# Forcing you Bank NOT  to lend your Deposits



## horusd (19 Jan 2011)

Wonder if anyone saw excellent banking documentary on BBC 2 last night(18/1/11) 9pm? One of the ideas was that depositors could force bankers not to speculate or lend their money, just put it in a vault and keep it there. Some kind of bill was discussed in Westminster to ask depositors whether they wanted to do this on opening a deposit account. I understand why people might want to do this and avoid the bank gambling, but it seemed OTT. Surely the net result would be that depositors would have to pay banks to keep deposits and lose money as inflation kicks in? Got me thinking tho about whether there is a way to force banks to only invest in certain types of products/risks/spreads etc. Thoughts anyone ?


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## jpd (19 Jan 2011)

According to Adam Smith, if there was a market for a bank whose business was restricted to taking deposits and only using them to invest in certain types of products (I am assuming you mean product with a low risk of failure and thus with only small gains), then such a bank would be setup - the absence of such banks, implies that there is no such demand.

In fact, such banks did exist in the recent past - Building societies, but over the years they all changed themselves into more risky institutions.


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## Sunny (19 Jan 2011)

You don't need to make things so complicated by asking the man on the street to tell the bank what they can do with your money. These things can all be dealt with through proper regulation e.g. Restrictions on bank's leverage. Be careful what you wish for though. There are consequences. Bring in rules like the programme suggests and you will have small businesses complaining that they can't get credit.


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## lightswitch (19 Jan 2011)

My Father did this in the 70's.   Not sure how he managed it or if it's still possible.  There must have been some sort of crisis back then too to trigger him to take this action.


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## lightswitch (19 Jan 2011)

Sunny said:


> You don't need to make things so complicated by asking the man on the street to tell the bank what they can do with your money. These things can all be dealt with through proper regulation e.g. Restrictions on bank's leverage. Be careful what you wish for though. There are consequences. Bring in rules like the programme suggests and you will have small businesses complaining that they can't get credit.


 

Small businesses can't get credit as it stands.


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## Sunny (19 Jan 2011)

lightswitch said:


> Small businesses can't get credit as it stands.


 
Yeah but the crisis isn't going to last forever. Forcing banks to potentially keep 100% of deposits in cash that they can't lend isn't going to solve it any quicker.


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## lightswitch (19 Jan 2011)

Sunny said:


> Yeah but the crisis isn't going to last forever. Forcing banks to potentially keep 100% of deposits in cash that they can't lend isn't going to solve it any quicker.


 
Well forever is a very long time so yes, I guess you are right in that.  Even the state owned banks, funded by our money that we did not volunteer to give them in the first place are currently not lending to Businesses.   Begs the question as to what exactly they are doing with the money.  Personally I think if you do not want the banks to lend out your money that should be an option available to you.


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## Duke of Marmalade (19 Jan 2011)

You seem to be referring to a custodial service. I am sure that is possible.  With a custodial service you would not actually be lending the bank your money just giving it to them for safe keeping.  Therefore you cannot expect any interest and indeed would have to pay a fee.


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## horusd (19 Jan 2011)

It strikes me that we often consider money to be a physical thing that could be locked up in a bank. But increasingly it's just an electronic number. Apparently when the BOE engaged in quantative easing during the crisis they merely added a few 0's( and moved a decimal place or two!) to the money supply rather than physically printing notes. The idea of holding actual money increasingly seems anachronistic and will be increasingly out-dated. Yet this is one of the scary things about the banking problem. There are products (derivatives of incredible complexity) that few people including many bankers interviewed last night didn't even understand. If banks are taking actual money and converting it into these product types rather than just lending it per se to normal busineses as credit, few people including the central bankers have any idea what they are and therefore they are nearly impossible to value.


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## lightswitch (19 Jan 2011)

horusd said:


> It strikes me that we often consider money to be a physical thing that could be locked up in a bank. But increasingly it's just an electronic number. Apparently when the BOE engaged in quantative easing during the crisis they merely added a few 0's( and moved a decimal place or two!) to the money supply rather than physically printing notes. The idea of holding actual money increasingly seems anachronistic and will be increasingly out-dated. Yet this is one of the scary things about the banking problem. There are products (derivatives of incredible complexity) that few people including many bankers interviewed last night even understand. If banks are taking actual money and converting it into these product types rather than just lending it per se to normal busineses as credit, few people including the central bankers have any idea what they are and therefore they are nearly impossible to value.


