Fractional reserve banking...recipe for disaster?

Greetings,
let me start off by saying I studied biochemistry and astronomy in university so my knowledge of Economics (specifically banking) is limited. I tend to approach things with much skepticism, so I thought that I would post here to get a consensus.

I am beginning to research the concepts of debt, debt based money, and this formula: P < P + I

If you have the time, can you take a look at this video and please let me know if this is totally off base or is a valid criticism of the standard economic models

Short 10 minute videos:
PT1 - Revisiting American History
http://www.youtube.com/watch?v=l37RhdFGVsM

PT2 - Free Market Illusion
http://www.youtube.com/watch?v=BGTBkNJ8ZWI&feature=related

PT3
http://www.youtube.com/watch?v=a2VDC8UQ3c8&feature=related

Pt4
http://www.youtube.com/watch?v=aIsheDSCBK0&feature=related

His thesis seems to be pointing out the flaws in Neoclassical Economics which he lists:
Flaw 1. Neoclassical Economics assumes free, rational, economic actors by ignoring power differential of debt
Flaw 2. Neoclassical Economics ignores the issue that our money is debt
Flaw 3. Neoclassical Economics ignores the artificial scarcity condition
Flaw 4. Neoclassical Economics equates net worth with value creation

are these valid arguments?
Is a Bond really just a debt instrument?
Is Long term capital control the key to the apparent inequality in this system?

 

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Here's a longer, more light-hearted version:
http://www.youtube.com/watch?v=ZPWH5TlbloU

 

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No one has time for a 30 or 40 minute YouTube video. You can't summarize it for us?

 

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tl dr

debt, debt based money, and this formula: P < P + I
Does this formula ensure that we will always be in debt?

flaws in Neoclassical Economics:
Flaw 1. Neoclassical Economics assumes free, rational, economic actors by ignoring power differential of debt
Flaw 2. Neoclassical Economics ignores the issue that our money is debt
Flaw 3. Neoclassical Economics ignores the artificial scarcity condition
Flaw 4. Neoclassical Economics equates net worth with value creation

are these valid arguments?
Is a Bond really just a debt instrument?
Is Long term capital control the key to the apparent inequality in this system?

 

Here is a definition of a bond:
"A certificate of debt (usually interest-bearing or discounted) that is issued by a government or corporation in order to raise money; the issuer is required to pay a fixed sum annually until maturity and then a fixed sum to repay the principal."


Here is a sentence about fractional reserve banking:
"Fractional-reserve banking is the banking practice in which only a fraction of a bank's demand deposits are kept as reserves (cash and other highly liquid assets) available for withdrawal. The bank lends out some or most of the deposited funds, while still allowing all deposits to be withdrawn upon demand. Fractional reserve banking is practiced by all modern commercial banks."

from this link:
http://en.wikipedia.org/wiki/Fractional-reserve_banking

 

thanks for the reply. I was aware of the wikkipedia definitions for both bonds and fractional reserve banking;

what I am mainly looking for is context. Do you have an opinion as to FRB and its characteristics such as longevity or implementation? When factoring in human tendencies such as greed and dishonesty, does FRB eventually lead to bubbles and crashes?

Also,
P < P + I
Does this formula ensure that we will always be in debt?

 

I have not and am not going to look at your links, but I do have an education and background in business, finance and economics. The anti-fractional banking proponents are the luddites of the financial world.

There is nothing wrong with the current "fractional banking system" providing it is well regulated. And we know how to regulate banks, we have done so for almost 70 years. The problem we have in finance and banking is political corruption (e.g. repeal of Glass-Stegal). And the good news is that a severe banking crisis can be fixed. We know how to do it. In the US, we just did it. But it takes political will and guts. We in the US damn near went off the edge because of political corruption. Fortunately there were a few brave souls in Washington willing to do the right thing for the country and we dodged this bullet.

Your real question should be directed at political systems and corruption.

