Which modern economy has a banking system that requires 100% reserves? i'm genuinely asking. I've never heard of this kind of concept and do not understand the implications, except it seems that the central bank would become enomously more influential.
Actually, a Bitcoin-based system would, wouldn't it? (just thinking). So far I think people have hard time to figure out all the side effects of 100% reserves. I'm tentatively for it, though humans are great at "unintended consequences"...
Well, pretty much it would slam the door on growth and debt financing of anything. Want a house or a car? You will have to pay cash because nobody will have any money to lend.
Alternatively, to encourage more deposits so they can make more loans, interest rates will have to go way up. That will depress the stock market, eviscerating the other normal way that businesses finance growth.
No, inevitably bitcoin in such a scenario would end up as the base, and they'd stack an easier to abuse fiat secondary on top again. The demand would be not only overwhelming for such, but probably unavoidable.
You've got 1000 bitcoin, and you can lend it out as 'dollars' that can be spent in countless ways by the borrower. Instantly we're back to a system capable of vast credit. All it requires is a non-fixed fiat rider on top of bitcoin, likely controlled by a central government (so that they too can abuse it, for war, deficit spending, buying votes, et al).
No. Bitcoin has no mechanism for limiting lending. It's just fiat asset. Because bitcoin is not local currency anywhere, there are no mandatory reserve requirements for giving loans against bitcoin deposits.
Fractional reserve banking affects only for very liquid money-like assets like on demand deposits. Long term deposits create money outside reserve requirements. I think one solution is for banks to start offering people time deposit & credit card combinations. Income goes into time deposit and people use credit cards almost exclusively.
Poor people without credit cards might might have to pay a lot for having money in a bank, so they might turn into holding cash.
Bitcoin has built in limit to lending: you can't, in the classic way it's been done. Whoever has control of coins, has complete control. If I give you any bitcoin in a way that you can spend it, then I don't have a mechanism to get it back without your consent. So no "lent" bitcoin really exists within the system.
I think the point that needs to be made is that there is very little incentive for a bitcoin owner to store their bitcoins with a bank. People store cash because it's susceptible to being stolen and inconvenient to spend versus a debit card. Banks have complete control of our cash and we can only get it back on their terms, but that doesn't deter most anyone from lending it to them.
Bitcoins are susceptible to being stolen (by rubber hose cryptography if necessary) and when stored safely are inconvenient to spend versus a debit card.
You might as well say the same thing with physical cash. What makes the loan possible are the contract and the set of laws surrounding that contract. I don't see how bitcoin changes that part.
Not if everyone uses blockchain directly, but that is already too slow for quick transactions anyway.
Banks would add bitcoins as just another currency into their system. They can start giving out credit cards denominated in bitcoin for anyone who saves bitcoins in bank for interest, that effectively creates new money.
The elimination of intentional duration mismatch and the introduction of fraudulent time-money claims by the financial sector is one of the most important moral and social issues we face.
Can someone provide an explanation of how this works or provide a reference with an overview? The article is light on details. I assume this means preventing banks extending credit against deposits that don't necessarily exist?
" limit financial speculation by requiring private banks to hold 100pc reserves against their deposits. "
Normally, banks aren't required to actually have the money they lend out, so when a loan is credited to your account that money is created (and when you repay the loan, the money is destroyed). In many countries banks are required to hold a certain amount reserve (I think it's about 1.5% in the USA - the UK doesn't have such a requirement), so this is simply requiring that the banks have 100%, which means banks can only lend money they actually have.
EDIT: Did you mean how does the whole money creation thing work at all? There's a very clear guide at:
Say I deposit $100 in a bank. The bank has $100. Now, say the law requires a 10% reserve. They can lend $90--which they actually have. That person takes the loan, and deposits it in their bank. Now, there are $190 in deposits from the original $100. But the bank never lent money it didn't have. Instead, the money creation comes from the fact I get to treat my $100 deposit as good as cash on hand, even though 90% of it has been lent to another person.
Put another way, if everyone tried to withdraw all of their money from the bank at the same point, 90% (100% - 10% = 90%) of people's cash assets would be wiped out[0].
This is known as a bank run, or (when it happens to lots of banks simultaneously) a bank panic. During the Great Depression, banks were frozen, and people were barred from withdrawing money from the bank for a certain period of time. The motivation for doing this was to halt the bank panics that were occurring.
Raising the required reserve ratio has very far-reaching implications. Broadly speaking, it tightens liquidity, making loans more difficult to come by, which decreases investment in infrastructure. This slows economic growth, because it's harder to find capital with which to start businesses, and it's harder for people to obtain money to purchase a home, further their education, etc.
[0] in the aggregate; not everyone would lose 90%, but 90% of aggregate cash assets would be.
I take it those with large loans would be affected as potential buyers couldn't loan as much for real estate. However it also seems like it would be more sustainable.
George Bailey explained this, in one of the greatest movies ever made.[1]
CHARLIE
I'll take mine now.
GEORGE
No, but you . . . you . . . you're thinking of
this place all wrong. As if I had the money back
in a safe. The money's not here. Your money's in
Joe's house . . .
(to one of the men)
. . . right next to yours. And in the Kennedy
house, and Mrs. Macklin's house, and a hundred
others. Why, you're lending them the money to
build, and then, they're going to pay it back
to you as best they can.
I have absolutely no idea what Switzerland will wind up with if they vote for this. But it certainly won't be banking as we know it.
The loans are easy to come by because the fractional reserve requirements allow the banks to create money which they use to provide loans.
When the government creates the same amount of money and directly spends it on infrastructure as opposed to loaning it to infrastructure providers... what changes other than the fact that the infrastructure becomes cheaper to the public since the provider does not need to pay back the loan?
> When the government creates the same amount of money and directly spends it on infrastructure as opposed to loaning it to infrastructure providers what changes?
It's massively less efficient. It's important to note that this is true by definition, not by assumption.
For starters, the provider absolutely does still "pay back" the loan either way. Infrastructure investment isn't free, and if the aggregate value produced by the investment adds up to less than what it cost in the first place, then we would have been better off not doing anything at all.
Secondly, the government isn't able to spend on all types of infrastructure, and when it does, it's almost always less efficient. Public works are only one type of infrastructure spending, and they're pretty much the only one that remains exclusively in the domain of government projects these days.
To give you an example of what "infrastructure" can look like, look at the website we're on. Silicon Valley has a robust network of companies and organizations that both provide capital as intermediaries[0] and increase the ROI of that capital[1]. This wouldn't be possible if there weren't sufficient liquidity
When money is created by the banks, it's created in response to market forces. Banks have to turn an economic profit of zero on the aggregate of all loans they extend, which means that they price them accordingly, and therefore the price of capital converges (in the long run) to the value added by that investment. This makes it difficult (though not impossible) to secure capital for projects that have an inferior risk-adjusted payoff.
By contrast, the government does not create capital in response to market forces. Keynesians would argue that this is the entire point of government economic policy - to smooth out short-term cyclical trends. The problem with "spending" all newly-created money on smoothing short-term cyclical trends is that it leaves zero liquidity allocated to long-term economic growth.
[0] most startups are still funded by banks, at the end of the day, with VCs serving as intermediaries - venture capitalists get their money from LPs, which tend to be institutional investors like banks (or substitutes for institutional investors).
[1] even aside from the money that YC provides a company, YC makes companies more successful (or at least more likely to succeed) through the other, intangible assets it provides.
You claim less efficiency, 'by definition', but fail to provide a definition. You then state a non sequitur (the provider doesn't exist under the posited scenario).
Additionally, this $90 deposit can then be treated as 'real' money and loaned out according to the same 10% reserve - $81. In the manner of a babushka doll, this can be deposited and loaned out ($72.90, $65.61, $59.05... etc.) until the amount becomes vanishingly small.
While this is a textbook example reserve requirements haven't been a significant constraint on bank monetary creation since the 80's. The Bretton Woods system put in place after WWII and Nixon closing the gold window in the 1970's made reserves a less unique.
The creation of non-bank demand deposits like money market funds put the nail in the coffin of using reserve requirements to manage the amount of money in the economy.
Today the biggest constraint to monetary creation is bank capital ratios. Under current rules banks have to have roughly 1 dollar if equity for every 12 dollars of loans and that can vary based on the type of loans the banks make.
No, read the pdf I linked. Yours is the first misconception they address.
In summary, though, if we imagine that the bank is required to hold 10% reserve: I go to the bank and get a loan for $900. This is credited to my account. There is no requirement for this money to actually exist. The same day, you go and deposit $100 in actual dollar bills. Your account is credited with $100.
The bank's liabilities are now $100 (in your account) plus $900 (in my account) for a total of $1000. The banks reserve is $100 (real dollar bills you gave them). This is 10% reserve so the bank is legally OK. $900 has been created.
That's how it works. More detail in the PDF I linked.
Thanks for the pdf and this comment. The source seems reputable and it definitely changed my understanding of how money is created. I thought banks could only lend the money they took in through deposits or borrowing and had no idea they had the authority to actually create money directly.
It's interesting to realize that you can create money in the same way that a bank. Just give your friend a promise that you will pay him in the future and he could use it as money with third parties. Most people wouldn't accept it, but that is a different issue.
If somebody is in the mood to destroy more preconceptions about economy I recommend Warren Mosler 'Seven deadly innocent frauds of economic policy', it can be a good introduction to Modern Monetary Theory:
> Deadly Innocent Fraud #1: The federal government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow.
Unfortunately, in the (deadly?) Eurozone this is indeed how it works.
«In accordance with Article 123 of the Treaty on the Functioning of the European Union, overdrafts or any other type of credit facility with the ECB or with the national central banks in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be
prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.»
Anyone who reads Modern Monetary Theory should keep in mind that its somewhat fringe (not outside fringe like Austrian school, but very criticized and not widely accepted).
What you mean is that it's not mainstream. That's true.
Despite that, I can't recommend it enough. It's just after starting to read it that what was going on in the economy of the world made any sense to me.
Also, mainstream economy is just totally wrong in many of its descriptive aspects, but they continue teaching falsehoods anyway. An example at hand is how the fractional banking and the creation of new 'money' by banks works in, virtually, all the modern economies.
This is the reason that the linked PDF by someone a few posts above is so important. They say what Modern Monetary Theory have been saying all the time but the source is the Bank of England.
As Henry Ford said:
"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
The problem with MMT is that it extrapolates far too much from accounting identities and treats both the financial system and the state as a closed vacuum divorced from all issues of public choice and expectations. This is what leads to Mosler's "Seven Deadly Innocent Frauds" and his policy proposals. That they're frauds is technically correct from a national accounting POV, but taking them literally as the MMTers do can be disastrous. In fact, it's not taking them literally that separates MMTers and other people. It's not that mainstream economists aren't aware of the logical implications of ex nihilo fiat money creation.
Also, MMT is nothing new or groundbreaking, contrary to their claims. There have been chartalist and endogenous money creation theories for ages, and most mainstream economists are quite aware of them, contrary to the assertions of many MMTers. What separates MMT from the rest is its fusion with more dubious Post-Keynesian theories.
I have to read yet a good criticism of MMT that have not been addressed by the MMT proponents. Maybe you can address me to one.
MMT people don't claim it to be any new or groundbreaking, on the the contrary, they claim is just common sense and chartalism. What they claim is that chartalism is true, especially in modern economies. This is a very difficult thing to dispute if you analyze how money works nowadays.
In my experience, the real problem with MMT, is that the implications of what an economy is or how it really works are politically indigestible for a lot of people and inconvenient for a few.
Again, the problem is not the chartalism per se, it's that they read far too much from it for the policy aspects. They basically use the monetary theories as a front for the far more dubious Post-Keynesian policies, which have to be analyzed separately.
A good reading of the Public Choice journal and similar is a nice antidote to some of the zanier MMT and Post-Keynesian proposals.
§5 speaks in broad hypotheticals and apologetics of efficiently administrated policy, and is unsurprisingly very weak relative to the accounting and qualitative statements in the previous four sections.
