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Thread: How To Fix The Banking System

  1. #1

    Default How To Fix The Banking System

    When it comes to fixing the failed banking system, there exists two groups with two very different approaches.

    One group believes that there is a need for further regulation. The other group calls for less regulation. Now even though these are two very different approaches, both groups share something in common; the understanding and awareness that there is a fundamental flaw that needs attention. We all want stable banking and no matter how we arrive at that is irrelevant. The main thing is that we do. This is something we can all agree on.

    So let's tackle that right now.

    There is a sense among most people that banks are just "too big to fail" and playing such an important role in the economy, it only makes sense that the government must step in with taxpayers money to fund private gambling losses (they say). Both groups on this issue would wish this wouldn't be the case as it's morally wrong, that much everyone can agree on. So how do we change the "too big to fail" situation?

    Firstly, banks are "too big to fail" because of the government. This much is clear. Now you might say that banks are a "special case" and you'd be right, they are. They are because they're not restricted by the same laws that, say a grain silo are. Banks of course have a special legal privilege. It's called Fractional Reserve. When a depositor deposits 10 into a bank, the bank is only obliged to keep 1 of the depositors money. The other 9 is used to gamble on let's say a mortgage. Now what happens when the new house owner has empty pockets? It's clear where the problem arises. The banks do not have your money in their vaults. They have gambled with it. It's not there. It never was. If everyone withdrew their cash at the exact same time, people would simply get nothing back. The banks have grown to such an unnatural size, not because of the market, but because they're allowed to continue this practice of obtaining that extra 9 to gamble with. The market didn't give the banks this opportunity, the government did.

    Not only does this incredible funding source that would otherwise not be available to them if they conducted themselves by the same laws of other businesses allow the banks to grow beyond scope what they couldn't do naturally in the free market, but it makes them more risky. Every time a deposit is not backed 100%, the depositor is exposed to not getting his deposit back in full. If we end the legal privilege banks have over other businesses, the landscape would be totally different.

    How do we do this? Certainly not by regulation. If we regulate further, the banks will only cement and further solidify their legal status. Because out of all of the people calling for further regulation, not one of them have even whispered the fundamental problem here, Fractional Reserve Banking. Alternatively, if we deregulate we get the best of both worlds without the headaches. New banks will spring up overnight as there won't be any hurdles for them to jump through and of course they'll be successful if they offer the customer a 100% reserve on all deposits (with a small annual fee).

    The solution to the banking problem is deregulation.

  2. #2
    Politics.ie Member parentheses's Avatar
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    Quote Originally Posted by R3volution_R3ady View Post
    When it comes to fixing the failed banking system, there exists two groups with two very different approaches.

    One group believes that there is a need for further regulation. The other group calls for less regulation. Now even though these are two very different approaches, both groups share something in common; the understanding and awareness that there is a fundamental flaw that needs attention. We all want stable banking and no matter how we arrive at that is irrelevant. The main thing is that we do. This is something we can all agree on.

    So let's tackle that right now.

    There is a sense among most people that banks are just "too big to fail" and playing such an important role in the economy, it only makes sense that the government must step in with taxpayers money to fund private gambling losses (they say). Both groups on this issue would wish this wouldn't be the case as it's morally wrong, that much everyone can agree on. So how do we change the "too big to fail" situation?

    Firstly, banks are "too big to fail" because of the government. This much is clear. Now you might say that banks are a "special case" and you'd be right, they are. They are because they're not restricted by the same laws that, say a grain silo are. Banks of course have a special legal privilege. It's called Fractional Reserve. When a depositor deposits €10 into a bank, the bank is only obliged to keep €1 of the depositors money. The other €9 is used to gamble on let's say a mortgage. Now what happens when the new house owner has empty pockets? It's clear where the problem arises. The banks do not have your money in their vaults. They have gambled with it. It's not there. It never was. If everyone withdrew their cash at the exact same time, people would simply get nothing back. The banks have grown to such an unnatural size, not because of the market, but because they're allowed to continue this practice of obtaining that extra €9 to gamble with. The market didn't give the banks this opportunity, the government did.

    Not only does this incredible funding source that would otherwise not be available to them if they conducted themselves by the same laws of other businesses allow the banks to grow beyond scope what they couldn't do naturally in the free market, but it makes them more risky. Every time a deposit is not backed 100%, the depositor is exposed to not getting his deposit back in full. If we end the legal privilege banks have over other businesses, the landscape would be totally different.

    How do we do this? Certainly not by regulation. If we regulate further, the banks will only cement and further solidify their legal status. Because out of all of the people calling for further regulation, not one of them have even whispered the fundamental problem here, Fractional Reserve Banking. Alternatively, if we deregulate we get the best of both worlds without the headaches. New banks will spring up overnight as there won't be any hurdles for them to jump through and of course they'll be successful if they offer the customer a 100% reserve on all deposits (with a small annual fee).

    The solution to the banking problem is deregulation.
    Excellent post.

    It ain't gonna happen though. The fractional reserve privilege is the elephant in the room that nobody who has power will talk about

  3. #3
    Politics.ie Member Dan_Murphy's Avatar
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    Wouldn't a better alternative be to force a split of mortgage and investment banking from deposit and current account banking?

