The Vollgeld Proposal Is Bad, Very Bad

Jun. 07, 2018 6:39 AM ETEWL, SWZ, FSZ, HEWL11 Comments
Cullen Roche profile picture
Cullen Roche

Ever since the financial crisis, there has been an onslaught of people who think we need to scrap the entire financial system and start over. The main source of angst has been private banks. Basically, people think banks lent too much money and leveraged up the financial system and then we got a financial crisis. This isn't necessarily wrong, but that's not really how banks work. Let me explain.

A bank is a lot like your water company. The water company supplies water through the pipes into your home and you can turn on the spigot whenever you please. Water flows as you need it and stops as you don't need it. This is a good thing as it allows us to use water on-demand and to meet our specific needs. Banks operate in much the same way - they supply credit to the economy and when we need it we can tap into it. If the economy needs more liquidity, there is an elastic money supply that can expand to take advantage of those new opportunities. (Read, the Basics of Banking).

Now, the financial crisis was an unusual beast. The majority of loans being issued were relatively low risk loans. The problem was that all of the loans were tied to an asset (housing) that was assumed to be fairly low risk. And just like the water company doesn't decide how much water you put in the bathtub, the banks don't decide how much home prices get bid up (and down). So as consumers irrationally bid up home prices, the risks of the tub overflowing were growing.

The strange thing about the financial crisis is that when the tub overflowed (i.e., house prices collapsed), very few people blamed the homeowners who bid those prices up (i.e., the people who filled up the bathtub in

This article was written by

Cullen Roche profile picture
Mr. Roche is the founder of Discipline Funds, a provider of multi-asset low cost ETFs and financial advisory services. To learn more about Discipline Funds please see:

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