If anything, you've convinced me more that MMTers believe in a perfect State. Post-Keynesian ideas seem to emanate from it. Kalecki and Robinson were outright Marxists, the former basing their economics on class conflict and the latter praising North Korea and Maoist China. The entire Post-Keynesian literature is devoid of public choice considerations, sans one weak paper from ~2004.
If MMT claims are so weak we are in dire necessity of a paper or, at least, a blog post that address its issues seriously. After searching, I have not found such thing. Maybe you could write it.
Most critics dismiss the conclusions or address questions that are not really part of MMT.
Personally, I am specially interested in criticism of the most descriptive part of MMT, starting on chartalism but going beyond, banks money creation, sectoral balances, foreign exchange, etc..
I keep trying to repeat that the monetary economics of MMT are not that objectionable, but that the MMT banner encompasses a host of other unrelated conclusions that must be examined separately, and moreover that MMTers do not take public choice seriously. This isn't some shit-flinging that you can address in a blog post. You seem to be completely unable to differentiate across several taxonomies.
(FWIW, I do intend on eventually writing a criticism of Post-Keynesianism in book form, but I'm still in earlier research phases.)
Under your scenario, if a bank can lend out $900 for every $100 it collects in deposits, then won't we see runaway monetary growth? Consider the following scenario:
1) Alice deposits $100 in Bank X
2) Bob takes out $900 loan from Bank X and deposits it in Bank Y
3) Charlie takes out $8,100 loan from Bank Y and deposits it in Bank X
4) Eve takes out $72,900 loan from Bank X and deposits it in Bank Y
5) ... the cycle continues ...
Also, I would assume that the interest rates that my bank pays for my deposits would be a lot higher if it could lend out 9x as much as it holds in deposits.
The model where a bank lends out 90% of its total deposits still makes more sense to me and will result in $900 of total money created per $100 initially deposited.
1) Alice deposits $100 in Bank X
2) Bob takes out $90 loan from Bank X and deposits it in Bank Y
3) Charlie takes out $81 loan from Bank Y and deposits it in Bank X
4) Eve takes out $72.90 loan from Bank X and deposits it in Bank Y
5) ... the cycle continues ...
and if you sum the geometric series, which in this case is finite, you get $900 of total additional money created for the initial $100 Alice put in.
"2) Bob takes out $900 loan from Bank X and deposits it in Bank Y"
If Bob takes cash from Bank X and deposits in Bank Y, Bank X has less cash, that movement is reflected in their balance and in their reserves.
If Bob makes and electronic transfer from Bank X to Bank Y, at the end of the day, Bank X and Y have to clear their balance with each other. As some people have moved money in the opposite direction, from Bank Y to Bank X, the balance could be compensated.
If for some reason, people only retire money from a bank without never making deposits, you have a bank run and it's an indicator of mistrust in that bank.
Quite. Now suppose you take that $900 you've been loaned and spend a mere $90 of it buying goods from a supplier that uses a different bank. Suddenly your bank cannot meet its reserve requirements. However, if the supplier used the same bank everything would be fine. The amount banks can lend is constrained not by how much deposits they currently have, but whether it could cause a net outflow of deposits to other banks in the future.
Amongst other things, this means that how profligate a bank can be in lending money depends heavily on how much all the other banks are lending. So long as all the other banks are lending just as much out and their savings terms are competitive, the outflow of loaned funds will be balanced by an inflow of other banks' loaned funds. What happens in practice is that there's a glut of easy credit during booms which dries up during busts, making the boom-bust cycle worse. You can find some discussion of this here: http://www.bankofengland.co.uk/research/documents/workingpap...
I've skimmed this before and have to say I read it as the BoE absolving itself of responsibility. The popular stance is "blame the banks" and some people even believe that (commercial) bankers just print money (for themselves) whenever they feel like getting a nicer car.
Several places the paper state that the ultimate control of money creation is monetary policy i.e. not the banks. This is what I'd always thought before this idea of commercial banks having complete freedom became popular. It also states that the interest rate set by the central bank decides the rate of the loans, and thus the demand for them, and thus the amount of creation. Interestingly the link between the central bank rate and the commercial rate is not stated (I did not read it end-to-end). I always thought that ultimately they had to borrow from the central bank to remain solvent/meet reserve ratios. And that goes down as a debt to the central bank, whereas the central bank can genuinely create that loan from nowhere and is doing the creation.
Banks would essentially just facilitate transactions and act as conduits between borrowers and the central bank. I don't think it makes much sense for country like USA that places such a high importance on free markets and liberty.
There is a website [0] and book [1] on this topic, "Up until about forty years ago a good percentage of the money in circulation was produced by the Bank of England and the seignorage went to the Treasury. Today 97% of all the money in circulation is created as debt by the banks and the seignorage profit goes to them. The result is that between 2000 and 2009 the state has foregone a trillion pounds. How many public services could that have funded? ... Modernising Money shows how a UK law implemented in 1844 can be updated and combined with reform proposals from the Great Depression, to provide the UK with a stable monetary and banking system, much lower levels of personal and national debt, and a thriving economy."
A survey [2] was done as part of a master's thesis at Zurich University, which found that, "Only 13 percent know that private commercial banks provide the majority of the money in circulation. However, 78 percent of the Swiss population would like money to be produced and distributed solely by a public organisation working for the common good, such as the National Bank. Only 4 percent preferred the system we actually have today – that money is mostly created by private, for-profit companies such as commercial banks."
So what you mean to say is that the Swiss will now create a system where Swiss banks are required to have a tiny and fully controlled "overseas" (about 5 cm overseas preferably) subsidiary that "really"/legally originates all the loans ...
Because it would still be legal for banks in every other country to loan out Swiss dollars with fractional reserve. (Or even with 0 reserve)
I bet France and Germany will soon be voting a 2% foreign bank tax and send a box of flowers to every Swiss citizen as thanks. Nah doesn't sound realistic. They're governments. They'll never send thanks to anyone for money they suddenly can steal.
>Because it would still be legal for banks in every other country to loan out Swiss dollars with fractional reserve. (Or even with 0 reserve)
There is more to money creation than just extending loans and crediting customer accounts. In order for such a debited balance to be actually useful, a bank needs to be able to settle interbank payments.
Interbank settlements are usually performed using central bank reserve accounts – and the central bank is free to limit access to that system only to 100% reserve compliant parties.
"Swiss population would like money to be produced and distributed solely by a public organisation working for the common good, such as the National Bank." This is where the biggest fallacy lies.
>The result is that between 2000 and 2009 the state has foregone a trillion pounds. How many public services could that have funded?
In addition to what can be funded now? Probably none at all. The size of the government as a share of national spending is not determined by specific sources of income. It is an ideological and pragmatic decision of the people (or by whoever else has political power)
So if the government had this source of income, it would not be able to levy all other taxes to the same extent it does now. It is unrealistic to assume that the share of government spending would be much greater if they had this particular source of income.
It's hard to have a debate when people take a purely ideological stand and have little understanding of the mechanics of the problem.
The immediate effect of 100% reserve is that commercial banks cease offering credit and instead start behaving like safe deposit boxes for people's money, offering negative interest. They effectively stop transforming savings in productive investments, saved money is simply extracted from circulation.
If it wants to prevent a major liquidity crunch, the central bank will flood the market with newly created money and keep the economy going. Just what we want, right ? But in doing so, it will effective take on the role of the commercial banks in deciding which areas of the economy are worthy of investment.
So instead of voting with your money and choosing a bank that is safe and makes prudent investments, everybody is forced to "save" at zero interest and empower the Central Bank (effectively, the state) to make investments on their behalf and decide the economic future. Worse still, any failure or bad investment is socialized through inflation and high interest to the whole of the population, since there is no longer any competition that prunes imprudent banks.
We are in fact moving away from market solutions and into a central planing utopia. Instead of punishing and bankrupting the speculators, we are putting them in charge.
I don't think you are quite understanding the mechanics of the problem yourself. Banks don't transform savings into productive investments, they print money. When they give (say) a $1 million loan to a business they're writing $1 million of new money into existence in their account, money which is just as good as printed cash. Their ability to do so is not much affected by whether people save money or splurge it all on expensive cars and goods, because either way the money remains in the banking system and the banks can make loans using it.
Also, it's not realistic to expect people to vote with their money and choose a bank that is safe and makes prudent investments. Teams of experts with specialised knowledge who do this as their full-time job can't figure that out; how is your average Joe with a full-time job of his own and no industry experience meant to? Worse still, with fractional-reserve banking if enough people believe that a bank will fail then the resulting run on the bank will cause it to fail, at which point you'd best hope you got your money out in time. If people don't trust the banking system as a whole, it doesn't force banks to make prudent investments, it causes bank failures and people keep their money under the mattress because even if they could figure out which banks are investing well those banks are still likely to fail due to bank runs.
> When they give (say) a $1 million loan to a business they're writing $1 million of new money into existence in their account, money which is just as good as printed cash.
Actually, it's exactly the cash from the depositor, loaned out. What the depositor gets in return for his cash is a "bank account": a freshly printed promise from the bank that, at a later date, he will be able to extract his cash. So the depositor takes a risk and makes an investment, and is rewarded with an interest.
When you are insisting on 100% reserve banking, you are denying the bank the option to lend out your money.
I assure you institutional investors, like large corporations, pension and investment funds and which provide the bulk of the funds, very much vote with their wallet. They are not protected against bank failures and it's not like they can cash out billions and keep then under mattresses. The mere threat of a liquidity problem will make the bank very risk averse and focus on improving it's position at the expense of it's market share. So banks don't need to fail for the banking market to work, the diligent bankers will be those providing liquidity.
> a freshly printed promise from the bank that, at a later date, he will be able to extract his cash
That's not really what they're offering. Physical money is incredibly inconvenient compared to bank accounts, so much so that the only reason to use it for large amounts is if you or the other party don't trust the banking system. The banks rely on this because they can't actually handle more than a tiny amount of people withdrawing their money.
In effect what they're doing is offering to exchange your physical cash for bank-account cash that's more convenient and is treated by everyone as having the same value as the physical cash, plus a promise that so long as everyone continues to treat it that way you'll be able to convert it back to physical cash. The promise is essentially worthless because it's conditional on something that means you'd be able to do so anyway. (It's only worth something in full-reserve banking which we don't do anymore.)
> Actually, it's exactly the cash from the depositor, loaned out.
It's not, because it doesn't show on the depositor's ledger. The bank will not tell you that you have $10,000 left in your checking account because the remaining $90,000 have been loaned. It will tell you that you have the full $100,000 available to you at any time, relying on the fact that on average more than 90% of their depositors' money is extremely likely to remain unsolicited by them.
It is important to distinguish between what we call "creating money" which is really fraudulently introducing multiple claims on the same monetary unit at the same points of time (and which remain unexercised until a panic) vs. loaning money, which can be done perfectly safely so long as the money being loaned is available for the duration of the loan.
So, when a bank issues an honest loan for a million dollars for 10 years, it needs to have 1 million dollars pledged to it by savers for at least ten years (in the form of CDs or what have you.) This money may be spent in the economy and thereby returned to the bank as a deposit of some duration, which can be loaned against again safely, so long as it is reloaned under the same constraint: the bank must ensure that any loans made against the re-deposited money are done in a shorter term than the deposit is for. You can have very rapid loan growth in this manner, as time horizons expand during growth phases, and suffer none of the issues with multiple parties claiming the same monetary unit at the same time, commonly called bank runs.
Money can be safely "fractionally reserved" so long as intentional duration mismatch (which is really fraud) is not allowed. That's the core issue in the banking system. The production of the underlying money is a separate question, but I'm less and less convinced it matters all that much, as long as it isn't insane.
That is not correct, unless you consider demand-deposits and intentional duration mismatch fundamental aspect of a fractionally reserved system. If you follow that definition, then I concede the point, but I don't think it really matters to the fundamental argument.
All demand deposits must be reserved at 100%, of course, but duration-constrained savings vehicles (e.g. CDs) can be loaned against safely, allowing credit to expand as time horizons do.
