How banksters fool politicians and everyone else.

 

The existing (fractional reserve) bank system has given us truly amazing benefits like the 2007/8 bank crisis which did untold economic and social damage.  

But when anyone proposes a move from fractional to full reserve, banksters always respond by saying it would raise interest rates and thus cut the overall turnover of banks which would harm the economy. Well there’s a phenomenally simple flaw in that argument – the flaws in arguments put by bankers and economists very often are phenomenally simple. The flaw is that the latter bankster argument rests on the “all else equal” assumption: i.e. the idea that if banks’ turnover is reduced, the turnover of the rest of the economy does not rise to compensate.

The truth of course is that if a switch to full reserve DID CUT the turnover of banks, there’d be absolutely nothing to stop governments and their central banks creating and spending a bit more money into the economy to compensate. The net result would be a fall in debt based economic activity (debt owed to banks, that is) and a rise in non debt based economic activity.

Moreover, fractional reserve is a system under which lending by banks is SUBSIDISED: that is, those who want banks to lend out their money (i.e. depositors) are protected from loss gratis taxpayer backed deposit insurance and bank bail outs. And it is widely accepted in economics that subsidies do not result in GDP being maximised. Ergo it is actually fractional reserve which fails to maximise GDP and full reserve which does maximise it, even if full reserve involves higher interest rates.

Incidentally, anyone wishing to cite the now fashionable view that banks do not lend on depositors’ money, please see here.