Fractional Banking v Bond Market


COMMENT: Marty, I found your take on matching lenders and borrowers precisely on point. Whilst it sounds innovative, that is precisely what blew up with the mortgage backed securities. The New York bankers took long-term and sold it to many banks in Europe and to insurance funds. That was matching the terms. Even Iceland’s proposal to shift credit decisions to government makes one wonder how stupid people are attracted always to public office.

I worked in banking my whole life in the City. I too watched it decline. Your relationship banking that turned into transactional banking is a brilliant observation that comes only from someone with experience. These people who dream up such theories from the outside lack the experience to understand what they think/believe  to be a great idea is a bit amateurish if not outright stupid.

There appears to be a movement against fractional banking attributing everything to this aspect of banking as the root of all evil. Human beings are perhaps unique in having the ability to learn from the experience of others, but we are also remarkable in our apparent disinclination to do so. Eliminating fractional banking is simply the bond market which you point out is going to crash and burn and is ten times bigger than the share market. The type of debt they would eliminate would be credit cards. Matching lenders and borrowers is just the bond market and nothing more.

REPLY: Absolutely. The bond market is the matching of both sides and that will never eliminate the business cycle. You are correct. It will be the short-term credit that collapses, which could have a devastating economic impact upon the way of life. Merely changing the reserve ratio will change the leverage. China just lowered theirs to try to help the banks and increase the leverage by 1%.