Unrestricted Banking and Problem Banking

[minor-transgression]

Placeholder for definitions

[1713924030]

1713924030

[minor-transgression]

The term "Fractional Reserve Banking" does not adequately describe the
process of Banking in the recent past. I am open to suggestions on how
to better describe Banking, particularly the Banking interaction with
Bitcoin. I offer the following definitions, feel free to disagree:

First, a description of Money.

Money: An agreed method and system of payment exclusive of third-party risks.
Gold, Silver, and Bitcoin are Money. Everything else is either credit or a liability.

Banking: The acceptance of deposits, and the provision of, and repayment of,
loans whereby the business transactions normally exceed the Bank's ability to
repay all deposits at any given time. 

Fractional Reserve Banking: The practice of restricting the availability of
credit issued by particular banks such that money on deposit remained above
an agreed fraction (historically one eighth) of the banks loans. In order to
ensure that there was some stability within the banking system as a whole,
the Bank's Reserves, (gold) were transferred to a Central Bank who then issued
banknotes to their value and ensured that prudents levels of lending were
maintained. The Bank of England was the first Central Bank of this type,
founded in 1694, and the Federal Reserve Bank was formed in 1913.
The end of the convertibility of the US currency into gold in 1971 marked
the end of the era of Fractional Reserve Banking.   

Unrestricted Banking: The pressures that brought gold convertibility to an
end did not dissipate with the end of Fractional Reserve Banking, and between
1971 and 2009 bank lending increased exponentially. New regulations and
restrictions were applied to the financial systems and the banks, but these
typically relied on internal systems of risk management and the supposed
discipline of the markets. This proved inadequate in 2008, leading to
accuations that regulators were "asleep at the wheel". 
Haldane, "Why Banks Failed the Stress Test" speech [p12], 2009, summing up
the beyond-laissez-faire ethos perfectly:
"No. There was a much simpler explanation according to one of those present. There
was absolutely no incentive for individuals or teams to run severe stress tests and
show these to management. First, because if there were such a severe shock, they
would likely lose their bonus and possibly their jobs. Second, because in that
event the authorities would step-in anyway to save a bank and others suffering
a similar plight."
http://www.bankofengland.co.uk/publications/speeches/2009/speech374.pdf

Problem Banking: A notional conversation that might have taken place 
in late 2008 between Representatives and the Federal Reserve Bank (and presumably
similarly for the Bank of England and for the ECB)
R: "Why should we make your lack of foresight and planning our problem?"
F: "Because if you don't you will not have an economy tomorrow morning"
Thus Problem Banking came into being and continues from the beginning of 2009
to the present day. We live in the age of Problem Banking.

The intent of these descriptions is to accurately describe the condition of
Banking in the recent past, to add colour, and a range of adjectives available
in our discussions. I am not entirely happy with the above, there are subtleties
across national banking systems and regulation that are not adequately
covered, but these names may be good enough.

[CoinCube]

You define money to be only sound money.

There is noting wrong with doing it that way. However, I think it may be easier for most people to understand if allow the definition of money to include what most people consider to be money and subdivide it into two groups. Sound money = your definition and unsound money = fiat and its derivatives.

I agree with you that our system is fundamentally different (mostly much worse) than traditional fractional reserve banking with sound money and deserving of its own name one that highlights its unique excesses.
 

[Harry Hood]

To me, unrestricted means anyone can offer banking and the rules are set by that entity.

Problem banking? I have no idea what you mean..."Problem" is too vague a word because it depends on the perspective of the person. One mans problem is another mans solution...

[minor-transgression]

If statistics gives you a headache, just watch the video and skip to the next post.
https://www.youtube.com/watch?v=c7AihnLbw1E
I get a headache too ;-)

The Thought for the Day
"This emerging nonlinear structure forces the system to take, or "collapse" to, one of
its multiple possible realisations, which means that those realisations, actually and
unceasingly replacing one another in a dynamically random, or "chaotic," order are
dynamically symmetric among them, while they always differ in their detailed, partially
irregular structure."
[Universal Symmetry of Complexity and its Manifestations at Different Levels of World Dynamics
Kirilyuk, 2004.]

Picking up from my earlier post:
Haldane comments that "To provide some context, assuming a normal distribution,
a 7.26-sigma daily loss would be expected to occur once every 13.7 billion
or so years. That is roughly the estimated age of the Universe."

