Monday, 3 July 2017

THE ULTIMATE REGULATORY REFORM: ABOLISH FRACTIONAL RESERVE BANKING


The Trump Administration has presented the first part of its plan to overhaul a number of Wall Street financial regulations. Many of these were enacted in the wake of the 2008 financial crisis. The administration's proposals are included in a report released by the U.S. Department of the Treasury the entitled "A Financial System That Creates Economic Opportunities" (6th June, 2017).

The report was prompted by Executive Order 13772. This ordered the US Treasury Department to examine the United States’ financial regulatory system and detail "executive actions and regulatory changes that can be immediately undertaken to provide much-needed relief."

In the report, Treasury Secretary Steven T. Mnuchin states:

"Properly structuring regulation of the U.S. financial system is critical to achieve the administration's goal of sustained economic growth and to create opportunities for all Americans to benefit from a stronger economy. We are focused on encouraging a market environment where consumers have more choices, access to capital and safe loan products – while ensuring taxpayer-funded bailouts are truly a thing of the past."

The report makes the following points:
  • Community financial institutions – banks and credit unions – are critically important to serve many Americans
  • Capital, liquidity and leverage rules can be simplified to increase the flow of credit
  • We must ensure our banks are globally competitive
  • Improving market liquidity is critical for the U.S. economy
  • The Consumer Financial Protection Bureau must be reformed
  • Regulations need to be better tailored, more efficient and effective
  • Congress should review the organization and mandates of the independent banking regulators to improve accountability
Not surprisingly, most of the banking industry expressed support for the report. Critics – mostly Democrats – pointed out that it would lead to the type of practices that produced the 2008 panic in the first place. Both opponents and those in favor, as well as the clueless financial press, fail to grasp the underlying cause of not only the recent crisis, but the majority of those which have occurred for the past century.

Quite simply: the fundamental cause of the 2008 financial crisis was fractional-reserve banking (FRB).  FRB is the practice whereby banks keep a "fraction" of the funds deposited by customers in their vaults, lending out the rest at interest and "profit." Banks are thus inherently unstable, since, if all depositors came at once and demanded their money (a "bank run"), banks would not be able to redeem their deposits. Moreover, FRB encourages banks to engage in exceedingly speculative and risky behavior, which creates unsustainable bubbles throughout the economy.

The nation’s central bank, the Federal Reserve, was created by the banksters and politicos to enshrine this immoral and economically ruinous practice into the heart of the American financial landscape. Any "reform" of Wall Street's financial practices that does not advocate doing away with FRB and the institution (the Fed) which enables it to exist, is doomed.

The banks in collusion with the Fed are able to expand the money supply through this process, while enriching the banksters' balance sheet. On the macro level, the creation of money through FRB is the genesis of the destructive boom-bust cycle.

This is why banks and the entire financial system are so prone to recurring crisis, and no regulation, reform, or Treasury Department "findings," can make such a system "stable." The only true reform is to abolish FRB and establish a monetary order that requires all financial institutions to keep 100% reserves of depositors' assets.

The Treasury Department’s recommendations are mere window dressing by the very banksters whose opulent livelihoods stem form FRB.

The elimination of FRB would go beyond a beneficial financial revolution, but would affect the foreign policy of the USA. Without the ability to create money via FRB, the murderous American Empire could simply not exist, nor would the nation’s draconian domestic security apparatus.

With his selection of crony capitalists and members of Goldman Sachs to his economic team, it is apparent that President Trump does not understand the true nature of the nation's financial woes or what precipitated the last financial crisis and what will assuredly lead to a far bigger mess down the road. If he did, his next Executive Order would be to implement steps and procedures to eliminate the scourge of fractional reserve banking forever.

Originally published at Antonius Aquinas


4 comments:

  1. There is some evidence that Abraham Lincoln was killed because of his Greenback policy. By introducing interest-free currency into circulation to fund his war, he bypassed the usurious practices of the (((Bankers))). These practitioners of the Babylonia practice of lending 10 existing monetary units and expecting to be paid back 11, the 11th not being in existence, have accumulated the world's wealth at the expense of the borrowers. They own the world, the people in it, and believe they deserve it. I assure you, if Trump actually did attempt to eliminate the Federal Reserve, he would be dead.

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  2. Abolishing fractional reserve banking means abolishing banking entirely as we have known it. If banks cannot make loans using part of the money deposited with them, they can't make loans at all. They will then be merely money storage and transfer facilities, for which services they will charge their customers. Forget about interest paying CDs or savings accounts. As far as allowing the government just to print money, how is that different from the Federal reserve or any central bank just printing money. Banksters and politicians are in the same club and the money will still end up in their hands. Whatever was the reason for Lincoln's assassination (and I'm inclined to believe it was just southern revenge), if he used greenbacks to crush the south, preserve a tyrannical union and get hundreds of thousands of Americans killed in the process, this was a very bad thing, not a good thing.

    Some libertarians would argue that all kinds of currencies should be allowed to compete against each other - gold, paper, bitcoins, cattle, whatever. Each person could decide how he wants to be paid for goods or services. The problem is that all of us would then have to become experts in multiple currencies and who has the time? That said, a certain amount of banking decentralization would probably help as would decentralization in other areas. But entirely outlaw fractional reserve banking? I'd first prefer to see a real world example of a modern economy which functions on this basis.

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    Replies
    1. Fractional reserve banking will always lead back to the same point. If you have standards that only allow them to make loans if they have 80% of the capital in house, you will still arrive at the same deleterious effects as 3% backing. It will just take longer. Proponents of fractional reserve banking like to point out that it is actually currency in circulation that drives the economy. True, but it also is driven by bankruptcies and debt, booms and busts. Currency itself has been reduced to electronic pluses and minuses and only exists on "paper". This might actually lead to stability if bankers had the best interest of the people in mind. The only way to make an economy work with inflationary currency, which all interest bearing currency is, is to tax the excess out of the system. Whatever the currency is would have intrinsic value as it could be used to pay taxes.

      I think we would be better off using joint-venture banks. The history of these, especially in the Netherlands during it's heyday in the 17th century, shows that they can work. Rather than using interest, they connected investors with people needing money. Say, you were a ship's captain and were going to the East Indies for spices. You might only have 5 percent of the capital needed, along with your ship. The investors could agree to back you. They would pay you a salary as captain and for the use of your ship. You would also own 5 percent of the profits based on your initial investment. If the voyage was a success, you would receive the payoff which you could invest in another voyage. If the voyage failed, you would have had insurance to recover the loses. Over time, you could accumulate a substantial amount of capital and invest it to increase your wealth. Admittedly, this would be a slower way than using fractional reserve banking in amassing wealth, but there wouldn't be the downside risk either. Plus, it would be a slower more genteel way of commerce. There is nothing wrong with that. Slow growth is good. And since we are talking about an entire people, everything doesn't have to happen overnight.

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    2. The joint-venture system you are talking about is not really banking as people usually think of it - it's investment brokerage. Under this system there would be no basis for consumer loans. This may or may not be a good thing and you may well consider it a good thing, but I doubt if people at large would go for it if the implications were made clear. No home mortgages, no auto loans, no credit cards, the list goes on and on. And I am not necessarily convinced that commerce would be more genteel. There was certainly plenty of economic motive in the numerous wars with Spain, England, and Portugal that the Netherlands waged during that period.

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