Anyone have one that would serve well in explaining its ills to younger minds?
It’s like a kindergarden in a poor country where the students have to bring their own sandwhiches to lunch.
The teacher puts them in the refrigerator for the kids until lunchtime.
While the kids are busy playing outside, the teacher sneaks in and sells most of the sandwhiches to strangers.
“What will you do when the kids come back for lunch?”
“Hope most of them aren’t hungry.”
Fractional reserve banking is like when you buy a car but it has no wheels or no engine, and no muffler. You thought they were there, and he didn’t explicitly tell you that they weren’t, so its basically theft/murder.
It would be like selling 500 ‘personal’ parking spaces to 5,000 people.
Or like telling everyone in a game of musical chairs that their seat is reserved.
do you here say that fractional reserve banking takes place now ona national scale?
are all of you worse or better off? can you say that gold/silver used to get additonal gold/silver out of the ground would have made you less wealthy than you are?
Selling more plane or movie tickets than seats available.
Insuring overall greater value than the total premiums paid.
HAHAHA! Hilarious. Thanks.
yw[Y]
The kids in school analogy can be extended to explain the FDIC:
When the angry parents come to the principal and threaten to leave the school because of stolen sandwiches, the principal has an answer.
“I personally guarentee every last sandwhich if some evil teacher steals yours.”
Pleased and happy, the parents go home.
When the inevitable theft happens, 30 parents come to the principal demanding their sandwhiches back.
“Fear not, I have it all right here for every last one of you.”
The principal takes out a spare sandwhich of his own, cuts it into 30 pieces, and hands it out.
“I am a man of my word,” he says.
[:D] Nice Stuff
The kids lunch example should be placed in a Mises Comic Book for highschool students.
Doesn’t this happen though, because not everyone who reserves a ticket actually shows up…
I find that a train analogy always works.
Let’s say that the train represents gold, the coal represents paper money, and the tracks represent the state of the economy. The bank is the train station. And people are demand deposits.
You can put more coal in the in the train to make it faster (good) but if the tracks are doing strange things or are messed up(messed up economy), going to fast would derail the train. (and the banks lose all the gold) A lot of people die (you lose demand deposits) and no one wants to go to that train station anymore (the bank loses all its business) So when the dead people want their gold back, a lot of it is missing because a lot of the train went missing in the crash.
…
Ok, maybe that didn’t work.
Yes, it happens, and this is where the analogy is all the more relevant. I fly pretty often, at least once a month and have done for the past two years, I know people who fly more often than that and nobody I’ve spoken to has every complained about not being allowed on the plane because the airline overbooked. In order to maximise profits the airline must calculate the probability of people turning up, and weigh the benefit of the extra revenue from the ticket against the loss associated with having to compensate those who have been denied access. It turns out that airlines are fairly competent at this, I see no reason why banks should be any different.
There are a few a differences.
- If the airline guesses wrong, who loses? They do. Unhappy customers are created, who will look somewhere else. And of course the airline has to refund the customer out of pocket if he doesn’t get a seat.
If the bank guesses wrong, who loses? Not the bank. The FDIC will reimburse the customers. The customers don’t care, as long as they get their money. The only one losing is the taxpayer, who has to foot the bill for the bank’s mistakes. But he doesn’t know about every bank that fails. And if he lives 3,000 miles away, the bank would not have gotten his business anyway.
So the banks have NO INCENTIVE to do it right. And guess what? they don’t get it right, do they? They have been going bankrupt like lemmings off a cliff.
- The forces deciding how may people will go on a plane at a given time of year are pretty constant. The guy whose parents live in Omaha will probably go there every year at the same time etc. Of course, a few observations are needed to see if this is really true, but once established as afact, it is pretty reliable.
In other words, the airlines are dealing with a very simple predictable thing.
The banks, on the other hand, are dealing with the ever changing wildly unpredictable. Is this guy who just walked in worth lending money to? Will there really be enough rich people who can and who will want to buy the luxury apartments this fellow wants to build?
How good are they at this? LOL, look at how many are bankrupt.
This is not a difference, it’s a similarity. If anything, banks loose more, because nothing can save them once their soundness and reliability is questioned/compromised.
Sure it does. It goes out of business.
Don’t conflate free-banking with our current quasi-socialist system.
No it’s not. It’s not any more constant/predictable than changes in the demand for money.
And the demand for money usually rises at the end and beginning of every month.
The last 40 years of American economic growth has been disproportionate and polarizing. Does this mean that capitalism must necessarily lead to polarizing and disproportionate social growth patterns? Again, our current system does not say anything about FRB under a free-banking system/regime.
If you want to refute the free-banking position then by all means, go ahead. But don’t look for deceptive and meaningless analogies to demonstrate your point.
Hang on just a minute. I was indeed talking about “our current quasi-socialist system.” Which I presume is what the OP was talking about. So most of your remarks don’t apply.
Who is talking about changes in the demand for money? We are talking about running a bank. Which means more than anything else “Who is the guy who will actually repay my loan?”
There is a literature that tackles the problem of predicting airline passenger volume using matematical methods. Some formulas are more succesful than others, but I’m assuming that ultimately some formula fed into a computer is how the airlines decide. Are you saying you can write a program that will know wether to approve a loan?
You missed the point here as well. Everyone wants money. The question is who to lend it to.
This topic is about fractional reserve banking, and not about our defunct system. A Socialist, a Keynesian, a Monetarist, and any average person can and will tell you that our current system is inherently flawed. That’s not what’s being discussed here.
Way to miss my point.
Let me spell it out for you: airlines have to measure market demand conditions and act accordingly. They may employ the use of mathematical models which aid them in this endeavor. Likewise, banks have to understand current market demand conditions for money and credit, and like airlines, they can employ mathematical models which can aid them. Such mathematical models categorize their assets (loans) according to risk, amongst other factors. Once they figure out demand conditions, they determine their capital/leverage ratios, and competition sets interest rates.
Are the mathematical models entirely sound? No, because they don’t account for radical uncertainty. But this is just as true for banks as it is for airlines.
The rich have been getting wealthier, and the poor have been getting poorer. This is asymmetric growth, and its not typical of capitalist market economies. The period between 1880-1896 saw 85% rise in real wages across the board. The great virtue of free markets is that it economically elevates all of society, and not just a select few. The cause of this asymmetric growth, which began in the 70s, is inflation.
Use logic.
The arguments against Fractional reserve banking are just as applicable to banking as they are to almost any other industry/sector. Thankfully, the Rothbardian argument against FRB is not, in anyway, valid.
Way to miss my point.
Let me spell it out for you: The airline problem is very simple, relatively. Think of it as making a mudpie. The banking problem is a million times more difficult. Think of it as catering an elaborate wedding.
How did you reach this conclusion? Why are airlines inherently better at predicting future demand conditions? Why is their crystal ball so much better?