    If, for example, the Hypothetical Mortgage Bank was in danger of collapse but the Hypothetical current account Bank was a separate legal entity, then only bondholders would stand to lose and there would not need to have been a bank rescue to save depositors.
    Last edited by Dan_Murphy; 21st May 2013 at 03:52 PM. Reason: Syntax error

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    Politics.ie Member farnaby's Avatar
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    Is it right to call your solution "deregulation" when it involves governments exercising considerable power, to strip banks of their current 'flexibility' in the provision of credit and thus reducing their power considerably? The common understanding of 'deregulation' is giving private enterprises more freedom to do what they want, not less.

    Maybe that's just semantics. My main question is - wouldn't this have to occur globally or at least in the major financial centres of power (US, Frankfurt, London etc.) to succeed? Wouldn't countries doing this individually be put at a disadvantage (at least short-to-medium term)?

  5. #5
    MrFunkyZombaloo
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    And what if, in such a de-regulated scenario, banks buy up other banks and become "TBTF" again?

    Would a new bank, offering 100% reserve on deposit, deign to operate in this de-regulated market or would it try and maximise it's profits by using the FR model?

  6. #6

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    Quote Originally Posted by farnaby View Post
    Is it right to call your solution "deregulation" when it involves governments exercising considerable power, to strip banks of their current 'flexibility' in the provision of credit and thus reducing their power considerably? The common understanding of 'deregulation' is giving private enterprises more freedom to do what they want, not less.

    Maybe that's just semantics. My main question is - wouldn't this have to occur globally or at least in the major financial centres of power (US, Frankfurt, London etc.) to succeed? Wouldn't countries doing this individually be put at a disadvantage (at least short-to-medium term)?
    I'm not calling for the government to exercise power in telling banks what to do. What I am asking is that governments get out of telling banks what to do. The consumers should tell the banks what to do and that's what happens in the market.

    Quote Originally Posted by MrFunkyZombaloo View Post
    And what if, in such a de-regulated scenario, banks buy up other banks and become "TBTF" again?

    Would a new bank, offering 100% reserve on deposit, deign to operate in this de-regulated market or would it try and maximise it's profits by using the FR model?
    It's entirely possible that they would want to maximise profits but the market will tear them apart. How can a bank break a contract with it's consumers? If the bank has signed a contract with the consumer saying that 100% of their deposits are safe and on hand should the consumer wish to withdraw it...then how can the bank loan out the depositors cash? But that's just one problem. There are more, not least where deregulation would see the rise of new 100% reserve banks in which consumers would wish to buy their services over the fractional reserve banks. Would you keep your money in a bank that indulged in FRB or a new bank guaranteeing your money in their vaults? This is the market. But it's not being allowed to work in the current situation.

  7. #7
    Politics.ie Member Sync's Avatar
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    Jesus.

    Ok let's keep it simple:
    When a depositor deposits €10 into a bank, the bank is only obliged to keep €1 of the depositors money. The other €9 is used to gamble on let's say a mortgage. Now what happens when the new house owner has empty pockets?
    Now....it shouldn't be gambling. It should be lent out to appropriate sources who then repay the amount. If it's not lent out to appropriate sources (Or as Dan touches on, if it's used for investment banking) then that's a regulatory issue, not a conceptual issue with FR.

    If you don't have the concept of fractional reserve then only the rich will ever be able to get a loan. Do you get that? You use the example of 10:1, if you halve that then 5 euro won't be lent into the economy. So the bank is going to be far more reticient in giving out loans. I.E: The people who have a decent job, pull together a 15% deposit for their house, isn't going to get that loan now because the risk of them becoming a bad debt now poses more of an impact to the bank (Because they're lending less).

    If you get rid of FR then all you're left with is a stagnant very high interest market where the lower/middle classes can't get access to funds for private and business use.
    I'm living in America, and in America, you're on your own. America's not a country. It's just a business. Now f***ing pay me.

  8. #8
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    Quote Originally Posted by Dan_Murphy View Post
    Wouldn't a better alternative be to force a split of mortgage and investment banking from deposit and current account banking?

    If, for example, the Hypothetical Mortgage Bank was in danger of collapse but the Hypothetical current account Bank was a separate legal entity, then only bondholders would stand to lose and there would not need to have been a bank rescue to save depositors.
    no, that in itself would be regulation,

  9. #9
    Dylan2010
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    its a case of matching risk and reward. the hypothetical granny with 200K in Anglo should never happen. Speculative lending should be financed by shareholder capital and depositors should have the option of having their money ring fenced for certain activities or if our granny wants to lend 200k into 20 year home lending to chase yield she should not have free state insurance and instead accept potential losses in the future.
    the current system seems to want everyone "standing up at the cinema" to get a view which means higher house prices and retail rents then there ought to be.

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    Quote Originally Posted by MrFunkyZombaloo View Post
    And what if, in such a de-regulated scenario, banks buy up other banks and become "TBTF" again?

    Would a new bank, offering 100% reserve on deposit, deign to operate in this de-regulated market or would it try and maximise it's profits by using the FR model?
    i would have no objection to a bank being using the FR model in a free market situation, however it would be fraudulent and illegal for such a bank to tell depositors that they can withdraw their deposits "on demand",

    and, without the backstop of a Central Bank, only an idiot, or someone with intimate knowledge of granular detail of the bank's balance sheet would deposit money in it,

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