Steve G.

Fictional Reserve Banking

In Libertarian on September 28, 2008 at 11:31 pm

From the desk of George Phillies

I suppose “zero’ is a fraction, but this is not what is usually meant by “fractional reserve banking”. Source is an LPMass member and attorney.

If this emergency bailout law passes.

12 USC sect. 461 defines the reserves that commercial banks (“depository institutions”) have to maintain.

(b)(1)(A) defines “depository institution”, and (b)(2)(A) sets the reserve minimums. Long story short, commercial banks have to keep 3% reserve against “monetary policy” transactions up to $25 million, and between 8% and 14% (set by the Fed) on transactions above $25 million.

Now check the “Notes” for that section.

Pub. L. 109–351, title II, §§ 201–203, Oct. 13, 2006, §§ 201–203, 120 Stat. 1968,
provided that, effective Oct. 1, 2011, this section is amended— (1) in subsection (b)(2)(A), by striking “the ratio of 3 per centum” and inserting “a ratio of not greater than 3 percent (and which may be zero)” in clause (i) and by striking “and not less than 8 per centum,” and inserting “(and which may be zero),” in clause (ii).

This amendment was scheduled to eliminate the reserve requirement entirely on 10/01/2011. I say “was”, because here’s this gem from the Emergency Act that Congress just published tonight:

Section 203 of the Financial Services Regulatory Relief Act of 2006 (12 U.S.C. 461 note) is amended by striking ‘‘October 1, 2011’’ and inserting ‘‘October 1, 2008’’.

In other words, the reserve requirements for commercial banks can be ZERO for ALL TRANSACTIONS as of this Thursday, if this monstrosity passes.

  1. The enormous graphic of the two-hands tugging on the “O” has been posted here before. Can y’all shrink the size next time, and maybe explain for the dullards here the meaning of the graphic?

  2. Zero percent. Hopebama.

    read @ your own risk:

    Don’t say I didn’t warn you.

  3. pauliecannoli,

    Those links are to pages with thousands of words. For the dullards that read this blog, can you summarize things in twenty words or less?

  4. For the benefit of some people, I just pulled out my dictionary and looked up the word “dullard.” It is what I thought it was. For the dullards who read this blog who didn’t realize I was mocking myself and hoping to trick pauliecannoli into posting something that made it easier for me to be sure I understood the graphic, shame on you dullards!

  5. wesbenedict,

    Sorry. You’ll just have to expand your … horizons.

  6. I saw the post that George references around the same time he did (I was on the CC list) and this was my response to the original; what do the rest of you on LFV think?

    “Translation for us non-finance / legal experts please? What impact is this likely to have on our daily financial lives?

    I’ve been suggesting to the girlfriend that it might be prudent to pull a good chunk of her banked cash out of the bank and keep some as cash on hand, and convert a good bit of the rest into some sort of physical “hard money” asset – probably bullion grade silver coins (i.e. pre-64 silver…)

    Does this seem like sound advice? Does this proposed change make it a more urgent / more prudent thing to do?”


  7. the reserve requirements for commercial banks can be ZERO for ALL TRANSACTIONS as of this Thursday, if this monstrosity passes.

    Fred C on IPR list: “As to the zero reserves… holy crap!”

    Yeah….that means the fig leaf is off.

    Hi ho silver!

  8. Does it mean bend over, taxpayer?

  9. At this point, it may be wise to pull all your money out of banks and Wall Street. Invest in commodities that you hold – gold, silver, ammo, canned goods, bottled water, and any other items that have long shelf lives that you plan on buying in the future.

    Even a good pair of jeans can be a good investment. Paying $20 now for some jeans and putting them away is a great investment considering that you might pay $50 for the same jeans 2 years from now. You won’t get that kind of return on most investments these days.

    Once the gangstas impose the bailout, the dollar ain’t going nowhere but down.

  10. I guess you Rothbardians are pretty angry right now. But as an advocate for free banking myself, I see eliminating reserve requirements as a good thing: the less government regulation the better.

    This change means banks will keep the optimal rate of reserves to maximize interest while preserving liquidity rather than an arbitrary amount set by government regulators. Obviously in a competitive market bad bank policy will be punished and good bank policy will be rewarded. Banks who keep too low reserves will suffer from angry customers who can’t withdraw their money and banks who keep too high reserves will suffer from angry customers who want a higher interest rate.

    Now if only we could return to a system of competitive note issue where banks issue their own currencies…

    See Larry White’s The Theory of Monetary Institutions for more information.

    But you Rothbardians can continue to advocate for a strong central government to enforce your banking regulations if you want… you know, since you hate the free market.

  11. I’m glad Phillies explained that part, because it was lost on me. Seriously. IMO the bankes have always made it mroe complicated than it needs to be. (Of course, I think that about most things in life that are not in the natural sciences.)

    My bigger concerns are the “unjust enrichment” stuff, the Oversight Board of Cronies, the Spending Scam, and FDIC becoming a loan manager.

    That, and no Vaseline to go with the $2333 extra per person onto the now-raised $11.315T debt ceiling…

  12. Wes, and others,

    In case you wanted to learn of Goatse…

  13. So, the finger with the ring in the Obama version is not the ring finger, and it is the right hand.

    I agree with Mr. Moulton that competing currencies would be good. FA Hayek wrote about this topic in his book on Denationalisation of Money. A buddy of mine wrote a few essays about that book:

  14. Certainly they would, but I don’t see fictional reserve banking by itself, with everything else as it presently stands, as a good solution either.

    It reminds me more of the Texas toll roads type of fake privatization that Wes is talking about in the following post than a true free market.

  15. I think reducing reserve requirements to zero has always been a good idea, but it is especially appropriate at this time. There is a good chance that banks actually need to use their reserves at this time to cover adverse net clearings rather than continuing with using interbank borrowing.

    This positive element of the bill, however, doesn’t overcome its shortcoming. Bailing out the bad investments of financial insitutions.

  16. Reducing reserve requirements to zero means that each bank has the authority to write an infinite amount of money into existence. Which is a nice power to have. It does not seem to encourage any sort of care, though. One would think that the banks in those states with similarly low reserve requirements would simply write themselves loans to buy the banks in the other states (in those states that allow out of state – foreign – banking corporations to buy their banks). Consolidation goes wild.

    Is there anything in the current situation to suggest that absurdly low reserve requirements, fiat money, or the consolidation of banking companies into a few huge players has been helpful for the economy? There is plenty to show it has been risky and even dangerous for the economy.

    I would be in favor of a system of unregulated banking. But, lifting just one regulation, like the reserve requirement, does not necessarily make things better.

  17. Agree with John. Prioritizing deregulation makes a lot of sense.

    For ex., I would assert the right to firearms on one’s property WAY before asserting the right to private nukes. In fact, I’m inclined to NEVER assert the latter!

    Guess that makes me a statist in some people’s eyes 😉

  18. I guess you Rothbardians are pretty angry right now. But as an advocate for free banking myself, I see eliminating reserve requirements as a good thing: the less government regulation the better.

    I’m with you, Chuck, though I probably fall into the “Rothbardian” camp. Actually, I thought Rothbard – although he liked the idea of reserves – recognized that it was not a matter for the government. Of course, for much of Rothbard’s life, *nothing* was a matter for the government.

  19. […] done an analysis of the bailout bill; that’s a bit like counting strokes during a rape. But check this out: apparently one effect of the bailout bill will be to make the reserve rate for commercial banks […]

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