[quote=davelj][quote=Russell][quote=CA renter]And this is exactly why we’re in trouble.
The economy should be more about solvency and productivity than about wishing, hoping, and “confidence.” If “confidence” is the foundation of our economy, something is seriously f’ed up.[/quote]
Has there ever been a time when “confidence” and attempted enforcement of that confidence was not involved in any economy?[/quote]
Fractional reserve lending began in the 15th century once goldsmiths saw that people would not generally redeem all of their gold-based notes at the same time, and they saw the opportunity to invest their coin reserves in interest-bearing investments. So, in effect, “confidence” has been one of the foundations of the world economy for, oh, about 500+ years. A few times each century – the recent crisis being a good example – confidence is shaken and bad things happen in the financial system and the economy… as it should be. None of this is particularly new. It’s just new to those living through it for the first time.
The term “Ponzi Scheme” is thrown around an awful lot these days, and generally in an incorrect context. While our financial system may have “ponzi-like elements,” (arguably, fractional reserve lending displays ponzi-like elements), that “like” word is an important distinction. For example, Madoff operated a true Ponzi Scheme. He had to keep raising new money to pay off previous investors or the scheme would collapse, and it did. There were very few assets actually backing his operation – the money was lost or spent. In contrast, our banking system is backed by real assets – securities, loans, etc. Now, you may not believe the assets are worth what the banks say they are (in many cases, I certainly don’t), but… there are real assets there backing the capital in the system. So, this is far from a true Ponzi Scheme. Although one could argue that because “confidence” is necessary (that is, all depositors and lenders can’t have their money at the same time), there is a ponzi-like “element” to the system. But these are two very different things.
Just wanted to clarify these concepts.[/quote]
Needless to say, I’m not a fan of fractional reserve lending. 😉
