Prominent Economists Call for End to Fractional Reserve Banking

Discussion in 'Politics' started by poncho, Apr 30, 2014.

  1. poncho

    poncho
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    Challenging a Sacred Cow of Banking Dogma

    Excessive leverage by the banks was one of the main causes of the Great Depression and of the 2008 financial crisis.

    As such, lower levels of “fractional reserve banking” – i.e. how many dollars a bank lends out compared to the amount of deposits it has on hand – the more stable the economy will be.

    But economist Steve Keen notes (citing Table 10 in Yueh-Yun C. OBrien, 2007. “Reserve Requirement Systems in OECD Countries”, Finance and Economics Discussion Series, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board):

    The US Federal Reserve sets a Required Reserve Ratio of 10%, but applies this only to deposits by individuals; banks have no reserve requirement at all for deposits by companies.

    So huge swaths of loans are not subject to any reserve requirements.

    Indeed, Ben Bernanke proposed the elimination of all reserve requirements for banks:

    The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

    Economist Keen informs Washington’s Blog that about 6 OECD countries have already done away with reserve requirements altogether (Australia, Mexico, Canada, New Zealand, Sweden and the UK).

    But there is a growing recognition that this is going in the wrong direction, because fractional reserve banking can destabilize the economy (and credit can easily be created by the government itself.)

    It was big news this week when one of the world’s most prominent economics writers – liberal economist Martin Wolf – advocated doing away with fractional reserve banking altogether… i.e. requiring that banks only loan out as much money as they actually have on hand in the form of customer deposits:

    Read More At: http://www.washingtonsblog.com/2014/04/conservative-economist-wants-basically-ban-banking.html
     
  2. InTheLight

    InTheLight
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    The problem is that most of these economists are calling for full reserve banking, i.e., the bank must have equivalent assets on deposit in order to make an equivalent loan. So if someone wanted to take out a $15M loan the bank would need to have $15M on hand. Also, if there was ever a run on money at the bank, everyone would get their money back. Sounds sensible at first glance.

    But if this were policy the economy would slow down to a terrible crawl. Hostile nations might provoke war knowing that the US could never borrow more than they had on hand.

    It might be a good idea to increase the fractional reserve from the current 10% minimum requirement to perhaps 25% or 30%. And in reality most banks are at about a 55% to 60% loan/asset ratio, that is, they have assets covering 40% of their loans, not the 10% minimum allowed.
     
  3. preachinjesus

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    Steven Keen is only a "prominent economist" among Australians who don't understand economics.
     
  4. poncho

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