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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: basho who wrote (54043)	2/17/2006 2:05:20 AM
From: gpowell	Read Replies (1) \| Respond to of 110194

I entirely agree that moral hazard is the critical problem. Nevertheless, I still have some reservations about fractional reserve banking and incline to the strict Austrian view that demand deposits are in fact claim transactions rather than a credit transactions and should be legally treated as such. This small but vital change could in my view go a long way towards lessening systemic fragility. Fractional reserve systems are not inherently unstable. Given rising marginal cost of keeping currency in circulation, legally unrestricted currency issuers will not issue without limit, nor earn unlimited profits. The real economic issue here is not the stability of the banking system, but whether fractional reserve banking leads to economic instability through distorting interest rates away from their natural rate. From my perceptive, that instability is the very reason why fractional reserve banking would persist in a free market, as it allows for a more efficient market for risk. BTW, I don't think Austrians are united on their FRB views. It was Mises' view that much of the drama of the 1930s in bank runs and exchange rate fluctuations was due to the error of banks guaranteeing effective on demand withdrawal of savings deposits. (Savings deposits?) I don’t think Mises is correct on this one. Bank runs were an endemic feature of US Banking and that has its seeds entirely in banking regulations. I’m not quite sure what you’re saying here. If we look at the US and Australia, for example, from 1986 to the present their monetary bases have grown by an annual average of 7.4% and 6.5% respectively. This doesn’t strike me as either fixed or the sort of growth rate one would have expected from a commodity standard. Have I misunderstood your intent somehow? I wasn’t clear on what I meant by reserves. I extract currency held in the public hands from the monetary base to arrive at a reserve figure. This in essence treats “reserves” as if they were a commodity reserve (being made up of both vault cash and deposits at the Federal Reserve) and currency in the public hands as if they were a claim on those reserves. By doing this we can see that much of the increase in the monetary base is due to an increase in the demand for currency, which I take as being consistent with changing expectations for low rates of inflation and increased use of the dollar in foreign markets. That much of the demand is from abroad also serves to increase the elasticity of demand, which, in turn, serves to discipline the Fed. i10.photobucket.com