Fractional Reserve Lending IS NOT bad - its unavoidable

[Razick]

I can't understand why people start insulting others because of divergences of opinion.
Insulting is an aggressive action and aggression usually (lets forget now about cases of greed or power that are irrelevant here) is a manifestation of insecurity.

If someone is ignorant and like to stay that way and hates anyone that tries to help him, that is a case for ignoring him or, at most, to laugh, not to insult.

I'm not taking sides or thinking about anyone in particular. Just read some messages on this thread.

+1

[Razick]

Alright, we have some common ground.

But don't believe on owners (big or small) doing the right thing. History shows people usually don't do the right thing. Slavery ended not because of owners wanting to do the right thing: it's all about regulations. Hell, in the USA it was necessary to kill more than half a million people to end it.

I agree with efficiency and scale production, but on a monopoly the price has little to do with the cost of production. The monopolist extracts as much as possible from buyers.

I'm no believer on Rousseau good savage or the good human nature of anarchism. I hate power and authority, but I have no illusions, without public authority controlled by the people, mostly it would be hell on earth.

Very true, but do you think that the people who run the government are any better? The problem is that right now, we have rules that are similar to putting a $2,000 Sargent & Greenleaf padlock on a $500 bicycle. The people in favor of the rules say "We haven't had our bicycle stolen in the 2 years since we bought the lock," but they neglect to notice that they could have bought four bikes for the price of the lock. That's a simplistic and extreme example, but you get the point.

[NotLambchop]

Could you allow, as a hypothetical, that the regulations were not put in place by people intent on causing harm?  That the regulations were arrived at after an entire human history of trial and error, by people who are no less intelligent or aware than us?  Is this at least theoretically possible?

Re. 2nd edit:  A good baker is not necessarily a good bakery owner, a good bakery owner is not always capable of running a chain, the guy who knows how to run a chain of bakeries doesn't always know how to bake.  See?

I  do allow that. Regulations are created with good intentions, the problem is we often fail to properly assess the costs.

Then we pretty much agree, I just can't say with any certainty how much bureaucratic overhead and regulation is "too much" without understanding the macrosphere.   My first business was run on 3-part forms for accounting.  Worked out great, but I doubt it would have scaled well.  I'm pretty sure no one wants costly regulation when it comes to regulating them.  And I'm also sure that bureaucrats try to increase the amount of regulation to justify their own existence, so that their branch of bureaucracy is fruitful and multiplies.  But there are mechanisms in place to keep the system in a dynamic equilibrium.  That study about excessive regulation, for instance, was funded by Small Business Administration, a .gov agency.

edit:

... right now, we have rules that are similar to putting a $2,000 Sargent & Greenleaf padlock on a $500 bicycle...

Just as an example of having to weigh all the variables, consider that it might take a day of productivity to replace a stolen bike *and* make bicycle theft economically viable, thus attracting thieves to the community, increasing the crime rate, and tanking property values by much more than $2,000.  Yeah, this is reductio ad absurdum, so meant to sound ridiculous, but just an illustration of how what seems absurd on its face is actually a fairly complicated problem.

[r34tr783tr78]

Of course, I don't trust people in power. They are the last that deserve trust, since power corrupts. Therefore, they have to be controlled by the people.

On regulations and taxes, here I have no doubt that we disagree. Since the Reaguen/Tatcher/Neo-liberal take over, many regulations were repealed, so I don't think we have an excess of it.

Moreover, we never had so much inequality and so many people receiving aid from charities (instead of public social services) and that is humiliating. Wages have been losing their share on the global income. We have people working full time and even having second jobs that are poor. I can't help feeling pity for them and thinking they live on unfair situations.

Inequality must exist, since it has efficiency consequences, but people earning 50 and 100 times what other earn is like making them from different species.

Can a democracy work well on those circumstances, where a few can with their money almost control public authorities and buy all the attention, work and subservience of millions of workers?

[Razick]

Just as an example of having to weigh all the variables, consider that it might take a day of productivity to replace a stolen bike *and* make bicycle theft economically viable, thus attracting thieves to the community, increasing the crime rate, and tanking property values by much more than $2,000.  Yeah, this is reductio ad absurdum, so meant to sound ridiculous, but just an illustration of how what seems absurd on its face is actually a fairly complicated problem.

My view is that unless a regulation can be proven beneficial it should be assumed harmful. If we are going to interfere in people's live and livelihoods, we should be able to justify that.

[Ask Ken About Love]

...My view is that unless a regulation can be proven beneficial it should be assumed harmful. If we are going to interfere in people's live and livelihoods, we should be able to justify that.

I'm pretty sure regulations have to be justified before they are implemented.  The question is only "to whom" and "to what extent."  In theory, the bureaucrats you elect somehow represent your opinion.  In principle.  Practice is a bit different, but now we're into the gray of implementation rather than principle.  Not quite as fun.

P.S:  This is an alt account of NotLambchop.

[Razick]

Of course, I don't trust people in power. They are the last that deserve trust, since power corrupts. Therefore, they have to be controlled by the people.