How inconvenient. Because when we decide to replace normal, Gaussian, with the
power law relationship, we immediately have a problem. Unless restrictions
are placed on the model, the area under the power law curve can be infinite.
Fortunately, power law relationships are common in nature, are well documented,
and hence some comparisons can be drawn with recent experience in the financial
systems. Most systems that offer exponential growth can be expected to exhibit
other features of power law relationships, including emerging nonlinearities.

The Sand Pile is perhaps the (deceptively) simplest system to understand. Sand
flows at a constant rate onto a pile. The subsequent avalanches that occur fit
a power law relationship. The longer the interval between collapses, the bigger
the expected collapse. Avalanche always happens.

In general, all forms of debt exhibit exponential growth, and unless there is
evidence that financial systems are exceptions to universal laws, the longer the
interval, the greater the expectation of a collapse. Note that interests vested
in financial systems have an incentive to promote the idea that their debt can
never fail, that their "money" is sound but the others cannot be trusted.  

I've read that AAA rated debt carries an expectation of a default every 10,000 years.
Really? I'd be pushed to accept 100 years just based on past civil and world wars,
nuclear proliferation, and the tendency for reserve currencies to have a lifespan
of less than 200 years. Throw in Unrestricted Banking, Problem Banking, uncertainties
around Climate Change, Peak Cheap Oil, Limits to Growth, and 30 years seems to me to
be a believable figure. I picked that figure out of my arse, BTW. (The technique was a
trade secret of the Anglo Irish Bank prior to 2009.) There's more on this later.  

Next up - Dexia Bank Failure - 6 October 2011
http://www.bbc.co.uk/news/business-15180153
"In spite of all this, Dexia passed July's banking stress tests carried out by the
European Banking Authority. This happened because the bank had a core tier one capital
ratio of 10.3%. The measure weighs up a bank's top-notch assets against its more risky
holdings and is used to gauge its financial strength. Dexia's score put it well above
the 6% threshold demanded for a clear pass. So on 15 July, the bank issued a press
release headlined "2011 EU-wide stress test results: no need for Dexia to raise
additional capital"."

Well, that escalated quickly. Fortunately, or unfortunately, Dexia was unable to
print its own banknotes, ran out of credit, so got put on the naughty step, and some
stuff got pushed into a "bad" bank. The privilege of printing Euro Notes belongs to
the European Nation States, who each have the right to print the notes, and then add
an identifying character to the serial numbers, and all under the control of the ECB.

And the meaning of "objective", and "probability" is ?
http://www.zerohedge.com/news/2015-09-03/central-banker-urges-lying-public-about-bank-health
"The optimal level of 'informativeness' ... depends on the objective probability that
the banking sector is vulnerable," authors Wolfgang Gick, from the Free University of
Bozen, and Thilo Pausch, an economist with the Bundesbank, wrote.

Anyone still believe? Anyone think the problems of 2008-2009 are gone forever? Anyone?  

[username18333]

In general, all forms of debt exhibit exponential growth, and unless there is evidence that financial systems are exceptions to universal laws, the longer the interval, the greater the expectation of a collapse.

(Red colorization mine.)

In a world where the things we need and use go bad, sharing comes naturally. The hoarder ends up sitting alone atop a pile of stale bread, rusty tools, and spoiled fruit, and no one wants to help him, for he has helped no one. Money today, however, is not like bread, fruit, or indeed any natural object. It is the lone exception to nature’s law of return, the law of life, death, and rebirth, which says that all things ultimately return to their source. Money does not decay over time, but in its abstraction from physicality, it remains changeless or even grows with time, exponentially, thanks to the power of interest.

(Red colorization mine.)

[johnyj]

You define money to be only sound money.

There is noting wrong with doing it that way. However, I think it may be easier for most people to understand if allow the definition of money to include what most people consider to be money and subdivide it into two groups. Sound money = your definition and unsound money = fiat and its derivatives.

I agree with you that our system is fundamentally different (mostly much worse) than traditional fractional reserve banking with sound money and deserving of its own name one that highlights its unique excesses.