An "intentional duration mismatch" (as you call it) between a CD and a loan would indeed create a case of fractional reserves. But it is not "fundamental" as there are other events that can cause fractional reserve to occur. For example the CD and the loan could both be established for, say, 5 years, but if the loan recipient defaults after 5 years the bank would be missing the money to repay the CD depositor; so safety policies need to be established to avoid this, eg. never loan more than 90% of the deposits.
Yes, that's correct: the bank would no doubt need to have some capital on hand to deal with defaults, and may of course choose to loan its own capital in an unconstrained manner. A prudent regulator would demand that a bank demonstrate at all times that it can satisfy its duration commitments and, as defaults creep in, insist that bank capital be used and/or raised to cover the shortcomings.
Eventually a bank may go bankrupt (although this would be a much slower process than todays panics) and would need to be liquidated via the normal bankruptcy mechanisms.
I would expect a healthy secondary market for CDs (or the like) to exist as well.
What happens if the bank lends 10 million as per the previous example, holding only 1 million, then the bank goes bust. Does that 9 million seemingly magic money stay with the borrower? I don't understand how it balances back again.
I don't totally understand your question: the bank is typically slowly paid back on the loan and the loan is collateralized, so the nine million dollars don't puff out of existence at a single point any more dramatically than it currently would. The bank would have time to deal with the inevitable defaults due to the duration matching of deposits and loans.
Obviously banks could still go bankrupt, but they would not be bankrupt by design, like they currently are.
I don't have strong feelings on your question. I would prefer to live in a country where individuals could save via CD-like instruments and earn a reasonable return, because I think it would better express the time preferences of society as a whole, rather than a centralized political entity, but its certainly not something I would force everyone to live under.
My core point is that we should not allow the introduction of multiple claims on monetary units at a given point of time. This is simply fraud, even though it requires a bit of thinking (and un-thinking, if you have an econ background) to realize it.
Intentional duration mismatch is fraud, and is no way to run a banking system.
No. The share price is the latest price someone purchased that share for. It's just a metric. Someone did literally spend $700 and gave it to someone else in exchange for one "share". Now, you may call a "share" just a piece of air--but it is something that has value. The money for it, however, comes out of my pocket and is definitely not thin air.
What if you skip selling the shares for money and you use them directly to buy something? I'm pretty sure you can buy other companies with a partial payment in shares and you can hire people doing the same, so the share acts like currency in some scenarios.
No. Stock prices represent the markets approximation of the value of a share in the company, and its potential for future growth. Stocks can (sort of) be thought of as currency which represents companies rather than a government's reserve systems. A US dollar is worth $1 because you and the person you are giving it to expect it to be worth $1 (roughly) tomorrow. When you move stocks, it's a similar agreement on the value of what is being moved.
Of course, with stocks you have a much larger ability to measure your trust.
It can increase the amount of money in circulation. If you sell your Apple share for $700 to someone who had that sitting in their savings account then you can go spend it whereas the money might have just sat there otherwise.
Economic historian Niall Ferguson beautifully describes fractional reserves as one of the greatest innovations of humankind in Ascent of Money.
The miseries from bank runs and crashes are real, but even so, the total impact on human welfare from fractional reserves has been overwhelmingly positive.
How do we know?
There were holdouts in Europe originally, some central banks were slow to adopt fractional reserves. They were trounced by the economies of other European nations and their superior access to liquid capital.
We've essentially done the laboratory tests here, it's one of the few areas where econ plays like a hard science. We know the answer here, and it's not 100% reserve requirements.
It's a tragic topic to put to a referendum though, because I don't expect every random person to be an expert on the technical nuances of financial history. And this is a topic where intuitions are a pretty poor guide, one where I'd expect the wisdom of crowds to fail hard. PhantomGremlin's quote from George Bailey is a good example. Most people aren't bankers, and don't really understand how it works as a system, beyond their own account, so it's weird to ask them to make key decisions here.
To be fair, the proposal (if I've read it correctly) is not for all banks to have a 100% reserve requirements - but it's for commercial banks to have that requirement. The central bank can still create money on a fractional reserve basis.
I agree that this seems like an unusually technical topic to subject to referendum.
The Swiss hold referendums on most big issues, every year they have quite a few of them and this has been going on for about 150 years, direct democracy is quite big there as it seems.
It looks like a lot/most/all(?) of these, if categorized, would be "public moral position" questions. 2015 and 2014, at least. I wonder if bank reserve regulations really falls into that as well?
Funny that you call the details of a control mechanism used by moneyed elites, which is not particularly complicated, an "unusually technical topic". It's unfortunate if you are right.
> The central bank can still create money on a fractional reserve basis.
The central bank does not even need to hold fractional reserves: As the entity creating base money, it can literally create that out of thin air.
Of course, history has taught that unlimited money creation is usually a bad idea, so usually base money is now backed by public or private debt, but this idea is distinct from fractional reserve banking.
"natural experiments" like this case of the apparent success of fractional reserve banking are not "laboratory tests". There are many other confounding variables that cannot be eliminated.
> Most people aren't bankers, and don't really understand how it works as a system, beyond their own account, so it's weird to ask them to make key decisions here.
That's a strange principle to hold, especially if it wouldn't apply to any other asset. People are generally free to own securities no matter how complicated their structure. But the fiat system seems to conveniently siphon lending power from account holders to account managers -- effectively centralizing economic planning to financial institutions by fiat.
Saying "central banking is good" is like saying "government is good". It definitely can be, but it can also be murderously oppressive. The question is, how did this economic decision maker come to be -- and why are they in control of your money instead of you.
> It's a tragic topic to put to a referendum though
How one can reach such conclusion is beyond me. People will discuss the question, and democratically decide. You'd be surprise the fierce debates that erupts among citizens when a serious question is on the table, and how everyone makes oneself enlightened before vote. This is what actual democracy is. This is how it should work everywhere for any serious issue.
Designating a cherry-picked representative who carries exactly zero obligation to hold his promises is NOT democracy, but elective oligarchy. Almost all countries calling themselves democracies certainly don't deserve the name.
It may take a long time, but the debate is 18 months long, more than enough for everybody to get on board on the issue.
It's ridiculous to believe that citizens have no business in important matters. If you're not deciding, you're not acting, and your voice doesn't matter at all.
In case you're not just trolling, I'm wondering if your argument would change in case of matters that require medical or nuclear engineering expertise.
Why shouldn't voters get a say in these matters? If it is so important that experts make the calls, then convince the voters to vote for allowing the experts to make the calls. If the voters don't trust the experts to such an extent they rather risk screwing everything up, then that is what we will have to live with.
For a interesting thought, what about matters of brain development and ability to reason? Why should voters get to decide on matters such as when we are considered adults or when consenting to contracts or sex is possible. For nuclear or medical expertise, there is at least expertise. For matters of brain development, the science is still very young and limited. Or even on a greater extent, why should a voter be given power in matters that require ethical expertise? Matters that require legal expertise?
I've spent more than that amount of time casually trying to make sense of monetary policy, simply out of interest.
I do not feel competent to take part in a decision about the reserve requirement.
I guess you could set up a system where you delegate your vote to a third party on an issue-by-issue basis. An interesting thought experiment, but quite a few things to work out. My guess is, at the end, it would be similar to the system we have.
I'm curious to which country you're assigning these noble ideals.
In no place I've lived would the average person walking into the voting box have spent time studying the history of banking law and policy to make a well-informed rational decision. They'd at most have read the opinions of some journalists or listened to a news reporter, and would make their decision after discussions between similar poorly informed friends/colleagues.
Fierce debates != well-informed debates.
We elect representatives because it's known that the body politic, once it reaches a large size, doesn't have the time to be well-informed on all decisions they'd need to make as a pure democracy. To suggest so exposes a serious need for a second look at the situation.
Switzerland, actually, is bloody good at this referendum thing. They do it all the time, and because of that the level of debate is relatively high and the populace make far better choices than you would see in a country without the same situation.
Can you point to a Swiss referendum campaign with a high level of debate? I've only closely followed one referendum campaign in Switzerland, I'll admit, but the level of debate in that one was quite low, even by the standards of a typical European election campaign. That was the 2014 referendum on whether to put quotas on Schengen-zone immigration [1]. It was basically the usual shouting match over immigration you'd expect anywhere, full of a lot of vitriol and not much in the way of rational debate or accurate statistics. The outcome was also what you'd expect anywhere else too, predictable more by demographics than argumentation: rural areas and less-educated people voted to restrict immigration, cities and the highly educated voted not to, so the final outcome depended mainly on voter turnout among each of those groups. Since getting your base as riled up as possible is a better way of getting turnout than rational debate, that's what both sides did.
>the level of debate is relatively high and the populace make far better choices than you would see in a country without the same situation.
What about the Swiss referendum on an absolute ban on the construction of minarets? (note: not a ban on building mosques)
Switzerland, like many other European countries, has planning laws that decide on the architectural appropriateness of a building in its surrounding environment on a case-by-case basis. But this referendum, passed by a majority of the Swiss population, placed a complete ban on a minaret ever being built again in Switzerland. That was a completely democratic decision by the people of Switzerland. But was it based on informed debate? Or reactionary and emotional appeals? [1]
Wonderful buttons for pressing eh? "Reactionary" & "Emotional" - words which in the absence of qualification are essentially meaningless or as in this case, take on the perjorative meaning you like to confer on them, to justify an unargued position.
However great the temptation, I take note that HN is not the venue for a continuation of this debate.
> I'm curious to which country you're assigning these noble ideals.
Actually all of them.
> In no place I've lived would the average person walking into the voting box have spent time studying the history of banking law and policy to make a well-informed rational decision.
Because most people have been mercilessly been beaten into obedience, and the belief that they aren't actually able to think by themselves, that they're inferior to the oligarchs in command (hint: they aren't. The President is no better than me and no better than the garbage man).
In 2005, in France, the "referendum on a European Constitution" lit an immense debate, and there was an incredibly well-formed decision on an enormously obtuse tome of legalese.
You can check that similar debates are common in Switzerland. People actually think about the problem, discuss it, and vote in conscience.
If you think people aren't able to think and decide autonomously for themselves, you are actively opposing democracy.
Ordinary elective oligarchy is the ideology that mostly pass as "democracy" nowadays, but please don't stay abused and go on pretending you like democracy when you don't.
Both of you are correct. The problem with direct democracy these days is that it ignores the power of mass media, which is to say it ignores the influence of money on a statistically significant portion of the voters.
Premise 1: if you continue adding people to the voting pool on an issue, at some point (X) you're going to exceed the number of people who have interest / time / capability to render themselves informed.
When you do, mass media begins to exert a much greater effect on the outcome (as these people are more susceptible to having their opinions swayed).
Premise 2: If you shrink the pool of potential voters, but keep the money involved the same, then corruption increases
--
There are of course things you can do legally to fight both of these negative outcomes, but I feel you'll always be fighting the basic tendencies. The solution then isn't direct democracy (where mass media overrides logic) or oligarchy (where corruption rules) but some point in between.
> Both of you are correct. The problem with direct democracy these days is that it ignores the power of mass media, which is to say it ignores the influence of money on a statistically significant portion of the voters.
That's why the example of the 2005 French referendum is so important. All of mainstream politics were campaigning for "Yes". All of media, papers, TV, radios were exclusively campaigning for "Yes". However, the "No" vote won by a comfortable margin 55% to 45%, and the campaign for the "No" almost entirely took place on the internet and social networks.
The outcome and the results are useless without normalizing against an unadvertised baseline.
If either traditional/big media or the internet and social networks influenced the vote by pursuading people who didn't do their own research -- that's a fundamental problem.
Quite a lot, and I try to and avoid the self-satisfying feeling of smug contempt or disdain. And I've met people pretty close to the highest level of command of this world, too. Therefore I feel entitled to compare them and I'm absolutely certain that the difference between the lowest pavement sweeper and POTUS is much, much smaller than the oligarchy wants you to believe. Because you know, that would mean that democracy, equality, freedom are actually possible. That the rich and powerful don't actually deserve any special treatment. etc.
Voters do not have much incentive to make informed votes since the expected impact of their vote is very small. As a result, they tend to use their vote for signaling purposes, as a way to reflect the type of person they want to be, rather than based on what they anticipate the consequences of their vote will be.
