# Full-Reserve Banking

Discussion in 'Business & Economics' started by Cellar_Door, Jul 11, 2011.

1. ### Cellar_DoorWhose Worth's unknownRegistered Senior Member

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Surely this would solve so many problems? Why is it not discussed as a serious option for banking reform in the mainstream media?

Fractional-reserve banking relies on exponential growth that obviously cannot be sustained and thus results in economic collapse.

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And surely you cannot be serious!!! It's obvious that you fail to understand that even without making a profit, a bank has overhead to pay. And then comes the MAJOR question - where is the money to male loans with, eh??

Not a thought-out suggestion at all. :shrug:

Oh, and before I forget: you apparently have little idea how fractional-reserve banking works anyway.

5. ### Cellar_DoorWhose Worth's unknownRegistered Senior Member

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Why would full-reserve banking prevent banks being able to lend money?

Person A takes out a loan and uses it to produce some goods. Persons B, C, and D buy these goods and A uses the money received in exchange to pay the loan interest and principal.

B,C, and D are better off than the were originally since their wants were satisfied and A both has money to pay back the loan and 'profits' to buy goods and services from B, C, and D who could then also buy from each other and A.

Everyone gets to accumulate more wealth (real goods) while no new money is created.

Banks want to be paid in commodities but want to pay you in paper, for obvious reasons.

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WOW!!! You really have no idea what you're talking about here. Full reserves means *exactly* that - every dollar (full) deposited MUST be kept in reserve - that's what FULL means. So there's not one penny to loan out.

And with nothing to loan a bank can't even earn what it needs to pay a single employee, the power bill OR *anything*. You've just killed ALL the banks in existence. They are now extinct.

I see in your profile that you are a student - that's a good thing because you still have a LOT to learn about some very basic things. Like how fractional banking really works and how it has helped advance countries and civilization itself.

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Two things. First the FDIC Insurance guarantee should go down, not up. It should be $50,000 per account. Secondly, the fraction on FRB should be 20%. This will fix the banks. 9. ### Read-OnlyValued Senior Member Messages: 10,296 You first suggestion would have little to no effect at all. I already have 16 bank accounts to keep all my deposits covered and I could easily go to other banks and open as many as I need if the guarantee is lowered. So could everyone else. :shrug: As to your second, exactly how did you determine that precisely 20% would "fix" the banks. I think you just pulled a number out of thin air. Besides, it still needs to be adjustable. 10. ### jmpetValued Senior Member Messages: 1,891 I agree. Go ahead and open 16 bank accounts. Didn't know you had half a million in your checking accounts. What's the current number? 10%? What is the effect of the FRB increasing it from 10% to 20%? Come on- you're a big boy- you figure it out. 11. ### Telemachus RexProtesting Mod StupidityRegistered Senior Member Messages: 249 Of course you are correct that full reserve banking means no loans can be made against deposits. Money *could* be lent against the profits banks earn though. Those profits would then become the account balance of the borrower, and earn interest. Of course the only place to get that cash would be to raise it from investors OR (and very likely concurrently) to increase fees on the depositors. That said, many people are going to avoid using banks once the banks stop paying interest and instead start charging depositors for the privilege of using the service. If a bank raised money solely from investors, and not from depositors at all, then why are they providing the net negative service to people who want to deposit money? They wouldn't. They'd only provide that service to people willing to pay them for that service. People want bank regulation, but I think they'd find paying the bank money just to have a checking account to be a "rip off." People really want bank regulation that will cost those people nothing. They might as well want a "magical spell of goodness" to be cast on bankers by Obama's fairy godmother. 12. ### PinwheelBannedBanned Messages: 2,424 Perhaps a better idea would be to seperate retail banking completely from investment banking. In retail banking you could restict lending to safe sustainable levels, where as the investment banking would be the place where investors could put thier money at risk (in return for potential higher returns). These high risk banks would then operate under the understanding that they would NEVER get a bailout. Anyway IMO full reserve banking would seriously hamper geniune wealth creation. 13. ### Cellar_DoorWhose Worth's unknownRegistered Senior Member Messages: 1,310 Personal insults aside, I don't know what your situation is (nor do I care) but that's a very simplistic way of looking at it. The key is to understand the difference between a deposit and a loan. This difference has been deliberately blurred by banks, governments and (in recent times) the legal system. If money is deposited for safekeeping, like a warehouse, then the bank will not pay the customer an interest; the customer will pay the bank to keep the money safe. If a customer wants to borrow money, to take out a loan, he may do so from people willing to lend out their capital, and this may be done through a bank acting as an intermediary. But the bank would not be lending out any of the money it has deposited for safekeeping. 14. ### jmpetValued Senior Member Messages: 1,891 Banks are in the risk business. They give out loans and take the risk that you might not be able to pay them back. This is where FRB comes in. Of course I have no sympathy for banks whatsoever but they have overhead to pay for being a bank. So they borrow$1 million from the Fed and in turn loan out $10 million in loans. The riskier the bank is, the more risk they will take (see:2008 housing bubble). The riskiest banks will loan out all$10 million, safer banks loan out $5 million. This is all important because when the SHTF, the banks- which may be worth$10 million- have \$100 million plus out there in loans which explains why they fall like dominoes.