 
Therein lies the problem that needs to be addressed.  A lot of things are accepted in the name of progress.  The progression to "virtual" money has proved to be a very negitave experiment.  Hard cold cash is the only currency to trust.


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## Duke of Marmalade (19 Jan 2011)

_horusd_, it is a very long time since people held money in its physical form, probably Tudor times. For the last few centuries money has been in the "virtual" form of paper notes or coinage in base metal or account balances in banks. Yes, these days that virtuality has become a step more virtual.


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## horusd (19 Jan 2011)

I know Duke,but even the Zimbaweans produced a note of some kind. The idea that you can increase the money supply by billions at the click of a mouse is scary. As it happens I have ZAR $ note  for 1 million so technically I am a  ZAR millionaire!  It's amazing to think that at one time the US $ and the ZAR $ were par.


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## Duke of Marmalade (19 Jan 2011)

horusd said:


> I know Duke,but even the Zimbaweans produced a note of some kind. The idea that you can increase the money supply by billions at the click of a mouse is scary. As it happens I have ZAR $ note for 1 million so technically I am a ZAR millionaire! It's amazing to think that at one time the US $ and the ZAR $ were par.


Having checked with Wiki, your description of QE seems about right.


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## Chris (20 Jan 2011)

horusd said:


> Surely the net result would be that depositors would have to pay banks to keep deposits and lose money as inflation kicks in?


Yes indeed, and this is how things worked before fractional reserve banking, i.e. you paid a bank to store your money just like you would pay a warehouse to store some goods.
As a depositor in the fractional reserve banking world you would end up losing out as the value of the money would decrease. This approach would only make sense if an end was put to inflation; note that inflation is not a naturally occuring phenomenon, it created by central banks and the fractional reserve monetary system.



jpd said:


> According to Adam Smith, if there was a market for a bank whose business was restricted to taking deposits and only using them to invest in certain types of products (I am assuming you mean product with a low risk of failure and thus with only small gains), then such a bank would be setup - the absence of such banks, implies that there is no such demand.
> 
> In fact, such banks did exist in the recent past - Building societies, but over the years they all changed themselves into more risky institutions.


Very good point, however you have to remember that deposit insurance, even for small amounts, makes the depositor oblivious or ignorant of what is actually done with his/her money. If there was no deposit insurance people would be a lot more careful where they deposited their money, and you would see banks advertising based on risk.
The bigger problem is that if I thought there was a market (even a small one) for a simple savings and loan bank, that only made loans to SMEs for example, the cost of regulatory compliance to set up the bank is so prohibitive, that it would not make sense for me to do so. The higher the cost of regulation the less competition and new businesses will be created, even if there is a market for them.




Sunny said:


> Yeah but the crisis isn't going to last forever. Forcing banks to potentially keep 100% of deposits in cash that they can't lend isn't going to solve it any quicker.


But this is the underlying problem with fractional reserve banking. Demand deposits, as their name suggests, should be available on demand. Fixed term deposits, as in the true meaning of the word (not the way most term deposits can be cashed in early), would only be available on completion of the term. Forcing banks to keep 100% reserves on demand deposits does not mean that there will be no money to lend out. Those people that wish to have their money available on demand would have to accept no interest and a "storage" fee, while varying term deposit products would try and attract customers with interest rates.
And the crisis came about by too much lending; making more money available to a debt riddled economy does not solve the problem.



horusd said:


> I know Duke,but even the Zimbaweans produced a note of some kind. The idea that you can increase the money supply by billions at the click of a mouse is scary. As it happens I have ZAR $ note  for 1 million so technically I am a  ZAR millionaire!  It's amazing to think that at one time the US $ and the ZAR $ were par.


I was given a Weimar Republic Reichsmark note when I was a kid (1 billion, trillion, can't remember what it was) to teach me the evils fiat money. You are rightfully scared about the effects of money expansion at the click of a button, especially when the action is declared to be beneficial. Ask yourself this, if increasing the money supply is such a good idea, then why not decriminalise counterfeiting?


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## horusd (20 Jan 2011)

Excellent points Chris. I'm more scared now than when I started this topic. What's your long-term assessment viz a viz inflation , alternatives to holding $'s £'s €'s ? Some posters elsewhere on AAM are talking about gold - any thoughts ?


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## Duke of Marmalade (20 Jan 2011)

Chris said:


> Ask yourself this, if increasing the money supply is such a good idea, then why not decriminalise counterfeiting?


You don't see any difference between the monetary authorities printing money as part of its management of the economy and private citizens having a free hand at printing as much they want?


