Full Reserve Banking

[Aeson]

well if want a debate about boris' opinions then you'll need to ask him. i will repeat though that the reason you gave for full reserve banking being deflationary is not one of those advanced by opponents of full reserve banking. these tend to revolve around a lack of money being created through credit, thus reducing demand and causing a slowdown, and while such arguments are misguided, for the reasons i've given above, they do at least deserve to be taken seriously.

What I said explicitly referenced Oncle's general sentiment about the profitability of banks. It was not a statement about full reserve banking.

one of the big advantages of such a change would be taking important decisions currently made privately and putting into the public domain.

Monetary supply is already done in the public domain. The Treasury and Fed both answer to elected officials.

[C0ckney]

most money creation (97% or so - and obviously i'm talking about the UK here, but the position in the US can scarcely be different) is done by private banks.

i think what you mean is monetary policy, which central banks and governments use to essentially, if indirectly, by targeting inflation and/or interest rates, manage expectations.

[Aeson]

It's all backed, regulated, and guided by government. The Fed and Treasury can effectively determine the money supply.

Of course the Fed and Treasury are largely populated by people from or headed to the financial sector, so it's not really a point of variation if you do manage to move it more/less public. It's largely going to be the same group of people making the decisions in either case.

[Dinner]

Anyone who says full reserve banking is not deflationary doesn't know what they are talking about.
Right now, if you deposit $1 then based on that $1 deposit the bank can lend out $20 (most will do less leverage but let's go with this example to illistrate the deflationary problem). That is $20 worth of credit and financing made. Under full reserve banking with a $1 deposit the bank could loan a MAX of $1 but since the bank has to pay it's expenses, have cash on hand to give people who make withdrawals, etc... Really the bank can only lend some fraction of that $1. Probably less than 50% but certainly more than 10%; to make the numbers easy let's go with 50%. That means for every $1 in deposits the bank can only loan $0.50.

Do you see the big difference between $20 in loans and credit granted and $0.50 in loans and credit granted? In this example you only get 1/40th as much credit in the economy so forget about having a credit card, forget about financing a new car, forget about getting a mortgage to buy a home, even businesses would find it difficult to finance their operations because there would be a massive credit crunch preventing anyone but the most wealthy with perfect credit from getting access to credit and even they would have to pay much higher interest rates.

In short, it would destroy the financial system and virtually eliminate access to credit for the vast majority of the population. This without question would crash the economy thus decreasing demand and causing prices to go down as suppliers desperately tried to compete for the few people who still have either cash on hand or access to credit. That is deflation by definition.

[C0ckney]

governments can do things to affect the money supply, but as banks create around 97% of that supply, the actual money creation is not done by the government. if we look at what actually happened prior to and after the 2008 crash, it was a case of private banks creating far too much money before 2007/8 and then far too little afterwards (this is obviously a massive simplification, but accurate enough for our purposes).

some of full reserve banking's biggest support comes from central banking figures. i think here especially of mervin king and martin wolf.

[Dauphin]

Anyone who says full reserve banking is not deflationary doesn't know what they are talking about.
Right now, if you deposit $1 then based on that $1 deposit the bank can lend out $20 (most will do less leverage but let's go with this example to illistrate the deflationary problem). That is $20 worth of credit and financing made. Under full reserve banking with a $1 deposit the bank could loan a MAX of $1 but since the bank has to pay it's expenses, have cash on hand to give people who make withdrawals, etc... Really the bank can only lend some fraction of that $1. Probably less than 50% but certainly more than 10%; to make the numbers easy let's go with 50%. That means for every $1 in deposits the bank can only loan $0.50.

Do you see the big difference between $20 in loans and credit granted and $0.50 in loans and credit granted? In this example you only get 1/4th as much credit in the economy so forget about having a credit card, forget about financing a new car, forget about getting a mortgage to buy a home, even businesses would find it difficult to finance their operations because there would be a massive credit crunch preventing anyone but the most wealthy with perfect credit from getting access to credit and even they would have to pay much higher interest rates.

In short, it would destroy the financial system and virtually eliminate access to credit for the vast majority of the population. This without question would crash the economy thus decreasing demand and causing prices to go down as suppliers desperately tried to compete for the few people who still have either cash on hand or access to credit. That is deflation by definition.

You messed up here. No deposits can be loaned out. Your following analysis is similarly flawed, for example 50 cents is not a quarter of $20. Etc...

[Dinner]

Cockeysville is right that some banks were way over leveraged; up to 50 times deposits. Before banking git deregulated in the 90's by law in the US a bank could only leverage 10 times deposits and both community banks and state chartered banks to this day can only leverage 10 times deposits (which every economist going back to the 1930's agrees is a safe and sustainable amount). The problem is lobbyists from federally chartered national banks success got the cap removed for federally chartered banks and only federally chartered banks. That is why there was a huge boom in credit, or at least part of the reason, and why national banks got so unstable. If they lost $1 in deposits then the loses got multiple by 50 times once you factored in the leverage.

That is a very unstable system and why companies like Leemen Brothers went bust. There were other problems like how banks which originated loans no longer had to keep them on their books but could sell them on, this meant under writing standards became nonexistent as the bank wouldn't be left holding the bag when the loan went bad and instead it would be who ever bought the repackaged set of loans who got screwed. Often those were pension funds in the EU or where ever.

