http://market-ticker.org/archives/1490-Mish-Hard-Money-Goes-Off-The-Rails.html
I have class, so I may be reading it hastily, but what it seems he’s saying is, “Fractional reserve is not fraud. There is a difference between a loan and expanding credit. Not all loans are fractional.”
His conclusions don’t follow his thesis. He seems to, ultimately, agree with “Mish”.
Building the house is not money creation, it is value creation. Big difference.
This guy is completely missing the point that loans are supposed to be made on time deposits, not demand deposits, which technically can not be loaned out. Loaning out demand deposits is fraud, loaning out time deposits that have been given over with the intent of investing them to earn a return is not fraud. Collateral is not money, too. Credit is the advancement of real resources to fund a productive process with an expected return and an understood risk going in, not the creation of money out of thin air to do the same by taking funds not meant for investment and loaning them out. He misses the real resources aspect by confusing money with a house. The whole point of saying fractional reserve banking is fraud is specifically because there is no house backing the money lent out as credit.
Supposed to? Who cares? If we (the bank and the depositor) agree then there isn’t any fraud.
“Mish” also fails hard at addressing this:
Not a single libertarian could believe you own value.
If the bank and the customer agree to it then it really isn’t really a demand deposit now is it?
I didn’t say they owned value, I said they created it. Learn to read. Creating a house is not the same thing as creating money as the article’s author says. Creating house out of raw materials is creating value, a valuable thing which may back credit, or for which someone may pay money. It isn’t money creation unless of course people are using houses as the general medium of exchange. If that’s the case where you are, then not only do I suggest reading classes once more, but I want to see your pants. You must have huge pockets.
At base the disconnect between real resources available in the economy the amount of money in circulation and its value relative to those resources is the issue this author, and you apparently, miss. Fractional reserve banking is part of the reason for that disconnect.
I don’t see why not. Its been commonly accepted for quite a while and they may call it whatever they want.
That was “Mish” who I was correcting… so relax.
This author was correcting an article by “Mish,” who also made a completely false claim. Which I corrected. The point you made, that loans aren’t supposed to be made on demand deposits, was a non-sequitar. If there is an agreement its doing exactly what its supposed to, which means it isn’t fraud.
The model never succeeded in a really free market - No, there’s never been a really free market so the merits of fraudulent reserve banking have never been tested in the field.
Now, considering that fraudulent reserve banking has always been in bed with the state, one wonders how widespread could fraudulent reserve banking become in a free market…where no government can prop it.
Your first sentence renders any point about any specific banking system moot, as the merits of all banking systems have never really been tested absent the state.
No it doesn’t. It just shows that ‘arguments’ based on empirical evidence can’t prove what you want them to prove. OTOH arguments based on theoretical considerations (such as “a thing can’t be both lent out and available on demand”) and empirical data regarding government intervention on behalf of bankers do greatly undermine the case for fractional reserves.
So the entire comment was a non-sequitar, as I didn’t make an “argument” for FRB based on empirical evidence. What I did say was that what is/can be and isn’t/cannot be a demand deposit is irrelevant to the question of whether FRB actually is fraud.
And ideas such as “option clauses” really make such theoretical considerations pointless and you should certainly should know that government has also intervened for full-reservists as well.
No. My comments were clarifications on issues that are being obfuscated.
Are you joking?
Your comment about “fraudulent reserve banking” never succeeding in a free market clarified the issue of how it not really being a demand deposit and thereby constituting fraud? Really?
Well you can call it a zebra for all I care, what’s relevant is the nature of the thing, not its label.
If there is an agreement, yes, it’s not fraud, so long as all possibilities are stipulated, such as not being able to produce money on demand because it’s been loaned out. It’s also not a demand deposit even though it may be called that, and even though the bank may produce another slip of paper to give to the customer if he demands it, that’s called a pnzy scheme because they’re using other people’s property to pay out to you and just hoping not everyone comes in all at once. As for your contention that you were correcting Mish, I call bullshit. The article says this:
That was not quoted from Mish’s article in any way that I can see, it was the author’s wording. If that’s you, then you screwed up, because building a house is not creating money, it is creating a valuable thing for which money may be given, or which may be used as collateral for a loan of existing money. No money has been created. To create money you either have to produce more of the money commodity or trick someone into thinking you’ve done so with fraudulent receipts to nonexistant money property. The creation of money not backed by real property is fraudulent regardless of agreement because there’s more people involved at that point than just the depositor and the bank. There’s the people who receive the loans and this hinders the bank’s ability to pay out actual demand deposits it has outstanding. By engaging in fractional reserve banking that’s what they’re doing, and unless their agreements with existing customers stipulate that they may not be able to pay out on demand, they are committing fraud.
