This is my latest paper. The abstract is as follows.
Deposit insurance is beneficial in that it ensures everyone has a safe method of storing and transferring money. That is a basic human right. Unfortunately deposit insurance also supports a commercial activity, namely depositing money at a bank with a view to the bank earning interest for the depositor, which a bank can only do by in effect lending out depositors’ money. That is just as commercial as depositing money with a stockbroker, mutual fund or unit trust with a view to interest or some other form of return being earned. And it is not the job of government to support commercial activities.
As for the idea that banks create the money they lend out, rather than intermediate, that is dealt with in the opening paragraphs below.
Preventing deposit insurance assisting the above commercial activity while retaining a form of totally safe deposits is easily done by splitting deposits into two types: first, those where the depositor simply wants money stored safely, with that money being lodged at the central bank where it earns no interest, and second, those where the depositor wants to be into commerce. Interest is earned on the latter deposits, but depositors carry the risk involved which essentially turns those deposits into equity. And that is precisely what full reserve banking consists of.
Banks do not seek to attract deposits. They seek to retain deposits which are created in the act of lending. It's a distinction with a difference.
ReplyDeleteAnd what would a bank do if it was too successful in attracting deposits? It's not like they could lend them out. You know, on account of banks not being able to lend out deposits.
We know this because a bank's balance sheet expands when it lends. As for those deposits which it attracted, they'd just sit there on the balance sheet doing nothing.
As I explain in the main text, deposits which are "attracted" do not just sit there: they have another effect which is to boost the relevant bank's stock of reserves. The relevant bank will have demanded reserves off the bank where the deposit money originated. Making sure you don't run out of, or run short of reserves is important for any bank.
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