If voters are so astute and informed, how do you explain that they radically disagree on the consequence of various policies, and that their disagreement can be predicted based on their parent's politics? How do you explain that in polls, voters position align so well with the left-right axis?
We aren't just talking about values here, but about a non subjective assessment of the consequences of policies. How odd that it would cluster in this way!
Because most people have been mercilessly been beaten into obedience, and the belief that they aren't actually able to think by themselves, that they're inferior to the oligarchs in command.
I don't agree. I've read quite a bit of economics, I read serious newspapers from a range of political viewpoints, and I have a technical degree. All of this merely helps me to appreciate just how ignorant I am, and how complicated the world is.
Imagine that my local council asked its residents how much money this year should be dedicated to renewing the sewerage system, which is a typical example of the small but important decisions that have to be taken on behalf of the public. I don't know the first thing about sewerage engineering. If the council tells me that they recommend $10M then I have literally no idea whether this is the right number, even to an order of magnitude.
The Pointy Haired Boss is a character in the Dilbert cartoons. He doesn't understand the technology Dilbert is working on, but that doesn't stop him from telling Dilbert how to do his job. Direct democracy puts the public in the role of the PHB, and the results would be very similar.
But the thing is, the members of the council don't know either. Do you think the retired economist or the graduate in communication studies - the two most senior members of my local council - know about sewers?
> In 2005, in France, the "referendum on a European Constitution" lit an immense debate, and there was an incredibly well-formed decision on an enormously obtuse tome of legalese.
On the contrary, the outcome of the referendum was less about the merits of the proposed constitution, and more an expression of growing anti-Establishment social opinion and a demonstration of discontent with the majority parties and President Chirac.
> If you think people aren't able to think and decide autonomously for themselves, you are actively opposing democracy.
If you think people aren't able to determine how to choose reasonable facsimiles of their moral/social/economic position through which to abstract their effect on the daily operation of a state, you are actively opposing democracy.
Being able to choose when and how to make decisions must be a core component of the free exercise of democracy.
Both the ruling class and the public of the 21st Century United States have a great deal of emotional investment in pretending that we are some sort of hyper-equitable nation, governed wisely by the public in the interests of freedom and the general good, instead of our government being a plutocratic shit-show.
> In no place I've lived would the average person walking into the voting box have spent time studying the history of banking law and policy to make a well-informed rational decision
It is the responsibility of those advocating for a position in favour/against fractional reserves to inform voters and debate in front of them. Experts who can't or refuse to communicate to laypersons on matters than concern the latter are near useless.
>In no place I've lived would the average person walking into the voting box have spent time studying the history of banking law and policy to make a well-informed rational decision.
Do they study laws, ethics, psychology, sociology, or criminology before making laws? The average voter on any issue is not educated. Why should any issue be given special consideration for this? And if this is an issue with every issue, then the issue is with democracy itself.
We can observe from the american congress that an elected minority is no better informed than the population at large. They have passed laws that were far to large for them to have read in the given time, they don't even have debates.
In my experience, most people simply vote for the opinion shouted loudest and the one their relatives/friends vote. Only a very few investigates the topic independently, but their votes are lost in the noise. I would not trust decisions, that require specific knowledge and that can't be explained in layman terms, to the masses.
In my experience, most people simply vote for the opinion shouted loudest
and the one their relatives/friends vote. Only a very few investigates
the topic independently, but their votes are lost in the noise. I would
not trust decisions, that require specific knowledge and that can't be
explained in layman terms, to the masses.
Could you provide some examples?
---
Personally I don't trust politicians as much anymore these days to make choices in the benefit of the people. Most often the politicians' votes seem more aligned with business interests compared to the people interests, especially in large powerful constructs like the EU. I've also seen politicians make plenty bad choices in my country.
My opinion is that we should get more referenda in the future. The innovation of internet makes it possible to do this very cheap.
I agree that politicians make some terrible and downright malicious decisions (namely TTIP) and citizens should have more power (stop NSA, anyone?), but some decisions are best left to the specialists. Utopian government should be some kind of a mix between democracy and technocracy imho.
An anecdote to answer your question: in Lithuania (where I live), few elections ago, the most vote received a party consisting of the local TV and pop stars that, no need to say, had absolutely no clue about politics. Of course, they didn't last long and only caused few months of turmoil.
I'm swiss and you'd be surprised how many don't even know what we voted about after the vote. Less than 50% of all people vote and everytime it is over 50% it's because the right-wing parties shouted really loud and spend a lot of money.
It is getting really absourd. Next year we have a vote about if we should enforce a vote back from 2010.
Participatory democracy is the lesser evil from what we know so far, and it's not absurd that only the people interested in the subject at hand go to the voting booth.
Representative democracy is terrible. Italy's current prime minister was elected directly by the people only as mayor of Florence. From there he went on being nominated and elected by various representatives.
The problem is that representation in politics is not transitive. B might represent A and C might represent B, but this does not mean that C represents A.
It's a republic not a democracy. The problem with a democracy is the majority rules. If the US were a true democracy the civil rights movement would have never happened. The white majority could have simply out voted the black minority. Pure democracy is mob-rule.
The idea that the "republic" part of the system protects minorities despite vast opposition from the majority sounds nice, but it's not supported by reality.
That's like saying that it's an animated film, not a comedy. The republic is a form of government and democracy is a way to involve the people in deciding who governs them. Some republics are democracies, some democracies are republics.
> The problem with a democracy is the majority rules.
When the minority rules, like in a plutocracy, you've got a bigger problem.
It's totally unfair and undemocratic for some people to be able to print money and for the rest to not be able to. Gives the former huge advantage, and creates economic inequality.
You can print money; if you hand a friend a piece of paper that says "I owe you $10" or "I owe you ten apples", you've printed money. The nominal economic value of that paper becomes the value of what it promises. Your friend could then trade that marker to one of his friends on its nominal value, as long as his friend trusts that you're good for it.
You perhaps can't print currency, but you can create money in exactly the same fashion that banks do - any time you issue a debt marker, money is created.
This is an interesting angle. The important thing to note is the "I owe you $10" piece of paper is worth roughly $10 when it comes from a trusted source.
I think if I wrote that it might not be worth the full $10 in "publicly traded" circumstances.
There's an interesting exercise in how bank-like you can become before you need to register as a financial institution.
The real difference is that you can't force the FDIC to 'insure' your 'debt marker', while a bank can. If there were no deposit insurance, depositors would actually have to worry about the soundness of their bank - and probably would demand 'full reserve' banking.
Banks allocate real resources in the economy, and the instrument by which they exercise this power is making loans (printing money) for projects they deem appropriate. I think often people get the causality backwards: banks don't have more power than other institutions and people because of their ability to loan money into being, they have the ability to make loans because of their existing power. That is, loans are merely the mechanism by which banks exert their power over resource allocation in the real economy. This Swiss referendum may put the kibosh on this particular style of loan generation, but I see no evidence that private banks won't just create a new system of loan accounting and money creation for the central bank to implement which will accomplish the same outcome within the parameters of the new referendum.
> There were holdouts in Europe originally, some central banks were slow to adopt fractional reserves. They were trounced by the economies of other European nations and their superior access to liquid capital.
"Hard science" and "laboratory test" means random selection with random assignment and controls for confounding. What are some quick keywords so I can Google for your claim? I'm not even asking for a citation.
If I said something about causal learning, I could point to Patricia Cheng as a keyword to Google. If I said something about dual systems of cognition in economic behavior, I could point to Daniel Kahneman or Jonathan Evans.
Point me in the direction where one can find this "hard science" with "laboratory tests", so that I may know these are not toy words you threw around.
Not the OP, but there's no such thing as proper experimental setup in economics (because there can't be). That's why using economic/econometric modelling for causal inference is the holy grail of the field.
Yes, many economics papers are at the intersection of economics and psychology with a focus on human behavior. One of the broad assumptions of economics is that individuals are largely rational, but controlled experiments sometimes show that people don't always act in their best interest.
But at a macro level, there are no controlled experiments. We can look toward "natural" experiments (e.g., wages and the labor rate of two border towns, where one is in a state that has raised minimum wage and the other has not), but there's nothing like the gold standard double blind randomized trial that you'd find in a drug study.
"If I said something about causal learning, I could point to Patricia Cheng as a keyword to Google. If I said something about dual systems of cognition in economic behavior, I could point to Daniel Kahneman or Jonathan Evans."
Obligatory:
"You just got finished readin' some Marxian historian -- Pete Garrison probably. You're gonna be convinced of that 'til next month when you get to James Lemon, and then you're gonna be talkin' about how the economies of Virginia and Pennsylvania were entrepreneurial and capitalist way back in 1740. That's gonna last until next year -- you're gonna be in here regurgitating Gordon Wood"[1]
The Ascent of Money is filled with great citations to the academic literature. Don't have my copy handy, but you should check it out if you're interested in more info about fractional reserves.
You should also read up on "natural experiments." They got us things like the elimination of cholera from major metropolitan areas, the link between smoking and heart disease, and Hubble's Law describing the expansion of the universe. Sometimes looking at the world tells us stuff about the world.
You should also maybe check out the work of John Ioannidis, and the hoax research of John Bohannon, and articles on publication bias. Check out how frequently lab p-values cluster just around publishable.
We've reached a weird state where, give me a natural experiment in economics, where the author actually has to think about and discount possible alternative explanations sufficiently to sway aggressive critics on a contentious topic. Then give me a modern nutrition study claiming that some fad food abruptly cures cancer in rats, with a convenient p of exactly 0.05, which becomes an isolated media frenzy before it's never cited again. I'm going to treat the economics with far more deference, despite my general fondness for double-blind RCT.
EDIT: Also, the original reference was a simile, signaled by words like "essentially" and "like." Ease up a bit with the 'toy words' accusations, I was not trying to claim economics is literally indistinguishable from physics, just that the case studies here are surprisingly compelling, and seem to point in one clear direction.
>There were holdouts in Europe originally, some central banks were slow to adopt fractional reserves. They were trounced by the economies of other European nations and their superior access to liquid capital.
This is in no way a proof. A good analogy, but not a perfect one, I agree, is looking at 2 companies where one of them has more capital and so it can undersell its competitor, using prices lower than its production prices. You might win the competition, but that's definitely not a a good system long term.
And another thing that I think is very important to keep in mind is that we went through 2 world wars quite recently, each one performing a reset of the system. It is very hard to say that we are on the right track when the system needs to crash and burn every couple of generations.
>Economic historian Niall Ferguson beautifully describes fractional reserves as one of the greatest innovations of humankind in Ascent of Money. The miseries from bank runs and crashes are real, but even so, the total impact on human welfare from fractional reserves has been overwhelmingly positive.
That doesn’t make any sense. Runs and crashes are an important part of the free market, keeping banks in reign. Fractional reserve banking would be impossible or very limited if runs and crashes were allowed to happen. This would result in non-inflationary currency, improved value of savings, and decreased volatility of the markets (extreme booms followed by extreme crashes and long periods of unemployment due to constant reallocation of resources in the society).
I wish you would explain more in detail or link some more reading. I find this interesting. I've always seen this reckless lending/printing money as something unsustainable but obviously I don't know much about the subject, it's hard to find decent reading material for the average person to understand.
Uhh, the referendum talks about banning Private Banks from creating money. The Swiss National Bank will still have fractional reserves and will reserve the right to create physical and electronic money. So isn't that a good thing?
> If successful, the sovereign money bill would give the Swiss National Bank a monopoly on physical and electronic money creation, "while the decision concerning how new money is introduced into the economy would reside with the government," says Vollgeld.
> But over 90pc of money in circulation in Switzerland now exists in the form "electronic" cash created by private banks, rather than the central bank.
> The Swiss National Bank will still have fractional reserves and will reserve the right to create physical and electronic money. So isn't that a good thing?
For the banks? It depends on how quickly the central bank is going to loan them new money.
For the bank's customers who want their easy loans? Best case scenario - nothing changes, worst case - loans are now harder to get because the central bank is shy about increasing the money supply.
