If you’ve followed my posts for long you’ve undoubtedly seen me lament the corruption, and the long-term financial instabilities of fractional-reserve banking, overseen and manipulated by Central Banks. Simply put, these things are a tyrannical politician’s best friends because they dramatically shift power from the average man on the street to a small cadre of elites.
But, you may have wondered, what is a possible alternative? This post from Zero Hedge very brief summary is one example that provides much greater economic stability, restrains foolish debt-dependent finance, puts handcuffs on government spending, allows stupid bankers to fail, and returns power to the People.
“A World without Fractional-Reserve Banks and Central Planning.”
Now, is this critique of the current monetary system just impotent ideological whining over something that, like the weather, can’t be changed? Or could fractional reserve banking and the resulting need for economic central planning actually be replaced by something better? Specifically, how could a banking system without fractional reserve lending accommodate depositors’ demand that their money be there when they want it and borrowers’ desire for 30-year mortgages which would tie up those deposits for decades? And could this market operate without the need for government oversight and management?
The answer to that last question is yes. A better financial system is possible, and here’s how it would work:
First, today’s commercial banks would split into two types. “Banks of commerce” would take deposits and keep them safe for a fee, like the goldsmiths of old. “Banks of credit” would pay interest on deposits and lend out depositor money, but would have to match the duration of deposits with the duration of loans. Deposits that can be withdrawn anytime (a checking account for instance) could only be used to fund a loan which the bank can “call” on demand, while longer-term deposits (say a 5-year CD) would be matched to longer-term loans like a business term loan or 5-year mortgage. Really long-term loans like 30-year mortgages would be funded with deposits for which the bank would have to pay up in order to convince a depositor to part with his or her money for such a long time.
The resulting mortgage would carry a high enough rate to provide the bank with a small profit, which would make 30-year mortgages both expensive and hard to get. But the case can be made that they should be hard to get. Buying a house – or anything else that requires capital for extremely long periods – should require a hefty down payment, other liquid assets as collateral and a solid income stream. This coverage would give the bank the ability to foreclose and realize more than the value of the loan, which would protect its ability to repay its depositors, thus making depositors more willing to tie up their money for long periods.
Such a society would be a lot less prone to excessive debt accumulation and inflation, bank runs would be far less frequent and government deposit insurance would be much less necessary. It would, in short, be a saner world in which individuals managed their own finances, saved with confidence and borrowed only for highly-productive uses, while two sharply-differentiated types of banks facilitated wealth protection and real wealth creation rather than paper trading.
This is a conversation that is long overdue, and which the elite will resist with everything they’ve got, because it impinges on their power and wealth. You want better income distribution? Here’s a way to achieve it, while exalting freedom.
To those who think this is a pipe dream… I will never stop dreaming. In order to arise from the inevitable collapse, good and just ideas will have to be present in the mind of the culture. And the current system will collapse. At that point we either drive toward a system like this, or we will embrace the worst tyranny of rescue by a false political messiah.
By the way, please don’t treat this as a Democrat v. Republican problem. There is no dividing line on this one. My own state’s Bailout Bob Corker is so far up the hindquarters of the financial elite that it’s amazing we ever see him, and that’s true of many Republicans. Both parties are filled to the brim with Fascists, and the saddest thing is that almost certainly the majority in each doesn’t even comprehend how well they wear that label, due to sheer ignorance.