Fractional reserve lending is fine at 8 to 1 or even 12 to 1 - at 30 to 1 it poses a massive risk to the solvency of the entire system. It's not the concept that's at fault, it's that these guys pushed it way beyond the limits of safety just to keep making their quarterly numbers.
Of course you ignore all the good areas where money has been put to work that's made our country strong over the past 200+ years. That's why people like you prefer to stay here to mischaracterize our financial system and bitch rather than moving somewhere else.
It’s not the concept that’s at fault, it’s that these guys pushed it way beyond the limits of safety just to keep making their quarterly numbers.
Of course, in line with the above, that forces the next poor schmuck to make even DUMBER decisions to stay afloat. And so it goes.....
Mr. Jeeves,
I do believe you are confusing fractional reserve banking with the operations of the large ‘investment banks’ which are really trading houses.
The fractional reserve rate only applies to regular banks, like Bank of America or Washington Mutual. They are required to keep a certain percent of their reserve (the fraction) on hand in the form of liquid assetts: typically cash or T-bills.
The fractional reserve rate has not been anywhere near 1 in 8 (12.5%) for a while, but like most Fed stuff this fact is disguised in an avalache of weird financial footnotes and re-definitons.
Here is the Wikipedia article on Reserver Requirements:
A cash reserve ratio (or CRR) is the percentage of bank reserves to deposits and notes. The cash reserve ratio is also known as the cash asset ratio or liquidity ratio. In the United States, the Board of Governors of the Federal Reserve System requires zero percent (0%) fractional reserves from depository institutions having net transactions accounts of up to $9.3 million.[1] Depository institutions having over $9.3 million, and up to $43.9 million in net transaction accounts must have fractional reserves totaling three percent (3%) of that amount.[2] Finally, depository institutions having over $43.9 million in net transaction accounts must have fractional reserves totaling ten percent (10%) of that amount.[3] However, under current policy, these numbers do not apply to time deposits from domestic corporations, or deposits from foreign corporations or governments, called “nonpersonal time deposits” and “eurocurrency liabilities,” respectively. For these account classes, the fractional reserve requirement is zero percent (0%) regardless of net account value.[4]
The “30 to 1” ratio frequently mentioned here and in the press lately is the amount of “leverage” that the “investment banks” have. Investment banks (until the Bear-Sterns bailout) have never been part of the Federal Reserve System. This is because, despite the fact that they are called “banks” they are really just giant trading houses. Their leverage is similar to the leverage you as a stock trader would have buying on margin.
I believe the SEC allows individual traders to get up to 50% margin, meaning if you invest a dollar in a stock you can get 50c of stock from the broker.
The situation of the large investment banks is that they have investments in the ratio of $30 for every real dollar of assetts they have.
It might be more akin to you having a $300,000 house with only $10,000 down. (Which come to think of it a lot of people did during this bubble).
Reading old magazines and advertising from decades ago banks would list their assets and liabilities, I guess to reassure depositors.