Full Reserve Banking

[Aeson]

Oncle seems to be against banks being as profitable as they are. That intent is deflationary.

As for what would happen, it would depend on implementation. Our government has a pretty good track record of fudging things towards the wealthy and powerful whenever they can get away with it, and I don't see why they wouldn't take the opportunity to do so again. Printing $trillions would be a HUGE opportunity.

[C0ckney]

Oncle seems to be against banks being as profitable as they are. That intent is deflationary.

boris' opinions are not 100% clear to me, however i would like to know why you think such a move would be deflationary (i.e. the mechanism through which such deflation would happen).

[Bereta_Eder]

The Greek governement ?

The greek government smells of roses, what you're talking about?

However, what I've asked is a bit different.

[Sir Og]

boris' opinions are not 100% clear to me, however i would like to know why you think such a move would be deflationary (i.e. the mechanism through which such deflation would happen).

If total nominal spending in the economy goes down that will have a deflationary effect. Prices will have to go down if you are to have the same real economy as before.

What will actually happen is a recession (contraction of the real economy) due to price stickyness.

[Aeson]

boris' opinions are not 100% clear to me, however i would like to know why you think such a move would be deflationary (i.e. the mechanism through which such deflation would happen).

Reducing profitability of a business devalues that business. It's stock price will fall. That is deflationary.

[C0ckney]

If total nominal spending in the economy goes down that will have a deflationary effect. Prices will have to go down if you are to have the same real economy as before.

What will actually happen is a recession (contraction of the real economy) due to price stickyness.

right. but why would this necessarily be the case?

let's take something that full reserve banking would make (all but) impossible: consumer credit. under the present system if there were no consumer credit then there would serious deflation as people would find themselves without money to spend. but what if that money they would have borrowed were given to them via a citizens income, or they were given more money through reduced taxation, or the state provided those things that people previously used credit for. as long as the total amount of money circulating stayed the same (or rather kept in line with goods and services produced), then there would be no deflation.

Reducing profitability of a business devalues that business. It's stock price will fall. That is deflationary.

no. and this is nothing like the arguments that the opponents of full reserve banking employ.

[C0ckney]

there's also a related point about what the money created by banks is used for. a lot of it in the UK (i remember reading around 80%, though i'd have to check) is used for financial instruments and land speculation. this benefits a very small minority, but obviously has many undesirable effects. if money were spent in the real economy, producing goods and services, instead of being used to inflate land (house) prices, we would all benefit. now of course full reserve banking wouldn't solve the land problem on it own, but combined with other measures, a land value tax say, it would provide a means to move money away from land speculation into productive activities.

[Dauphin]

crap, my reply was ate by the fickle copy/paste gods.

In essence:
I see your point, but unless the bank wants to issue a loan that's anything other than a promise to pay, it needs to have enough cash on hand (from other deposits) to pay for the possibility that the guy who took out the loan wants to do anything with it. So it's not the 100 deposit that allows the bank to create the extra 900, but the aggregate of all its business.

If I follow you right, you're saying the initial deposit gives them the effective license to loan out nine times as much (or four times, with an 80% margin)? Stands to reason. That's not "swindling" me out of anything, unless the bank oversteps, folds, and gets bailed out with my tax dollars. But the system itself robs me of nothing.

Well almost (N3st0r) and quite (Elok), which is why I don't understand what OB is on about when he says we are being cheated.

Most depositors are depositing the money created by the multiplication effect. Only physical cash handed over will contribute to the money multiplier. So, given that ability to money multiply isn't really provided by a depositor, but by the cash reserves held by the bank, it becomes even more obscure.

Okay, how about his inflation escape thing? His first explanation was unfathomable, and he won't elaborate. Is there some accounting trick that somehow makes that work?

In any case, this was a tangent related to Rah's post. OB still has to justify how several billion dollars (or maybe more?) which would have gone towards loan payments going instead towards buying stuff is not going to cause prices to go up.

Not within my knowledge on the economic logic, but the accounting effect of i) introducing a requirement to have increased cash reserves to match deposits, and ii) this be done by selling loans to the government for newly minted; will mean you have not actually changed the amount of money for people to spend on goods, services or or whatever else you may want.

Initially you have assets as $100 cash reserve, $900 as loans receivable and liabilities of $1,000 of current account cash for people to spend.
Afterwards, you have assets of $1,000 cash reserve and $1,0000 of current account cash for people to spend.

That said, two points:

1) In the latter scenario, I would have a credit liquidity concern as you can only lend more if you acquire more cash reserves. In the first case there is more scope for a bank to lend on a discretionary basis because it can leverage the money multiplier. I would therefore expect lending rates to increase due to reduced liquidity, and in turn reduce inflation amongst other things.

2) Some countries, such as China, adjust there reserve requirements to manage inflation. Increasing the requirement is designed to reduce inflation, so there is probably a more thought out economic argument that can be made.

