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Comment by higherpurpose | Hacker News Reader

Fractional reserve? I don't like that. It's like building a house of cards or a ponzi scheme. You shouldn't be able to say you have 10x of the value you actually have.

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Right? Banks making loans? It's preposterous.

Sigh. It's a fallacy that making loans implies fractional reserves as normally understood.

Banks can still make loans simply by offering certificates of deposit. This is the above-board way of loaning out people's money -- you make it absolutely clear that taking it out early has a cost, because the money is locked up in (hopefully) profitable ventures.

Would that be less profitable for the banks? Not really -- they would just adjust their prices to compensate, by charging fees on idle money that's instantly redeemable.

And if you let a secondary market for CDs flower, customers can still get good liquidity. Just in a way that's better subject to market discipline.

What you are saying is that you would replace interest bearing savings accounts with fee charging "idle money" accounts, and that if you want to earn any interest on your savings you have to lock it up for a fixed term.

That doesn't really sound like a better alternative.

You may think it sounds better after a few more rounds of banking crises. TANSTAFL.

Traditional paradigms of banking might have to change when each person can be his or her own bank.

Fractional reserve is sort of a misappropriated term as applied to bitcoin exchanges. Such exchanges aren't making loans, so where would the money be going? There's no good reason for them not to have 100% of the funds in reserve.

Some of them offer margin trading which is a loan.

This proposal doesn't prevent loans and fractional reserve or whatever schemes people may want. What it does is makes it much harder to fail to disclose the truth of the matter.

What kinds of terms people choose to transact under is their own business— but all the better when we can be more confident those terms are being followed.

Full reserve banks are possible. You just have to maturity match everything, meaning every loan of term t has a matching deposit with a maturity of t. Deposits in demand accounts could not be lended.

I have no idea whether this is a good idea or if it would work as a business.

That's sort of the idea behind securitized mortgages, except once the bank makes the loan the bank leaves the picture (except perhaps as a custodian responsible for payment collection sometimes.) This is one reason securitization of mortgages led to lower interest rates and was generally considered a good thing for a while.

In the alternative scenario, economists describe loaning from demand deposits (at a higher interest rate) with a phrase like "the bank is selling liquidity".

The retail markets have voted overwhelmingly for interest bearing demand deposit accounts. I'm not sure if a fee-based DDA is available anywhere but it certainly is not popular in the US where we get "free" deposit insurance.

Full Reserve banks don't make loans?

Fractional Reserve banks enable you to have your money and be loaned out at the same time(thereby stretching the money supply like an elastic rubber band).

Full Reserve banks ONLY loan out money which was specifically deposited to them for the purposes of being able to be loaned out.

You're mistaken if you think full reserve banking somehow doesn't "stretch" the money supply. Let's say I deposit $10K in a "full reserve" bank. The bank then loans it to someone who buys a car. The car dealer goes back to the bank and deposits the proceeds of the sale. Another fella comes in for a loan and the bank gives him dealer's $10K. He then goes to buy a car. Now there are 2 cars bought with "my" $10K. And this can go on ad infinitum. So there is nothing superior about full reserve banking. The only thing you're doing is preventing me from getting my money unless the guy who took the loan pays it back. That will surely incentivize people to keep their money in a bank.

What you get is interest fit allowing your part of their reserve to be used for loans. It's why certificates of deposit have a higher interest rate at /r/ActualMoney banks.

And that is the entire purpose of the proposal.

Not sure if joking

You do realize that modern finance depends on this notion?

For example, Banks need no more than 10% of a loan as cash on hand.

> You do realize that modern finance depends on this notion?

Modern finance also causes some very serious societal problems, in my opinion.

We're using the word "modern" extremely broadly in this context. Fractional reserve banking goes back to what, the early Renaissance? Did the economies of the Middle Ages really serve people better than our economies do today?

Correlation does not equal causation.

And arguably, the invention of dual-entry accounting in the early Renaissance -- a self-auditing system similar in many ways to nullc's proposal -- played a much bigger part in the beginning of modern economic development than did fractional reserve banking.

This is the exact same answer you used to get in the old days, back when real communists actually existed, and you'd ask one of them why there were no communist countries with anything like a functional economy. "Correlation does not equal causation, comrade! Just because those troubled countries are all communist does not mean that it is communism that is the cause of their troubles."

I'm just sayin', theory is nice and all, but examples from real practice are more interesting. Fractional reserve banking has been widely in use for hundreds of years in countries which have prospered far more than the general run of humanity has. Show me a capitalist economy that (1) outlawed fractional reserve banking and (2) functions better in some tangible way than the rest of the developed world, and you've got an argument more compelling than a chapter from a textbook of Austrian economics.

Your argument against correlation doesn't equal causation is...communism? That's quite a red herring. For the record, and it shouldn't matter, but I learned about correlation doesn't equal causation in an epidemiology class, and I've always associated it with rational thought.

>and you've got an argument more compelling than a chapter from a textbook of Austrian economics.

Another ad hominem.

And you didn't even address my point about double-entry accounting, which shares a striking similarity in some ways to this proposal. Way to mount an effective argument.

Alternatively, a fractional reserve institution can offer interest on accounts which might entice some people to accept the risk of a bank run. Given the popularity of some explicit ponzi schemes in the past month, It seems fairly clear there are plenty of folks who would accept those terms.

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