It's a tragic topic to put to a referendum though, because I don't expect every random person to be an expert on the technical nuances of financial history.
That's true for nearly every subject. It's an argument against this referendum as much as it is against democracy in general.
Even representative democracy. Most people are certainly not experts at hiring executives. Seemingly even those whose job it is to hire and fire.
It's not a binary option. It's possible to be anti-fractional reserve while not requiring 100% reserves for everything. Mutual credit economies, for example, require no backing store, giving all the advantages of fractional reserve, with no systemic risk.
Say that to my face I'll have you know I am trained in black ops cyber warfare and I will hack you in to oblivion. I am an expert on technical nuances in financial history, and I will exclaim one truth:
> The miseries from bank runs and crashes are real, but even so, the total impact on human welfare from fractional reserves has been overwhelmingly positive.
It surely has been positive in the past but that does not mean it is positive now or in the future.
We are entering a new era, where (economic) growth is no longer necessary for human development, due to automation and that an increasingly large percentage of innovation is in software. In a world of progress without growth, we cannot have an economic system that requires growth to function properly.
So true. The real problem we are facing is not lack of growth, it's getting used to the situation that we'll never again achieve absolute employment, since the need of human labour is shrinking. Depending on our choices today we may end up in either Star Trek or Elysium kind of society in the future.
I can only applaud Switzerland taking seriously this, as well as basic income initiative. If anyone is able to pull it through, it's them. The only pity is that the current discussion is made in German, so most of the anglosphere won't be able to read or contribute to the discussion directly, and would be left to low quality "journalism" as a source of information about the debate.
>It's a tragic topic to put to a referendum though, because I don't expect every random person to be an expert on the technical nuances of financial history.
Voters are not experts on matters of laws, morality, ethics, psychology, sociology, or criminology. If it is tragic for this to be put to referendum, then most every referendum is tragic.
>total impact on human welfare from fractional reserves has been overwhelmingly positive.
Measured in what, GDP? A relentless race to extract more and more resources from the earth and lay waste to countries in the process? Easy money only emboldens a race to the bottom for extraction of resources, not a holistic life for the world's population. Such banking only empowers a few.
I don't really understand how this isn't a proposal to effectively end lending.
If banks are required to hold 100% reserves against their deposits, where exactly are they supposed to get money for lending?
The article says "they’ll only be able to lend money that they have from savers or other banks" but that seems inconsistent with the 100% reserve requirement. If I'm required to hold on to 100% of deposits, I can't lend them out.
won't be surprised if affected banks started selling deposit swaps if this comes to pass. would be pretty interesting if cash funds picked this up so that the everyday man can have a little bit of exposure to what is the bread and butter of the bank as we know it.
actually this probably won't affect much. it just means the capital requirements is increased. a bank may not necessarily choose to utilize its deposits before any other source. a bank can happily lend deposits and borrow on the overnight all at the same time to finance day to day operations.
> If banks are required to hold 100% reserves against their deposits, where exactly are they supposed to get money for lending?
They can borrow money from central bank if they think they can lend it for more. I don't think safety improves through that, because if retail borrowers don't pay up en masse we still have a lot of money in the economy that we don't know how to take back. ... maybe additional safety through one more layer of oversight ... if commercial banks give bad loans, central banks could prevent them from taking more loans
On the plus side less profit from taking the risk of overinflating money supply lands in commercial bank owners hands.
It's not, it can not be. Banks will just have to answer to the central bank for big loans and truth is that it makes sense if you think that every single bank will have to rely on the central bank when it faces a bank-run... So now the central bank will be able to control the banks in a more direct way (theoretically it already does, but in practice it didn't work in many countries, don't know about Switzerland though).
So, nothing spectacular except from the idea of putting this into a referendum instead of saying "No/Yes" without consulting the population. Switzerland is amazing.
It is more likely to kill almost all deposits. The bank wouldn't really profit from stored money so they will want fee for keeping money. Interesting experiment but I definitely wouldn't want it to happen in my country.
Only if central bank deposits do not bear interests. If they do, depositing money at a commercial bank would increase that bank's central bank balance. If the central bank's deposit interest rate is higher than the commercial bank's, this would generate a profit for the commercial bank.
In the Eurosystem, for example, minimum reserves bear interest even today; only excess reserves are "punished" by negative interest rates.
That's what I have been thinking how the system should be.
Just print eg 3% more money each year. Give eg 30% of the new money to the state for its expenses, give the rest equally divided to all the population. End of story.
No need for IRS, no need for filling taxes, layers, tax accountants, tax checks. The amount would be insignificant (as a percent) for the rich, significant for the poor, thus helping them more. The only tax would be the specifc controlled inflation.
Looks to me as a very simple, nice system. ..Any thoughts anyone, why this would or wouldn't be a good idea, and / or how it could possibly be improved?
I think it would be hard for central banks to control inflation well in this system. Japan has been trying hard for 20 years to trigger inflation through QE and related money-printing schemes, but it hasn't translated to inflation.
In Japan's case, inflation happened because of a sales-tax increase. Taxes are forced spending, and you can target heavy savers if you need to.
I think that just the levers of how much money to print and percent going to gov't could give a good amount of control though.
Some practical considerations though: How do you get the money to each person? Not everyone has a bank account. In a lot of countries (including US), there's no good single-identifier to find people either. Fraudsters could claim for other people, and the innocent people couldn't get their share. There's some logistics involved.
One small thing is that taxes have also been used a way of incentivising certain behaviour. Carbon taxes aren't about generating revenue but reducing pollution. How would that enter in this new system? Maybe Carbon...incentives? Kind of weird to implement I think
Money would find its way from the consumers to companies that need investment. Instead of banks estimating how viable your business is before giving you a loan you'd get your money straight from your customers. The market would decide which endeavors should get funding.
My only concern is that printing money would not provide enough money to run country budget (let alone basic income) without creating hyperinflation.
I meant on the logistics side of things. Lots of people don't have bank accounts. Lots of people don't have any solid ID. Plus you'll get people who are really in limbo in whatever system you build to get money to the people... some tricky stuff (especially if it's real large amounts of money).
Maybe Medicaid has solved all these kinds of issues already, and it's just about scaling
Fractional banking deployment is the equivalent to nuclear power discovery, nuclear fusion can used to create energy using nuclear power plants our to destroy using atomic bombs.
The same way Fractional banking can be useful by increasing the credit supply and destructive when over leverage.
Simply put Fractional banking creates a derivative instrument on money.
One of the reasons I immigrated to Switzerland is direct democracy and stability. Since two hundred something years Switzerland is politically neutral. It is ranked the most stable economy in the world and the most competitive nation (https://www.quora.com/Why-is-Switzerland-the-most-competitiv...). The Swiss Franc is the sixth most-traded currency in the world. If you get your salary in Swiss Francs, you maximize the chances that the salary you earn will actually be worth something in the future and is not just paper.
If you look for a tech-job in Switzerland, I work as a tech-recruiter in Zurich. Check out my story "8 reasons why I moved to Switzerland to work in IT" on https://medium.com/@iwaninzurich/eight-reasons-why-i-moved-t... and / or send me a mail to the address in my HN-profile.
Switzerland is only 8 million inhabitants, thus it obviously can't produce on Chinese/US/German scale.
Some Swiss IT-highlights include:
- The biggest Google software engineering office outside California (around 2000 employees).
- Logitec
- ETH university
- Many ETH-spinoff/startups: Doodle, Bitspin (bought by Google), Teralytics, Archilogic, Fashwell, Getyourguide, Numbrs and I surely forgot many others.
> If you get your salary in Swiss Francs, you maximize the chances that the salary you earn will actually be worth something in the future and is not just paper.
Or, when living in a country with untrustworthy currency, you can just exchange your savings to USD (or CHF etc.) and have them equally protected.
I don't know about current Russia, but in communist Poland (with a terrible currency) you could exchange the USD for a local currency in an instant on a black market, and at an extremely favourable rate (which reflected the weakness of the local currency).
In Yugoslavia all deposits were blocked at one point. You couldn't withdraw your own money from the bank. So, it's not the same which country are you living in.
I'd keep my long-term savings in a foreign bank, so the authorities could at most get my grocery and rent money (still bad, but not quite as devastating). If foreign bank was not an option, I'd just keep my money in the proverbial matress - in fact, that was a common option for saving in communist Poland (US dollars stored at home).
Your comment suggests you've never lived in a country where you would want/need to exchange your currency.
The smart money (I.e. politically well connected) gets to exchange their money. As soon as every one else finds out, capital controls have been introduced.
The politically well connected, usually, get to continue exchanging their money at an artificial rate.
The idea is to be exchanging them _in_advance_, i.e. exchanging the savings part of your monthly salary to USD every month. Don't wait till the shit hits the fan and everybody wants to get rid of their local money.
A country cannot have a widely distrusted currency for long, because everyone will do as you say (exchange away).This causes capital flight, so the gov't introduces capital controls shortly thereafter.
So the only way to do as you say is to be (far) more prescient than your peers. You need to be far more prescient because you have to beat the gov't insiders too.
Also, prescience does not save your future earnings (I.e. after controls have been imposed)
As someone who has worked in Switzerland, how did the Swiss Franc cap removal (against dollar) has impacted tech industries around Zurich ? Some of them took a 40% hit on their margins.
I asked @yanisvaroufakis for a comment[1], here's the tweet: It is a silly idea. Tantamount to preventing banks from lending Jack Jill' deposits. There are far better ways to control banks
I like this initiative very much. It is simple and effective. Please do read the website of the initiative: http://www.vollgeld-initiative.ch/2-minuten-info/. The initiative states that all Swiss banks should hold all your money on your checking(!) account in 100% reserve. Your money is always there. There is no interest rate. It is just like cash money. Only digital.
If you want your money to gain interest you can open a savings account. Or you can invest your money in any other investment opportunity. The 100% reserve rule does not apply to saving accounts.
And thus you, as a customer, have a clear choice. Money on your checking account is save and always yours. Guaranteed by your National Bank and/or State. Money anywhere else is treated as an investment. You win some, you loose some.
An implication from the power of private banks to create money out of nothing is that people will have to borrow money for their homes essentially part of their future income to the banks and its bond holders.
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[ 0.27 ms ] story [ 220 ms ] threadThat hasn't worked out very well.
Alternatively, to encourage more deposits so they can make more loans, interest rates will have to go way up. That will depress the stock market, eviscerating the other normal way that businesses finance growth.
You've got 1000 bitcoin, and you can lend it out as 'dollars' that can be spent in countless ways by the borrower. Instantly we're back to a system capable of vast credit. All it requires is a non-fixed fiat rider on top of bitcoin, likely controlled by a central government (so that they too can abuse it, for war, deficit spending, buying votes, et al).
Fractional reserve banking affects only for very liquid money-like assets like on demand deposits. Long term deposits create money outside reserve requirements. I think one solution is for banks to start offering people time deposit & credit card combinations. Income goes into time deposit and people use credit cards almost exclusively.
Poor people without credit cards might might have to pay a lot for having money in a bank, so they might turn into holding cash.
Well, a bank could offer to pay interest on the deposits.
Banks would add bitcoins as just another currency into their system. They can start giving out credit cards denominated in bitcoin for anyone who saves bitcoins in bank for interest, that effectively creates new money.
[1] https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf
The elimination of intentional duration mismatch and the introduction of fraudulent time-money claims by the financial sector is one of the most important moral and social issues we face.
EDIT: http://ecedweb.unomaha.edu/ve/library/HBCM.PDF it seems to be more about loans being spent and thus the spent money being at another bank and loaned out again
" limit financial speculation by requiring private banks to hold 100pc reserves against their deposits. "
Normally, banks aren't required to actually have the money they lend out, so when a loan is credited to your account that money is created (and when you repay the loan, the money is destroyed). In many countries banks are required to hold a certain amount reserve (I think it's about 1.5% in the USA - the UK doesn't have such a requirement), so this is simply requiring that the banks have 100%, which means banks can only lend money they actually have.
EDIT: Did you mean how does the whole money creation thing work at all? There's a very clear guide at:
http://www.bankofengland.co.uk/publications/Documents/quarte...
