So it is quite likely that in a free-market economy the threat of bankruptcy will bring to a minimum the practice of fractional-reserve banking.

Which means that in order to increase it’s reserves, banks would have to pay higher interest rates, to attract savers.

But today, not only to banks pay NO interests (0.25% interest is a complete joke) but they charge fees for everything and even for nothing.

The reason they can do this is they know that you cannot put your money under the mattress, inflation is so high that banks don’t have to pay you interests, you can’t go elsewhere.

Plus, all the government laws that forbids you to pay in cash more than $10,000 etc. Or that forbids you to get paid in cash when you work for an employer.

The government forces you to use paperwork and that requires to use bank services.

Basically, the government is making it impossible for joe average to save money.

This is not my understanding of the “repeal” of Glass-Steagall. The portion of that act that allowed commercial banks to affiliate with bank holding companies that underwrite and trade in securities. The provisions that forbid commercial banks from themselves underwriting and trading in securities remain in effect. The only underwriting they can do, as before, involves the safest securities, including GSE ones. Thus the banks’ activities vis-a-vis mortgage-backed securities could have gone on regardless of what was done with Glass-Steagall.

Moreover, commercial banks can acquire securities because they believe they are good investments to hold, not for the purpose of trading. The “repeal” of Glass-Steagall did not transform commercial banks into investment banks.

I get questioned all the time about “free-market” banking prior to 1913 and the larger “boom-bust cycles” that occurred before The Fed was instituted when I argue the “free-market” banking issue. How can we explain this to Central Banking proponents in simple terms so that they’ll SEE the logic of free-market banking?

Dr. Woods,

My only real complaint with Meltdown is that it made no mention of Glass-Steagall. Given that the mainstream economists in large measure point their finger in the direction of Glass-Steagall’s repeal as being the culprit responsible for the financial crisis – regardless of the merits of the charge – I am convinced that failing to mention the regulation or its repeal was an oversight that requires correction. This notion was reinforced by the reactions of three individuals to whom I lent the book which, distilled, expressed incredulity in Meltdown’s entire thesis based on the absence of any such commentary at all.

I meant to ask you about it when I was fortunate enough to meet you in Seattle last year, but at the last minute I was, apparently, sideswiped by your rock stardom. I notice you’ve been addressing Glass-Steagall in much of your recent commentary, so I’m pretty sure I’m just fulfilling a role as an echo chamber here because it seems like you’ve encountered this complaint before. I just think that Meltdown doesn’t fully succeed at persuading an individual beholden to the conventional view because they expect to see in a truly persuasive text an accounting of their favorite scapegoat.

Don’t think for a second, of course, that I’m beholden to that point of view. Not at all. But to be truly effective, I think Meltdown would have benefited from, at the least, shining a brief spotlight on the arguments of the mainstream towards the repeal view and a rebuttal.

All of the attacks on fractional reserve banking that appear on these pages fail to mention a beneficial effect: compulsory savings and investment. The fiduciary media goes to investors first, not consumers. Would there be more savings and investing or less if there was no fractional reserve banking?

@David Roemer

Investment and saving are two different things. Saving is the forgoing of consumption. Investment is a category of consumption. The purpose of fractional reserve banking is to facilitate investment without the need for saving.

Putting aside why you think compulsion is good in the first place, why do you believe fractional reserve imposes compulsory savings?

Regarding Meltdown and Glass-Steagall:
Fannie Mae and Freddie Mac bought mortgages from commercial banks, securitized them, and sold securities to investment banks, correct? How would Glass-Steagall have prevented this?

The meltdown went well beyond the banking industry and has it’s roots in the insurance industry. It was the mortgage insurance policies that allowed underwriters to approve those sub-prime loans. It was the insurance companies that did not have the reserves that got the ball rolling.

Insurance companies like AIG were basically selling a naked put at a strike price that they thought would never be reached. And when prices fell well below that strike price, they could not cover and the bank holding the insurance policy was left out in the cold.

The market system is not without faults. There are abuses in market actions as well. For example, I know of firms that don’t pay bonus. Instead they leak insider information to allow their employees to trade on them for additional income. And if you believe Goldman Sachs was smarter than the rest with their timing in the markets prior to the meltdown, then you are not living in the real world.

Anyway, the whole mess goes beyond the Fed, banks, insurance, markets and the government. The problem is that we can address some of the problems, but not all of them.

greg,

There’s absolutely nothing wrong with a credit default swap theoretically. The problem arises when many financial institutions are holding mbs’s. Besides, it was regulators that told financial institutions to have a certain amount of CDS to offset the risk in mortgage backed-securities. CDS also could have predicted the stability of what they insured better than the give credit rating agencies’ assessments.

Brian Rutledge>”free-market” banking prior to 1913 and the larger “boom-bust cycles” that occurred before The Fed

There was NEVER free mkt banking in the US, merely different extents and mixes of govt intervention. The alleged free banking era included state regs. See Rothbard’s free, online, _History of Money & Banking in the US_ (ignore his intermittent, tedious, Marxist, concern with influences among businessmen) and Richard Timberlake’s (technical) study of the ideas justifying intervention, _Monetary Policy in the United States: An Intellectual and Institutional History_. Rothbard identifies bank bailouts in the colonial era. These two books make monkeys out of mainstream voices.

I don’t recall whether the socialist boom-and-bust cycle was bigger pre-Fed but the intervention was smaller.

those interested in a counterpoint may care to read:
http://mises.org/journals/qjae/pdf/qjae1_1_1.pdf

regardless whether glass steagall was effective or not, i think the shostak/rothbard point is correct. the system is a rort, and controlling it reaffirms that belief with the public.

Robert Brager: When you are writing a book, you surely can not see all things that commes to mater later. I am sure, that GSA is just one of more pieces, and weight of every piece deppends on everyones wisdom and amount of propaganda he absorbed. If Dr Woods commes with Meltdown 2.0 addressing everything raised until today, tomorrows news would make it nonsense for anyone wanting to stay in dream…