What are banks for?

Fight_Club

Generali wrote: »

Why would a monopolistic, state owned bank not use fractional reserve banking?

You realise that if your banking system came about you could only lend the money that is saved by people - the destruction of credit would be immense. House prices would fall by 90+%, agricultural production would plummet, Government spending would have to be slashed, imports and exports would all but cease and business would stop.

An interesting point. I'm sure there must be a way round this but can't think f it right now.

They seemed to get on ok before we started using fiat currency - and wasn't that during the second world war or am I getting muddled up?

Generali

Fight_Club wrote: »

An interesting point. I'm sure there must be a way round this but can't think f it right now.

They seemed to get on ok before we started using fiat currency - and wasn't that during the second world war or am I getting muddled up?

The UK stopped using the Gold Standard during WW1, went back onto it in 1925 and left again in 1931 (1932?). Since then we've had fiat currency.

Banking crises were pretty common in the C19th.

bubblesmoney

ninky wrote: »

Agreed, the fractional reserve banking system is a big pyramid scheme. Once it reaches saturation point it can not longer continue.

I think we should bring back a National Bank like Giro Bank. It revolutionized the banking system and was run through the Post Office. It was sold off by the Tories to Alliance & Lester. I think the govt are looking into bringing back something similar.

Whether we should have several National Banks is questionable. It could be a little defeating to have them competing against each other.

a knife can be a useful tool or a weapon. the problem is not with the knife but how it is used.

there needs to be proper regulation of what banks can do and what banks cant do. any bank not following the rules should be dealt with sternly and the people running it should get long times cooling their backsides in jail.

see this useful explanation of fractional reserve banking.
http://market-ticker.org/archives/865-Reserve-Banking.html

http://market-ticker.org/archives/868-Followup-Reserve-Banking.html

Here's the bottom line folks:

• Fractional reserve banking has both costs and benefits.
• The benefits, by and large, appear to this writer to outweigh the costs.
• Attempting to game the costs, however, leads to dramatic and extraordinarily bad outcomes.

Simply put, leverage limits prevent excessive expansion of credit without interfering with the intermediation function that we now find essential in modern life.
Government is, of course, always pressed by business to override these limits in one form or another, because with greater leverage comes greater profits when things go well.
Of course the corollary is that you get greater losses when things go poorly.
One corrective measure we should apply is to set regulatory capital limits as the inverse of leverage. That is, if we have a 6% regulatory capital requirement for 10:1 reserve lending, if someone wants 20:1 they should be required to hold 12%.
If you couple this with two more demands you can effectively eliminate systemic failure risk:

1. Everything you hold as an asset must be traded on a public exchange or have an exposed and public model, both run nightly, with no hidden or off-sheet exposures of any kind.
2. Your regulatory capital ratios must be published and exposed every night.

Immediate seizure and liquidation of any firm that violates limits now provides the safety necessary to insure that depositors are protected, and public exposure of (1) and (2) means that the sort of game-playing we saw with IndyMac, where capital was improperly moved from one reporting period to another, will be immediately detected both by investors and the public at large.

reduceditem

bubblesmoney wrote: »

see this useful explanation of fractional reserve banking.
http://market-ticker.org/archives/865-Reserve-Banking.html
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does not compute.

treliac

bubblesmoney wrote: »

... now its time to show this to my wife as proof that i dont spend too much time on the computer, hope she buys my excuse after she sees this

All these neglected wives, they're incredibly patient with their MSE hubbies. Bet they wonder where the socks keep disappearing to as well.

ts_aly2000

bubblesmoney wrote: »

see this useful explanation of fractional reserve banking.
http://market-ticker.org/archives/865-Reserve-Banking.html

Which is precisely why the Government is making such a foul up of it all. They're trying to influence the 'system' of cause and effect, when it's effectively the law of the jungle. Survival of the fittest.

All of the people who have borrowed irresponsibly should be going to the wall. While the savers are able to ride out the storm.

But the Government is attempting (with our money, quality of life, and country stability) to influence this natural event of the mathematical correction of the banking system. Which is wrong. The natural course of events are being clouded and greatly complicated in ways which are not proven. Well, they are proven, and each time it ends in disaster. The fractional system NEEDS debt to function. If there were only creditors then it wouldn't work. It needs debtors too. But not to the degree which are currently present, which is why the system needs to self correct itself.

The Government are doing the worst possible thing by pumping money into it. Some businesses are meant to suvive, some aren't. Some people should be out on the street, while the prudent shouldn't. No pun intended. But what's happening is that the Government are upsetting this mathematical process by interferring in the law of the jungle. Phone sanitisers? Psychics? Councils...

Damn. We're fooked!

ninky_2

Generali wrote: »

Why would a monopolistic, state owned bank not use fractional reserve banking?

You realise that if your banking system came about you could only lend the money that is saved by people - the destruction of credit would be immense. House prices would fall by 90+%, agricultural production would plummet, Government spending would have to be slashed, imports and exports would all but cease and business would stop.

you are right, simply creating a nationalized bank would not remove the reliance on fractional reserve system.

we have to move away from fractional reserve banking. surely even you can see it is unsustainable?

we need a value exchange system. there is enough value (wealth) in the world. the problem is distribution not creation.

in a value exchange system products with genuine value would naturally rise to prominence. for example, instead of 'cash' crops like tobacco and excess amounts of cotton and sugar cane, the pressure on land would be for it to be used for nutritious food.

likewise, time/life rich (as opposed to mass produced) products and services would become more highly valued along with products with a long lifespan and recyclable functions.

the throwaway fastbuck resource wasting system that fractional reserve supports would be a thing of the past.

kabayiri

Going forward, shouldn't we have :-
a) retail banks; the safe utility institutions for operating your current account; car loans etc etc
b) investment banks; high flying casino banking - potentially lucrative returns but with higher risk

Put back the separation between a) and b).

If people want to gain higher return from their money they can choose to direct it into the City where b) operates.

ninky_2

kabayiri wrote: »

Going forward, shouldn't we have :-
a) retail banks; the safe utility institutions for operating your current account; car loans etc etc
.

any banking system that sustains such pointless debt is fundamentally flawed.