Mish: Case Against the Fed and Fractional Reserve Lending (w/ Ron Paul)

[Lucille]

Case Against the Fed and Fractional Reserve Lending (http://globaleconomicanalysis.blogspot.com/2009/05/case-against-fed-and-fractional-reserve.html)


Ron Paul explains Why We Can’t Reinflate The Bubble (http://www.ronpaul.com/2009-02-25/ron-paul-why-we-cant-reinflate-the-bubble/).

YouTube - Ron Paul's opening statement 2009.02.25 (http://www.youtube.com/watch?v=aW2V50AS7K0)

We have to come to the realization that there is a sea change in what’s happening. This is an end of an era and that we can’t re-inflate the bubble, just as we devised a new system of Bretton Woods in ‘44 which was doomed to fail. It failed in ‘71 and then we came up with the dollar reserve standard which was a paper standard; it was doomed to fail and we have to recognize that it has failed. And if we think we can re-inflate the bubble by artificially creating credit out of thin air and calling it capital; believe me, we don’t have a prayer of solving these problems. We have a total misunderstanding of what credit is vs. capital. Capital can’t come from the thin air creation by the Federal Reserve System; capital has to come from savings. We have to work hard, produce, live within our means and what is left over is called capital. This whole idea that we can re-capitalize markets by merely turning on the printing presses and increasing credit is a total fallacy; so the sooner we wake up to realize that a new system has to be devised, the better.

Right now I think the Central Bankers of the world realize exactly what I’m talking about and they’re planning, but they’re planning another system that goes one step further to internationalize regulations, internationalize the printing press. Give up on the dollar standard, but we have to be very much aware that that system will be no more viable. We have to have a system which encourages people to work and to save. What do we do now? We’re telling consumers to spend and continue the old process; it won’t work.

[nate895]

I disagree with his fifth point. Fraud is when you lie about the nature of something. If the bank tells you that your assets will only be backed by 10% of the amount you deposit, and you agree to risk possibly losing it for the interest rate, that isn't fraud, it is just stupid. I highly doubt that fractional reserve lending would actually survive in a free market with full information, but it always could.

[Lucille]

Denninger: Rebuttal To Mish: FRL (http://market-ticker.org/archives/1019-Rebuttal-To-Mish-FRL.html)


Our failure is regulatory. It is against the law to commit fraud and yet we have refused to prosecute those who have claimed to be solvent when they are not.

We require no new law and no "reorganization" of the banks.

We simply must enforce the law as written which instantly forces banks to make only prudent loans and forbids them to loan unsecured funds that exceed their excess capital at any point in time.

The sooner we the people understand that this crisis is the result of massive fraud committed by our banking class and covered for and bailed out by our government, the sooner we can force prudent regulation, clear the bad debt out of the system and return to having a stable, productive economy.

Fed Ducks Responsibility: Impeachment Time (http://market-ticker.org/archives/1020-Fed-Ducks-Responsibility-Impeachment-Time.html)


Banks can make all the unsecured loans they want, so long as every dollar of them is covered by one dollar of excess capital.

That is, capital beyond regulatory minimums.

Secured lending, that is, a loan for which the current recoverable market value of the collateral (including all costs of foreclosure and resale) exceeds the loan balance is a fully secured note and is safe irrespective of the loan performance, as seizure and resale of the collateral will always result in no loss for the bank.

Enforcing this regulation of course requires that all assets be marked to their market every day. This sounds impossible, but it is not. You can mark at a frequency and excess cushion on asset valuation to preclude going into negative territory. Let the bank choose the frequency, but make clear that the penalty of going negative on unsecured loans .vs. excess capital is immediate seizure and shutdown of the institution. Period.

The above is the definition of "safe and sound" for any fractional reserve lending system. All the rest of this noise out of people like Bernanke, the OTS, OCC, the industry itself and Congress is just that - it is noise and a willful, knowing lie.

We are here in this mess because regulators refused to enforce this simple, one-sentence fundamental statement of safety and soundness in our banks.

As a direct consequence of this refusal we blew a huge asset bubble.

This was particularly inexcusable because we did it right on the back of a previous asset bubble that burst for the exact same reason.

No bank should ever be able to come to the taxpayer for a bailout,and if we enforce the single basic rule of fractional reserve safety and soundness none ever will need to be bailed out, because it will be closed and liquidated before it can pose systemic risk.

We the people must insist that Congress force these clowns to do their jobs. They know the mathematical facts behind this, and that is in fact the only safe and sound way to run a banking system.

They're refusing because they also know that the banks have not conformed to this, do not conform now, and have and will bribe Congress and others to prevent this standard from being imposed on them, instead sucking off the taxpayer teat.