Credit unions use fractional reserve banking. How do you think they make loans?
There are in fact some coherent arguments for the abolition of fractional reserve banking, and it’s worth talking about. But you can’t expect anyone to take you seriously with hyperbolic nonsense and links to a UKIP video. There’s a pretty good summary of both sides here:
Yeah, that made little sense. VC needs bankers, just like anyone else. Being a banker to VC isn’t doing VC.
The real reason SVB went bust is because they believed the ‘inflation is transitory’ message from the Fed and the Biden administration. Had inflation actually been transitory, interest rates would not have gone up as much, and SVB would be fine.
But if you believed that inflation was more structural, as was obvious if you looked into the data and didn’t buy into modern monetary bullshit, buying 10 year bonds at 2% was nuts. I mean it was buts anyway to tie up capital in ten year instruments when their lending cycles were much shorter, but buying long bonds in a rising interest rate environment was crazy.
As for fractional reserve banking, there are alternatives. I don’t know if they would be better, but they do exist. One is to create two tyoes of deposits: liquid deposits pay no interest and maybe even carry higher fees, so the bank can profit from them. But longer term investments could generate interest, but it would be made clear that the bank will be re-investing that money and will simply not be available until the term is up. So all cash that must be available at any time is 100% backstopped. Runs on the bank would be either impossible or rare. Banks would be required to invest depositor’s money in a time frame that guarantees the capital is returned before the deposit term ends.
On the other hand, that would crush bank profitability, which would likely drive up the cost of borrowing. And banks with crushed profitability are more likely to look for other ‘creative’ ways to make money which could open them up to more risk of a different sort.
The immediate result would likely be a reduction in borrowing, lowering the velocity of money and shrinking the money supply. In inflationary times that might be helpful in controlling inflation, but in normal times would likely result in lower economic growth, less borrowing, and more competition for scarce capital bidding up prices for borrowed money. Whether that’s good or not depends on how you value those factors.
Hardest hurt would likely be poor and lower middle class people who need to borrow money. Everything from cars to housing would be more expensive for them. For rich people who can hold large cash reserves, not so much. Also hurt would be startup businesses and really any business that has large working capital requirements. They would earn no interest on that money.
Another potential consequence is that you could see more private lending deals, more partnerships between people with money and those without, etc. If you can’t earn money from interest in a bank, the temptation to invest it in private deals will go up.
Jeez, if only those senior managers had agency, but no, definitely blame Biden and the Fed.
ETA: Are these the same senior managers that lobbied (and got) reduced regulations under Dodd-Frank?
This kind of political sideswipe as an intro kind of devalues any substantive point you’re about to make. Please point to any example of any politician (in power) ever saying that current economic problems are anything other than transitory?
I agree that Biden’s administration showed a lack of prudent foresight on inflation risks, but to imply that this is a partisan issue and that Republican administrations have historically behaved with foresight and prudence is just utter nonsense. The Republican vs Democrat record on the budget deficit is well documented, and let me link again to this:
…in 2018, following a wave of complaints from smaller banks struggling to handle the costs of complying with enhanced regulation, Former President Donald Trump, who described the Dodd-Frank Act as “a very negative force,” signed into law a partial rollback.
The bill increased the SIFI threshold to $100 billion and then all the way up to $250 billion 18 months later.
Note the last sentence. Both of the banks that just failed were in the size range that Trump exempted from the tighter regulation and closer scrutiny that had been implemented by Dodd-Frank after the 2008 crisis.
I said the problem was that they believed them. That’s on them. It should have been clear that inflation was not transitory - that was always a fairy tale meant to tamp down inflation expectations and not cause an even bigger problem. The fed always downplays inflation expectations and oversells its ability to ccontrol it, because inflationary expectations can exacerbate inflation. Always consider that when you hear the Fed speak.
The bankers should have known better, but it apoears we are in the Great Economic Forgetting, where we ignore everything we learned in the past because it’s inconvenient.
BTW, if the new Biden budget passes (it won’t, but…), expect more inflation and even higher interest rates. Those 1.6 trillion dollar deficits will have to be paid for with more printed money. Bankers who have forgotten the fundamentals, take note. Stagflation sucks.
Hopefully you can see from the above that I didn’t intend to make it partisan. I agree with you - this is normal behaviour from politicians and thr Fed. Remember Bernanke saying he wasn’t worried about Quantitative Easing at all, because the Fed had plenty of tools to painlessly unwind it? Yeah, good times. He was a Republican and chair of Bush’s Council of Conomic Advisors before heading the Fed. He helped kick this mess off, and it was well underway long before Biden took power.
