‘The big education for me is that civilisation is fragile and can be destroyed in a heartbeat' - Jeremy Brade, former peacekeeper in Sarajevo.

Wednesday, August 06, 2008

Fractional reserve banking - why bother?

Karl Denninger comments on the unfolding crisis of non-subprime mortgages, where he thinks losses will be even worse.

A question: why bother with any kind of reserve?

Once you've determined that banks can lend a high multiple of deposits, you may as well make deposits entirely irrelevant. In fact, it would save quite a bit on operating costs if you could have banks that specifically didn't take deposits from anybody - no cash in or out, so no tellers, no branches. Let the Federal Reserve or the Bank of England give a handful of providers a total lending limit, and then stand back and watch them pump away.

Insolvency? Loan-to-value not good enough? Raise the limits again, pump harder. Get a punter to overpay for one house and you increase the value of all the others in the street, so making their mortgages safer. And if the bank doesn't have to pay interest to depositors, it can charge as little as it likes for its loans.

I can't see the flaw here, any more than I can see the difference between a banker and a swindler.

I don't know why I didn't think of it before.

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