Screw 'em I say- banks are to blame for the housing bubble, they should bear the burden. But having banks collapse is not good for America.

If the banks did FRB with a higher rate, they would be assuming more personal risk in their loans. This way if the lendee goes bankrupt, the bank takes more of a direct hit right in their fat wallets. This is why the FRB rate should be higher- banks should be more careful to who they lend money out to (see: NINJA loans).

15. ### adoucetteCaca OccursValued Senior Member

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How are the banks to blame because I know of nobody who decided to buy a house based on pressure from a banker to do so?

On the other hand, I know of a lot of people who bought far more house than they could afford if one of the two earners was to be unemployed for just a little while or took out low rate ARM loans assuming they could sell/refinance when/if the loan re-set at a higher rate.

But of course, these bad personal financial decisons were all the bank's fault.

16. ### jmpetValued Senior Member

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Yes they WERE the bank's faults, because the world is full of people ready to borrow money for a million different reasons but it was the banks that agreed to their whims and gave them those loans. Guess you didn't see:NINJA loans.

PS- what a surprise- you disagree with me.

17. ### PinwheelBannedBanned

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Banks of course have much of the blame to share. Reckless lending brought them down to their knees. No-one FORCED banks to lend to people with little or no chance to pay it back. Whats worse they thought they could sell the debt to a greater fool til the world ran out of fools.

18. ### adoucetteCaca OccursValued Senior Member

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Right,
The bankers dragged those poor buyers in through the front door and forced them to buy houses.
I did see NINJA loans, and they served a valid purpose, but because BUYERS abused them, it's the bank's fault for making them available.

What a surprise, you don't believe in personal responsibility.

19. ### adoucetteCaca OccursValued Senior Member

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Bank's can't make money on loans they keep in their portfolio if the borrower doesn't pay the loan back. And Countrywide, Wachovia and WAMU are no more because of this.

Some banks also made mistakes (they are run by people after all) but most banks did not and so to claim that the bubble is the bank's fault misses the point that every home buying decision starts with an individual's decision to buy a house.

Arthur

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I've made no personal insults - your childishness is showing. There's nothing wrong with not understanding something BUT there certainly is a LOT wrong with trying to shove your uneducated ideas onto others who actually know what they're talking about. And ALL the adults here certainly know the difference between a deposit and a loan! Sheesh!:bugeye:

Here's the real facts - banks are in business to make a profit THROUGH MAKING LOANS. Your concept of "warehousing" is OK as far as it goes, but what the bank gets for "keeping your money safe" is TRIVIAL to what they earn from making loans. And if they charged customers enough for that service just to pay their overhead costs, they would not have one single customer!!!

21. ### Cellar_DoorWhose Worth's unknownRegistered Senior Member

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You seem to be getting very angry about this and I'm not sure why. I haven't put forward my views in any way that could be construed as aggressive, nor is this some wild and unfounded theory on banking I've just made up that no one with any credibility in economics supports.
And, for the record, if using unrelated information from my profile in order to belittle me isn't getting personal, I'm not sure what is.

In a previous post you said:

"... a bank has overhead to pay. And then comes the MAJOR question - where is the money to male [sic] loans with, eh??"

I then made a reply in which I demonstrated that it was perfectly possible to lend money within a full-reserve system. All I got in return was more insults and a suggestion that this was all obvious anyway.

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Nope, I'm not one tiny bit angry. Again, you are mistaking one thing for another - what I HAVE been displaying (as I often do here) is emphasis. And nothing more.

The only reason I used the "student" info I found in your profile was to provide you with a way out - what is sometimes called "saving face". Unfortunately, you chose not to take it or failed to recognize it for what it was. :shrug:

And no, your suggestion of a way for a bank to make money while maintaining 100% reserves is quite silly because there are other businesses that operate as you described (but without the nonsense of full reserves either). You might mistake them for banks but they aren't. Things like venture-capital groups on the high end and Credit Unions and Co-ops on the low (common) level.

23. ### WorkaholicRegistered Senior Member

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I think the hang-up here is the original post was not constructed very clearly with regard to intent.

If the very defintion of a "bank" is an organization which makes money through loans made against deposits, then a simple change to 100% reserves will obviously not work -> Read Only's point.

On the otherhand, the OP may be trying to say that the whole banking system, i.e. Our definiton of what a bank is, should be changed to ensure that it is more akin to a "money warehouse" with profit coming from fees made by the "bank" against deposits.

Although these services are available already, perhaps he is saying the whole system should be reformed so most people (99%) are "forced" to subscribe to these "money warehouse" services? In this case the majority of loan money would have to come from a different place (ie. not from deposit money).