Your bitcoin in an exchange is not bitcoin, until you withdraw. Similarly, your money in your bank account is not money until you withdraw or spend it

The problem is that most of the people still believe in an illusion that their money is in the bank, because when they try to withdraw or spend it, it works fine

[minor-transgression]

Back to Semantics:

http://www.zerohedge.com/news/2015-08-29/us-debt-age-unrestrained-central-banking
http://bawerk.net/2015/08/28/that-70s-show-episode-4/
"But we digress, in the this episode we will focus on debt levels within the context of unrestrained central banking."

Unrestrained, Unrestricted, which to choose? All the while the hunt for scapegoats
continues. A reporter in China, a lone trader in London, the weaker, easier meat
that strayed from the herd only to be culled as an example to others. Pointing to
a naked Emperor can have consequences.

[minor-transgression]

More on statistics. Sometimes a .jpg and some numbers are worth a thousand words.
These numbers are just for illustrating "normal" vs power law relationships.
Source:
http://streettalklive.com/images/1dailyxchange/misc/MW-September-Performance.jpg

Take the first set of decline days and sort into ascending order:
18 20 24 25 33 35 43 43 63 70 91 96 104 157 162 209 252 288 449 531

Hmmm ... at a stretch, you might think "normal" distribution. Now look at the second
set of recovery days:

32 34 39 42 55 62 67 73 75 84 94 109 118 118 125 144 178 181 527

That 527 is four "standard deviations" away from the "mean", in a sample size of 19.
These are what power law relationships look like. The reader may research the
appearance of "normal" relationships at their leisure.

The exponent in the equation seems to be around 2. That sets expectations on how the
system will behave. Of course, if the exponent is 1.9 or 2.1 things change, and
because this is not a natural system, there are limits to comparisons with avalanche,
sand-piles, and forest fires. There are even good reasons to discount time-invariance
and perhaps to expect a model closer to the wave-particle-wave phenomena demonstrated
by light, but with normal financial transactions exhibiting a brownian chaos, thus
from Complexity Theory change in the form of chaos-order-chaos may emerge.

That, in turn, gives a new meanings to the phrases "New World Order" and "collapse into chaos,"
don't you think? Hold that thought :-) More on Banking next.   

[minor-transgression]

The Thought for the Day

"If you have nothing to hide, you have nothing to fear" - attributed to Goebbels.

Unless, of course you are Anglo Irish Bank, who had plenty to hide and had no fear
of their Regulator, the Irish Central Bank. As the 2009 tape revealed, their figure
"picked out of my arse" was no simple lie about the needed financial support .
Too low a figure, and the Central Bank would insist that ANGL sort its own problems out.
Too high a figure would invite questions, and to tell the truth would reveal a problem
that would have the Central Bank running for the hills, seize the bank, and prompt
questions of legality. What was needed was a credible amount of excess debt, but large
enough that when the Central Bank stepped in with support, it would be unable to
withdraw from its position without compromising the Irish Government.

This was no cavalier act of bravado, but a studied fraud on the Regulator and the
Irish Central Bank. There were plenty of warnings on fraud if you knew where to look,
not just in Ireland but throughout the Western World.  

Prof William K Black, on Control Fraud : "We also know that turning a blind eye to
the mortgage fraud epidemic was the only way the rating agencies could hope to attain
those profits."
http://www.huffingtonpost.com/william-k-black/the-two-documents-everyon_b_169813.html

Thinking about this would lead to an expectation that those financial entities
engaged in fraud would keep two sets of books. One to show to the regulators, and
another to actually manage the business. So where and when does that line get crossed?

Some recent research for the Bundesbank,
http://www.zerohedge.com/news/2015-09-03/central-banker-urges-lying-public-about-bank-health
The Bundesbank's views are not necessarily represented by those who suggest that the
public's perception should be managed within the Overton Window for the benefit of
the Banks, but at least there seems to be no suggestion that today's banking should
run on two sets of books. It seems therefore that Haldane's observation may still apply.
Why give up on a nice little earner, with profits rising like a stairway to heaven,
if you are still secure in the knowledge that the taxpayer will bail you out if you
are unable to deliver on the bets you have placed?

Remember the expectation for larger avalanches given longer time intervals? Do you
think that post 2008 that maybe we just pushed the sand back up the hill? Then,
maybe, because these things are less predictable than most think, the next
avalanche may be big. As in too big for the taxpayer to be able or willing to bear,
and if governemnts and taxpayers are unwilling then creditors can expect a haircut.
Of course, if this is feft to the Banks, the taxpayer will be the last to know.  

