Regulating Banks
Many commentators are urging greater regulation of the banking system to prevent future banking crises. These efforts will fail, because they do not deal with the basic flaw with the modern banking system.
When I give some share certificates to a courier to deliver to another person, the courier company does not claim ownership of my shares. They do not add my shares onto their balance sheet as an asset, because they realise they belong to me.
When I put some of my goods in a warehouse for storage, the warehousing company does not claim ownership of my goods. The goods they are storing are not recorded on their balance sheet as their assets. They realise that they goods in storage still belong to their owners.
Banks are in the business of storing and delivering money. I store my income in a cheque account until I am ready to spend it. I write a cheque on my account to get the bank to deliver money to a person to whom I owe money.
Although they are in the business of providing delivery and storage services, banks do something odd with the money that is entrusted to them. They claim ownership of the cash that is put into cheque accounts and other demand deposits and include them as assets on their balance sheets. If they think that I will not use my money for a while, they will lend it to someone else.
This creates a strange situation where I think that I own the money in my bank account, but the bank also claims to own it. The only word to describe their behaviour is fraud. Governments everywhere have legitimised this theft.
I think that I can spend my money when I choose, but the bank has most likely lent it to someone else, who has already spent it. This is the basic flaw in the modern banking system. It creates a system where two people end up owning the same money.
This basic flaw is the reason for bank runs in troubled times. It is the reason why banks can be highly leveraged (the cause of the current crisis). This flaw is the reason for the credit multiplier that has exaggerated the effects of the credit crunch. Regulation will not eliminate these problems, because it will not deal with the basic flaw.
The only solution is honest banks, which start treating money entrusted to them with the same integrity as courier companies and warehousing companies. If we demanded that all banks act in this way, most financial crises would disappear.
More on this topic here.
8 comments:
"The only solution is honest banks"
How about we start with honest bloggers, who answer dissenting comments with fact and reason, rather than deleting them?
Because you are not the moderator of this site. Use an honest name and I happy for your comments to appear.
I will try again anonymously then, and see if I can get you to re-consider (or you me).
A fiat currency is indeed fraud, as Rand said it is a promise against goods not yet produced, backed by a gun to the head of those expected to produce them. That is not a store of wealth. That is not honest money. The very fact of inflation in our currency sine 1913 and especially since 1973 is proof that the paper dollar is a violation of the Bible's prohibition against unjust weights and measures.
That is a separate issue from "fractional reserve banking". I am depositing my money in the bank, and they are assuring me I can get it back, but they are not promising me to leave it in the safe. We understand that they are loaning the money out, just as we are in a sense loaning it to them. I understand that the risk is not ZERO.
In return for my deposit, they give services like free checking, which gives us an official record of payments we make. They may even pay a tiny amount of interest on checking. Its not fraud, I am loaning them my money in exchange for financial services and perhaps even a tiny interest payment.
Banks also offer a service which you consider "honest banking"- that is a safe deposit box. If you want one of those you are free to get one.
Banks don't claim they "own" my deposit, they just claim it as an asset available for use. If I lease a truck, I would claim the truck as an asset, but the payments for it as a liability. I know it is not my truck, I just hope to make more money hauling gravel, or whatever it is I plan to do with the truck, while I am using it. The same with bank demand deposits.
Now if a bank is leveraged 50 to 1 and they are telling you that they are a "sound" bank, then that is fraud. The fraud is not intrinsic to fractional reserve banking, but rather related to their recklessness. In the same way there is nothing wrong with selling you an investment fund that is "sound", but there is if you find out all they have in the portfolio are lottery tickets.
The state has a role in preventing fraud. They are responsible for setting guidelines for banks in order for that bank to consider itself "sound". Our government has turned a blind eye to reckless leveraging in order to "keep the party going". A party based on expansion of credit and illusion. Each administration was tempted to let the banks get riskier because they wanted to let someone else show integrity and stop the party.
Mark
I will comment further in future posts, but the situation is not as clear as you imply. While banks may assume that they are providing the service that you describe, most bank customers think they are getting a "safe deposit" service. The banks do very little to clarify this misunderstanding, because they know that if they did spell out clearly what they had done with money deposited, many of the customers would be spooked. The fraud is that money deposited in demand deposits is not available "on demand".
Regarding your truck, if you have an operational lease, (the truck reverts to its owner at the end of the lease period) it should not be recorded on your balance sheet as an asset. You cannot claim it as your own, but use it for the period of the lease.
The truck should only appear on your balance sheet, if you have a financial lease or capital lease which lasts for the life of the truck, because in this case ownership does not revert back to the original owner. This situation is more akin to a hire purchase agreement. It is not relevant to a demand deposit at a bank.
The bank never claims zero risk, never claims that you will always be able to get all of your money back the same day, and never claims that it will keep your money in the vault.
Just the opposite, if you read the fine print of the checking account agreements they tell you the limitations of your "demand deposits". So where is the fraud? Why does the consumer's failure to understand constitute "fraud" on the part of the banks?
Fractional reserve banking is not fraud, the fraud is when the government calls something "fractional reserve banking" when it does not require reserves.
Do you know what the government reserve requirement is on CDs? ITS ZERO. The bank can call itself "sound" if it fits all the lawful requirements of a sound bank- but those requirements are a sham.
Don't you agree that the GOVERNMENT is committing the root fraud here? THE GOVERNMENT is the one pushing the fiat currency, which is a dishonest measure, and the GOVERNMENT is the one setting reserve requirement, which is also a fraud.
Excuse me, I would claim the USE of the truck as an asset, I would not list the truck itself as an asset on my balance sheet.
You would expense the fee for using the truck on your profit and loss statment. You cannot record the use of the truck as an asset.
I have written elsewhere about the problems with what governments do. However, there is also a problem with the way banks operate, given that most depositors do not understand them.
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