Anyway, I would be fine with once again capping the max amount of leverage a bank could make to 10 or 20 times deposits. That would decrease access to credit but would also help prevent a crisis due to excess leverage. We should make sure the rules cover all banks equally though and stop giving special privileges to politically connected Wall St banks but denying the same abilities to local credit unions or community banks.

[Dinner]

You messed up here. No deposits can be loaned out. Your following analysis is similarly flawed, for example 50 cents is not a quarter of $20. Etc...

You are not reading correctly. 0.5 is 1/40th of 20 which is what I wrote. Also, yes, banks loan out money which is deposited. That is how they make their money and can afford to pay interest to depositers.

[Dinner]

Ok, I tried to type 1/40th but some how the zero didn't make it one out of four times I typed 1/40th. Is that what confused you?

[Dauphin]

Not under full reserve banking. Deposits can not be used to make loans. They basically keep your money in a vault or under a mattress.

And yes, as you wrote 1/4th.

[C0ckney]

Anyone who says full reserve banking is not deflationary doesn't know what they are talking about.
Right now, if you deposit $1 then based on that $1 deposit the bank can lend out $20 (most will do less leverage but let's go with this example to illistrate the deflationary problem). That is $20 worth of credit and financing made. Under full reserve banking with a $1 deposit the bank could loan a MAX of $1 but since the bank has to pay it's expenses, have cash on hand to give people who make withdrawals, etc... Really the bank can only lend some fraction of that $1. Probably less than 50% but certainly more than 10%; to make the numbers easy let's go with 50%. That means for every $1 in deposits the bank can only loan $0.50.

Do you see the big difference between $20 in loans and credit granted and $0.50 in loans and credit granted? In this example you only get 1/4th as much credit in the economy so forget about having a credit card, forget about financing a new car, forget about getting a mortgage to buy a home, even businesses would find it difficult to finance their operations because there would be a massive credit crunch preventing anyone but the most wealthy with perfect credit from getting access to credit and even they would have to pay much higher interest rates.

In short, it would destroy the financial system and virtually eliminate access to credit for the vast majority of the population. This without question would crash the economy thus decreasing demand and causing prices to go down as suppliers desperately tried to compete for the few people who still have either cash on hand or access to credit. That is deflation by definition.

this has already been covered but perhaps it bears repeating.

full reserve banking would destroy consumer credit, but why would this be a bad thing? let's take a simple example. mr x wants to to buy a television. he doesn't have the cash right now so instead he takes out a loan; this money thus being created. loans are subject to interest, and so mr. x ends up paying more for the tv than he otherwise would have. but let's imagine that mr x. could obtain it in some other way. he receives a citizen's income, paid by the government to every citizen each week/month/year; this money thus being created. mr x. uses some of his citizen's income to buy the tv, paying the retail price for it.

in both cases mr x. gets his tv and the money to buy that tv has been created. however in the second case mr x. does not find himself in debt and he also pays less, meaning that he has more money available to buy other goods and services. because he does not pay interest, it means that financial sector has no claim on his labour. ultimately this would result in a transfer of resources from the financial into the real economy.

[Fake Boris]

I see the thread has been moving on, I'll be back later.

[Bereta_Eder]

Noone answered my question.i'm going to post ' confessions of afinancial assassin' book videos until they do.

[N35t0r]

this has already been covered but perhaps it bears repeating.

full reserve banking would destroy consumer credit, but why would this be a bad thing? let's take a simple example. mr x wants to to buy a television. he doesn't have the cash right now so instead he takes out a loan; this money thus being created. loans are subject to interest, and so mr. x ends up paying more for the tv than he otherwise would have. but let's imagine that mr x. could obtain it in some other way. he receives a citizen's income, paid by the government to every citizen each week/month/year; this money thus being created. mr x. uses some of his citizen's income to buy the tv, paying the retail price for it.

in both cases mr x. gets his tv and the money to buy that tv has been created. however in the second case mr x. does not find himself in debt and he also pays less, meaning that he has more money available to buy other goods and services. because he does not pay interest, it means that financial sector has no claim on his labour. ultimately this would result in a transfer of resources from the financial into the real economy.

But to cover all the credit that is being given out, the government would have to pretty much issue billions of new dollars every month.

Also, mr. x pays more for the TV, for being able to have it sooner. He can always wait for n amount of months until he has the money.

[Aeson]

governments can do things to affect the money supply, but as banks create around 97% of that supply, the actual money creation is not done by the government.

What you're saying is like saying the Treasury doesn't physically create dollar bills, the guy cutting the paper does. The guy cutting the paper is only doing what government has decided should be done. Banks are taking deposits and loaning out money, but within the bounds (and at rates) dictated to them by government policy.

if we look at what actually happened prior to and after the 2008 crash, it was a case of private banks creating far too much money before 2007/8 and then far too little afterwards (this is obviously a massive simplification, but accurate enough for our purposes).

They only could do it because government regulations changed to allow them to reach those multiples, and government policies/laws promoted it. You're not getting the money supply any more into the public domain, because it's already there. (Though, as they should, they tend to listen to the market about where to set it.)

What you're doing is changing who is actually doing the nitty gritty details such as who gets what money when. Not who is deciding how much money is in circulation. Governments are notoriously bad at determining who should get what and when, and can already distribute massive amounts wherever they decide if they want to. A $trillion+ to replace Saddam with ISIS ... while the veterans we're maiming in the process can't even get decent healthcare. That's the kind of track record our government has at those nitty gritty details of who gets what when.