Thursday, March 21, 2013

fraudulent guarantees and fictional reserve lending

globaleconomicanalysis | Should banks (large too-big-to-fail banks) run out of reserves, the Fed is Johnny on the spot, ready and willing to create reserves out of thin air. However, other banks can't count on it.

In essence, the system is one giant Ponzi scheme (not just in the US but everywhere), kept afloat by wizards willing to ramp money supply every time big banks get into trouble.

An enabling factor to all the bank leverage is Fractional Reserve Lending (which on numerous occasions I have likened to "Fictional Reserve Lending" but is really better thought of as "Negative Reserve Lending".

Please see my 2009 post Fictional Reserve Lending And The Myth Of Excess Reserves for further discussion. It's well worth a read.

Amusingly, people were arguing at the time such policies would soon cause massive price inflation, but I took the other side of the bet (and still do - for the time being).

The Fed, was and still is willing to step in and help any "too big to fail" bank, but numerous small banks went bust in the Great Financial Crisis, and depositors with money over the FDIC limit did on occasion suffer losses.

In that regard, the Reserve Bank of New Zealand at least has the courage to tell the truth, with precisely stated reasons: "deposit insurance is difficult to price and blunts incentives for both financial institutions and depositors to monitor and manage risks properly"

I am planning a follow-up post on the fraudulent nature of Fractional Reserve Lending, deposit insurance, and related topics, but the five key points for now are as follows:

Five Key Points
  1. In a Fractional Reserve Lending scheme, the notion there are meaningful reserves is ridiculous
  2. Far more money has been lent out than really exists (the rest is a fictional accounting entry)
  3. Fractional reserve lending constitutes fraud (just as lending something you do not own is fraud)
  4. There is no way for all this money to be paid back (so it won't be)
  5. Of all the central banks, the Reserve Bank of New Zealand has the most sensible policy for the most sensible reasons of all the central banks.