It's for the UK, but pretty much all modern countries work in a similar way.
Say I deposit $100 in a bank. The bank has $100. Now, say the law requires a 10% reserve. They can lend $90--which they actually have. That person takes the loan, and deposits it in their bank. Now, there are $190 in deposits from the original $100. But the bank never lent money it didn't have. Instead, the money creation comes from the fact I get to treat my $100 deposit as good as cash on hand, even though 90% of it has been lent to another person.
This is known as a bank run, or (when it happens to lots of banks simultaneously) a bank panic. During the Great Depression, banks were frozen, and people were barred from withdrawing money from the bank for a certain period of time. The motivation for doing this was to halt the bank panics that were occurring.
Raising the required reserve ratio has very far-reaching implications. Broadly speaking, it tightens liquidity, making loans more difficult to come by, which decreases investment in infrastructure. This slows economic growth, because it's harder to find capital with which to start businesses, and it's harder for people to obtain money to purchase a home, further their education, etc.
[0] in the aggregate; not everyone would lose 90%, but 90% of aggregate cash assets would be.
George Bailey explained this, in one of the greatest movies ever made.[1]
I have absolutely no idea what Switzerland will wind up with if they vote for this. But it certainly won't be banking as we know it.[1] http://www.aellea.com/script/itsawonderfullife.txt
When the government creates the same amount of money and directly spends it on infrastructure as opposed to loaning it to infrastructure providers... what changes other than the fact that the infrastructure becomes cheaper to the public since the provider does not need to pay back the loan?
It's massively less efficient. It's important to note that this is true by definition, not by assumption.
For starters, the provider absolutely does still "pay back" the loan either way. Infrastructure investment isn't free, and if the aggregate value produced by the investment adds up to less than what it cost in the first place, then we would have been better off not doing anything at all.
Secondly, the government isn't able to spend on all types of infrastructure, and when it does, it's almost always less efficient. Public works are only one type of infrastructure spending, and they're pretty much the only one that remains exclusively in the domain of government projects these days.
To give you an example of what "infrastructure" can look like, look at the website we're on. Silicon Valley has a robust network of companies and organizations that both provide capital as intermediaries[0] and increase the ROI of that capital[1]. This wouldn't be possible if there weren't sufficient liquidity
When money is created by the banks, it's created in response to market forces. Banks have to turn an economic profit of zero on the aggregate of all loans they extend, which means that they price them accordingly, and therefore the price of capital converges (in the long run) to the value added by that investment. This makes it difficult (though not impossible) to secure capital for projects that have an inferior risk-adjusted payoff.
By contrast, the government does not create capital in response to market forces. Keynesians would argue that this is the entire point of government economic policy - to smooth out short-term cyclical trends. The problem with "spending" all newly-created money on smoothing short-term cyclical trends is that it leaves zero liquidity allocated to long-term economic growth.
[0] most startups are still funded by banks, at the end of the day, with VCs serving as intermediaries - venture capitalists get their money from LPs, which tend to be institutional investors like banks (or substitutes for institutional investors).
[1] even aside from the money that YC provides a company, YC makes companies more successful (or at least more likely to succeed) through the other, intangible assets it provides.
Relevant section from 'Money as Debt': https://youtu.be/jqvKjsIxT_8?t=12m57s
The creation of non-bank demand deposits like money market funds put the nail in the coffin of using reserve requirements to manage the amount of money in the economy.
Today the biggest constraint to monetary creation is bank capital ratios. Under current rules banks have to have roughly 1 dollar if equity for every 12 dollars of loans and that can vary based on the type of loans the banks make.
In summary, though, if we imagine that the bank is required to hold 10% reserve: I go to the bank and get a loan for $900. This is credited to my account. There is no requirement for this money to actually exist. The same day, you go and deposit $100 in actual dollar bills. Your account is credited with $100.
The bank's liabilities are now $100 (in your account) plus $900 (in my account) for a total of $1000. The banks reserve is $100 (real dollar bills you gave them). This is 10% reserve so the bank is legally OK. $900 has been created.
That's how it works. More detail in the PDF I linked.
It's interesting to realize that you can create money in the same way that a bank. Just give your friend a promise that you will pay him in the future and he could use it as money with third parties. Most people wouldn't accept it, but that is a different issue.
If somebody is in the mood to destroy more preconceptions about economy I recommend Warren Mosler 'Seven deadly innocent frauds of economic policy', it can be a good introduction to Modern Monetary Theory:
http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf
Unfortunately, in the (deadly?) Eurozone this is indeed how it works.
And most don't realize yet.
«In accordance with Article 123 of the Treaty on the Functioning of the European Union, overdrafts or any other type of credit facility with the ECB or with the national central banks in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.»
Despite that, I can't recommend it enough. It's just after starting to read it that what was going on in the economy of the world made any sense to me.
Also, mainstream economy is just totally wrong in many of its descriptive aspects, but they continue teaching falsehoods anyway. An example at hand is how the fractional banking and the creation of new 'money' by banks works in, virtually, all the modern economies.
This is the reason that the linked PDF by someone a few posts above is so important. They say what Modern Monetary Theory have been saying all the time but the source is the Bank of England.
I think it deserve to be linked again: http://www.bankofengland.co.uk/publications/Documents/quarte...
As Henry Ford said: "It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
Also, MMT is nothing new or groundbreaking, contrary to their claims. There have been chartalist and endogenous money creation theories for ages, and most mainstream economists are quite aware of them, contrary to the assertions of many MMTers. What separates MMT from the rest is its fusion with more dubious Post-Keynesian theories.
MMT people don't claim it to be any new or groundbreaking, on the the contrary, they claim is just common sense and chartalism. What they claim is that chartalism is true, especially in modern economies. This is a very difficult thing to dispute if you analyze how money works nowadays.
In my experience, the real problem with MMT, is that the implications of what an economy is or how it really works are politically indigestible for a lot of people and inconvenient for a few.
A good reading of the Public Choice journal and similar is a nice antidote to some of the zanier MMT and Post-Keynesian proposals.
I want to return the courtesy, this a reply to critics or MMT: http://www.levyinstitute.org/publications/modern-money-theor...
I have not problem with a lot of post-keynesian ideas by the way.
If anything, you've convinced me more that MMTers believe in a perfect State. Post-Keynesian ideas seem to emanate from it. Kalecki and Robinson were outright Marxists, the former basing their economics on class conflict and the latter praising North Korea and Maoist China. The entire Post-Keynesian literature is devoid of public choice considerations, sans one weak paper from ~2004.
Most critics dismiss the conclusions or address questions that are not really part of MMT.
Personally, I am specially interested in criticism of the most descriptive part of MMT, starting on chartalism but going beyond, banks money creation, sectoral balances, foreign exchange, etc..
(FWIW, I do intend on eventually writing a criticism of Post-Keynesianism in book form, but I'm still in earlier research phases.)
1) Alice deposits $100 in Bank X
2) Bob takes out $900 loan from Bank X and deposits it in Bank Y
3) Charlie takes out $8,100 loan from Bank Y and deposits it in Bank X
4) Eve takes out $72,900 loan from Bank X and deposits it in Bank Y
5) ... the cycle continues ...
Also, I would assume that the interest rates that my bank pays for my deposits would be a lot higher if it could lend out 9x as much as it holds in deposits.
The model where a bank lends out 90% of its total deposits still makes more sense to me and will result in $900 of total money created per $100 initially deposited.
1) Alice deposits $100 in Bank X
2) Bob takes out $90 loan from Bank X and deposits it in Bank Y
3) Charlie takes out $81 loan from Bank Y and deposits it in Bank X
4) Eve takes out $72.90 loan from Bank X and deposits it in Bank Y
5) ... the cycle continues ...
and if you sum the geometric series, which in this case is finite, you get $900 of total additional money created for the initial $100 Alice put in.
If Bob takes cash from Bank X and deposits in Bank Y, Bank X has less cash, that movement is reflected in their balance and in their reserves.
If Bob makes and electronic transfer from Bank X to Bank Y, at the end of the day, Bank X and Y have to clear their balance with each other. As some people have moved money in the opposite direction, from Bank Y to Bank X, the balance could be compensated.
If for some reason, people only retire money from a bank without never making deposits, you have a bank run and it's an indicator of mistrust in that bank.
Amongst other things, this means that how profligate a bank can be in lending money depends heavily on how much all the other banks are lending. So long as all the other banks are lending just as much out and their savings terms are competitive, the outflow of loaned funds will be balanced by an inflow of other banks' loaned funds. What happens in practice is that there's a glut of easy credit during booms which dries up during busts, making the boom-bust cycle worse. You can find some discussion of this here: http://www.bankofengland.co.uk/research/documents/workingpap...
Several places the paper state that the ultimate control of money creation is monetary policy i.e. not the banks. This is what I'd always thought before this idea of commercial banks having complete freedom became popular. It also states that the interest rate set by the central bank decides the rate of the loans, and thus the demand for them, and thus the amount of creation. Interestingly the link between the central bank rate and the commercial rate is not stated (I did not read it end-to-end). I always thought that ultimately they had to borrow from the central bank to remain solvent/meet reserve ratios. And that goes down as a debt to the central bank, whereas the central bank can genuinely create that loan from nowhere and is doing the creation.
Banks would essentially just facilitate transactions and act as conduits between borrowers and the central bank. I don't think it makes much sense for country like USA that places such a high importance on free markets and liberty.
A survey [2] was done as part of a master's thesis at Zurich University, which found that, "Only 13 percent know that private commercial banks provide the majority of the money in circulation. However, 78 percent of the Swiss population would like money to be produced and distributed solely by a public organisation working for the common good, such as the National Bank. Only 4 percent preferred the system we actually have today – that money is mostly created by private, for-profit companies such as commercial banks."
[0] http://positivemoney.org
[1] http://www.amazon.com/Modernising-Money-Monetary-System-Brok...
[2] http://positivemoney.org/2015/09/survey-confirms-people-have...
Because it would still be legal for banks in every other country to loan out Swiss dollars with fractional reserve. (Or even with 0 reserve)
I bet France and Germany will soon be voting a 2% foreign bank tax and send a box of flowers to every Swiss citizen as thanks. Nah doesn't sound realistic. They're governments. They'll never send thanks to anyone for money they suddenly can steal.
There is more to money creation than just extending loans and crediting customer accounts. In order for such a debited balance to be actually useful, a bank needs to be able to settle interbank payments.
Interbank settlements are usually performed using central bank reserve accounts – and the central bank is free to limit access to that system only to 100% reserve compliant parties.
If you now proceed to say that that is lunacy ... I'd agree with you. But it's still how it works.
In addition to what can be funded now? Probably none at all. The size of the government as a share of national spending is not determined by specific sources of income. It is an ideological and pragmatic decision of the people (or by whoever else has political power)
So if the government had this source of income, it would not be able to levy all other taxes to the same extent it does now. It is unrealistic to assume that the share of government spending would be much greater if they had this particular source of income.
The immediate effect of 100% reserve is that commercial banks cease offering credit and instead start behaving like safe deposit boxes for people's money, offering negative interest. They effectively stop transforming savings in productive investments, saved money is simply extracted from circulation.
If it wants to prevent a major liquidity crunch, the central bank will flood the market with newly created money and keep the economy going. Just what we want, right ? But in doing so, it will effective take on the role of the commercial banks in deciding which areas of the economy are worthy of investment.
So instead of voting with your money and choosing a bank that is safe and makes prudent investments, everybody is forced to "save" at zero interest and empower the Central Bank (effectively, the state) to make investments on their behalf and decide the economic future. Worse still, any failure or bad investment is socialized through inflation and high interest to the whole of the population, since there is no longer any competition that prunes imprudent banks.
We are in fact moving away from market solutions and into a central planing utopia. Instead of punishing and bankrupting the speculators, we are putting them in charge.