Exactly, not fraud, Sorry “Mish”
If the contract stipulates that the bank can produce money on demand even if Its not a Ponzi scheme either. A Ponzi scheme is a form of fraudulent investing while FRB generates actual legitimate profits by providing a demanded service through purely voluntary agreements.
You can stop right there.
I corrected “Mish’s” claim that it was unlibertarian, and therefore fraudulent, because it robbed people of value. You are critiquing the author, Karl Denniger, who made no attempt to refute 'Mish"s very false claim. So what you have written isn’t pertinent to my specific correction.
I took some issues with Mish’s article, but this “rebuttal” is fundamentally flawed. In fact, it borders insanity.
A fractional reserve bank obviously balances its assets and liabilities. There is no such thing as fractional asset banking → this is simply a different way of saying insolvent bank banking. FRB is holding a fraction of RESERVES against DEMAND DEPOSITS.
Unchecked FRB can easily lead to asset-liability mismatch and insolvency. Look at the housing bust. Assets and liabilities were matched when houses and their mortgages were worth historically high prices. Yet the banks’ assets collapsed IN TERMS OF DOLLARS, while their liabilities remained fixed IN TERMS OF DOLLARS.
Banks operating on FRB must refrain from issuing credit (creating money) that is not matched to savings rates. Otherwise, it triggers a business cycle. At first the bank appears quite profitable. Its assets are gaining value relative to liabilities. Yet soon things reverse.
FRB can technically work, so long as credit issue remains bound by real savings. However, a much better (IMO) way to issue credit would be through time deposits or other methods that guarantee real savings are available.
This is some of the stupidest bullcrap I ever heard.
Not the issue. The issue is fraudulance. And unless the contract has a “We can tell you to go screw yourself” clause for so called ‘demand deposits’, at some point the bank is lying to someone. But if eveyrone signs that contract then so be it. So here we have You and … <— A Million or so Miles —> … and here we have The Point; The Point being that if people agree the money is at risk and they might not get it back, then it isn’t a demand deposit and the ‘bank’ doesn’t need reserves to cover it, and we’re no longer talking about fractional reserve banking which is really a function of fraudulent warehousing of money property, but about investments which come with risk and which you explicitly state is disclosed prior to the act of investing in a contract.
And incorrectly so by playing with labels and ignoring reality. Fractional reserve banking is fraudulent. Relabeling investing as fractional reserve banking and then claiming it isn’t fraudulent isn’t an argument, it’s bullshit.
Are you even trying to make sense? I make a point about fraudulence and you reply “Not the issue. The issue is fraudulence.” Honestly?
There is no point where the bank has to be lying to someone, people who agree to the contract and put there money in the bank certainly aren’t being defrauded. And people who accept the bank notes as a form of payment aren’t being defrauded as they are under no obligation to accept them.
And again that isn’t the point at all. As we’ve already agreed, what its called is irrelevant, they could call it a zebra. The point is whether FRB is inherently fraudulent and whether you have the right to value, which it clearly isn’t and you clearly don’t. Sorry “Mish”
Right “incorrectly playing with labels” as opposed to “correctly playing with labels.” Fractional reserve banking obviously isn’t fraudulent due to the fact that both parties agree and the risk is clearly accepted. Only unlibertarian people like “Mish” who don’t understand the nature of value think otherwise.
do you agree with the promise theory of contract or the title transfer theory of contract?
are people who have accepted green shiny apples from the grocer not being defrauded as they were not obliged to accept them; even if when they get home they realise they have been sold poisoned apples?
just some questions to prompt debate on points of contention…
Good questions.
I agree with the Title transfer theory of contract.
If the grocer represented the green shiny apples as being apples, (as in being fit for their commonly accepted purpose of being food) and the people buy them while the grocer knows that they are in fact poison, then they are being defrauded. The grocer knowingly obtained the customers money without their full consent and is a thief.
If the customers are aware that they are poisonous then no.
I was refering to your aside on ponzi schemes. Either way I’ve already made all the points I want or need to. You are not talking about fractional reserve banking if people stipulate the money is to be invested and will not be available on demand. A bank need not cover such a ‘deposit’ with reserves.