The strange thing is, at the limit the financial system is BIBO stable. It can
be fixed, at a finite cost, given the will so to do. It is the will that is weak.

There is a simple test of this thesis: Try to pass legislation that should any
systemically important bank require support form the Central Bank (read taxpayer) a
mandatory 10 year prison sentence is imposed on the Bank's President, CEO, CFO, and
their Regulator. There are already calls for the FED to be audited, and for the present
and past executives to be jailed on evidence of criminal activity, and why stop there?  

After all, if they have nothing to hide, they have absolutely nothing to fear.

[minor-transgression]

"If I had an hour to solve a problem I'd spend 55 minutes thinking about the problem
and 5 minutes thinking about solutions." - Albert Einstein

Thus far the things described are no more than symptoms of a deeper malaise. It is
now time to think about the meaning of Sovereign Default. Sovereign Default happens
when a nation can no longer roll over its debts. It is the place at the end of a
long road paved with good intentions. With each misstep, the debt burden increases,
the credit score worsens, and the interest risk premium increases. Eventually a
line is crossed where debt becomes immediately due with no prospect of a rollover. 

If the debt is owned by the nation's citizens, the chances of repayment after
an interval, possibly in a devalued currency, are high. After all, razing the
infrastructure to the ground would make repayment less likely. Hence the nation's
citizens may, (in the words of Ireland's Finance Minister referring to bondholders).
be fair game, different considerations apply today. In ancient times Greek City
states would go to war if payments ceased, at some times for lesser reasons.

What happens next depends on just how badly the regime has messed up. Theoretically,
the creditors might shrug their shoulders and cut their losses. Iceland was
probably as good as it gets, with less than a dozen bankers going to jail. Within
days the currency had collapsed, the three biggest banks failed as did 80% of
Icelandic businesses as interest on loans soared to 300%. At the other end of the
spectrum lies martial law, and unpaid armies looting, raping, and pillaging until
a new order is in place, as happened in medieval times. Arguably this deficit also
applied to continental Europe and to Japan prior to the Second World War.   

The key question is - How badly has your regime messed up? The credit rating on your
sovereign debt should tell you - good for 10,000 years? According to the ECB, Europe's
sovereign debt carries no risk. Really? And negative interest rates are the new sanity?

History is of limited use when the probability of default follows a power law. Minsky,
when referring to the effects of speculation, suggests that long periods of stability
are destabilising. Power law relationships suggests that natural forces, if suppressed
for any reason, will finally erupt with even greater force. Suppression can take
strange forms and come from unexpected places: 

Since when does a Civil Servant issue threats to an elected Minister of a Sovereign
country that would land an ordinary citizen in jail on terrorism charges? 
http://www.rte.ie/news/2015/0910/726863-banking-inquiry/
"He [Mr Trichet] said if you do that a bomb will go off, and it won't be here, it will
be in Dublin," Mr Noonan told the banking inquiry.

Bear in mind, strictly speaking, this is private debt that is being discussed. That's
the sort of debt - "debt doesn't matter because we owe it to ourselves" - that
doesn't matter (because only taxpayers will be hurt) until it matters. And how does
this relate to Sovereign debt? more on that later :-)

[minor-transgression]

Debt is all about having confidence that the debtor can and will make good on his
promises, and legal structures have developed with each lending initiative to create
a contractual framework to deliver payment in full. Private lending by banks is
usually secured by a claim on the creditor's collateral in the event of default.
Sovereign Debt rarely provides this cushion, instead, a comfort blanket called
"full faith and credit" is provided instead, with the implicit guarantee that that
Nation's taxpayers will pay.

Once upon a time, if Tribute went unpaid, it made economic sense to go to war and
to seize the gold and silver contents of the enemy's Treasury. Today, not so much.
Warfare today is all about seizing natural monopolies : railroads; power stations;
water and sewage infrastructure; banks; toll roads; and airports and ports.
Obviously, the overt use of force to gain control of this infrastructure would likely
damage profitability, hence outright War of the global thermonuclear type would be
the last and final option. Instead today a broad spectrum of economic warfare is
ongoing at this time, disguised as Trade Agreements and Treaties supporting global
and international corporations. As a rough rule of thumb, the greater the military
force applied, the greater underlying economic distress. 