[N35t0r]

But it's one thing to increase/modify the requirement and have banks have to deal with it, and another thing to print a couple trillion dollars and give them to the banks (which they'd effectively need to hold on to). I somehow doubt they'd have the same effect.

[Dauphin]

In this scenario the government is buying the public debt holdings, not giving away cash for nothing.

If the onus is on the banks, they have to offload/sell debt if they have too little cash.
If the government compulsory purchases public debt, they have to sell their public debt holdings (a form of loan) first, then offload/sell other forms of debt (or loans).

In either scenario, they are offloading debt in return for cash.

[Dauphin]

I have no idea what you're talking about and I'm not going to read all that.
However,
Dauphin (or anyone else who thinks he knows this somewhat),
wasn't the case though, also and particulalry in the Irish crisis, that the central banks in various european countries simply ignored the warning signs of some private bankers about the minimum deposits a bank was supposed to hold before it could loan more? And that this was done in corelation with the private bank's directorate? Who actually forced their employees not to report the correct figures to the central banks anyway but keep loaning like there was no tomorrow?

Missed before. Not sure if it was so much conspiracy as falling asleep at the wheel on the part of central banks. On the part of the banks, they have a reputation for acting for a profit, consequences be damned, legality or not be damned.

[Sir Og]

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as long as the total amount of money circulating stayed the same (or rather kept in line with goods and services produced), then there would be no deflation. ...

Agree.

there's also a related point about what the money created by banks is used for. a lot of it in the UK (i remember reading around 80%, though i'd have to check) is used for financial instruments and land speculation. this benefits a very small minority, but obviously has many undesirable effects. if money were spent in the real economy, producing goods and services, instead of being used to inflate land (house) prices, we would all benefit. now of course full reserve banking wouldn't solve the land problem on it own, but combined with other measures, a land value tax say, it would provide a means to move money away from land speculation into productive activities.

This is not necessarily the result of fractional reserve banking. The fact that most money goes into land and buildings reflects the preferences of the people to consume land and buildings. There is no reason for this to change because of a change in the banking system.

[C0ckney]

This is not necessarily the result of fractional reserve banking. The fact that most money goes into land and buildings reflects the preferences of the people to consume land and buildings. There is no reason for this to change because of a change in the banking system.

i didn't mean that fractional reserve banking causes land speculation, but rather that land speculation is something negative that occurs under a fractional reserve system.

there are a few things here as well. land is not a good, it is a factor of production that is also used as an investment. it is not capital but rather a sink for capital. the reason that land attracts such a lot of speculation (or as some would call it, investment) is not a result of preferences, but rather the fact that land is very lightly taxed and usually goes up in value. in other words for people with capital to invest land is a more attractive option than other investments - investments which could otherwise go into producing goods or providing services - and this is what makes land the subject of so much speculation.

this can proved by the fact that in the 1930s land's percentage in the price of a house (for new builds) was between 2.5% - 5.0%, while today it is more than 60%; yet people needed somewhere to live in the 1930s just as much as they do today.

[Aeson]

no. and this is nothing like the arguments that the opponents of full reserve banking employ.

The price of a stock (or anything) dropping is deflationary.

You seem to be confused as to what you were responding to. I said what Oncle wants is deflationary, because Oncle clearly thinks that the banks making more money than rah is a very bad thing that must be stopped. He wants banks to be less profitable, and that will definitely devalue them. His intent if achieved is necessary deflationary in that regard.

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In regards to the actual effect to economy wide [de|in]flation, as I have said that is up to implementation. There are obviously many influences, not just the price of bank stocks, and they can be covered up by government action. With a fiat currency, nominal [de|in]flation can be controlled by government. Not completely ... and not perfectly accurately ... but to the point where it is in-and-of-itself essentially a useless metric. We could nuke ourselves into the stone age and issue $google bills and avoid nominal deflation, but we'd still have lost most of the real value we had.

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As to changing to full reserve banking, I said it's re-arranging deck chairs. The ability of government to back transactions isn't dependant on how big a pile of paper is lying around. Because government has full control at any given time of how big that pile of paper is. It can snap it's fingers and the pile gets bigger. You are in fact relying on this ability to get to full reserve banking in an orderly fashion in the first place.

How orderly it would be would depend on implementation. Do we really want our economy across the board to be entirely reliant on direct government intervention at all times? While it's not impossible that it could be done ... our government can't even properly roll out a website. A "hiccup" like Obamacare's website would utterly destroy our economy. All to try to re-arrange deck chairs.

[C0ckney]

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.

How orderly it would be would depend on implementation. Do we really want our economy across the board to be entirely reliant on direct government intervention at all times?

the creation of money could be decentralised, by using regional development banks for example. there are diverse possibilities and the one, or combination, chosen would be the result of a political choice. one of the big advantages of such a change would be taking important decisions currently made privately and putting into the public domain.