Fractional-reserve banking in Bitcoins - nothing prevents it!

[bitcoin.monger]

So, vinnie, how would this work in an anonymous setting, and without "men with guns"?
Just trolling...

[Vinnie]

Adam, thank you for your opinion on my IQ!
Retarded as I am, please explain how the bank (which one?) can "deposit" BTC100 in the block chain if said bank does not own BTC 100 to clear the transaction.

Thank you in advance for your explanation!

The deposit (transfer of possession of the 100BTC) would be reflected in two places; in their books and in the block chain. According to the block chain, the bank owns the 100BTC. But according to the contract between the depositor and the bank, the depositor owns the 100BTC but consents to the bank lending all or a fraction of it out.

[Vinnie]

So, vinnie, how would this work in an anonymous setting, and without "men with guns"?
Just trolling...

*shrug*

I doubt it would work in an anonymous setting. Banking depends on trust.

I'm assuming the "men with guns" means the government. Societies find all sorts of interesting solutions for contract enforcement, and settling peacefully is usually cheaper than going to war.

[bitcoin.monger]

So we would all need to accept "their books" as legal tender  

[Vinnie]

So we would all need to accept "their books" as legal tender  

Not if you don't want to. Others might.

[bitcoin.monger]

Uncle Vinnie, thank you for not calling me retarded 

[hugolp]

*shrug*

I doubt it would work in an anonymous setting. Banking depends on trust.

I'm assuming the "men with guns" means the government. Societies find all sorts of interesting solutions for contract enforcement, and settling peacefully is usually cheaper than going to war.

If you trust the bank enough you could have an anonymous account just controlled by a private key. IF you trust the bank enough (big IF, but there are some examples in reality).

So we would all need to accept "their books" as legal tender

Stop trolling. That you engage in some contract with the bank does not mean their notes become legal tender. IT just mean that you accept them, not everyone else. Legal tender means that the bank notes are forced upon everybody.

[bitcoin.monger]

Two different people consider this trolling. Sorry, good enough for me!
I apologize, and I am out of this subject 

[Adam]

Getting back on topic, I can't see banks that do nothing but take in bitcoins and loan than out again being viable.  How do you secure a loan denominated in bitcoins?  If I loan them out and the value doubles or triples the borrowers would probably never be able to pay the loan back.  It seems like it could possibly work if you were only lending capital to fund bitcoin businesses who would thrive if the value jumped, but I can't see how it would really work.

[hugolp]

Getting back on topic, I can't see banks that do nothing but take in bitcoins and loan than out again being viable.  How do you secure a loan denominated in bitcoins?  If I loan them out and the value doubles or triples the borrowers would probably never be able to pay the loan back.  It seems like it could possibly work if you were only lending capital to fund bitcoin businesses who would thrive if the value jumped, but I can't see how it would really work.

Yes, its not really viable at this point. But in the future it will probably happen (Im pretty sure it will happen).

[Longmarch]

Someone could probably try this on a small scale right now if they could figure out a way to issue some kind of BTC-backed notes.  Physical notes are obvious enough, but the electronic format of such a thing would require some amount of cleverness...

[BenRayfield]

Fractional-reserve banking is a type of banking whereby the bank does not retain all of a customer’s deposits within the bank. Funds received by the bank are generally on-loaned to other customers. This means that available funds (called bank reserves) are only a fraction (called the reserve ratio) of the quantity of deposits at the bank. As most bank deposits are treated as money in their own right, fractional reserve banking increases the money supply, and banks are said to create money.

http://en.wikipedia.org/wiki/Fractional-reserve_banking

It makes the rich get richer and the poor get poorer. When the poor lack food or other things, they make a plan of how to get it from the rich people. When the rich use supply and demand to determine who should get food and who shouldn't, they make another plan, which is to fight for survival, and others join them. Food is one of many things they fight for, and its not always things they need, but it is mostly caused by "the rich get richer and the poor get poorer" which is mostly caused by the Fractional Reserve system and Patents, but Patents are a different problem.

In a Fractional Reserve system, terrorism (a type of war) and other wars are inevitable and in increasing amounts over time. As such wars increase, Patriot Acts and other reductions of freedom and increases of military spending will happen. Reacting to that, terrorism and other wars will increase. Its a cycle of conflicts escalating until World War 3.

Therefore we either get rid of the Fractional Reserve system or World War 3 will happen.

