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You say that in the 1980s "most countries moved to fractional reserve banking rather than full reserve". This is at best confusing: in most developed countries

You say that in the 1980s "most countries moved to fractional reserve banking rather than full reserve". This is at best confusing: in most developed countries fractional reserve banking, regulated by central banks, goes back to the 1600s. The bank runs that have occurred throughout US history were only possible because essentially all our banks used fractional reserve banking. Also, the 2008 crisis was not due to or amplified by fractional reserve banking. The debt overhang was due to mortgage brokers and investment bankers (often without a retail bank license) selling securities -- effectively bonds secured by mortgages. As with any security, these had the explicit risk of becoming valueless, but this risk was hand-waved away by corrupt bond rating and other tricks. In fact, I'm pretty sure that no bank customers lost any deposits due to the 2008 crisis. Fractional reserve regulation worked exactly as intended.

hkt 6y ago
True, no bank customers lost deposits to my knowledge either. And yes, a major cause of the 2008 crisis was collateralized debt obligations (CDOs) built on residentially backed mortgage securities. Often CDOs would be built on other CDOs in a way which masked the risks involved and made investments of junk look great. The resultant loss of confidence was, in some ways, a result of investors not "getting" the almost recursive nature of those products. What I meant by the role of fractional reserve was related to capital ratios. I was incorrect to say full reserve was in effect until the 1980s, but the rate at which banks could create money was lower before then because their capital ratios were different. The rate of creation of money (usually for mortgage lending) increased from the lower capital requirements. This in turn increased the size of the market for mortgage backed securities (created to shift mortgages off the books of banks and to let them lend more) and led to 2008. It is a sufficiently epic size of subject to not really play nicely with brief explanation, so I aimed to make a tactical simplification. Fair enough for pointing that out!

hkt 6y ago

True, no bank customers lost deposits to my knowledge either. And yes, a major cause of the 2008 crisis was collateralized debt obligations (CDOs) built on residentially backed mortgage securities. Often CDOs would be built on other CDOs in a way which masked the risks involved and made investments of junk look great. The resultant loss of confidence was, in some ways, a result of investors not "getting" the almost recursive nature of those products. What I meant by the role of fractional reserve was related to capital ratios. I was incorrect to say full reserve was in effect until the 1980s, but the rate at which banks could create money was lower before then because their capital ratios were different. The rate of creation of money (usually for mortgage lending) increased from the lower capital requirements. This in turn increased the size of the market for mortgage backed securities (created to shift mortgages off the books of banks and to let them lend more) and led to 2008. It is a sufficiently epic size of subject to not really play nicely with brief explanation, so I aimed to make a tactical simplification. Fair enough for pointing that out!