Full-Reserve Banking

I don't think so, but even if it it is, his logic would still be just as faulty as what he stated literately. He obviously does not understand exactly what fractional reserves are and the benefit gained through their usage. It's a *very* powerful tool for expanding OR contracting the money supply when action is needed. It's impact on interest rates is practically instantaneous.

 

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Oh absolutely, a change of this magnitude will have many ramifications both positive and negative, many of which we can't begin to imagine.

It's just that the negative effects will far outweight any positive effects, imo.

On second thought, are there ANY positive effects from such a change? I can't think of a convincing one.

 

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Your idea on loans doesn't work either. If *I* have capital and I want to lend, why do I need a bank to arrange that transaction? Because I want to pay them a fee? What would the fee be? It had better be "the same amount they would have earned today" or you will be in a world with fewer loans.

Let's assume we do need middlemen though, why banks? How is the business of holding and safeguarding money (safeguarding it from what? Fire?) in any way related to the business of taking money and lending it in that world?

Plus, let's say they switched to that system tomorrow and your bank called you to inform you that they'd be charging you $1000 per year to hold your money. $1000 for a full year's worth of service is not a huge fee they are collecting and it means these banks are making far less money than they do on loans. Still, since the only risk to money is theft and fire, many many people would rather pull money out of banks and put it in a fireproof safe than spend that kind of money (more likely the fee would be a percentage of your total deposit, of course, like the bank takes 1-3% per annum of your deposits, withdrawn daily).

Problem: there isn't enough physical currency on Earth to save us when the the "Great Bank Run of Cellar Door" starts on July 13, 2011, so that quickly turns into the Great Bank Panic of 2011.

Perhaps a simpler version of your proposal would be this:

Suppose when you made a bank account, you were given two options:

OPTION 1: You have a normal factional reserve bank account, and the bank can lend against your deposits, and will be paid interest on the amounts on deposit. Your deposits ore FDIC insured.

OPTION 2: You have the right to "opt out" of that default scenario, and the Bank will not lend against your deposits and agrees to maintain a currency reserve specifically for you in the local branch in which you created the account, BUT, if you opt for this, you must pay them $0.25 per day per thousand dollars deposited (the market can later adjust this when the banks compete, but it would cover the cost of maintaining a cash reserve and tracking the physical location of your deposits), plus all of their regular fees and charges. Your deposits are also FDIC insured, but who cares? because they have your cash in their vault.

That could work, but mostly because I think only a handful of nuts would take Option 2.

 

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LMAO, this cracks me up.

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What this discussion really boils down to, imo, is the allocation of services needed to run a modern economy.

A short list (not exhaustive):
1. Medium of wealth storage (probably electronic storage, ie. a number in a database somewhere).

2. Someone to keep a record of who has how much.

3. Someone to transfer funds for transactions

4. Someone to organize money which can be use in loans.

The question then is, who does what and where does the money to provide these services come from. The current systems provides for all of the above (and more). It has its faults and benefits (as do all systems). However, it seems we just don't have any better ideas at the moment.

 

Obviosuly, thats why they sell those debts onto another fool.

 

I think one of the fundamental misconceptions that the OP makes is that lending money doesn't take any skill:

Loan origination (much of it to the commercial market) requires a lot of industry knowledge, secondly, the bank pools the risk, meaning if they have a ratio of 1 out of 50 loans going bad, if they price the loans correctly they still make money.

But if there are individaul lenders on the other side of the transaction, then one out of 50 lenders goes bust. Which means everyone would have to price their loans far higher to cover the higher inherent risk.

Arthur

 

If you sell the debt, then you are no fool.

But people with money to spend aren't typically fools either and so only pay for something based on what it is worth, which is why they won't pay as much for sub-prime debt. The system failed because the RISK of the sub-prime market was significantly underestimated.

 

Very true.

Even though he seems to have stop posting, I really hope the OP is still reading this thread. There's been a fair amount of basic AND more advanced info presented here and he could learn a lot from it.

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By using a bank you are able to reduce risk. If you were just to lend your money out to a neighbour, then maybe you charge them 10%. Either they pay it back or they default, either through bankruptcy or fraud. If they pay it back you get 110% of what you lend out back, and if they default you have nothing.

By using a bank you are spreading the loan across their whole customer base, and then defaulting becomes a matter of statistics, you assume that 3% of people default for example, so then once the bank takes 1% for its overheads and 1% for its profits you're left with 5% interest, each and every time. This is where banks become useful