Hacker News Reader

Comment by neffy | Hacker News Reader

However, effectively it would remove at least half the total loan supply, which would probably not be a good thing.

Why not?

Was the last global financial crisis not caused by idiotically lax lending conditions, made possible by - amongst other things - the fact that loans were far too abundant and cheap? And that was in turn because banks can lend deposits without blocking access to that same money by the depositors?

If the loan supply was significantly tightened, this would be "bad for the economy" in the sense that there'd be less economic activity. However that's not inherently a bad thing. Digging holes in the ground and filling them up again is economic activity, but it's still a waste of time.

Because borrowing money is often a good thing. Most people borrow money when they're younger, because their earning power is smaller, and they know they can repay it in the future. E.g. to finance their education. Most new businesses start off by costing their owners tons of money and not earning them anything, but again, some of them end up being an overall economic success.

Sure, if you're rich enough, you can self-finance your education or your new business, but if not, a loan is what you're looking for.

Most people loan money when they're younger

I think you mean borrow. Loan would be the opposite.

You're arguing that loans are useful. Nobody is arguing the opposite. Yes, loans are useful, but when the people making them have nothing at stake because they are creating the money from nothing, you get a lot of low quality lending to low quality investments that are unlikely to pay back (put another way, are bad investments).

> I think you mean borrow. Loan would be the opposite.

Thanks, fixed.

> You're arguing that loans are useful. Nobody is arguing the opposite.

Like everything else, making it harder to make loans will decrease the amount of loans. It's not exactly a sliding scale converting between "the amount of reserves necessary" vs "the amount of loans available", but that's the basic model.

So arguing that we should go from a certain amount of fractional reserves, to effectively 100% reserves, will have the side effect of cutting down the amount of loans by a lot.

So the discussion needs to be "how much risk are we willing to tolerate, for X amount of loans".

However, I see most people in this thread (including your parent comment) who are saying something like "loans are bad". I'm trying to make the case that, quite the opposite, loans are inherently a good thing, it's the risk that's bad, but you can't cut down one without impacting the other, so you have to consider the tradeoff.

Maybe I misread your comment btw, but you're talking about digging holes in the ground and filling them up being a bad thing - I agree! But I just don't think that's what most loans are doing, certainly not the 90% of them that we would be killing! (I'm totally guessing on the number, but I think it's >50%?)

>loans are inherently a good thing

I'm happy to agree that loans are neutral but "inherently good" is pushing it.

Loans on things that generate more income for a socially-positive purpose can be good things but often loans can cause enormous problems of their own (see: student loan debt spiraling out of control because there is so much free money available to buy an education now).

They're not creating money from nothing, hence fractional. And to the extent they don't have anything at stake, it's because they get bailed out, which is a different concern altogether.

> And to the extent they don't have anything at stake, it's because they get bailed out, which is a different concern altogether.

The two things are directly linked. If people want to gamble on a bank deposit like any other investment, that's fine. The less sound banks will need to offer higher returns on money than the more sound banks in order to compete. The problem lies when the government (implicitly or explicitly) backs the deposits - without this backing, people wouldn't care nearly as much about the issue.

> They're not creating money from nothing, hence fractional.

No, banks do create money through loans - lending occurs first, then reserve requirements are met afterwards. See for instance this research paper from Standard & Poor's:

Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves

https://www.kreditopferhilfe.net/docs/S_and_P__Repeat_After_...

The idea of "fractional-reserve banking" isn't accurate when it comes to modern banking.

The problem as mentioned in [1], is that banks don't necessarily do productive credit creation. They can create money just for people to buy assets, and not to invest in research and development. I think that it is the main idea behind removing them the possibility to create money, so as to reduce loans which inflate assets and create crisis.

[1] https://professorwerner.org/shifting-from-central-planning-t...

> Was the last global financial crisis not caused by idiotically lax lending conditions

No. It wasn't.

The housing market began collapsing in certain states as early as 2006 and many banks had problems then. The wider crisis only happen once the central bank totally misjudged the monetary conditions and let demand collapse.

They were talking about high inflation fears in 2008 when it was clear that NGDP was dropping like a stone (look at FOMC meeting in November of 2008). The real 'Great Recession' meaning the large bank failures and the even most of the housing problems outside of the original crisis states only happened after that.

The effect of bad house lending was visible from 2006 but that should not effect all other industries unless the broader monetary system fails.

My favorite 1h talk on the subject:

http://www.econtalk.org/archives/2015/12/george_selgin_o.htm...

> And that was in turn because banks can lend deposits without blocking access to that same money by the depositors?

That is how the monetary system has worked for 200 years. Its hard to explain crisis by this alone.

> However that's not inherently a bad thing. Digging holes in the ground and filling them up again is economic activity, but it's still a waste of time.

You can not just assert that economic activity is wasted without having a story why that should be true. The investment are driven by individuals who want to improve their lives, not dig holes and fill them up.

It would apply to current accounts only (not saving accounts) which represent quite less that half the total loan supply.

So banks are allowed to offer all their normal services, but they have to use the words "savings account" rather than "current account"?

Or is there some other factor which determines which accounts are current vs savings?

Both exist currently. There are "on demand" deposits (current accounts, checking accounts or whatever you want to call them) which are considered "money" (and added to physical money to get the M1 money supply). And there are other deposits (like saving accounts) which are investments. The distinction is quite blurred nowadays, you are not getting any interest on them anyway, but if the initiative had passed banks would only keep in their balance sheets the investment-like deposits and not the money-like deposits (which would be transferred to the central bank). Edit: to be clear, current accounts and savings accounts are quite different now from the point of view of the bank: fractional reserve requirements apply only to the former, allowing for "money creation".

So presumably the banks would have offered accounts that were as close as they could be to current accounts while still counting as savings accounts according to the regulators. The impact of the law would have depended on exactly how similar the regulations allow these saving accounts to be to current accounts.

I suspect most people would have moved their money to "savings" accounts and things would continue as before.

It's hard to know how things would have been implemented and how the different parties would have behaved, but I suspect it's clients that would need to be convinced by banks and not regulators.

Taking UBS as an example, the interest rate offered on the current account is 0%. The interest rate offered on the savings account is 0.01% (and it comes with some restrictions, withdrawals above CHF 50'000 p.a. require a three-month notice).

Even if they were otherwise identical, why would anyone put their money in the "risky" savings account instead of the "safe" current account? Interest rates paid to depositors would have to rise to make saving accounts attractive.

Reply on news.ycombinator.com