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Comment by carsongross | Hacker News Reader

With sweep accounts, the reserve ratio is far, far worse than 10%. This is why we are screwed: we've been expanding the fractional ratio for 60 years and it's finally starting to matter as the U.S. economy slows and stops growing fast enough to paper it over.

There is no exit. The Fed cannot raise rates.

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Keep in mind also that the 10% reserve doesn't mean physical money (paper/coins). When a bank loans money, it can create $9 out of thin air for every real $1 it holds (be it in paper or in DB entry). When loans are being paid back, the banks count that payment as "real" money against which they can loan 9x the value again. In theory at least, this process can repeat to infinity.

I wonder if anybody unit tested this design for flaws.

> This is why we are screwed: we've been expanding the fractional ratio for 60 years and it's finally starting to matter as the U.S. economy slows and stops growing fast enough to paper it over.

If the above was the problem, then the below wouldn't matter:

> There is no exit. The Fed cannot raise rates.

Because the Fed wouldn't be considering raising rates. If the US economy is growing too slowly, the Fed generally seeks to lower rates, not raise them.

Why is having a lower reserve ratio far worse?

See above.

Or, ask yourself: why is there any reserve ratio at all?

As long as a loan is collateralized by an asset that a reasonable market would value at or above the amount of the loan, the only issue is liquidity...right? So whether the ratio is 10%, 2%, etc. is kind of irrelevant. If folks want their money all at once, no reserve requirement would be sufficient. But at least the idea here (not that it has been followed) is to keep things stable enough so no large group runs for the exits and so long as conditions are maintained that don't foster those runs, the system should work.

That is not correct. For demand deposits there should be a 100% reserve requirement. No bank run is possible: if everyone shows up and wants the money they are legally able to demand at a given moment, it's all there.

Loans are then (strictly) duration matched with financial instruments offered to the public. Collateralization provides the banks with assets to offset the inevitable bad loans, but "investors" can't demand their money back earlier, and the banks had damn well better be on point when it comes to making and managing the loans, or they are out of business. There would be a secondary market for these instruments, of course.

It's pretty straight forward when you just think in terms of contracts. Its a testament to how fucked up (or, perhaps, effective) our education system is that smart people like yourself can't see these problems straight away.

> Loans are then (strictly) duration matched with financial instruments offered to the public.

So loans are funded by the public?

> It's pretty straight forward when you just think in terms of contracts. Its a testament to how fucked up (or, perhaps, effective) our education system is that smart people like yourself can't see these problems straight away.

Why are folks like you so afraid of discussing issues that might challenge your worldview? I would argue that only by being able to articulate answers to these questions (some of which you claim have such obvious answers) can we obtain a better understanding. Maybe your schooling encouraged a blinders mentality, but I humbly suggest you be open yourself to provide answers and not insults.

So loans are funded by the public?

Of course, with the banks as intermediaries.

The last part was a bit offsides, sorry about that, but it was directed mainly at the econ education community, not at you. I'm happy to discuss anything, as I hope this thread indicates. I've come to my understanding through a long and winding path, including half an econ degree at Berkeley, some marxism, a trip through anarcho-capitalism and forcing myself to concentrate long enough to get through (most of) Steve Keen's work.

I'm advocating a 100% reserve ratio on demand deposits only, duration matching of non-demand deposits and a citizens dividend for economic stimulus. Ain't no school gonna teach you that. :)

Thanks a bunch for that reply and I too love discussing this material and I don't think we have much of a disagreement. What I am advocating is having answers to these basic questions like, "why have a reserve ratio?" So many times, even these basic questions haven't been thoroughly explored through debate so that people, new to the subject matter, don't have anywhere to go for context (except people shouting at each other).

With regard to your other reply I have some questions:

> I'm advocating a 100% reserve ratio on demand deposits only, duration matching of non-demand deposits and a citizens dividend for economic stimulus. Ain't no school gonna teach you that. :)

These would be demand deposits paying zero interest (not that they're paying much more than that today :) ?

"duration matching" sounds like those deposits are participants in the loan (e.g. share the risk)?

"citizens dividend for economic stimulus" not sure about this one?

> These would be demand deposits paying zero interest (not that they're paying much more than that today :)?

Yes. In fact, you would probably have to pay for the services around them, as with a safe-deposit box, so in some sense they would have negative interest. That's the price of being able to demand the money at any point. Banks would compete on the lowest price for this (and likely pass the cost through to point-of-sale surcharges.)

The core point is that the banks cannot commit fraud: they cannot tell all of us that we can have our money at any point and then not be able to deliver.

> "duration matching" sounds like those deposits are participants in the loan (e.g. share the risk)?

The idea is that banks can make profits on loans, but not by introducing double-counting of money at a given time-point, which is what they do now. (This is why bank runs are possible.) The participants still share default risk, which is hopefully covered by collateralization. If a bank fails to deliver on a given payment, they go into default like a normal business, and they have to strictly demonstrate that they can meet all time-dollar commitments without double-counting any money. Profits are earned via excess interest and I would imagine that well run banks would maintain a positive reserve on top of their commitment curve.

> "citizens dividend for economic stimulus" not sure about this one?

The government issues debt-free money or takes cash-flow from public entities like utilities and distributes it directly to the citizens. This serves as a way to broadly distribute monetary expansion, rather than putting money into the financial system or to favored constituents, with the attendant early-reciever and corruption problems.

It's not a system without flaws and it would be gut-wrenching to move to it. However it does have the advantage that it will never be implemented, so I will never be proven wrong. Perfect! ;)

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