For a Sovereign Nation, given the uneasy relationship of a government to its Central
Bank, the additional demands of external creditors to considerations of how to balance
electoral promises, position on the Laffer curve, manage imports and exports, will be
unwelcome. External creditors may be not only uninterested in the economic success
of a Nation State, they may be incentivised to provoke a default if they think there
may be economic advantage in so doing. Studies suggest that Debt to GDP ratios of
180 percent and above signal significant economic stress within economies. Laffer
suggests that there is an upper limit to the amount of tax that can be usefully
imposed on an economy, usually expressed as a percentage of GDP. It follows that
for a given Debt to GDP ratio, there is an upper limit to the interest rate that a
Nation can pay on its Debt without defaulting within the foreseeable future.

Another factor in play is the currency in which external debt must be repaid. While
Sovereign Debt is, almost by definition, repaid in the Nation's currency, that is
not necessarily the case for liabilities of the Central Bank. Indeed, where a
Central Bank trades in foreign currency, some debt will carry a currency risk. There
is, perhaps, on exception: the US dollar acts as the world's reserve currency. Some
say that the USA can never default on its obligations because more dollars can
always be printed. But "It ain't what you don't know that gets you into trouble.
It's what you know for sure that just ain't so" - Mark Twain.

[minor-transgression]

"That is, we see again that the presence of Ponzi can destabilise and otherwise
stable equilibrium provided its own growth rate when the economy is deeply depressed
is large enough. But since such equilibrium is economically undesirable we might
say that this particular destabilising effect is rather welcome" -
An Analysis of the Keen model for credit expansion, asset price bubbles and
financial fragilility" -  Grasselli and Costa Lima 2012.

High up on the list of things we know for sure is that Central Banks know their
business. What could be simpler: borrow at 3%, lend at 6%, and be on the golf
course by 3pm? Unfortunately, it is in a Central Bank's interest to have things
appear somewhat more complicated than that, and to get involved in things it should
best avoid.[2] An example:

"The employment rate will rise if economic growth exceeds the sum of population
growth and the growth in labor productivity." - Keen

More jobs good? OK? Well, if your economy is predominantly a service industry the
chances of a significant boost to labor productivity is as near zero as makes no
difference. So, less unemployment means that economic growth must exceed the growth
in the population. That, in turn, probably means that debt has to expand significantly
faster than economic and population growth. So, if a Central Bank wants to keep
credit under control, and keep its job, it is unlikely to tell its public that its
actions are making the unemployment figures worse.

So why not just allow credit to expand? Surely the free market would take action to
punish any bank or financial entity that lent recklessly? Don't commercial banks
have incentives to behave prudently? Well, No. You have read the earlier posts
on this thread haven't you? Besides avarice and greed, here are two other reasons:

More lending means much bigger profits for the banks. What's not to like?

Secondly, it can be difficult to decide when to restrict the growth of credit.
Keen's Minsky model defines Investment, Speculative financing, and Ponzi
financing in mathematical terms, following Minsky's thesis that stability will
encourage progressively greater risk taking. In this context, faith in Central
Banks is destabilising, and the damage to the economy only becomes apparent long
after the last greater fool has bought at the all-time high. This restriction of
credit is usually characterised as taking the punchbowl away before the party gets
too raucous. That may be too late, and who wants to go to a party with no punch bowl
and where the guests get a pat down on arrival followed by the confiscation of hip
flasks and indeed any concealed alcohol?

Put simply, wealth, in the form of good collateral, (claims on natural monopolies,
property, and extractive industries. Not government promises), expands much more
slowly than credit. Eventually the leverage becomes unsustainable and in some part
of the economy where the stress is greatest, collapse begins. If the debt burden is
high enough and the economy is left to fend for itself, the result will be a deep
and progressive depression throughout the entire, possibly global, economy.

As Grasselli and Costa Lima propose, at that point speculative activity and Ponzi
financing are needed provide a welcome boost to economic activity. However well
defined the mathematics may be, it is far from certain how this would play out in
the real world. More on that, later. 

[2] There are things that Central Banks should be involved in, including
cryptocurrencies, that could be helpful, but that is off-topic for this thread.

