As promised earlier, here is the video of Steve Baker speaking at the Libertarian Alliance conference, held last weekend, as produced by Dr Sean Gabb. Steve is introduced by David Farrer: Steve Baker, LA Conference, 30th October, 2010 Please click the image below for a PDF copy of the slides:
For me, fractional reserve banking is a beautiful entrepreneurial solution to a pressing economic problem. But I might be wrong. Perhaps 100% reserve banking will prevail in a free society, even though I believe both theory and history speak against it.
So far as I am aware, no free banking scholar takes a utilitarian approach to this question. I just disagree with de Soto on the legal and ethical implications of fractional reserve banking — you can call it a philosophical disagreement.
I’m still on the fence on this one.
I think it is more the interaction of fiat money with fractional reserve banking that causes the problem. For fractional reserve banking to function it NEEDS fiat money.
If we only had gold coins then you could still have fractional reserve banking but it would be a brave bank that reduced its reserves too low. Clearly this is impractical but it demonstrates that fractional reserve banking alone does not create lots of money. It is only the legalisation of fiat money that allows banks to “create” money in league with central banks.
Fractional reserve banking alone is not all that bad. Fractional reserve banking with fiat money and central banks is, however, a disaster.
I think a more simple reform of market set interest rates, market set reserve rates and either bank issued currency or Hayek’s/Mises’ idea of repealing legal tender laws to allow any curreny to be used would solve most of the problems we have. Oh and close down the Central banks of course.
While Toby B’s proposal on issuing cash to replace the extended bank credit and then imposing 100% reserve requirements is a fun idea and might well work initially, I can’t stand rewarding poor decisions by the banks and I don’t trust them not to lobby for a reduction in reserve requirement. The whole problem with state intervention is that it perverts natural incentives.
Overall we need a correction. All the printing, borrowing, spending is holding off the inevitable and I really don’t know how long that can go on as we’re still in the experiment. However, there is a reason it is called a correction. If we look back from 2008 to now and think what would have happened if we had let the banks fail, let interest rates rise, cut govt. spending and regulation and let the market correct then we would be in a Hell of a better place today. We would be in a land of opportunity with competative taxation rates!
Right now the fundamentals are even worse than 2008, so we’ve paid a fortune, become poorer and borrowed from our children and grandchildren for the total gain of sod all. It should be a simple message to get across and although the media call the Tea Partiers stupid they stand over here admiring the emperors latest robes.
As long as risk is reflected back on bank share holders, bond holders and depositors, I don’t see a problem with fractional reserve banking. However, when banks start being propped up, you are maintaining imbalances of wealth, which the market is trying to correct. If capitalism is to function, it has to be as common to lose as it is to gain. In short, investors (even depositors) must perceive themselves having as having an equity share in the loan book.
IMO, the only full reserve banking system which I would be happy with, would be the Limited Purpose Banking approach, as suggested by Prof. Kotlikoff. With such a banking system, risk is obvious and ever present. With such highly liquid markets as are available today (via technology advances), the lines between loan assets and money are ever more blurred and LPB reflects and embraces this.
As Mervyn King eloquently pointed out, we need far more equity in our banking system. In short, we need risk to be reflected and appropriated right through the banking system.
There is nothing wrong with taking risks, should individuals want to speculate. There is a problem with losses from said risks being bailed out. This is the crux of the problem and reducing risk exposure by preventing fractional reserve banking is addressing the wrong problem.
Finally, I find it difficult to accept that those of a free market persuasion would want to ban fractional reserve banking, which was itself born from the free market. Remove the support from the state, then encourage safe alternatives to flourish and let the free market again find a balance between risk exposure and safety. IMO, removing support for our universal banking system would sow the seeds for a vibrant selection of alternatives, including narrow and LPB banks. This is why I support and condone the Baker/Carswell bill – it’s an evolutionary step in the right direction.
Agreed about the bailouts.
How long after the LTCM bailout in 1998 did Goldman go public? 12 months?
And I agree the Bill seems a good way of allowng the market to set reserve requirements rather than central planners.
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