Fractional Banking v Matched Funding
Banking has existed from the earliest of times and has taken many forms from safe deposit storage, money changers, merchants with the ability to move money internationally, to money lenders. Some people wrongly assume that they can eliminate the business cycle by eliminating fractional banking. They assume that it will be possible to match lenders and borrowers to maturity contracts. They do not comprehend that this is the line of thinking that always leads to authoritarianism, all the way to communism.
The problem that will emerge from this matching lenders and borrowers to a maturity contract is that the boom bust cycle will still exist. There will always be the perpetual rise and fall in asset values caused by other factors (including human nature), not the least will be changes in technology, no less civil unrest and war that can alter capital flows. History offers a catalogue of solutions. All we need to test such an idea is to open the books.
People assume the cause of the business cycle is the fractional banking issue, as if that were eliminated, then you would flat-line the business cycle creating utopia. Be very careful. This was the goal of Karl Marx as well. So the starting point is a basic question. Has fractional banking always existed? NO! Since the answer is no, then did the boom and bust cycle in banking exist even without fractional banking? The stark answer - YES.
In ancient times, there were financial panics without fractional banking as well. In Athens during 354BC, people borrowed money from the Temple unbeknownst to everyone else. They were speculating in real estate. The real estate market collapsed without fractional banking and then it exposed that the money was borrowed behind the curtain, so to speak, from the temple. Corrupt priests had all this money donated to Athena. She obvious was very frugal since she never seemed to go on a spending spree to buy shoes, owls, or spears. She wore a helmet so she didn’t need a hairdresser. So the priests could keep their hands out of the treasury. Oops – they were caught lending it out to their buddies for spare change. There was no fractional banking involved. They had the money and lent it to their buddies. The assets collapse because as always, the mood of people changes with the seasons.
Fast forward to the 17th century, we find the very same scheme played out by politicians. There was the collapse of Wisselbank in Amsterdam, where people had deposited their money and assumed the bank was strictly a safekeeping facility. They offered no loans and paid no interest. Little did they know, the government was using their deposits to fund their own trading.
The Wisselbank was founded in 1609. Upon first opening an account, a depositor paid a fee of ten guilders, three guilders, and three stuivers for each additional account. Two stuivers were paid for each transaction, excepting those of less than three hundred guilders, for which six stuivers were paid, in order to discourage the multiplicity of small transactions. A person who neglected to balance his account twice in the year forfeited 25 guilders. A person who ordered a transfer for more than what was upon his account, was obliged to pay three per cent for the sum overdrawn. The bank made further profit by selling foreign coin and bullion, which fell to it by the expiration of receipts, and by selling bank money at five percent and buying it at four percent. These sources of revenue were more than enough to pay for the wages of bank officers, and defraying the expense of management. (Adam Smith)
In 1602, the United East India Company (VOC) formed from six trading companies in the Netherlands, and granted a trade monopoly over the Indies. The bank was administered by a committee of city government officials concerned to keep its affairs secret. It initially operated on a deposit-only basis, but by 1657, it was allowing depositors to overdraw their accounts, and lending large sums to the Municipality of Amsterdam and the United East Indies Company (Dutch East India Company). Initially this was kept confidential, but it had become public knowledge by 1790. The City of Amsterdam took over direct control in 1791 as a bailout, before finally closing it in 1819.
There is plenty of history of banking BEFORE fractional banking. Sorry, but that did not stop banking panics nor did it stop the business cycle with the boom and bust events. The Tulip Bubble was not leveraged with fractional banking. No matter what, the boom and bust cycle is driven by human nature. We do have a tendency to change our minds about everything from fashion to money.
The idea that we can match lenders and borrowers sounds nice. However, that will not eliminate the cycle. I can find no instance of such a flat line except during a Dark Age where there was no banking, private ownership, or any real economy. Coinage during the period is rare and is typically confined to the region where it was struck demonstrating the lack of an economy or circulation due to trade.
How Banks Wiped Out Eastern Europeans
When Communism fell, there was no private ownership. People ended up owning the place in which they lived for a small fee payable to the government. Suddenly, Eastern Europeans owned property with no debt for the most part. Banks rushed in offering credit cards and mortgages backed by wholly owned property. The banks buried the people in debt and then sold them mortgages in Swiss francs, telling them they would save money on interest. The bankers could care less about the people – after all, this was Transactional Banking. Just write the business and resell it to someone else. Who cares what happens later?
Then the Swiss franc jumped 30%. Eastern Europeans are drowning in debts and now their politicians simply tell them it is their fault for protecting the bankers. The politicians are for sale everywhere you look. They do not defend the people or even bother to regulate the banks either prohibiting loans in foreign currency or demanding that they explain such transactions with full disclosure that there is a huge currency risk and offer hedging insurance. No, the politicians are in league with the transactional bankers - burn ‘em and churn ‘em – next!
The defaults on loans throughout Eastern Europe are likely to be seen as we turn down from 2015.75. This is part of the whole looming debt crisis. This is by no means a joke. This is a serious crisis brewing that is still off the radar. While everyone worries about the derivatives, they are not even paying attention to the Eastern European Swiss Loan crisis.
ZDF Aspekte TV Show on the ECM & More
The popular German cultural show for the younger generation “ZDF Aspekte” (Aspects) sent a film crew to the States to interview me on the Economic Confidence Model, Europe, and a lot more. It should appear this Friday night, April 24, 2015, throughout Germany.
The rising generation is looking more and more for answers since the old way of thinking will never produce anything new. You cannot solve the problem with the same line of thinking which created it. The generation that is in power now has lost its way, becoming so corrupt that it sold itself to the highest bidder. There is no reform because to them, this is the way it has always been done.
The youth unemployment at over 60% in many parts of Europe has far exceeded the 25% high of the US Great Depression. The elderly, told to save for their retirement, have lost a fortune. The Euro has crashed from 160 to par and the ECB has taken interest rates to negative territory punishing the very people that believed in government.
This line of thinking is producing the worst economic debacle in hundreds of years. This is pushing society to the brink of a revolution as we head into 2017. Civil unrest and war will ONLY appear when you turn the economy down. When things are good and people are fat and happy, we all magically just get along.
There is a change in the wind. The question is, in which direction will the leaves blow?