bearfund

Want to Fix the Fed? Get Rid of It

Rhunzzz, right, eliminating fractional reserve banking would mean banks could lend their equity and time deposits. It would, as you point out, result in MUCH less borrowing. That is exactly what the United States needs not just to recover and improve but to survive - as Volcker himself pointed out. Basically, if a bank isn't willing to lend its own shareholders' money, it shouldn't be willing to lend mine. When a bank borrows from the Fed at trivial interest rates, it devalues the cash I have saved. It is not merely lending my money, as it would if it lent the contents of my deposit account, but actually destroying it through monetary inflation and the loss of purchasing power.

But I'll meet you halfway, because I believe in consistency. The margin rate for lending by banks should be the same as it is for buying stocks: 50%. For every dollar of equity you have, you may lend that equity, and another dollar you've borrowed from me. Not 10. Not 25. Not 50. 1. And the author is right - the Fed should go. It exists to allow consumption to occur before production. If you want to borrow, borrow someone else's savings. And yes, you will pay more. Interest rates might be 10% for short term low risk loans and 25% for longer terms and higher risk. Most individuals should not have any credit at all, certainly not unsecured credit. Mortgages should be for those with superlative credit, and then offered only with LTVs below 70%. But note that since margin requirements would be much higher, there would not be an enormous upward pressure on deposit interest rates, so there would be less disincentive to invest than most people assume. If you can gear up 30x and lend at 7%, it makes a lot of sense to offer depositors 5.5%. But if you can only gear up 2x while lending at 10%, you won't offer your depositors much because you can't usefully deploy very much money. But they can't borrow, so they'll have to save anyway. And once they've saved, they'll have every incentive to consume and/or invest, precisely because you won't pay them much. This, in short, described America before the Fed.

All that's left is to use gold as money again. And at that point, what's the harm?