4 ms·

> Shorting behaves the same way that fractional reserve banking does Yes. Except that the fractional reserve banking system has a lender of last resort.

eru 6y ago
Some fractional reserve banking systems do. Historically, systems without lender of last resort have done quite well. See eg the Canadian system of the 19th century, with no lender of last resort, and that often ended up as an emergency lender to the mis-regulated and crisis-prone American system to the south.
sidibe 6y ago
And the whole "fractional" word. You can't lend someone 10 shares based on the one you bought.
- kgwgk 6y ago
  In fact the "fractional" part goes the other way. You can lend the whole share you bought. But the bank cannot lend the whole dollar you deposited, they have to keep a fraction of it as reserve.
  - sidibe 6y ago
    You and I can lend each other all of our money. The bank can lend more than they have.
    - Chris2048 6y ago
      Not really. You. nor the bank, can't lend more money that you have, but you can promise more than you have. That automatically implies something more complicated than lending. At the very least, money was borrowed (on a promise) from a third party in order to provide the money they loaned. You and I can do the same, I can promise you whatever I like. And if I manage to convince you, or a third party, that my promise is good, I can even borrow money from them. And loan out that money, despite not owing it; Unless there is something fraudulent in doing that wrt my agreements with the borrower - but the bank has the same, nationally regulated, restrictions too.
    - kgwgk 6y ago
      If a bank is created and you deposit $1, the bank has $1. They can lend only $0.9 because they need to keep $0.1 as reserve (for example). From there different things could happen: a) if the borrower takes the $0.9 and takes it elsewhere the bank cannot lend a single additional cent until they get more deposits. The fractional reserve means they could only lend a fraction of the dollar. Maybe the money will be deposited in another bank who will then lend to someone else, but for the original bank who got $1 it stops there. b) if that money remains in the bank as a new deposit, they have now $1.9 in deposits. They can lend a fraction of the additional $0.90, and make an additional loan of $0.81 (keeping $0.19 in reserves in total). If the second loan also ends in the bank as a deposit they will have $2.71 in deposits, they can make a new loan etc. but the multiplier is limited. For shares there is no limit at all. If Alice has a share she can lend it to Bob who sells it to Carol. Carol can lend it to Daniel who sells it to Elaine. Elaine can lend it to Felix who sells it to Gloria. Gloria can lend it to Hector who sells it to Ingrid. They can go on for as long as they want and all the ladies will be long one share.
      - sidibe 6y ago
        Ah I see thanks, well explained
jameshart 6y ago
So does the stock market: a company can always issue more stock. And a market can allow naked short sales to provide liquidity.

eru 6y ago

Some fractional reserve banking systems do. Historically, systems without lender of last resort have done quite well. See eg the Canadian system of the 19th century, with no lender of last resort, and that often ended up as an emergency lender to the mis-regulated and crisis-prone American system to the south.

sidibe 6y ago

And the whole "fractional" word. You can't lend someone 10 shares based on the one you bought.

kgwgk 6y ago
In fact the "fractional" part goes the other way. You can lend the whole share you bought. But the bank cannot lend the whole dollar you deposited, they have to keep a fraction of it as reserve.
- sidibe 6y ago
  You and I can lend each other all of our money. The bank can lend more than they have.
  - Chris2048 6y ago
    Not really. You. nor the bank, can't lend more money that you have, but you can promise more than you have. That automatically implies something more complicated than lending. At the very least, money was borrowed (on a promise) from a third party in order to provide the money they loaned. You and I can do the same, I can promise you whatever I like. And if I manage to convince you, or a third party, that my promise is good, I can even borrow money from them. And loan out that money, despite not owing it; Unless there is something fraudulent in doing that wrt my agreements with the borrower - but the bank has the same, nationally regulated, restrictions too.
  - kgwgk 6y ago
    If a bank is created and you deposit $1, the bank has $1. They can lend only $0.9 because they need to keep $0.1 as reserve (for example). From there different things could happen: a) if the borrower takes the $0.9 and takes it elsewhere the bank cannot lend a single additional cent until they get more deposits. The fractional reserve means they could only lend a fraction of the dollar. Maybe the money will be deposited in another bank who will then lend to someone else, but for the original bank who got $1 it stops there. b) if that money remains in the bank as a new deposit, they have now $1.9 in deposits. They can lend a fraction of the additional $0.90, and make an additional loan of $0.81 (keeping $0.19 in reserves in total). If the second loan also ends in the bank as a deposit they will have $2.71 in deposits, they can make a new loan etc. but the multiplier is limited. For shares there is no limit at all. If Alice has a share she can lend it to Bob who sells it to Carol. Carol can lend it to Daniel who sells it to Elaine. Elaine can lend it to Felix who sells it to Gloria. Gloria can lend it to Hector who sells it to Ingrid. They can go on for as long as they want and all the ladies will be long one share.
    - sidibe 6y ago
      Ah I see thanks, well explained

jameshart 6y ago

So does the stock market: a company can always issue more stock. And a market can allow naked short sales to provide liquidity.