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Viewing 15 posts - 31 through 45 (of 61 total)
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  • February 18, 2009 at 10:42 AM #348877
    peterb
    Participant

    I agree with Breeze on this one. Fractional reserve is like a pit bull. Very useful if kept in check. But can be very bad if allowed to get outta hand. Which every so many decadeds seems to happen. Human nature I suppose. Creating money outta thin air is just too tempting to be kept at bay for too long. Steven Keen has some really interesting insight on his website about this.
    But look at countries with undeveloped banking systems, they suck. It’s a good thing, it just needs careful oversight.

    The FDIC insures deposit at a certain limit. It is not nationalization. It does not protect investors, debt holders or the solvency of the bank. That’s all been happening illegaly by our govt at this time. But it’s not the FDIC.

    February 18, 2009 at 11:22 AM #349245
    davelj
    Participant

    I mostly agree with Breeze and peterb. There’s nothing inherently wrong with fractional reserve banking and it has one enormous advantage over non-fractional reserve banking: lower interest rates. Look at the interest rate spreads between mortgages and government debt in countries where there is no or limited fractional reserve banking – they’re through the roof. Why? A thought experiment to explain part of the reason. Let’s say I want to start a bank and earn 10% on my equity. Fractional reserve banking allows me to lever up my equity, thereby lowering the necessary spread between my cost of borrowing (deposits) and lending (loans). Holding return on assets constant, my return on equity increases with leverage. So, let’s say I can lever 10-1, earn 1% on assets and achieve a 10% ROE. Now, let’s eliminate fractional reserve banking and now I have to fund entirely with equity. Now I have to earn a 10% ROA. If my cost of deposits is 3% and operating costs are 2%, then I have to charge 15% on my loans to make it worth my while. Anybody want 15% mortgages? Then eliminate fractional reserve lending and your wish shall be granted in short order.

    Personally, I don’t have a problem with 20% down mortgages. Recall, that without the 0%, 5%, 10%, etc.-down mortgages, we never would have had the bubble in the first place, so the 20% down mortgages wouldn’t currently be in jeaopardy. That is, if we had stuck to 20% down over the last 8 years we wouldn’t be in this mess in the first place.

    February 18, 2009 at 11:22 AM #349500
    davelj
    Participant

    I mostly agree with Breeze and peterb. There’s nothing inherently wrong with fractional reserve banking and it has one enormous advantage over non-fractional reserve banking: lower interest rates. Look at the interest rate spreads between mortgages and government debt in countries where there is no or limited fractional reserve banking – they’re through the roof. Why? A thought experiment to explain part of the reason. Let’s say I want to start a bank and earn 10% on my equity. Fractional reserve banking allows me to lever up my equity, thereby lowering the necessary spread between my cost of borrowing (deposits) and lending (loans). Holding return on assets constant, my return on equity increases with leverage. So, let’s say I can lever 10-1, earn 1% on assets and achieve a 10% ROE. Now, let’s eliminate fractional reserve banking and now I have to fund entirely with equity. Now I have to earn a 10% ROA. If my cost of deposits is 3% and operating costs are 2%, then I have to charge 15% on my loans to make it worth my while. Anybody want 15% mortgages? Then eliminate fractional reserve lending and your wish shall be granted in short order.

    Personally, I don’t have a problem with 20% down mortgages. Recall, that without the 0%, 5%, 10%, etc.-down mortgages, we never would have had the bubble in the first place, so the 20% down mortgages wouldn’t currently be in jeaopardy. That is, if we had stuck to 20% down over the last 8 years we wouldn’t be in this mess in the first place.

    February 18, 2009 at 11:22 AM #349365
    davelj
    Participant

    I mostly agree with Breeze and peterb. There’s nothing inherently wrong with fractional reserve banking and it has one enormous advantage over non-fractional reserve banking: lower interest rates. Look at the interest rate spreads between mortgages and government debt in countries where there is no or limited fractional reserve banking – they’re through the roof. Why? A thought experiment to explain part of the reason. Let’s say I want to start a bank and earn 10% on my equity. Fractional reserve banking allows me to lever up my equity, thereby lowering the necessary spread between my cost of borrowing (deposits) and lending (loans). Holding return on assets constant, my return on equity increases with leverage. So, let’s say I can lever 10-1, earn 1% on assets and achieve a 10% ROE. Now, let’s eliminate fractional reserve banking and now I have to fund entirely with equity. Now I have to earn a 10% ROA. If my cost of deposits is 3% and operating costs are 2%, then I have to charge 15% on my loans to make it worth my while. Anybody want 15% mortgages? Then eliminate fractional reserve lending and your wish shall be granted in short order.

    Personally, I don’t have a problem with 20% down mortgages. Recall, that without the 0%, 5%, 10%, etc.-down mortgages, we never would have had the bubble in the first place, so the 20% down mortgages wouldn’t currently be in jeaopardy. That is, if we had stuck to 20% down over the last 8 years we wouldn’t be in this mess in the first place.

