davelj, I’ve given more thought to your comment, and I’d like to point out that I would LOVE to actually have a fractional reserve banking system. Maybe the 75% of banks that you say will pull through unscathed still operate under a fractional reserve model, in which case they deserve our confidence, but no actions by the federal government can help us differentiate those from the imprudent ones. But the overall lack of confidence stems from the fact that largely banks have been operating under a multiple reserve system.
With a true fractional reserve, banks can not lend out more than a fraction of deposits from savers. If the demand to borrow excedes the supply of savings, market forces push interest rates higher. Saving is encouraged, frivolous borrowers are squeezed out. Not so with our multiple reserve system, in which banks can lend out an unbounded multiple of deposits from savers. Demand to borrow excedes savings? No problem, the Fed will lend the bank any amount of money at 1 or 2% interest, well below the rate of inflation. The bank has too many risky loans on its books? No problem, Fannie or Freddie will buy those loans and provide fresh new capital with which the bank can write new loans. With the current system, interest rates are artificially low, saving is discouraged, and frivolous borrowing is rampant. That’s what causes this bubble/bust cycle that is wrecking our economy.
The system is broken. The system has to be restored to a true fractional reserve system, and prudent lending standards have to be (re-)adopted. Then, and only then, can confidence return. And then confidence will return of its own accord. Confidence can not be purchased by a bailout that facilitates a continuation of the broken system.
