It is only fraud if you are told they are not going to lease the chair out and then they do and you don’t get the chair when you demand it. I could easily create a bank that had an insurer guarantee the demand deposits and then use the guarantee to minimize the cash on hand. The only obligation is to provide you the money on the terms we have agreed.
Isn’t the bank under the same obligation to pay you when the CD matures? What happens when the CD matures and they don’t have the money? Is that fraud? The only difference between the CD and the demand deposit is that the CD has a specific maturation date and the demand deposit matures at the time the depositor chooses. Once you understand that time is money then the length of time is irrelevant.
The point is whether I use your money for one second or one year I am still obligated to return it to you at the given time. A demand deposit is nothing more than a shortened loan period. The whole purpose of banking is to receive money and then loan money out.
No you couldn’t. Nobody with any sense would underwrite that. Insurance only works with quantifiable risks; you’re asking them to insure against an event of unknown probability and impossibly huge payout.
Of course you could insure demand deposits. There is X amount of demand deposits that is the total risk possible. It is very quantifiable and easily insured.
Hmm, you’re probably right. I looked it up further and I saw nothing about limiting excess reserves. It looks like last-resort-lender policies and all that stuff makes full reserve a lot less profitable.
As a side note, contracts in which gold is used as currency are unenforcable [1]. But this pertains to the gold standard.
If you have insurance for something that will pay out, say, $1000, and the insurance company knows the probability of having to pay out is, say, 1%, it knows it’ll have to pay out on average $10 per client (per year, or whatever), and charge its clients appropriately. If you have insurance for bank deposits, the insurance company has no way to estimate the probability of default - I suppose the only sensible thing it could do, if it wants to survive, would be to assume it’s 100% - so the cost of insurance would be equal to the total of the bank’s deposits (or at least the insured portion)…but it only has a small fraction of that amount, by definition, and needs that to support the customers until the inevitable default arises…
Of course you can estimate the probability of default. The insurer would know where and for what the bank is lending money. Are you really trying to say there is no way to measure credit risk? That is all we are talking about.
Are there any real insurance plans out there that insure a loan against default?
I know they have things like CDS but those aren’t insurance policies per se.
This is what you’re really talking about here, loan insurance and not deposit insurance because there is no way to do a 1:1 deposit to loan matchup when it’s all about ‘money management’ as you like to claim.
It is also quite telling that the FDIC is the only form of deposit insurance out there since the private sector won’t touch it with a ten foot pole. They didn’t privatize an already existing plan but had to make it up all on their own with the taxpayer being ultimately responsible for backing the deposits in case all the insurance runs out.
Insurance companies aren’t too keen on the whole ‘privatize the profits and socialize the losses’ when they’re the one who are paying for the socialism and their customers are getting all the profits.
I have a mission for you Max, find us a historic free market banking system with both fractional reserves and insured deposits that was ‘free’ in the sense that they couldn’t suspend specie payments or get any other kind of bailouts when things went bad.
Shouldn’t be too hard if such a system is possible…
I’d also like to see an example of an insurance plan where the risks are directly tied to the activities of the insured but I know that no such animal exists.
What you fail to factor in is that loaning money out is profitable. If the profit rate is greater than the default rate then the deposit which is backing the loan can be insured. This is how insurance works.
The problem with fractional reserve banking is not whether it is profitable nor whether the bank can perform some cash management hocus pocus capable of preventing a run nor even whether the depositors know that their money is being held under a fractional reserve system.
Fractional reserve banking is fraud because in a given moment of time two or more people each have a claim to 100% of the existing goods. If the depositor knows this, the only difference is that he is a willing party to the fraud commited against everyone else.
A time deposit does not have this problem, during the period of the deposit the depositor has no claim to the money, after the term the bank has no claim to the money.
The negative effects of FRB are just a symptom, allowing systematic fraud leads to economic problems - it should not surprise anyone who thinks in principles.
Merging two world views into one theory creates a seam. It is at this seam that a new theory is weakest. The reason this debate always pops up is because it hilights a criticial weakness in the seam sown by Murray Rothbard in his merger of Austrian economics with libertarianism.
Traditional austrian economics via Mises provides a sound economic critique of FRB. Libertarianism, on the other hand, espouses the primacy of contract. According to the libertarian, if two consenting adults choose to enter into an FRB style contract no one can forcibly prevent them from doing so. This denial and acceptance of FRB puts the austrian economist and the libertarian at odds.
Sowing together these two intellectual edifices with their differing opinions on FRB is therefore impossible, though Rothbard has attempted to do so (as has De Soto), usually through long and drawn out legalist arguments. There is such a panopoly of debates on this subject on Mises.com because it’s pretty easy for many to see through Rothbard’s weak seam; the inherent contradiction between Austrianism and libertarianism. At the same time, the anti-FRB fire control crowd comes to parrot Rothbard and man the weak link. Fireworks ensue.
On the whole, Austro-libertarians just need to accept the FRB weak-link as the price to pay for uniting two grand theories. To assume an entire intellectual edifice to be coherent and non-contradictory is sheer silliness.
Fractional Lending is the root to our dysfunctional financial system. This is why we need the FED to be our “lender of last resort”. Just think about a world without it; banks could only loan those deposits which depositors want to invest and gain a percentage. All other deposits have to be kept and can not be loaned. When this is done balance sheets are balanced and we don’t need any central bank to provide for anything. Market interest rates are to be determined by the supply of depositors to bank (expecting to earn a return) and companies, individuals and governments borrowing this money from banks. There is no room for mistakes here and business cycles are avoided. [:)]
I hope we all agree that if the people using a bank agree to how the system is being used then there is no fraud. So the question is do you think in a free society, people will agree to use this fractional reserve type of system? I say Yes.
Please explain the actual mechanics of why you think it is a ponzi scheme. If I agree how my money will be used and the risk associated with it how is that a violation of a libertarian principle?