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## Chris (21 Jan 2011)

horusd said:


> Excellent points Chris. I'm more scared now than when I started this topic. What's your long-term assessment viz a viz inflation , alternatives to holding $'s £'s €'s ? Some posters elsewhere on AAM are talking about gold - any thoughts ?


Well I have posted in other threads about my opinion on gold. I own a substantial amount and will continue adding to my holdings. I also own equities in industrial, mining, and agricultural companies, I have very little euros, no sterling and no US$ exposure at all.
Don't take any of this as advice to buy or not buy certain assets, always do your own homework.
I don't think we will see hyperinflation in the Euro zone, as a fear of it is ingrained in Germany. But I am almost certain that we will see substantial two digit price inflation. I made a post last year about what inflation is, as there is a very common misconception about it: http://www.askaboutmoney.com/showthread.php?t=141913



Duke of Marmalade said:


> You don't see any difference between the monetary authorities printing money as part of its management of the economy and private citizens having a free hand at printing as much they want?



In general I don't. Both actions inflate the money supply and do damage to the economy. The only difference is that central banks do it under the guise of benefiting the economy (while only those that receive the money first benefit), and criminals do it to advance their criminal ventures.
You cannot create economic wealth by creating more of the medium of exchange. If it were so easy, then there would be absolutely no reason why there should be poor countries. The only way you can create economic wealth is through production. 
Just look at what happened in the last 30 years in the US (the biggest inflator in the industrialised world) and how much damage has been done through manipulation of the money supply: 
- after the savings and loans crisis in the late 80s (caused by easing of monetary policies) interest rates were cut and money printed, this ultimately gave rise to the dot com bubble within 10 years
- after that bubble burst, interest rates were again slashed and more money pumped into the system, which gave rise to the housing bubble within 7 years
- after this huge bubble burst interest rates were slasched to pretty much zero, and an enormous amount of new money has been printed, and will continue to be printed

Now the question is, what bubble have they inflated now? Sovereign bonds are the most obvious candidate, and we are heading into the 4th year after the burst of the last bubble. If or when this bubble bursts, it will make the housing bubble and credit crisis look like a walk in the park.


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## Duke of Marmalade (21 Jan 2011)

_Chris_ I don't think anyone believes that printing money creates wealth, certainly not I. You are clearly of the view that printing money is the root of all evil. What about the biggest bubble of them all, the Wall Street crash on 1929. Did we not have the gold standard then?


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## zen (21 Jan 2011)

It doesnt matter if the currency is coinage,notes,gold, electronic or magic beans.  The future currency will be what you are told it will be. 
Notes is just paper
Coins are just metal
Gold is just another arbitrary currency at the base of it.
Electronic doesn't even exist.
The way forward is the magic bean of which the value will be held on your RFID chip lodged in your skull.

Four legs good two legs bad....


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## Chris (24 Jan 2011)

Duke of Marmalade said:


> _Chris_ I don't think anyone believes that printing money creates wealth, certainly not I. You are clearly of the view that printing money is the root of all evil. What about the biggest bubble of them all, the Wall Street crash on 1929. Did we not have the gold standard then?


I was hoping you were goign to ask that question ;-)
From 1921 to 1929, while technically the US$ was on a gold standard, the Federal Reserve increased the money supply by almost 70%. What essentially happened was that the US went from a 100% gold backing to I believe a 40% gold backing. This was plain and simple money printing.
There's a very good chart and chapter on this in Rothbard's "Americas Great Depression", see page 91 following: http://mises.org/rothbard/agd.pdf
I disagree with you that nobody believes printing money creates economic wealth. This is exactly what central banks and politicians are claiming. Bernanke and Obama are the worst culprits, who would have us believe that by simply inflating asset prices again (through money printing) people will feel richer, start spending, and magically create wealth for us all.



zen said:


> Gold is just another arbitrary currency at the base of it.


Not really true. Over millenia, gold became currency through human choice, and not through human design or government enforcement. And this happened independently in societies and cultures that never met.



zen said:


> The way forward is the magic bean of which the value will be held on your RFID chip lodged in your skull.
> 
> Four legs good two legs bad....


Hahaha


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## Duke of Marmalade (24 Jan 2011)

Chris said:


> I was hoping you were going to ask that question ;-)


So I fell for the trap Still I tend to believe the Wiki bible. It points out that the depression was worst and lasted longest for those who tried to preserve some sort of gold standard.