But by far the most common economic forgetting is when right wing administrations who don’t understand markets repeal or loosen sensible regulations that were introduced after the last financial crisis, after industry lobbying that the regulations are hampering short term profitibaility.
Interest rates went up because the Fed raised interest rates. The fact that this was motivated by the Fed governors believing that inflation would otherwise be persistent does not demonstrate that inflation would in fact otherwise be persistent.
Given the rate at which inflation is receding and comparing the timeline to the expected timeline for interest rate hikes to take hold, it seems more likely that the recent inflation spike is a transitory effect of demand recovering faster than supply as the worst of the COVID pandemic recedes.
Can you point to where I said anything like that? I don’t recall mentioning Republicans at all, except for the last message where I agreed that Republicans are also guilty.
You may have a good point about Trump. I haven’t looked into that at all. But Trump i# just as bad as Democrats when it comes to fiscal matters. He spent money like a drunken sailor, announced that entitlement reform is off the table, while cutting raxes. All that was also inflationary and fiscally reckless.
The Trumpoids in Congress are already pledging that they will fight to the death to prevent changes to entitlements. Well, soon they won’t have a choice, because interest on the debt is going to wipe out the discretionary spending budget as the debt rolls over. We can deal with hard issues now while we have some runway, or deal with them when everything crashes.
Are you anticipating that tax revenues will go to zero?
Republicans notoriously start worrying about the deficit at the moment they lose power. But when they gain power, they cut taxes without cutting spending. That’s why they have a far worse record than the Democrats on deficit reduction.
Your introductory sentence set up a narrative that inflation is Biden’s fault, the same false narrative that is pushed constantly by the Republicans. I don’t think it’s unreasonable for me to assume that you are pushing that same false narrative until you make it clear that you are not.
Moderating:
While it is difficult to discuss aspects of this matter without invoking politics, MPSIMS isn’t the forum for it. We have a whole forum dedicated to politics. Please remove further political dialogue in this discussion to that forum. Thanks.
This is a general mod note to all participants. Further political discussions in this thread will result in warnings.
Moderating:
Let’s dial back the snark by both @SmartAleq and @Riemann and the hijack by @SmartAlec. Thanks.
Point taken on the snark, but I don’t know what you mean about a hijack with respect to this issue. A substantive discussion on the implementation of fractional reserve banking is directly on point.
(Acknowledged that a discussion of the politics of deficits & inflation is not.)
We are straying into hijack territory, but I was giving Biden the benefit of the doubt that all his tax increases would in fact produce the revenue he thinks they will, without hurting economic growth. I think that’s actually laughable, and the deficits would be much higher than they project and economic growth will be hurt.
Yes, that’s true. Go back and see what I said about George W. Bush’s spending and deficits, and what I just said about Trump. I tell Republicans all the time: spending IS tax. Eventually. You can’t have low taxes and high deficit spending without eventually having high taxes. The growth effect of tax cuts is not going to offset the loss in revenue except in extreme cases. And in the right economic era, tax cuts can be terrible. With the debt well over 100% of GDP, we would get more bang for the buck by assigning taxes to deficit reduction instead of cutting taxes.
The worst case, however, is increasing taxes so you can increase spending during an inflationary, low growth era where the government has already broken through historical debt levels. If anything, we should be increasing taxes and cutting spending, and applying the difference to the debt until it’s back under 90% of GDP at least, or until inflation is under control.
I have long been a loud critic of both sides of the aisle on economic issues. In Canada, I reserved my harshest criticism (before Trudeau) for the Mulroney government, and said that the best government we’ve had in my lifetime for fiscal stewardship was the Chretien/Martin liberal governments. But I think you guys have a model of me as some kind of ‘generic Republican’, and you keep assigning beliefs to me that I simply don’t hold.
Moderating:
I’m going to give you the benefit of the doubt that you missed the mod note just 2 posts above this one. Don’t post further on the political aspects of this issue in this forum.
More moderating:
You’re arguing moderation in this thread. Please drop it now, or risk getting a warning for disregarding moderator instructions.
Huh? I can’t ask for clarification of what you mean? I just wanted to be clear on what areas you were saying is a hijack.
Not in the thread. Try a PM.
I’ve reviewed the flags and meant to admonish both you and @SmartAleq for snark and @SmartAleq for the hijack. I’ve edited the original mod note to so reflect.
My apologies for not clarifying it sooner. There were 2 flags coming simultaneously and my original mod note to you both did not make that clear.