Our current banking crisis was brought about by the repeal of regulations and lessons learned from the Great Depression. The fractional banking system is very efficient. If you want to rid yourself of it, then you need to understand that banking is going to get prohibitively expensive for the average Joe and Jane. And interest rates are going to sky rocket. That in turn will result in severe economic contraction and high and prolonged unemployment.

 

I assume you mean:
Principal < Principal + Interest

If you get a loan from a commercial source (as opposed to family), they will always want interest so P < P + I will always be true.

If you never get a loan, you're not in debt.
If you pay the loan off, you're out of debt.

I don't see what you are getting at.

 

I don't see what he's getting at either. But there ARE wackos out there that believe our banking system, the FED and other things all exist for the sole purpose of "keeping the poor poor" and/or controlling the money supply solely for the benefit of some imagined elitist group.

Now, I'm not about to waste my time watching any of those silly videos he linked to but I strongly suspect they are the products of some of those woo-woos. :shrug:

 

thanks. I was not really concerned with Joe Smoe as much as the perspective of a small business or a small bank where loans are a necessary and critical to daily operations:
1. Small business - loans for payroll, employee benefits, cost of doing business

2. Small Banks - that need to borrow money from Federal Reserve at interest

 

How did we "fix" the banking crises when the same culprits that helped create the crash were deemed "too big to fail"?

There would have to be some sort of accountability before you can say that we fixed the mess.

 

I think that you should keep an open mind. they are only 10 minutes long; surely someone of your educational background could take a gander....


as far as the Luddites of the financial industry, I don't count myself amongst them, but why are you so quick to dismiss a new model if the current model seems to be failing?

 

right now interest rates are still very high for those in need. payday loans for example

what are the flaws that you see in FRB?

is there another banking system that you see as tenable?

 

Wealth inequality
http://www.washingtonsblog.com/2011/01/inequality-is-worse-in-america-than-in.html

 

If you paid attention to what I wrote and obviously you did not, I said the problem was not the banking system but the political system and corruption. The rules that kept our nations financial system worked well for the last 70 some years. It is only when government at the behest of special interests changed the rules that the banking system got into trouble.

The problem here is political not economic. And as long as fools go around trying to blame the banking system, they are going to set themselves up for the next big bank disaster and will have learned nothing.

 

Payday Loans are not issued by banks. Every loan would be at Payday loan rates if you want to get rid of the "fractional banking system".

I am a supporter of the FRB and think it has worked fairly well. The biggest flaw of the FRB is that it is run by fallible humans. And humans make mistakes. The FRB lives as do all of us in a world of imperfect information.

 

The issue here is political. It is not a banking issue.

 

I paid attention.

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You said that the US "fixed" the banking crisis.
Im not so sure that is the case
"Too big to fail banks?"
http://www.npr.org/blogs/money/2011/01/26/133238907/still-too-big-to-fail

Greenspan "Crisis will happen again"
http://news.bbc.co.uk/2/hi/8244600.stm

http://www.csmonitor.com/USA/Politics/2010/0511/Will-financial-reform-end-big-bank-bailouts

So, you are saying that it is sound fiscal policy for a bank to loan out much more money than what it has in reserve? How do you prevent runs on the bank?

If FRB is susceptible to "corruption, greed, and politics" then can you envision another system that is less likely to cause bubbles and then crashes; one that is more resistant to human frailties?

 

How's about the United States Government. Isn't every dollar printed by the Federal Reserve associated with interest that the people of the US will have to pay back?

 

http://www.netbanker.com/2006/10/us-bank-payday-loans.html
payday loans from a major bank delivered through its online banking program. Minneapolis, MN-based U.S. Bank, not known for its pioneering work in online banking, quietly added payday lending to its platform recently

http://www.fdic.gov/bank/analytical/fyi/2003/012903fyi.html
While the payday lending business presents banks with new growth opportunities, it also presents significant risks. To be sure, higher pricing on payday loans promises higher revenues and wider margins for lenders.

also, we can discuss the practice of "subprime lending" in which banks lend to those in need pay in exchange for super high interest rates