[minor-transgression]

But "This time is different"? To say that there has to be at minimum, a first
time. Examples from history of economic recovery from a depression, especially a
global depression, are thankfully, rather thin on the ground. Hence there are a
slew of reasons why the following analysis is built on weak foundations. The
crash in 1929 and the subsequent depression is well documented, though there
is some data that is rarely discussed.

Peak Oil was a concern in the early 1920's, particularly in the USA. Production
was steadily increasing as new oilfields were discovered, averaging some ten
percent each year. Prices were volatile, beginning with $3.07 per barrel in 1920,
falling to $1.34 in 1923, and rising to $1.88 in 1926. In 1927, new oil finds
including Oklahoma, pushed the price back down to $1.3 and a year later to
$1.17. From 1920's 442,929,000 barrels, production rose to 1,007,323,000
barrels, priced at $1.27 in 1929. Significantly, in October 1929, "U.S.
commercial crude stocks peaked at a staggering 545 million barrels , following
the discovery of a series of huge new oil fields in Oklahoma, Texas, the rest of
the Southwest and California."

http://www.oilandgaspeople.com/news/1663/us-crude-oil-stocks-return-to-1930s-crisis-levels/

The oil glut was different to the coincident wheat and agriculture glut, in that
once consumed, crude oil cannot be replaced, hence the record (six months)
storage speaks to the psychology of early 1929 in America. It was a recipe for
disaster, though conventional methods of appraising valuation at that time
would suggest "a permanently high plateau had been reached."

That economist obviously was not looking at the state of America's oil industry
when those words were written. That all-time high inventory suggests that a
contraction in crude oil production was a near certainty for late 1929/1930
at a price of $1.19, followed by a collapse in prices in 1931 to $0.65.

Despite an extensive and prolonged search for guilty, no suitable scapegoat for
the crash could be found. It is worth remembering that the argument advanced
some sixteen years earlier claimed that having the Federal Reserve Bank in
place would prevent the periodic booms, busts and crashes of the earlier century
and of the first decade of the 1900's. Somehow, that got forgotten in the
1930's.

Grasselli and Costa Lima's paper expresses concern regarding "collapsing wages and
employment, exploding debt," and given particular initial conditions in the economy
being modelled, an outcome of a final stable equilibrium of zero wages and
zero employment and infinite debt. That seems to be remarkably similar to the
dynamics in play in the period leading into 1932.
 
Excess debt and interest payments were not the only forces depressing the economy. 

If you were a dentist in early 1932, you had limited choices. Progressively more
of your clients become unemployed, and others are unwilling to part with limited
funds even for for dental care. You either work and don't get paid for some work,
or you limit the work available. Either way, cash in circulation is shrinking,
and cutting fees for preventative dental work will not boost economic activity,
since some work is already being done in the hope of retaining clients and
future fee payments. Low prices were not the cure for low prices.   

As well as the extinction of inefficient production and bad loans in 1931, things
continued to get worse, as supply disruptions began to introduce inefficiencies.
Steel production fell steadily to 17% of capacity in July 1932, inviting the
question - if it could fall that far, what stopped it from falling further?
Why not go to zero? bringing with it zero employment and zero wages?

Hold that question for a couple of weeks, OK?

[minor-transgression]

http://www.reuters.com/article/2015/01/29/us-usa-crude-stocks-kemp-idUSKBN0L229920150129
"(Reuters) - U.S. commercial crude oil stocks last week hit their highest level since 1931
- when the opening of giant oil fields in the United States coincided with the Great
Depression to create an enormous glut and sent prices tumbling to just 13 cents per barrel."
"The parallels are not exact because production and consumption are so much higher now than
in the 1930s. In 1931, stocks of 407 million barrels were equivalent to 160 days of
nationwide production, while in 2015, the same stocks are just 44 days of production."
"As the leasing frenzy seized the five counties of the field, Kilgore became the center of
the boom. In that small town, wells were drilled in the yards of homes and derrick legs
touched those of the next drilling unit. One city block in Kilgore contained forty-four
wells. Whether in town or on farms, independent operators were compelled to drill wells
as quickly as possible to prevent neighboring producers from sucking up their oil."
"Within 11 months, no fewer than 1,644 wells had been drilled into the new East Texas field.
Oil prices, which had been 99 cents per barrel when Daisy Bradford No 3 was drilled fell
to just 13 cents by July 1931."
"A group of oilmen in favor of production controls appealed to the governor to declare
martial law. On August 17, 1931 the governor ordered the Texas National Guard and the
Texas Rangers into the oilfield to shut all 1,600 wells and restore order."