On regulations and taxes, here I have no doubt that we disagree. Since the Reaguen/Tatcher/Neo-liberal take over, many regulations were repealed, so I don't think we have an excess of it.

Moreover, we never had so much inequality and so many people receiving aid from charities (instead of public social services) and that is humiliating. Wages have been losing their share on the global income. We have people working full time and even having second jobs that are poor. I can't help feeling pity for them and thinking they live on unfair situations.

Inequality must exist, since it has efficiency consequences, but people earning 50 and 100 times what other earn is like making them from different species.

Can a democracy work well on those circumstances, where a few can with their money almost control public authorities and buy all the attention, work and subservience of millions of workers?

I don't really think that's true, once again according to the SBA regulations increased by a lot in the past few decades. FICA taxes are 500% higher than in 1954, poverty is just as common (in the US, although extreme global poverty has actually fallen) as it was when the "War on Poverty" was started. Americans spend more on taxes than on food, shelter and clothing combined. In other words the cost of government is higher than the cost of living without even considering regulations. Add another $10,000 to $15,000 for them.

In the US the number of people receiving government support is huge. I don't know where you get that fewer people are receiving social services.

I agree that inequality is a problem, but have you considered that government may be partly to blame? With the regulatory burden actually being higher on small business (it is), big businesses have an advantage with has created many oligopolies and mega-corporations. The business failure rate is now higher than the start-up rate, is this because we don't have enough regulations? The reality is we have a lot, arguably more than ever before. The problem isn't not enough, it's too many. Inequality is very likely partly caused by a stagnating economy and higher regulatory barriers to entry.

America was a small government nation for a lot of its history, and it experienced the highest increase in standard of living in history along with a huge amount of technological innovation, and a growth of human rights. The evidence does not support high regulations and taxes, and if someone wants to tell me they are doing to take away nearly a third of what I earn, and require me to register with multiple government agencies and follow thousands of pages of rules, they damn sure better have a lot of evidence that it will benefit me, or at least society. They don't.

Compare Texas and California if you want some evidence that more freedom and less bureaucracy is a good thing (I'm not saying Texas is perfect by any means):

California’s wages, for those who had jobs, were higher. But wages are used to buy goods and services. Once California’s higher costs for housing, food, transportation and health care are considered, Texas workers end up with the advantage: $47,413 in cost of living adjusted average wages compared to California’s $41,680—before taxes.

The policy differences between the two biggest states result in vastly different outcomes for the most vulnerable of residents. The U.S. Census Bureau recently published a new, more comprehensive measure of state-by-state poverty that took into account cost of living as well as the value of government assistance. This survey showed that California had America’s highest poverty rate, 23.5 percent, with proportionately 42 percent more people living in poverty there than in Texas. -Forbes http://www.forbes.com/sites/realspin/2013/07/03/texas-v-california-the-real-facts-behind-the-lone-star-states-miracle/

[Razick]

...My view is that unless a regulation can be proven beneficial it should be assumed harmful. If we are going to interfere in people's live and livelihoods, we should be able to justify that.

I'm pretty sure regulations have to be justified before they are implemented.  The question is only "to whom" and "to what extent."  In theory, the bureaucrats you elect somehow represent your opinion.  In principle.  Practice is a bit different, but now we're into the gray of implementation rather than principle.  Not quite as fun.

P.S:  This is an alt account of NotLambchop.

Exactly. I don't think they are being justified to the right people and the right extent.


Thank you everyone for having a civil debate. We've gotten way off topic though and I think it's time for me to bow out before I spend my entire life on this thread. Good luck everyone.

[r34tr783tr78]

I think people forget that there were rates of taxes of 80% between 1940 and 1963 for the richest and the seventies (where we find more regulations) were the time with less inequality.
Just to justify my assertions, I end my participation with these links to charts on inequality on the USA.


http://www.newrepublic.com/article/116361/17-charts-about-inequality-obama-should-read
http://www.newyorker.com/online/blogs/johncassidy/2013/11/inequality-and-growth-what-do-we-know.html

[Ozziecoin]

I don't think that the creation of money is just a side effect: is an intended effect that directly support the profit of banks.
Anyway, being the main effect or a side effect is not the point: the point is that it's a soverign function that should be entrusted to a public independent entity, not the Government, but the central bank (well, in the USA the FED isn't exactly a public entity, but its status in one of those absurd things of the USA). And not conceded to private corporations. We all have to pay more taxes to support that aspect of the "free market".

Even if you believe that, which I feel has little to do with rational thinking and more to do with principle (I don't mean that personally), no one has proposed a reasonable solution. Destroying the economy based on principle is pretty foolish. FRB is how things work, you actually have to intervene in the economy to prohibit it. Why do you feel that a government continually fails at almost everything it does is better suited to money creation and than a free economy? You might not like FRB but the reality is it works, and massive piles of red tape will only make things worse for everyone.

I've got to say this is one of the most tortured pieces of logic I've come across. Almost hurt my eyes reading it. 

