groups share something in common; the understanding and awareness that there is a fundamental flaw that needs attention. We all want stable banking and no matter how we arrive at that is irrelevant. The main thing is that we do. This is something we can all agree on.

So let's tackle that right now.

There is a sense among most people that banks are just "too big to fail" and playing such an important role in the economy, it only makes sense that the government must step in with taxpayers money to fund private gambling losses (they say). Both groups on this issue would wish this wouldn't be the case as it's morally wrong, that much everyone can agree on. So how do we change the "too big to fail" situation?

Firstly, banks are "too big to fail" because of the government. This much is clear. Now you might say that banks are a "special case" and you'd be right, they are. They are because they're not restricted by the same laws that, say a grain silo are. Banks of course have a special legal privilege. It's called Fractional Reserve. When a depositor deposits €10 into a bank, the bank is only obliged to keep €1 of the depositors money. The other €9 is used to gamble on let's say a mortgage. Now what happens when the new house owner has empty pockets? It's clear where the problem arises. The banks do not have your money in their vaults. They have gambled with it. It's not there. It never was. If everyone withdrew their cash at the exact same time, people would simply get nothing back. The banks have grown to such an unnatural size, not because of the market, but because they're allowed to continue this practice of obtaining that extra €9 to gamble with. The market didn't give the banks this opportunity, the government did.

Not only does this incredible funding source that would otherwise not be available to them if they conducted themselves by the same laws of other businesses allow the banks to grow beyond scope what they couldn't do naturally in the free market, but it makes them more risky. Every time a deposit is not backed 100%, the depositor is exposed to not getting his deposit back in full. If we end the legal privilege banks have over other businesses, the landscape would be totally different.

How do we do this? Certainly not by regulation. If we regulate further, the banks will only cement and further solidify their legal status. Because out of all of the people calling for further regulation, not one of them have even whispered the fundamental problem here, Fractional Reserve Banking. Alternatively, if we deregulate we get the best of both worlds without the headaches. New banks will spring up overnight as there won't be any hurdles for them to jump through and of course they'll be successful if they offer the customer a 100% reserve on all deposits (with a small annual fee).

The solution to the banking problem is deregulation.
 
Top