rationalskepticism.org

Now, it strikes me as utterly bizarre that anyone freaks out over this. No actually currency is being produced, and lending money dramatically improves economic efficiency and growth as money is diverted from savers with no use for it at the time to borrowers who may have profitable investments or need for consumption at the time. Obviously bank runs can ensue, but our federal deposit insurance system insures deposits of up to like $250k now, and few reasonable people actually fear a run

Your fractional lending description is a little sketchy but the basic premise is correct.

This way the money supply matches the growth demand in theory.

Where it goes wrong is when it gets multiplied again by the banks and the speculative borrowers so the leverage gets up around 100:1 ( buying stocks or property on margin with borrowed money which is also leveraged 30:1 )

The trouble with fractional lending is that just as with buying on margin, if there is a loss or a margin call it's frightful.
So if a bank has a million dollars in capital reserve it can lend 10-30 million out.

However - a loss unwinds by the same ratio.....which puts banks rapidly underwater as we are seeing around the world.
Building societies and small community credit generally don't get into these issues as lending is to locals and the assets are sound to 75% of the value of asset. Then it works, and bankers don't make much.

When the leveraging and falsification of asset values ( I see the US is suing one of the credit agencies over fraudulent evaluations ) then it's to hell and gone.
That is what happened in the lead up to 2008 ( the Economist called it in 2005 ) and the bubble is still deflating and will be for a good while.
The conditions that led to that have not really changed much and one of the guys that called the meltdown accurately says another is inevitable. ( don't have the link ).

Fractional lending resolves the money supply issue when there is growth but when there is a decline and when there is fraudulent asset evaluation plus speculative leveraging it is just a licence for predation.

Because the right to fractional lending is a charter by the government - there is a strong need for the government to get it back under control.

To put it simply.
If you own one house you can rent it once.

If a bank owns one house ...it can rent it out 10 times up to 30 times....and that is a government chartered right.

No other business can magnify it's capital that way.

That the financial community fucked up so badly given the gov chartered privilege is just a lesson in what happens when predation goes unchecked.....that they don't see anything wrong with what they did is simply astounding.

They don't want transaction taxes, they don't want to give up their ridiculous bonuses and salaries and they seem not to see that the privilege of their position is societally granted and CAN and SHOULD be taken away or strictly controlled far more than it is at present.

The symbols of this abuse are all around us. Banks, realtors, financial houses all occupy the prime real estate in almost every town - even the small ones ( oddly Ottawa with it's controls is an exception ) and they use not only other people's money to accumulate that but then use the fractional reserve system to magnify their ability to rent out money and accumulate prime property.

That hardly ever happens with credit unions as they are directly responsible to their depositors for both income on deposits and their lending practices.

Regular banks can't create new money.

They do create new money in the money supply via fractional lending.
That cannot "print" money the way a central bank can.....that aspect.... QE etc is a can of worms beyond my ken.

In theory with fractional lending....as you pay down your mortgage the money goes out of the money supply....that's what is supposed to work.

When millions of homes are underwater and in foreclosure - the underlying capital of the banks is gone a couple times over and the gov has to prop them up.

When that happened in Sweden in the 90s the gov took over the bank, told the shareholders to piss off, fired the entire management, protected depositors and after a few years of oversight management sold the bank off.
That should be the gov backstop to protect the public weal and depositors.

The headache is the banks are so big now and so intertwined with mortgage, investment banks etc that taking them down when the bubble bursts hurts the underlying sound economy that needs short term financing to function and longer term financing to expand. If the bank's capital reserves are gone...they cannot lend anymore....and that's what almost happened in 2008 - the whole thing just about froze up.

Every 10 million in subprime mortage losses took out 100-300 million in new lending capacity..the scale of the problem was unprecedented as the bubble in housing was the equivalent of the entire annual GDP of the Big 8. Trillions of dollars of froth.

And the world economies are smothered in it still and facing an aging population issue as well ( Japan in particular ).

There simply is no easy way out and trying to "grow out" quickly sets the stage for another bubble.

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epete....deposits and bank capital are not the same....banks are publicly traded so have shareholder capital, retained earnings and deposits in the mix.

The banking act in Canada is a book about about a foot thick or more covering numerous aspects.

Not long ago banks could NOT deal in insurance or mortgages....there was a reason for that separation....and that it eroded did not benefit society as a whole......but it did create a privileged class with far too much economic leverage and far too little control on predation.

Iceland, Cyprus, just the edges of the meltdown.

Growth economies in the far east and resources economies like Australia and Canada dodge the worst of the bubble collapse but both Australia and Canada have a levitated housing bubble that is subject to the same meltdown factor unless wages rise to meet affordable ratios.
Even China is struggling with rampant housing speculation despite it's central control.

When housing speculation gets controlled as it is in some nations - there might be a bit of stability - but we are a long way globally from getting to a point where the froth is out. Many haircuts to come and the banks and financial houses that fueled the bubble with speculative lending allowed by the fractional reserve system are very reluctant to be trimmed.

Banks are supposed to lend to create real wealth at a conservative evaluation of that real wealth ( a house is real wealth and a bank should be lending to 75% or so of the current market value and these days in reality should be at 50% ).
The reality in the world??? every day of the trillions of dollars of transactions....99% are speculative, 1% is to create real wealth.

It's fucked big time.
Want security? - buy a wheat farm in the northern part of the growing range.

also epete.

The return on $100,000 deposit is about one third of a percent - not 3% and the banks lend to companies higher than 8% and make outrageous returns on credit cards. Despite all of the favours society granted them....it's been and is abused big time.
A transaction tax would at least provide a reserve fund.