I think it is unfair to criticize the fractional reserve system. The banking industry has turned into a commodity business and it is tough to make money in such kind of industry. As HLS points out recently, “I don’t know of any other business that sells something for $400,000 and only makes $1080 gross”. Without fractional reserve system, the banks will all die because they really have no profit margin at all.
I don’t think there is a solution to that. Risk takers in the banking industry will always get awarded for the short term. The government can regulate the hell out of it but there will always be loopholes.
The same will gradually apply to all businesses that turns into commodity business. They make up their margin by quantity… which is essentially excessive inventory that will kill them in times of economy trouble. The only way is for business and the country to innovate itself out of the poor industries (and let the Asian countries deal with it), but American has become too stupid and lazy to make steady innovations.