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| Is Risk-Free Banking Possible? What About Fractional Reserve Lending? 30-Year Mortgages? Posted: 21 Sep 2013 08:58 PM PDT Reader "Nate" noted that Bloomberg columnist Megan McArdle stated that banning Fractional Reserve banking won't work. Nate asked "What would a future without fractional-reserve banking look like?" Let's start with a look at Megan McArdle's article: Banking Without Risk Is Impossible. The fundamental fact of a banking crisis, which is different from a crisis in any other industry, is that if people believe a financial institution to be bankrupt, it actually is bankrupt.Megan McArdle Wrong Twice For starters a 100% reserve system is indeed a "particularly libertarian solution" for the simple reason fractional reserve lending is fraud. If I lent you a house that I did not have ownership of (or rights of control to), I surely would be convicted of fraud. If I sold you 100 tons of wheat, and only had 10, I likewise would be convicted of fraud. Reflections on "Legitimate" Right-To-Use Some argue that as long as customers agree to these various banking schemes it is OK. However, it's not OK because such lending is nothing more than a gigantic kiting scheme. Moreover, it affects others by cheapening the value of money, pushing up asset prices for the benefit of those with first access to money, the banks and the wealthy. Logically, two people cannot have the right to use the same money at the same time, whether they agree to such a scheme or not! Banks are allowed to lend money that does not exist, but if you or I did it, we would be convicted of kiting (fraud). 100% Reserve System Does Not Mean There Will Be No Loans Megan McArdle is also wrong about lending. A 100% reserve system does not mean there will be no loans. Instead it means banks cannot make loans for longer duration than they have ownership or control of the money. If banks want to lend money for 30 years then need to have 30-year term deposits. If banks want to lend for 5-years then they need to secure money for 5 years. Might this mean the end of 30-year mortgages? Perhaps, perhaps not. Perhaps it just means the end of cheap 30-year mortgages. As far as I am concerned that would be a good thing. 30-year mortgages with credit created out of nowhere fueled the property bubble. Would it mean the end of mortgages? Certainly not but 10 and 15-year mortgages would carry a far lower rate than 30-year mortgages than they do now. And why shouldn't they? Are not 30-year mortgages inherently more risky? Checking Accounts vs. CDs Since checking accounts represent money on demand, banks could not lend them at all in a 100% reserve system. Such deposits would indeed be risk-free. They would be fee-based, but without risk. Want to collect interest on CDs? OK, but such deposits would no longer be risk-free. Notice that a run on the banks in a full reserve system is not likely. 100% of demand deposits are always available. And term deposits would match term-loans and no longer. Of course, banks can foolishly lend money and not be able to return it at the end of the period. But that is the risk people take when they lend banks money. If people do not want to take those risks, they can leave the money in checking accounts and pay a fee for storage. For more on the case against Fractional Reserve Lending please see
Please click on the second link above and read it. On page 46 of the book Case Against The Fed Rothbard says "By the very nature of fractional Reserve Lending, banks cannot honor all its contracts". Does knowingly entering a contract that one cannot possibly honor, constitute fraud? Of course it does. I have talked about these issues many times before. For a synopsis, please see Central Bank Authorized Fraud; Fractional Reserve Lending Problems Go Far Beyond "Duration Mismatch" . Megan McArdle seriously needs to read the eBooks above, starting with Case Against The Fed. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Posted: 21 Sep 2013 12:29 PM PDT The data is a bit out of date, but the US Department of Education has a College Affordability and Transparency Center where you can see the highest and lowest tuition and net tuition (including aid) of various types of two and four-year colleges. The highest costs are over $60,000 per year. And that is just tuition and books, not just room and board. Business Insider commented on the costs in America's REAL Most Expensive Colleges. Fast Company also commented on the sad cost situation in How To Save $244,000 On Your Education. You, too, can experience the best that American education has to offer--without enrolling at NYU. Might I recommend that the curious would-be undergraduate or returning student check out:About Coursera The above links to Coursera, Enstitute, and General Assembly are Fast Company reports on those organizations, and well worth a look for those seeking alternatives to extremely costly education. I also encourage readers to go to the actual Coursera site. About Coursera®Future of Education is At Hand: Online, Accredited, Affordable, Useful On September 3, I wrote Future of Education is At Hand: Online, Accredited, Affordable, Useful. Please check it out. Avoid the College Debt-Trap Those with money to burn may wish to go (or wish to send their children to go) to 4-year brick-and-mortar colleges for $60,000 a year plus room and board. For everyone else who wants to avoid the college debt-trap, I strongly suggest exploring alternative approaches. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
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