7 ms·

There is a subsidy, but you are putting it in the wrong place in the chain of events. It is the government backstop that is the subsidy, not legalizing the abil

There is a subsidy, but you are putting it in the wrong place in the chain of events. It is the government backstop that is the subsidy, not legalizing the ability to make promises. If you had a banking system with no government backstop you could still have fractional reserve banking but all the players in the system would bear the counterparty risks. The bank could claim you $500 in it but in reality you'd have a contingent interest in the assets of the bank. Money markets worked this way until the USG decided to reward the gamblers by treating them identically to the more prudent.

pdonis 11y ago
> It is the government backstop that is the subsidy, not legalizing the ability to make promises. A bank lending out more money than it actually has on deposit is not just "making promises"; it's "making promises they know they can't keep". Yes, banks did get away with that before the government got into the business of printing money, but it was riskier for them, which is why they prefer to have the government do it--in other words, instead of taking on the risk themselves of printing money not backed by deposits, they prefer to have the government print the money and give it to them to lend. See my response to sbov upthread. The "backstop" is certainly a factor, of course--it's what prevents ordinary bank runs from happening. But, as I noted in my response to sbov upthread, that certainly doesn't eliminate financial panics; it just exchanges one failure mode for another (arguably worse) one. * If you had a banking system with no government backstop you could still have fractional reserve banking but all the players in the system would bear the counterparty risks. The bank could claim you $500 in it but in reality you'd have a contingent interest in the assets of the bank.* Well, I suppose this is true in a technical sense, but the fact is that practically nobody, in the days when banks did this (i.e., before governments started printing the money), understood that this was what was happening. Again, see my response to sbov upthread. > Money markets worked this way until the USG decided to reward the gamblers by treating them identically to the more prudent. I certainly agree that USG's actions have not helped; but "banking" is a much broader category than "money markets", and fractional reserve banking is centuries old. And, as I noted above, practically nobody who deposited money in a bank or borrowed money from one realized what was actually going on; they thought that the bank being "reputable" meant it only lent money it actually had. When people did realize what was actually going on, they started a bank run.
- kbenson 11y ago
  > it's "making promises they know they can't keep". If that's the case, how do they keep fulfilling those promises? Not fulfilling the promised is the exception, not the norm. You should check your assumptions when they don't align with reality. If you believe any lending when you don't have the full money on hand to account for all the loans is wrong, then you need to apply the same level of scrutiny to borrowing. Borrowing money to do something you didn't have the money to do initially would be just as wrong. The system works because both sides are taking on risk. The borrower's risk (and the risk of everyone using the money( is spread throughout the entire system though.
  - pdonis 11y ago
    > If that's the case, how do they keep fulfilling those promises? By having the government magically conjure new money into existence, and getting everybody to believe that that counts as "fulfilling the promise". And then having to wave their hands and obfuscate when the economy melts down. > If you believe any lending when you don't have the full money on hand to account for all the loans is wrong, then you need to apply the same level of scrutiny to borrowing. What counts as "the same level of scrutiny"? The analogue from the borrower's side would be borrowing money without any intention of paying it back, not borrowing money period. If the borrower takes the money, does something profitable with it, and pays back the loan with interest out of the profits, there's nothing wrong with that; indeed, it's why borrowing exists in the first place: because it's a positive sum transaction, benefiting both sides. > The system works because both sides are taking on risk. A system in which loans were always backed by real wealth would have this property; the lender takes the risk that the borrower won't pay the loan back in full, with interest, and the borrower takes the risk that his business venture won't pan out and he'll have to either find some other way to pay back the loan, with interest, or default and take the penalty for that. But both sides also have the possibility of gain to balance the risk. But our current system forces third parties--the taxpayers--to also take on risk: the risk of having to bail everyone out when the house of cards collapses and the economy melts down. What gain do the taxpayers get in exchange?
    - 11y ago

pdonis 11y ago

> It is the government backstop that is the subsidy, not legalizing the ability to make promises. A bank lending out more money than it actually has on deposit is not just "making promises"; it's "making promises they know they can't keep". Yes, banks did get away with that before the government got into the business of printing money, but it was riskier for them, which is why they prefer to have the government do it--in other words, instead of taking on the risk themselves of printing money not backed by deposits, they prefer to have the government print the money and give it to them to lend. See my response to sbov upthread. The "backstop" is certainly a factor, of course--it's what prevents ordinary bank runs from happening. But, as I noted in my response to sbov upthread, that certainly doesn't eliminate financial panics; it just exchanges one failure mode for another (arguably worse) one. * If you had a banking system with no government backstop you could still have fractional reserve banking but all the players in the system would bear the counterparty risks. The bank could claim you $500 in it but in reality you'd have a contingent interest in the assets of the bank.* Well, I suppose this is true in a technical sense, but the fact is that practically nobody, in the days when banks did this (i.e., before governments started printing the money), understood that this was what was happening. Again, see my response to sbov upthread. > Money markets worked this way until the USG decided to reward the gamblers by treating them identically to the more prudent. I certainly agree that USG's actions have not helped; but "banking" is a much broader category than "money markets", and fractional reserve banking is centuries old. And, as I noted above, practically nobody who deposited money in a bank or borrowed money from one realized what was actually going on; they thought that the bank being "reputable" meant it only lent money it actually had. When people did realize what was actually going on, they started a bank run.

kbenson 11y ago
> it's "making promises they know they can't keep". If that's the case, how do they keep fulfilling those promises? Not fulfilling the promised is the exception, not the norm. You should check your assumptions when they don't align with reality. If you believe any lending when you don't have the full money on hand to account for all the loans is wrong, then you need to apply the same level of scrutiny to borrowing. Borrowing money to do something you didn't have the money to do initially would be just as wrong. The system works because both sides are taking on risk. The borrower's risk (and the risk of everyone using the money( is spread throughout the entire system though.
- pdonis 11y ago
  > If that's the case, how do they keep fulfilling those promises? By having the government magically conjure new money into existence, and getting everybody to believe that that counts as "fulfilling the promise". And then having to wave their hands and obfuscate when the economy melts down. > If you believe any lending when you don't have the full money on hand to account for all the loans is wrong, then you need to apply the same level of scrutiny to borrowing. What counts as "the same level of scrutiny"? The analogue from the borrower's side would be borrowing money without any intention of paying it back, not borrowing money period. If the borrower takes the money, does something profitable with it, and pays back the loan with interest out of the profits, there's nothing wrong with that; indeed, it's why borrowing exists in the first place: because it's a positive sum transaction, benefiting both sides. > The system works because both sides are taking on risk. A system in which loans were always backed by real wealth would have this property; the lender takes the risk that the borrower won't pay the loan back in full, with interest, and the borrower takes the risk that his business venture won't pan out and he'll have to either find some other way to pay back the loan, with interest, or default and take the penalty for that. But both sides also have the possibility of gain to balance the risk. But our current system forces third parties--the taxpayers--to also take on risk: the risk of having to bail everyone out when the house of cards collapses and the economy melts down. What gain do the taxpayers get in exchange?
  - 11y ago