Also, it's not realistic to expect people to vote with their money and choose a bank that is safe and makes prudent investments. Teams of experts with specialised knowledge who do this as their full-time job can't figure that out; how is your average Joe with a full-time job of his own and no industry experience meant to? Worse still, with fractional-reserve banking if enough people believe that a bank will fail then the resulting run on the bank will cause it to fail, at which point you'd best hope you got your money out in time. If people don't trust the banking system as a whole, it doesn't force banks to make prudent investments, it causes bank failures and people keep their money under the mattress because even if they could figure out which banks are investing well those banks are still likely to fail due to bank runs.
Actually, it's exactly the cash from the depositor, loaned out. What the depositor gets in return for his cash is a "bank account": a freshly printed promise from the bank that, at a later date, he will be able to extract his cash. So the depositor takes a risk and makes an investment, and is rewarded with an interest.
When you are insisting on 100% reserve banking, you are denying the bank the option to lend out your money.
I assure you institutional investors, like large corporations, pension and investment funds and which provide the bulk of the funds, very much vote with their wallet. They are not protected against bank failures and it's not like they can cash out billions and keep then under mattresses. The mere threat of a liquidity problem will make the bank very risk averse and focus on improving it's position at the expense of it's market share. So banks don't need to fail for the banking market to work, the diligent bankers will be those providing liquidity.
That's not really what they're offering. Physical money is incredibly inconvenient compared to bank accounts, so much so that the only reason to use it for large amounts is if you or the other party don't trust the banking system. The banks rely on this because they can't actually handle more than a tiny amount of people withdrawing their money.
In effect what they're doing is offering to exchange your physical cash for bank-account cash that's more convenient and is treated by everyone as having the same value as the physical cash, plus a promise that so long as everyone continues to treat it that way you'll be able to convert it back to physical cash. The promise is essentially worthless because it's conditional on something that means you'd be able to do so anyway. (It's only worth something in full-reserve banking which we don't do anymore.)
It's not, because it doesn't show on the depositor's ledger. The bank will not tell you that you have $10,000 left in your checking account because the remaining $90,000 have been loaned. It will tell you that you have the full $100,000 available to you at any time, relying on the fact that on average more than 90% of their depositors' money is extremely likely to remain unsolicited by them.
So, when a bank issues an honest loan for a million dollars for 10 years, it needs to have 1 million dollars pledged to it by savers for at least ten years (in the form of CDs or what have you.) This money may be spent in the economy and thereby returned to the bank as a deposit of some duration, which can be loaned against again safely, so long as it is reloaned under the same constraint: the bank must ensure that any loans made against the re-deposited money are done in a shorter term than the deposit is for. You can have very rapid loan growth in this manner, as time horizons expand during growth phases, and suffer none of the issues with multiple parties claiming the same monetary unit at the same time, commonly called bank runs.
Money can be safely "fractionally reserved" so long as intentional duration mismatch (which is really fraud) is not allowed. That's the core issue in the banking system. The production of the underlying money is a separate question, but I'm less and less convinced it matters all that much, as long as it isn't insane.
What you describe is the opposite of a fractional-reserve system. It is a full-reserve system.
All demand deposits must be reserved at 100%, of course, but duration-constrained savings vehicles (e.g. CDs) can be loaned against safely, allowing credit to expand as time horizons do.
Eventually a bank may go bankrupt (although this would be a much slower process than todays panics) and would need to be liquidated via the normal bankruptcy mechanisms.
I would expect a healthy secondary market for CDs (or the like) to exist as well.
Obviously banks could still go bankrupt, but they would not be bankrupt by design, like they currently are.
Or forever if the loan defaults. What's wrong with the system where only central bank issues loans and only commercial banks can take them?
My core point is that we should not allow the introduction of multiple claims on monetary units at a given point of time. This is simply fraud, even though it requires a bit of thinking (and un-thinking, if you have an econ background) to realize it.
Intentional duration mismatch is fraud, and is no way to run a banking system.
If Apple goes from $13/share to $700+/share, those hundreds of billions of dollars are basically created from thin air, aren't they?
Of course, with stocks you have a much larger ability to measure your trust.
The miseries from bank runs and crashes are real, but even so, the total impact on human welfare from fractional reserves has been overwhelmingly positive.
How do we know?
There were holdouts in Europe originally, some central banks were slow to adopt fractional reserves. They were trounced by the economies of other European nations and their superior access to liquid capital.
We've essentially done the laboratory tests here, it's one of the few areas where econ plays like a hard science. We know the answer here, and it's not 100% reserve requirements.
It's a tragic topic to put to a referendum though, because I don't expect every random person to be an expert on the technical nuances of financial history. And this is a topic where intuitions are a pretty poor guide, one where I'd expect the wisdom of crowds to fail hard. PhantomGremlin's quote from George Bailey is a good example. Most people aren't bankers, and don't really understand how it works as a system, beyond their own account, so it's weird to ask them to make key decisions here.
I agree that this seems like an unusually technical topic to subject to referendum.
https://en.wikipedia.org/wiki/Swiss_referendums,_2015
https://en.wikipedia.org/wiki/Swiss_referendums,_2014
https://en.wikipedia.org/wiki/Swiss_referendums,_2013
https://en.wikipedia.org/wiki/Swiss_referendums,_2012
https://en.wikipedia.org/wiki/List_of_Swiss_federal_referend...
Against mass immigration
Financing and development of railway infrastructure
JAS 39 Gripen (Swedish fighter jet) procurement
Non-renewable energy tax
Fixed book price agreement
Foreign treaties
Hospitality industry VAT initiative
Gold reserves
And my 2 favorites... Increase petrol station shop opening hours
Music lessons
Seems much more than just "public moral position" questions to me.
The central bank does not even need to hold fractional reserves: As the entity creating base money, it can literally create that out of thin air.
Of course, history has taught that unlimited money creation is usually a bad idea, so usually base money is now backed by public or private debt, but this idea is distinct from fractional reserve banking.
See this Econtalk podcast on the topic: http://www.econtalk.org/archives/2015/12/noah_smith_on_w.htm...
That's a strange principle to hold, especially if it wouldn't apply to any other asset. People are generally free to own securities no matter how complicated their structure. But the fiat system seems to conveniently siphon lending power from account holders to account managers -- effectively centralizing economic planning to financial institutions by fiat.
Saying "central banking is good" is like saying "government is good". It definitely can be, but it can also be murderously oppressive. The question is, how did this economic decision maker come to be -- and why are they in control of your money instead of you.
How one can reach such conclusion is beyond me. People will discuss the question, and democratically decide. You'd be surprise the fierce debates that erupts among citizens when a serious question is on the table, and how everyone makes oneself enlightened before vote. This is what actual democracy is. This is how it should work everywhere for any serious issue.
Designating a cherry-picked representative who carries exactly zero obligation to hold his promises is NOT democracy, but elective oligarchy. Almost all countries calling themselves democracies certainly don't deserve the name.
Actually, if you don't trust democracy, labeling topics for a referendum as tragic or awful goes without saying.
Really.
How long does it take for someone to be competent to vote on monetary policy?
It's ridiculous to expect a voter to spend that amount of time on every issue.
It's ridiculous to believe that citizens have no business in important matters. If you're not deciding, you're not acting, and your voice doesn't matter at all.
For a interesting thought, what about matters of brain development and ability to reason? Why should voters get to decide on matters such as when we are considered adults or when consenting to contracts or sex is possible. For nuclear or medical expertise, there is at least expertise. For matters of brain development, the science is still very young and limited. Or even on a greater extent, why should a voter be given power in matters that require ethical expertise? Matters that require legal expertise?
I do not feel competent to take part in a decision about the reserve requirement.
I guess you could set up a system where you delegate your vote to a third party on an issue-by-issue basis. An interesting thought experiment, but quite a few things to work out. My guess is, at the end, it would be similar to the system we have.
In no place I've lived would the average person walking into the voting box have spent time studying the history of banking law and policy to make a well-informed rational decision. They'd at most have read the opinions of some journalists or listened to a news reporter, and would make their decision after discussions between similar poorly informed friends/colleagues.
Fierce debates != well-informed debates.
We elect representatives because it's known that the body politic, once it reaches a large size, doesn't have the time to be well-informed on all decisions they'd need to make as a pure democracy. To suggest so exposes a serious need for a second look at the situation.
Representative democracy isn't elective oligarchy.
[1] https://en.wikipedia.org/wiki/Swiss_immigration_referendum,_...
What about the Swiss referendum on an absolute ban on the construction of minarets? (note: not a ban on building mosques)
Switzerland, like many other European countries, has planning laws that decide on the architectural appropriateness of a building in its surrounding environment on a case-by-case basis. But this referendum, passed by a majority of the Swiss population, placed a complete ban on a minaret ever being built again in Switzerland. That was a completely democratic decision by the people of Switzerland. But was it based on informed debate? Or reactionary and emotional appeals? [1]
[1]http://blogs.reuters.com/faithworld/files/2010/11/ch-1.jpg
However great the temptation, I take note that HN is not the venue for a continuation of this debate.
Actually all of them.
> In no place I've lived would the average person walking into the voting box have spent time studying the history of banking law and policy to make a well-informed rational decision.
Because most people have been mercilessly been beaten into obedience, and the belief that they aren't actually able to think by themselves, that they're inferior to the oligarchs in command (hint: they aren't. The President is no better than me and no better than the garbage man).
In 2005, in France, the "referendum on a European Constitution" lit an immense debate, and there was an incredibly well-formed decision on an enormously obtuse tome of legalese.
You can check that similar debates are common in Switzerland. People actually think about the problem, discuss it, and vote in conscience.
If you think people aren't able to think and decide autonomously for themselves, you are actively opposing democracy.
Ordinary elective oligarchy is the ideology that mostly pass as "democracy" nowadays, but please don't stay abused and go on pretending you like democracy when you don't.
Or in 90%+ of the case they just follow the opinion of the federal council.
I would be surprised if he would be better than The Garbageman.
http://dilbert.wikia.com/wiki/The_Garbageman
Premise 1: if you continue adding people to the voting pool on an issue, at some point (X) you're going to exceed the number of people who have interest / time / capability to render themselves informed.
When you do, mass media begins to exert a much greater effect on the outcome (as these people are more susceptible to having their opinions swayed).
Premise 2: If you shrink the pool of potential voters, but keep the money involved the same, then corruption increases
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There are of course things you can do legally to fight both of these negative outcomes, but I feel you'll always be fighting the basic tendencies. The solution then isn't direct democracy (where mass media overrides logic) or oligarchy (where corruption rules) but some point in between.
That's why the example of the 2005 French referendum is so important. All of mainstream politics were campaigning for "Yes". All of media, papers, TV, radios were exclusively campaigning for "Yes". However, the "No" vote won by a comfortable margin 55% to 45%, and the campaign for the "No" almost entirely took place on the internet and social networks.
If either traditional/big media or the internet and social networks influenced the vote by pursuading people who didn't do their own research -- that's a fundamental problem.
I suspect you live in a bubble. Have you met many average voters?
Voters do not have much incentive to make informed votes since the expected impact of their vote is very small. As a result, they tend to use their vote for signaling purposes, as a way to reflect the type of person they want to be, rather than based on what they anticipate the consequences of their vote will be.
If voters are so astute and informed, how do you explain that they radically disagree on the consequence of various policies, and that their disagreement can be predicted based on their parent's politics? How do you explain that in polls, voters position align so well with the left-right axis?
We aren't just talking about values here, but about a non subjective assessment of the consequences of policies. How odd that it would cluster in this way!
True. This is called learned helplessness. But people can also learn autonomy, emancipation instead, given the possibility to make an impact.
I'm not pretending that people are "astute and informed", they aren't; but they're definitely able to become so.
I don't agree. I've read quite a bit of economics, I read serious newspapers from a range of political viewpoints, and I have a technical degree. All of this merely helps me to appreciate just how ignorant I am, and how complicated the world is.
Imagine that my local council asked its residents how much money this year should be dedicated to renewing the sewerage system, which is a typical example of the small but important decisions that have to be taken on behalf of the public. I don't know the first thing about sewerage engineering. If the council tells me that they recommend $10M then I have literally no idea whether this is the right number, even to an order of magnitude.