1. Money creation is not rocket science.  Create it, people use it.

2. Govt's NEED NOT BE INVOLVED in money creation at all. There is this thing called the Blockchain.  I don't care which we use but hopefully we stick to a few key ones and hopefully it's got privacy built in.

3. The problem is that the banking sector is creating more money out of thin air, to the detriment of everybody except the 1%.  JUST END THIS BIT!!!

Man, this should not be this hard.

You are making the argument on principle without providing *one good reason* to end a practice that many, including myself, would argue is beneficial. Other than "it's not fair," I've yet to see one reason that FRB should be banned, nor has anyone provided any evidence that doing so would not be immensely harmful.

You might not like the "big bad banks" but the reality is that all they are doing (in this case) is investing borrowed money. This works better for everyone since borrowing is cheaper, and savers earn interest instead of having to pay a fee. Yes, banks do make a profit, as they should, but the kind of money creation done by banks is different than just printing as much money as you want and spending it.

I agree that government need not be involved in money creation, but do you think that merely because Bitcoin is a non-fiat currency it is not affected? It is. Bitcoin is subject to FRB just as other currencies, and that is a good thing.

How do you propose we "just end this bit?" More importantly, why?

FRB dilutes the savings of retirees and workers for the benefit of the 1%.  That is reason enough.

[Ozziecoin]

I just want to ask... those of you who are against FRB seem to see it as Bitcoin vs Fractional Reserve Banking, but you do realize that the two are not mutually exclusive, right?

Sure...off blockchain counterfeiting(FRB) is certainly possible.

More importantly, why?

Because there's no capitalism without capital and there's no capital without savings(capital formation). The current system will end whether you love it or hate it. It's doomed to failure because debt greater than previous debt is unsustainable. It will eventually collapse on itself. Savers are being brutally punished under the current system, and while FRB is only part of the problem, not the whole problem, it's the subject of this particular thread.

Yeah, making a loan is now counterfeiting  .

I'd say those problems are mostly the result of government programs. Savers are being brutally punished by low interest rates, which are also causing the debt growth you are talking about. FRB has existed for thousands of years and been very prolific for the past few hundred and we've yet to see a massive collapse that can traced to FRB.

FRB leads to ever increasing debt and an eventual collapse of the financial system due to debt overload.

[Ozziecoin]

Yeah, making a loan is now counterfeiting  

Loaning "money" you do not have is counterfeiting. If I do the same it is not called "loaning" it's called "fraud".

It's not money they don't have, it's money they do have! You can't physically have money that you loaned out, that's the definition of it being loaned out. Any bank that doesn't have fractional reserves, yet loans out money, would be counterfeiting, not the other way around. When you deposit money in a bank, you are letting them hold your money and loan it out, they even pay you (barely anything thanks to the Fed). If they loaned it out and kept it too, you'd be right, but they don't, which is the whole point of FRB. The only alternative is for deposits to sit around in a vault, doing nothing and for banks to loan out only their own money (does 35% APR on a mortgage sound nice?). It would be a waste, and for no reason other than principle.

EDIT: Also, I should point out that it is not fraud for you to do the same thing. Try it at home: Ask a friend if you can borrow $100 as long as you pay back $110 at the end of the year. Now invest $90 (simulating a 10% reserve requirement) on BTC Jam or in a bond. At the end of the year, pay them back. You've just engaged in FRB.

The problem with this argument is that the fed is not part of government, it's privately owned and it is the fed that sets interest rates. If it were free market economics determining that 0% interest rates were appropriate and that saving should be a losing proposition that'd be one thing, but that's not the case.

Now, as for the Fed: It's created by fiat and authorized to be the sole issuer of the nation's sole legal tender. It's chairman is appointed by the President and confirmed by the Senate. Membership is mandatory for all national banks. It creates regulations that are binding for all member institutions (all national banks). Maybe it's technically not a government agency, but the reality is quite different.

Now other than whether or not it's part of the government, you seem to be agreeing with me that interest rates are manipulated by the Fed and that that is part of the problems we're seeing which was my point, so I'm not sure what you mean here.

This is rubbish.  Banks are loaning out not only the funds that they have but the funds that they do NOT have:

Lord Adair Turner, formally the UK's chief financial regulator, said "Banks do not, as too many textbooks still suggest, take deposits of existing money from savers and lend it out to borrowers: they create credit and money ex nihilo – extending a loan to the borrower and simultaneously crediting the borrower’s money account".

I'm quite happy to keep repeating this point until everyone gets it.

[Jomari]

I find the fractional reserve system to be appropriate for a system with regulated monetary supply, but debt being offered within some level of acceptable tolerance for default. I personally have been working on a system that uses a 100% reserve initially, but offers the ability to have various tiers.

I think the power of these cryptocurrency networks is that they establish the rules that guide the direction of utilization and aggregrate those who share those common values. Therefore, I do believe Fractional Reserve Lending is not necessarily bad, but it is often abused. However, within a cryptocurrency system, it is possible to design where the inflation rate is capped and lending represents a strict percentage of the monetary supply in accordance with the volatility and some margin of error.

The downside is increased competition for eligible funds.

These are the basic concepts supporting my work with the Digital Reserve.