I was interpreting your "printing creates wealth" argument literally i.e. that some people think that by printing a billion euro we have created a billion euro of wealth. The more subtle point that managing the money supply, if done *properly*, can enhance economic performance and therefore create wealth is one that I subscribe to, the key word being the one in bold.

According to Wiki if the World reverted to a gold standard the price of gold would have to be increased by 8 fold just to match the current money supply.  There is something really weird about that.  At the minute gold competes with other commodities and has found a price level.  If we were to revert to a gold standard gold would suddenly be artificially much more valuable compared to other commodities than the open market currently deems it to be.  That has to be wrong.

I worked this out before I read Wiki - there just isn't enuff gold to oil the wheels of modern economic activity.  Economic activity today is much much higher in real terms than it was say 100 years ago.  The gold supply on the other hand hasn't changed much.  How can the similar gold supply be right for such hugely disparate levels of economic activity.  If we had limited money supply to being one eighth of what it is today there is no doubt in my mind that economic growth would be much less.  I concede though that we would have avoided inflation and the worst excesses of the asset bubbles.  But surely economic growth is the ultimate objective.


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## Chris (24 Jan 2011)

Duke of Marmalade said:


> I was interpreting your "printing creates wealth" argument literally i.e. that some people think that by printing a billion euro we have created a billion euro of wealth. The more subtle point that managing the money supply, if done *properly*, can enhance economic performance and therefore create wealth is one that I subscribe to, the key word being the one in bold.


Friedman argued very much in the same way, but took it one step further by saying that the money supply should be mechanically increased by a certain percentage, and not based on some bankers or economists perceptions at any given time.
I buy into the idea that there is no human being or group of human beings that could possibly gather, analyse and interpret all economic activity that influences the price of money (which is what interest is) in a way that would allow them to accurately set interest rates and money supply. All tinkering with the money supply, especially when in the hands of some small political and banking elite is very dangerous, and in history has proven detrimental on all occasions.



Duke of Marmalade said:


> According to Wiki if the World reverted to a gold standard the price of gold would have to be increased by 8 fold just to match the current money supply.  There is something really weird about that.  At the minute gold competes with other commodities and has found a price level.  If we were to revert to a gold standard gold would suddenly be artificially much more valuable compared to other commodities than the open market currently deems it to be.  That has to be wrong.


Not quite correct, but I see what you are trying to point out. If gold became money again in the morning then the following would happen:
Today: 1 ounce of gold = about $1350 and 1 barrel of oil = about $88 so one barrel of oil would trade at about 1/15th ounce of gold.
Tomorrow: 1 ounce of gold = 8 * $1350 (I don't know whether this figure is correct, so I'm just using it for demonstration) = $10800. Oil, however, would not still be selling at $88, but at 1/15th ounce of gold or about $720, as gold now is money, and not Dollars.
What you do show is that you cannot simply switch overnight, as all savings are immediately wiped out. But I don't think that even the most die hard gold bugs would suggest that.
The other problem is that the reason gold's open market price is lower than what it would be under a gold standard, is because fiat money is forced on us as legal tender. Fiat currency does not have the same market forces as gold has.



Duke of Marmalade said:


> I worked this out before I read Wiki - there just isn't enuff gold to oil the wheels of modern economic activity.  Economic activity today is much much higher in real terms than it was say 100 years ago.  The gold supply on the other hand hasn't changed much.  How can the similar gold supply be right for such hugely disparate levels of economic activity.  If we had limited money supply to being one eighth of what it is today there is no doubt in my mind that economic growth would be much less.  I concede though that we would have avoided inflation and the worst excesses of the asset bubbles.  But surely economic growth is the ultimate objective.


I understand your points, but a real gold standard does not depend on any set amount of gold. Technically, any amount of gold backing, within reason, is enough. The idea of a gold standard is to maintain the value of money by restricting its inflatability. If the money supply is pretty much static then some prices have to go down for other prices to go up. And this is perfectly fine. The idea that price deflation is bad is a huge fallacy of modern political economics. If you look back at economic history since the industrial revolution you will find an uncanny recurrence of huge bubble/bust eras, that are directly linked to the amount of currency inflation.
Pretty much for the entire industrial revolution money was backed by gold. There were a few times, like major war times, where this was abandoned, but by and large, the western world used gold as money. This was a time of economic activity and growth that has not been matched since, while the money supply only increased by the amount of gold dug out of the ground. What did happen though was that gold bought you increasing amounts of "stuff", so that people didn't need nominal pay rises to have a better standard of living. You do not need to increase the money in circulation to have real economic growth, as opposed to nominal economic growth, which has now become the panacea.


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