    February 18, 2009 at 11:22 AM #348927
    davelj
    Participant

    I mostly agree with Breeze and peterb. There’s nothing inherently wrong with fractional reserve banking and it has one enormous advantage over non-fractional reserve banking: lower interest rates. Look at the interest rate spreads between mortgages and government debt in countries where there is no or limited fractional reserve banking – they’re through the roof. Why? A thought experiment to explain part of the reason. Let’s say I want to start a bank and earn 10% on my equity. Fractional reserve banking allows me to lever up my equity, thereby lowering the necessary spread between my cost of borrowing (deposits) and lending (loans). Holding return on assets constant, my return on equity increases with leverage. So, let’s say I can lever 10-1, earn 1% on assets and achieve a 10% ROE. Now, let’s eliminate fractional reserve banking and now I have to fund entirely with equity. Now I have to earn a 10% ROA. If my cost of deposits is 3% and operating costs are 2%, then I have to charge 15% on my loans to make it worth my while. Anybody want 15% mortgages? Then eliminate fractional reserve lending and your wish shall be granted in short order.

    Personally, I don’t have a problem with 20% down mortgages. Recall, that without the 0%, 5%, 10%, etc.-down mortgages, we never would have had the bubble in the first place, so the 20% down mortgages wouldn’t currently be in jeaopardy. That is, if we had stuck to 20% down over the last 8 years we wouldn’t be in this mess in the first place.

    February 18, 2009 at 11:22 AM #349400
    davelj
    Participant

    I mostly agree with Breeze and peterb. There’s nothing inherently wrong with fractional reserve banking and it has one enormous advantage over non-fractional reserve banking: lower interest rates. Look at the interest rate spreads between mortgages and government debt in countries where there is no or limited fractional reserve banking – they’re through the roof. Why? A thought experiment to explain part of the reason. Let’s say I want to start a bank and earn 10% on my equity. Fractional reserve banking allows me to lever up my equity, thereby lowering the necessary spread between my cost of borrowing (deposits) and lending (loans). Holding return on assets constant, my return on equity increases with leverage. So, let’s say I can lever 10-1, earn 1% on assets and achieve a 10% ROE. Now, let’s eliminate fractional reserve banking and now I have to fund entirely with equity. Now I have to earn a 10% ROA. If my cost of deposits is 3% and operating costs are 2%, then I have to charge 15% on my loans to make it worth my while. Anybody want 15% mortgages? Then eliminate fractional reserve lending and your wish shall be granted in short order.

    Personally, I don’t have a problem with 20% down mortgages. Recall, that without the 0%, 5%, 10%, etc.-down mortgages, we never would have had the bubble in the first place, so the 20% down mortgages wouldn’t currently be in jeaopardy. That is, if we had stuck to 20% down over the last 8 years we wouldn’t be in this mess in the first place.

    February 18, 2009 at 12:53 PM #349586
    SD Realtor
    Participant

    The biggest concern I have is that are we simply replacing one set of crooks with another set of crooks?

    February 18, 2009 at 12:53 PM #349486
    SD Realtor
    Participant

    The biggest concern I have is that are we simply replacing one set of crooks with another set of crooks?

    February 18, 2009 at 12:53 PM #349453
    SD Realtor
    Participant

    The biggest concern I have is that are we simply replacing one set of crooks with another set of crooks?

    February 18, 2009 at 12:53 PM #349013
    SD Realtor
    Participant

    The biggest concern I have is that are we simply replacing one set of crooks with another set of crooks?

    February 18, 2009 at 12:53 PM #349331
    SD Realtor
    Participant

    The biggest concern I have is that are we simply replacing one set of crooks with another set of crooks?

    February 18, 2009 at 2:41 PM #349666
    mike92104
    Participant

    I feel like the biggest problem with the whole thing is relying on a set of bought congressman to regulate the industry that pays them. I wish Dodd’s constituents would vote his ass out already along with Frank and Schumer.

    Other than that, there is no perfect system, and I don’t think down payment requirements would make much difference.

    February 18, 2009 at 2:41 PM #349412
    mike92104
    Participant

    I feel like the biggest problem with the whole thing is relying on a set of bought congressman to regulate the industry that pays them. I wish Dodd’s constituents would vote his ass out already along with Frank and Schumer.

    Other than that, there is no perfect system, and I don’t think down payment requirements would make much difference.

    February 18, 2009 at 2:41 PM #349093
    mike92104
    Participant

    I feel like the biggest problem with the whole thing is relying on a set of bought congressman to regulate the industry that pays them. I wish Dodd’s constituents would vote his ass out already along with Frank and Schumer.

    Other than that, there is no perfect system, and I don’t think down payment requirements would make much difference.

    February 18, 2009 at 2:41 PM #349534
    mike92104
    Participant

    I feel like the biggest problem with the whole thing is relying on a set of bought congressman to regulate the industry that pays them. I wish Dodd’s constituents would vote his ass out already along with Frank and Schumer.

    Other than that, there is no perfect system, and I don’t think down payment requirements would make much difference.

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