The super-giant oil field, whose first well was spudded in May 8 1929, was gradually
revealed to be over 200 square miles in size, the world's largest at that time. In those
early days money was scarce, and drilling continued unsuccessfully until 3rd October 1930,
when the #3 well blew. Over the next 30 years the field would provide 3.5 billion barrels
of oil.

By August 1931 the East Texas oil wells were providing between one third and one half
of all the oil production in the USA, bringing new roads, towns, railroads, pipelines
refineries, jobs and wealth. It seemed that for Texas, the Depression was over.

Elswhere in the USA the Depression was tightening its grip. Oil production fell from
851,081,000 barrels in 1931 to 785,159,000 barrels in 1932. Prices for Crude Oil and
for petroleum products fluctuated widely as the effects from the oil find worked their
way across America. The initial effect was a collapse in prices local to the discovery,
falling to $0.13 per barrel, and a bootleg price of $0.03 per barrel. If you held a
lease, you had no other option but to drill your well as quickly as you could because
if you held back, someone else would suck the oil out from under your patch. The
incentives of the free market pointed to a collapse of the oil industry unless
something was done. The State intervened in August 1931.

After the imposition of Martial Law to control production the price rose close to $1.00
per barrel, then settling to an average of $0.87 in 1932, and falling again to $0.67
in 1933. By then US oil production was running at 905,656,000 barrels per year,
a level last seen in 1929.
 
A dollar of 1933 money would be worth US$18 today.

So, did the discovery of a super-giant oil field in 1931 end the Depression?
Maybe not - crude oil stocks were still near a US all-time high. Something else?

[minor-transgression]

"Everything I thought was right is now proving to be wrong"
April 14 1932 - The Great Depression - A Diary - Benjamin Roth.

The private debt of the USA peaked close to 140 percent of GDP in 1929, falling rapidly
thereafter via eighty percent in 1932 and continuing to a low of thirty percent in 1940.
This fall reflected a transition from a time when everyone expected to become rich, "with
all sense of caution" lost, to one where poverty was prevalent. A feature of the early
days of the collapse was the ability of creditors to call in margin debt, and to
foreclose on property or projects that were unable to pay monies due on time. A further
complication is the ability of creditors to demand additional collateral on certain
loans if the creditor calculates that his debtor has negative equity or a similar
commercial risk. Those clauses in bank loan agreements providing the bank with the
ability to instantly demand repayment are there for a reason.

After the initial shock, people began to look toward a recovery. The fall in the Stock
Market was punctuated by periodic reversals. Blue chip companies maintained their
dividends and pricing while their lesser rivals fell to lower price to earnings ratios.
"The Dow Jones Industrial Average managed to recoup all but a quarter of its losses
 between December 1929 and March 1930." In August 1931 it seemed that it was "hardly
possible that things could get worse." But they did. Foreign investors were selling
stocks and bonds, and in 1932 over a billion dollars in gold left the United States.
In 1930 European countries had begun to collapse, went off the gold standard, and
wanted their gold returned.

Though the stock market bottomed in 1932, deleveraging continued until 1940. The fear
continued for may years afterwards. This final bottoming brought blue chip stocks into
line with their lesser brethren. Many companies were lossmaking in 1932, and some
others suspended dividends. Treasury bonds were perhaps the only safe haven. Banks
became afraid to bankrupt clients, fearing greater losses through the courts. 

"Most of the banks are now almost liquid and these vast resources will soon again be
loaned out for business expansion" - June 21 1932.

"In this 30 day period most of the popular common stocks have doubled or tripled
in value" - August 8 1932.

"Gasoline is selling at 14c per gallon. Out of this 5c goes to Ohio tax; 3c to the
retail gasoline station owner; 2c to wholesaler and 4c to cost of distribution,
and transportation and production. Business in almost every line is being run at a
loss" - January 12 1933 

"Seven banks closed in St Louis yesterday, and a couple more in Kansas. The newspapers
are suppressing news of this kind. Bankruptcy among merchants is on the increase and
is now reaching the large corporations". - January 17 1933.

