The Safe Banking Fantasy

Occasionally, we see an official attempt at a serious discussion of what Federal Reserve System economists would like the public to believe is safe banking. This means safe fractional reserve banking. This means fraudulent safe banking. This means fantasy banking.




All fractional reserve banking rests on a legal promise: you can get your money out at any time. Yet the money that you deposit is loaned out by the bank. This means that your money is gone. Then how can you withdraw it at any time? Only if (1) the money is loaned out on a "repay instantly on demand" basis, or (2) hardly anyone will demand withdrawal at the same time. The bank will pay you out of its tiny slush fund for withdrawals. The first option assumes that the debtor is always in a position to repay at any time, which is of course ludicrous for most corporate and business borrowers. They will not agree to such terms. The second option is equally ludicrous during a banking crisis.


In other words, all fractional reserve banking is based on a legal deception of the depositors. A depositor cannot get his money back when a lot of other depositors want to get their money back. This is called a bank run. All fractional reserve banking systems eventually experience bank runs.


During bank runs, bankers call on the government to bail them out. The government and the central bank bail out only the biggest banks. They let the smaller banks go under. Then big banks buy the assets of the smaller, now-busted banks at discount prices. The government (FDIC) pays off depositors with $250,000 or less on deposit. Taxpayers therefore subsidize the buying spree of the biggest banks. This is justified as "saving the banking system." The politicians provide taxpayer money every time.


I remember an on-camera testimony of Congressman Brad Miller, a Democrat Congressman from North Carolina, just before the TARP bailout. He said that his constituents were evenly divided between "no" and "hell no." He of course voted for the bailout, as did most of his colleagues. He was of course re-elected.


The voters did not really care. They screamed about the bailouts, but they refused to impose negative sanctions on all of the Congressmen who voted for TARP. Until there is real pain, they usually re-elect their Congressmen. They perceive, correctly, that their opinions do not count when big banks are asking for handouts in a crisis. The voters want their lifelong bailouts, and as long as their Congressmen bring home the pork, they really don't care. By "care," I mean an automatic vote for the challenger at the next election. Congressmen generally understand only one thing: defeat at the next election. Ron Paul doesn't care, and maybe Dennis Kucinich doesn't care, but most of them care deeply.


So, the #1 goal of most politicians, all bureaucrats, and all central bankers is to make sure that the voters feel no pain – at least not pain bad enough that might lead to (1) a new Congress, (2) budget cuts for bureaucracies, and (3) the nationalization of the central bank.


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