Saturday, 26 July 2014

Full reserve banking solves a problem Greenspan highlights.

Congratulations to Alan Greenspan for highlighting the point that asset price crashes are not much of a problem where those funding or owning the assets are equity holders rather than creditors whose stake in the asset is fixed in dollar terms. See paragraph starting “All bubbles expand…”.
Former governor of the Bank of England, Mervyn King actually made the same point in his “Bagehot to Basel” speech.  See paragraph starting "At the heart...".
Now under full reserve banking, loans are funded just by shareholders, not depositors, bond holders, etc. That is, the liability side of a lender / bank’s balance sheet can vary in value. That makes insolvency virtually impossible.
So bye bye credit crunches. What more do you want?

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