The Pointy Haired Boss is a character in the Dilbert cartoons. He doesn't understand the technology Dilbert is working on, but that doesn't stop him from telling Dilbert how to do his job. Direct democracy puts the public in the role of the PHB, and the results would be very similar.
On the contrary, the outcome of the referendum was less about the merits of the proposed constitution, and more an expression of growing anti-Establishment social opinion and a demonstration of discontent with the majority parties and President Chirac.
> If you think people aren't able to think and decide autonomously for themselves, you are actively opposing democracy.
If you think people aren't able to determine how to choose reasonable facsimiles of their moral/social/economic position through which to abstract their effect on the daily operation of a state, you are actively opposing democracy.
Being able to choose when and how to make decisions must be a core component of the free exercise of democracy.
It's kind of funny, because when I looked up the word oligarchy, I noticed that Wikipedia had an entry for the US:
https://en.wikipedia.org/wiki/Oligarchy#United_States
It is the responsibility of those advocating for a position in favour/against fractional reserves to inform voters and debate in front of them. Experts who can't or refuse to communicate to laypersons on matters than concern the latter are near useless.
Do they study laws, ethics, psychology, sociology, or criminology before making laws? The average voter on any issue is not educated. Why should any issue be given special consideration for this? And if this is an issue with every issue, then the issue is with democracy itself.
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Personally I don't trust politicians as much anymore these days to make choices in the benefit of the people. Most often the politicians' votes seem more aligned with business interests compared to the people interests, especially in large powerful constructs like the EU. I've also seen politicians make plenty bad choices in my country.
My opinion is that we should get more referenda in the future. The innovation of internet makes it possible to do this very cheap.
It is getting really absourd. Next year we have a vote about if we should enforce a vote back from 2010.
Participatory democracy is the lesser evil from what we know so far, and it's not absurd that only the people interested in the subject at hand go to the voting booth.
Maybe just a representative democracy like the rest of Europe.
The problem is that representation in politics is not transitive. B might represent A and C might represent B, but this does not mean that C represents A.
http://volokh.com/2010/05/24/public-opinion-anti-discriminat...
http://ropercenter.cornell.edu/voting-rights-act/
The idea that the "republic" part of the system protects minorities despite vast opposition from the majority sounds nice, but it's not supported by reality.
That's like saying that it's an animated film, not a comedy. The republic is a form of government and democracy is a way to involve the people in deciding who governs them. Some republics are democracies, some democracies are republics.
> The problem with a democracy is the majority rules.
When the minority rules, like in a plutocracy, you've got a bigger problem.
You perhaps can't print currency, but you can create money in exactly the same fashion that banks do - any time you issue a debt marker, money is created.
I think if I wrote that it might not be worth the full $10 in "publicly traded" circumstances.
There's an interesting exercise in how bank-like you can become before you need to register as a financial institution.
Which countries were these?
If I said something about causal learning, I could point to Patricia Cheng as a keyword to Google. If I said something about dual systems of cognition in economic behavior, I could point to Daniel Kahneman or Jonathan Evans.
Point me in the direction where one can find this "hard science" with "laboratory tests", so that I may know these are not toy words you threw around.
Some approaches are:
- structural models (google Pearl)
- instrumental variables (google Angrist)
But at a macro level, there are no controlled experiments. We can look toward "natural" experiments (e.g., wages and the labor rate of two border towns, where one is in a state that has raised minimum wage and the other has not), but there's nothing like the gold standard double blind randomized trial that you'd find in a drug study.
Obligatory:
"You just got finished readin' some Marxian historian -- Pete Garrison probably. You're gonna be convinced of that 'til next month when you get to James Lemon, and then you're gonna be talkin' about how the economies of Virginia and Pennsylvania were entrepreneurial and capitalist way back in 1740. That's gonna last until next year -- you're gonna be in here regurgitating Gordon Wood"[1]
[1] https://www.youtube.com/watch?v=azM6xSTT2I0
You should also read up on "natural experiments." They got us things like the elimination of cholera from major metropolitan areas, the link between smoking and heart disease, and Hubble's Law describing the expansion of the universe. Sometimes looking at the world tells us stuff about the world.
You should also maybe check out the work of John Ioannidis, and the hoax research of John Bohannon, and articles on publication bias. Check out how frequently lab p-values cluster just around publishable.
We've reached a weird state where, give me a natural experiment in economics, where the author actually has to think about and discount possible alternative explanations sufficiently to sway aggressive critics on a contentious topic. Then give me a modern nutrition study claiming that some fad food abruptly cures cancer in rats, with a convenient p of exactly 0.05, which becomes an isolated media frenzy before it's never cited again. I'm going to treat the economics with far more deference, despite my general fondness for double-blind RCT.
EDIT: Also, the original reference was a simile, signaled by words like "essentially" and "like." Ease up a bit with the 'toy words' accusations, I was not trying to claim economics is literally indistinguishable from physics, just that the case studies here are surprisingly compelling, and seem to point in one clear direction.
This is in no way a proof. A good analogy, but not a perfect one, I agree, is looking at 2 companies where one of them has more capital and so it can undersell its competitor, using prices lower than its production prices. You might win the competition, but that's definitely not a a good system long term.
And another thing that I think is very important to keep in mind is that we went through 2 world wars quite recently, each one performing a reset of the system. It is very hard to say that we are on the right track when the system needs to crash and burn every couple of generations.
That doesn’t make any sense. Runs and crashes are an important part of the free market, keeping banks in reign. Fractional reserve banking would be impossible or very limited if runs and crashes were allowed to happen. This would result in non-inflationary currency, improved value of savings, and decreased volatility of the markets (extreme booms followed by extreme crashes and long periods of unemployment due to constant reallocation of resources in the society).
All of this is prevented by central banks.
> If successful, the sovereign money bill would give the Swiss National Bank a monopoly on physical and electronic money creation, "while the decision concerning how new money is introduced into the economy would reside with the government," says Vollgeld.
> But over 90pc of money in circulation in Switzerland now exists in the form "electronic" cash created by private banks, rather than the central bank.
EDIT: Formatting
For the banks? It depends on how quickly the central bank is going to loan them new money.
For the bank's customers who want their easy loans? Best case scenario - nothing changes, worst case - loans are now harder to get because the central bank is shy about increasing the money supply.
That's true for nearly every subject. It's an argument against this referendum as much as it is against democracy in general.
Even representative democracy. Most people are certainly not experts at hiring executives. Seemingly even those whose job it is to hire and fire.
HACK THE PLANET
It surely has been positive in the past but that does not mean it is positive now or in the future.
We are entering a new era, where (economic) growth is no longer necessary for human development, due to automation and that an increasingly large percentage of innovation is in software. In a world of progress without growth, we cannot have an economic system that requires growth to function properly.
Instead, we need economic stability.
I can only applaud Switzerland taking seriously this, as well as basic income initiative. If anyone is able to pull it through, it's them. The only pity is that the current discussion is made in German, so most of the anglosphere won't be able to read or contribute to the discussion directly, and would be left to low quality "journalism" as a source of information about the debate.
Voters are not experts on matters of laws, morality, ethics, psychology, sociology, or criminology. If it is tragic for this to be put to referendum, then most every referendum is tragic.
Measured in what, GDP? A relentless race to extract more and more resources from the earth and lay waste to countries in the process? Easy money only emboldens a race to the bottom for extraction of resources, not a holistic life for the world's population. Such banking only empowers a few.
If banks are required to hold 100% reserves against their deposits, where exactly are they supposed to get money for lending?
The article says "they’ll only be able to lend money that they have from savers or other banks" but that seems inconsistent with the 100% reserve requirement. If I'm required to hold on to 100% of deposits, I can't lend them out.
actually this probably won't affect much. it just means the capital requirements is increased. a bank may not necessarily choose to utilize its deposits before any other source. a bank can happily lend deposits and borrow on the overnight all at the same time to finance day to day operations.
They can borrow money from central bank if they think they can lend it for more. I don't think safety improves through that, because if retail borrowers don't pay up en masse we still have a lot of money in the economy that we don't know how to take back. ... maybe additional safety through one more layer of oversight ... if commercial banks give bad loans, central banks could prevent them from taking more loans
On the plus side less profit from taking the risk of overinflating money supply lands in commercial bank owners hands.
So, nothing spectacular except from the idea of putting this into a referendum instead of saying "No/Yes" without consulting the population. Switzerland is amazing.
In the Eurosystem, for example, minimum reserves bear interest even today; only excess reserves are "punished" by negative interest rates.
Could they just abandon taxes and rely 100% on printed money or are modern states too expensive to be supported by inflation alone?
Just print eg 3% more money each year. Give eg 30% of the new money to the state for its expenses, give the rest equally divided to all the population. End of story.
No need for IRS, no need for filling taxes, layers, tax accountants, tax checks. The amount would be insignificant (as a percent) for the rich, significant for the poor, thus helping them more. The only tax would be the specifc controlled inflation.
Looks to me as a very simple, nice system. ..Any thoughts anyone, why this would or wouldn't be a good idea, and / or how it could possibly be improved?
In Japan's case, inflation happened because of a sales-tax increase. Taxes are forced spending, and you can target heavy savers if you need to.
I think that just the levers of how much money to print and percent going to gov't could give a good amount of control though.
Some practical considerations though: How do you get the money to each person? Not everyone has a bank account. In a lot of countries (including US), there's no good single-identifier to find people either. Fraudsters could claim for other people, and the innocent people couldn't get their share. There's some logistics involved.
One small thing is that taxes have also been used a way of incentivising certain behaviour. Carbon taxes aren't about generating revenue but reducing pollution. How would that enter in this new system? Maybe Carbon...incentives? Kind of weird to implement I think
Unconditional basic income?
Money would find its way from the consumers to companies that need investment. Instead of banks estimating how viable your business is before giving you a loan you'd get your money straight from your customers. The market would decide which endeavors should get funding.
My only concern is that printing money would not provide enough money to run country budget (let alone basic income) without creating hyperinflation.
Maybe Medicaid has solved all these kinds of issues already, and it's just about scaling
The same way Fractional banking can be useful by increasing the credit supply and destructive when over leverage.
Simply put Fractional banking creates a derivative instrument on money.
If you look for a tech-job in Switzerland, I work as a tech-recruiter in Zurich. Check out my story "8 reasons why I moved to Switzerland to work in IT" on https://medium.com/@iwaninzurich/eight-reasons-why-i-moved-t... and / or send me a mail to the address in my HN-profile.
Some Swiss IT-highlights include:
- The biggest Google software engineering office outside California (around 2000 employees).
- Logitec
- ETH university
- Many ETH-spinoff/startups: Doodle, Bitspin (bought by Google), Teralytics, Archilogic, Fashwell, Getyourguide, Numbrs and I surely forgot many others.
[0] https://www.voat.co/
Or, when living in a country with untrustworthy currency, you can just exchange your savings to USD (or CHF etc.) and have them equally protected.
The smart money (I.e. politically well connected) gets to exchange their money. As soon as every one else finds out, capital controls have been introduced.
The politically well connected, usually, get to continue exchanging their money at an artificial rate.
So the only way to do as you say is to be (far) more prescient than your peers. You need to be far more prescient because you have to beat the gov't insiders too.
Also, prescience does not save your future earnings (I.e. after controls have been imposed)
Or you take a risk and use the black market
[1] https://twitter.com/yanisvaroufakis/status/68180815534559641...
ps. I understand what he is saying but I have no idea where "Jack Jill'" came from, probably he is referring to this comic: https://en.wikipedia.org/wiki/Jack_and_Jill_(comics)
Note the dropped 's' in Varoufakis's comment.
If you want your money to gain interest you can open a savings account. Or you can invest your money in any other investment opportunity. The 100% reserve rule does not apply to saving accounts.
And thus you, as a customer, have a clear choice. Money on your checking account is save and always yours. Guaranteed by your National Bank and/or State. Money anywhere else is treated as an investment. You win some, you loose some.
The history of the Federal Reserve: http://www.jekyllislandhistory.com/federalreserve.shtml
An implication from the power of private banks to create money out of nothing is that people will have to borrow money for their homes essentially part of their future income to the banks and its bond holders.