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Comment by testacular | Hacker News Reader

No. They did not become a fractional reserve, they became insolvent. A large portion of the BTC community grossly abuse the term 'fractional reserve', and it's flatly wrong.

Fractional reserves refer to liqudity, not solvency. If I run a financial institution and I owe depositors $100, but have $10 cash and am owed $100 on top of that, I'm running a fractional reserve.

If on the other hand, I'm MtGox, and I owe depositors $100, but have $10 of cash and am owed nothing on top of that, I'm insolvent. Bankrupt. And if I keep operating, I am a fraud.

This is an incredibly important distinction.

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Yeah, I'm still constantly surprised how so many in the BTC community seem to lack even the most basic of accounting knowledge, yet have strong opinions on how international banking and currencies should work.

> A large portion of the BTC community grossly abuse the term 'fractional reserve', and it's flatly wrong.

A large portion of the BTC community grossly abuses all economic terms because it's a libertarian anarco-capitalist circle jerk much of the time. The sane and educated are few and far between but they're there.

The important side effect of such cash loans is that once on the market, they are indistinguishable from any other cash. So the bank essentially increased amount of cash in circulation. While technically they didn't "print money", for all practical purposes, they did. And since this cash slowly propagates throughout economy, it increases the total supply which leads to raising prices. Prices raise first where this newly loaned cash is being applied. Since 2000s it is stock market. It grows in total sync with Fed's "bonds buying".

fraud or a fiat

Gonna have to disagree with it being an important distinction.

In times where you can't liquidate assets at a high enough fraction of their "I deserve this much" value, then you can't meet your obligations and are thus insolvent as well. If someone's willing to buy your illiquid assets (or lend on the assumption that they're) at full "I deserve it" value, you were still insolvent -- you just got bailed out.

If you are otherwise profitable, then a long enough line of credit can return you to profitability. In that respect as well, an "insolvent" institution can become solvent thanks to this added liquidity.

For those reasons, I believe that in the interesting cases, liquidity and solvency are too deeply entangled to distinguish.

So when MtGox tries to keep the facade up long enough for trading fees to cover the shortfall, then yes, that is different from an "illiquid but solvent" bank getting a loan from the Lender of Last Resort ... but it's a different of degree, not kind (edit: fixed wording, thanks dllthomas). Both of them are trying to cover up functional insolvency with future profits they hope to operate long enough to get.

"but it's a different of kind, not type."

You mean "degree, not kind"?

Also, I find myself amused at the Haskell interpretation, where "kinds" are the "types" of types...

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