Fractional reserve banking works because most people don’t need all their money as soon as they get paid. Most businesses keep some money in the bank too. Banks have a required percent of deposits that they must keep on hand to allow these withdrawals. And if they run low on cash, they just borrow money for a day from other banks (literally just one day). The US government can adjust the percent of required reserves or the overnight lending rate to keep banks from lending too much money out.
Banks use this money to loan to businesses or people buying houses. It works well because whenever the money is loaned out it is used for a purchase and just redeposited in another bank. A percentage of that money is retained by the bank and the rest is loaned out again. And again and again. This way money is “created” when people buy things in the economy.
This seems like an already failed banking model which places lenders at the front of the pack and will lead to only larger asset bubbles. Japan’s Kiretsu system of banking led to banks taking out loans to cover up their own investment losses as they had put their money into an asset bubble which collapsed. Banks then committed wholesale fraud by disguising such losses on their books. The Japanese government then used quantitative easing. They create money ex nihilo, swap the money for a t bill, then they bought the toxic assets by giving t bills to the bank. The bank doesn’t sell the t bill, they merely collect interest on it.
The main effect is a system in which bubbles are never popped and consumers suffer a declining standard of living in order to keep asset prices high.
I mean, there’s all kinds of math that goes into making modern fractional reserve banking a self-correcting system with a reasonable theoretical basis, but I’m guessing you’ve made up your mind already.
Sorry I appreciate your comment. So I read (erroneously?) that central bankers had done away with the reserve ratio in the fractional reserve banking article. And that just seems like a reckless thing to do given how prone to bubbles our economy is.
One of the main points in “this time is different” is that despite the math, we are experiencing greater and greater asset bubbles and at no point in world history were things actually different.
In a lot of jurisdictions there’s no minimum reserve requirement anymore, in cash. It’s not really a problem, because at the big bank level money on paper is barely real. If they need more, they can almost just ask. They do have to have a certain minimum amount of capital, though, which can take a number of forms.
I mixed up my exact terms a bit earlier, sorry about that. I’m not a professional macroeconomist, I only know enough to know they’re not completely full of shit.
we are experiencing greater and greater asset bubbles and at no point in world history were things actually different.
I’m not sure what you mean by this. If things aren’t any different from before, how can we have bigger and bigger asset bubbles? I don’t know that we do, really. The niche for bear investors is very full, if something’s overvalued by the whole market you and me won’t know either.
Everything you wrote lined up with the article on wikipedia so if you got something wrong I didn’t see it.
I’m referring to the book “This Time Is Different: Eight Centuries of Financial Folly” the title of which mocks the oft repeated defense of bubble investors:
But their point is that every single asset bubble ended up popping, despite the protections instituted by banks and governments. They also point out that the bubbles have been getting bigger and bigger
I’m always surprised how few people know about this. The banks are literally gaining interest on money they never had. It should be illegal.
Well, they have it in the sense that somebody deposited it with them, and they have some fraction of it held
in reserveto cover withdrawals.Edit: Well, in the form of capital, so that’s actually the wrong terminology.
Yes, they still have it. It’s just not in cash.
Fractional reserve banking works because most people don’t need all their money as soon as they get paid. Most businesses keep some money in the bank too. Banks have a required percent of deposits that they must keep on hand to allow these withdrawals. And if they run low on cash, they just borrow money for a day from other banks (literally just one day). The US government can adjust the percent of required reserves or the overnight lending rate to keep banks from lending too much money out.
Banks use this money to loan to businesses or people buying houses. It works well because whenever the money is loaned out it is used for a purchase and just redeposited in another bank. A percentage of that money is retained by the bank and the rest is loaned out again. And again and again. This way money is “created” when people buy things in the economy.
This seems like an already failed banking model which places lenders at the front of the pack and will lead to only larger asset bubbles. Japan’s Kiretsu system of banking led to banks taking out loans to cover up their own investment losses as they had put their money into an asset bubble which collapsed. Banks then committed wholesale fraud by disguising such losses on their books. The Japanese government then used quantitative easing. They create money ex nihilo, swap the money for a t bill, then they bought the toxic assets by giving t bills to the bank. The bank doesn’t sell the t bill, they merely collect interest on it.
The main effect is a system in which bubbles are never popped and consumers suffer a declining standard of living in order to keep asset prices high.
I mean, there’s all kinds of math that goes into making modern fractional reserve banking a self-correcting system with a reasonable theoretical basis, but I’m guessing you’ve made up your mind already.
Sorry I appreciate your comment. So I read (erroneously?) that central bankers had done away with the reserve ratio in the fractional reserve banking article. And that just seems like a reckless thing to do given how prone to bubbles our economy is.
One of the main points in “this time is different” is that despite the math, we are experiencing greater and greater asset bubbles and at no point in world history were things actually different.
In a lot of jurisdictions there’s no minimum reserve requirement anymore, in cash. It’s not really a problem, because at the big bank level money on paper is barely real. If they need more, they can almost just ask. They do have to have a certain minimum amount of capital, though, which can take a number of forms.
I mixed up my exact terms a bit earlier, sorry about that. I’m not a professional macroeconomist, I only know enough to know they’re not completely full of shit.
I’m not sure what you mean by this. If things aren’t any different from before, how can we have bigger and bigger asset bubbles? I don’t know that we do, really. The niche for bear investors is very full, if something’s overvalued by the whole market you and me won’t know either.
Everything you wrote lined up with the article on wikipedia so if you got something wrong I didn’t see it.
I’m referring to the book “This Time Is Different: Eight Centuries of Financial Folly” the title of which mocks the oft repeated defense of bubble investors:
https://www.nber.org/system/files/working_papers/w13882/w13882.pdf
But their point is that every single asset bubble ended up popping, despite the protections instituted by banks and governments. They also point out that the bubbles have been getting bigger and bigger