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Thursday, June 14, 2012

A Question for Anti-FRBers

If you think fractional reserve banking should be illegal, do you think the same thing about any mismatch between your short and long loan maturities? That very thing, after all, was a big problem in the recent financial meltdown. If you think FRB should be illegal, it seems you ought to be for financial regulation that requires an exact match between the maturity of what you have borrowed and the maturity of what you have lent.

If you are not for that, why not?

3 comments:

  1. I don't think FRB should be "illegal" in that strong sense. I simply think that property rights in all goods should be well defined, and that bank accounts should not received insurance subsidies.

    Not too crankish yet, I think?

    From this, I think, it follows that there should never be a situation in which two parties correctly believe they have an ownership claim to the same dollar (up to a fungibility equivalence class, of course), which is what happens when you see a bank run.

    Such rights, I think would require that depositors put their money into two distinct types of accounts:

    a) "you can redeem only during these windows, up to the success of our investments; or by selling your shares" (i.e. mutual/hedge fund type banks), or

    b) "your money is being warehoused, here is our insurance policy against fires and robbery".

    Nothing against alternate arrangements that don't quite fit these categories, including FRB-like ones, so long as there is a "meeting of the minds" where well-defined rights are exchanged, so that e.g. the depositor can know if the savings are as illiquid as a 401k account.

    The problem right now is that the system allows "duplication" of claims to the same dollar, setting in motion a chain of events which will eventually end badly.

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  2. This is a great topic but I warn you, it is a black hole. I present both sides of the argument in a section in this paper (near the end), and as I recall I wimped out and didn't pick one.

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  3. I think that it means that if changes in the demand for money are volatile in the sense that the change in between a very narrow spread, then it means that the amount of banknotes issued in response to these changes are likely to be minor. I've always interpreted the Selgin/White model to imply that the major cause of a falling reserve ratio is the gradual replacement of gold with banknotes; aka that gold reserves are becoming redundant, and banks shed them.

    Silas, I think bank contracts tend to be explicit. You can redeem your money for gold on demand. Also, if there is an option clause then the contract will explicitly state this (and banks will pay a penalty).

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