The anonymous part has advantages and disadvantages, but just about the economic part, an unlimited grid of Bitcoin currencies, each with their own network, each designed with their own economic equations, is an example of a better system than Fractional Reserve, because economic equations would evolve and compete the same way products evolve and compete today, and whatever equations work best would be used by more people, more invested in them.

[sortedmush]

It's got nothing to do with fractional reserve banking. It's just a business model. Banks operating a fractional reserve just happen to have a monopoly in most countries. Examine the nature of that monopoly. Is it backed my violence?

Google "Von NotHaus" for the answer.

[BenRayfield]

It would be ok if it was just a business model, but then it would be ok to compete with them on a large scale. I'm almost certain that when Bitcoin or any cryptocurrency gets popular enough, the central bank system will try to make laws against it, not because there's anything wrong with cryptocurrencies, but because their "business model" is really a dictatorship. We don't need to make laws against Fractional Reserve because the right to compete is enough.

[mpfrank]

Easy enough to do at this point, if you utilize the GLBSE! Actually, you could say it is already happening.

Yes... For example, if I deposit bitcoins into an account at mybitcoin.com, and take a screenshot showing my account balance, you could call that a "bitcoin backed note" of sorts.  (It would be better, though, if the site gave you a formal, digitally-signed certificate showing your balance.)

[killer2021]

There is a huge incentive to not have fractional reserve banking and here it is:

http://www.youtube.com/watch?v=qu2uJWSZkck

[JoelKatz]

There is a huge incentive to not have fractional reserve banking and here it is:

http://www.youtube.com/watch?v=qu2uJWSZkck

Banks runs are actually not particularly hard to make much less harmful. The methods needed have been well worked out.

Basically, the bank issues notes and accounts that are payable on demand except if the bank declares an emergency (which it would do if there was a run). If the bank declares an emergency, they can pay you in notes instead of currency. The notes have a higher interest rate and are backed by loans and capital that the bank has. The only way you don't get paid is if there's a run on the bank, the bank doesn't have enough reserve, and a lot of its loans go bad. Of course that can happen, and if you're worried enough about it, you don't have to use fractional reserve banks.

The bank has to rig it so that the notes it issues in an emergency have a net present value, adjusted for risk, that's roughly equal to the value of the cash people want to withdraw. That way, people who need cash now can sell their notes, but there's not much incentive to continue the run. (Because you'll still be at some risk, and you won't get much cash today.)

If the bank declares an emergency just to save a few bucks, they won't actually make very much money, and their reputation will be ruined.

[hugolp]

There is a huge incentive to not have fractional reserve banking and here it is:

http://www.youtube.com/watch?v=qu2uJWSZkck

This is a incentive to not have very extreme fractional reserve banking. And that is what happened when banking was not regulated. Because banks were afraid of bank runs they kept a higher ratio, the were more prudent. Now, with regulations, they are protected from bank runs (specially because of central banking and FDIC) so they can go as low as the regulators allow them, which for example in Europe is 2% and in the USA a bit higher. The government regulations have taken the control away from the costumers. Bernanke at some point said that he wanted to change the regulations and regulate the rate to 0%. Imagine that...

[killer2021]

There is a huge incentive to not have fractional reserve banking and here it is:

http://www.youtube.com/watch?v=qu2uJWSZkck

This is a incentive to not have very extreme fractional reserve banking. And that is what happened when banking was not regulated. Because banks were afraid of bank runs they kept a higher ratio, the were more prudent. Now, with regulations, they are protected from bank runs (specially because of central banking and FDIC) so they can go as low as the regulators allow them, which for example in Europe is 2% and in the USA a bit higher. The government regulations have taken the control away from the costumers. Bernanke at some point said that he wanted to change the regulations and regulate the rate to 0%. Imagine that...

Yup, however it just makes the more system unstable if a crisis occurs. If there is ever a very large bank run then FDIC will go insolvent and the fed will have to back up the deposits. If that were to happen there would be massive increase in money supply. By the time you got your money it would be worth nothing.

The insurance is only good until you go to collect it.

[JoelKatz]

Yup, however it just makes the more system unstable if a crisis occurs. If there is ever a very large bank run then FDIC will go insolvent and the fed will have to back up the deposits. If that were to happen there would be massive increase in money supply. By the time you got your money it would be worth nothing.

The insurance is only good until you go to collect it.

That's what everyone thought. But then we borrowed money to finance two wars, had a global economic collapse, and borrowed money to "stimulate" the economy and ... no inflation. Our understanding of those mechanics is wrong somewhere. (Not to say that really bad things won't happen. Of course they will. But a lot of them will be deflationary.)