"The President formally devalues the dollar to 59.04% of its former value making gold
worth $35 per ounce. The stock market rises up from an average of 99 to 104. Yesterday
however it starts down again caused mostly by the precarious continuation of the gold
standard in France. In the meanwhile millions of dollars worth of gold are being rushed
by the fastest ships from Europe to America." - February 8 1934.

- The Great Depression - A Diary - Benjamin Roth.

Something in America changed between April 1932 and June 1932. The downslope of a
Seneca Cliff bottomed and reversed. It did not happen all at once in every town and in
every industry, but because of the interconnected nature of the stock market, that was
where new confidence emerged.

Many talk about confidence as if this were a commodity that could be bought by the
pound. The truth is very different. Confidence has to be internally consistent, and
that was especially true in that atmosphere where fear predominated. Bad debts do not
evaporate overnight, and over a period of thirty months, perhaps as much as sixty
percent of GDP, perceived as wealth but conjured into existence, was extinguished.
Thus maybe $60Bn of functionally equivalent bezzle[3](febezzle)[4] was processed
through the courts, or by other means, until finally real collateral and real wealth
found new owners.

There is a catch with this. As stated above, many businesses were lossmaking, with
no immediate possibility of becoming profitable, and deflation was ongoing in 1932.
A new question appears - where did they find the courage to embark on a new ponzi
scheme, doubling or trebling stock prices, in August 1932?   

[3] The Great Crash 1929 - John Kenneth Galbraith
[4] http://www.valuewalk.com/2014/06/charlie-munger-breakfast-meeting-of-the-philanthropy-round-table/2/

[BobK71]

This is a neat and innovative conceptual framework for modern banking, but banking is only half of our core modern problem.

The other half is the government.  The real reason why the debts of "private" banks are implicitly guaranteed by the state, which then under-regulates the banks, is that the political elite has an incentive to allow banks to take risks with taxpayers' money.  If banks didn't dream up innovative assets that savers might buy into, however temporarily, the inflationary effects of public debt (issued by politicians) would expose the weaknesses of the system, and eventually threaten the issuance of public debt from which politicians receive "free" political capital.

The core modern reality is that banks and the state ally with each other to jointly take wealth from the rest of the economy.  The banks contribute innovation and financial know-how, while the state supplies the power required to prop up financial assets.  The central bank's real role is to guarantee the survival of this partnership institutionally.

So, from a long-term point of view, we can basically kiss "good banking regulation" goodbye.  The entire system is wrong.

[minor-transgression]

"The entire system is wrong."
It's one thing to realise that, demonstrating the internal workings is a challenge.

This medium, a series of text messages, supports a logical but narrow structure.
(And it's all produced from the left side of the brain)
It is easy to get sidetracked and then it gets messy. Sometimes it is worthwhile
when a relevant article gets published, even if it's TLDR material.

This recent article on the US 1929 depression includes background information for those
still awake :-)
http://www.zerohedge.com/news/2015-10-28/why-friedmanbernanke-thesis-about-great-depression-was-dead-wrong

Four points omitted that might usefully be included:
* A mathematical outline of processes driving the boom and bust
* A comment on the oil industry and related capital flows
* The role that gold played internationally before and after 1933, and its domestic costs
* The relationship of US domestic banks vs their foreign counterparts

Those omissions aside, I am in broad agreement with larger argument. This was a depression
driven by financial mismanagement, both before and after the crash.

[teukon]

Banking: The acceptance of deposits, and the provision of, and repayment of,
loans whereby the business transactions normally exceed the Bank's ability to
repay all deposits at any given time. 

Interesting how fraud is essentially baked into this definition.  This is not a slight on your work, just an observation that the modern state of banking is so warped that failure to balance assets against liabilities is simply assumed.

[StevenLiang]

In theory, Banking is used for deposits, and the provision of, and repayment of,
loans whereby the business transactions normally exceed the Bank's ability to
repay all deposits at any given time.

But in reality Bank is just for saving money with small amount of interest per year. Surely we got any benefit feature like ATM, Credit Card and many other.

And about "Unrestricted Banking", i think all bank 'hope' their will got more and more money from all their clients.
Because Banking can invest that money in a lot place. While client just feel comfort to see number on their Bank Book.