Regulating Banks

I said, hey, the time is right
For palace revolution
But where I live the game
To play is compromise solution
--Rolling Stones

Frank Shostak argues that, if you're opposed to banks creating credit out of thin air, then tighter regs on banks make sense. Nice point.

Banking as we know it today is not a market-oriented industry. Instead, it can be seen as one huge monopoly bank controlled by central banks. A most undesirable feature of this arrangement is fractional reserve banking, which essentially permits the creation of fraudulent contracts that are impossible to honor. It is fractional reserve banking that permits the creation of money out of thin air.

If banking were a market-oriented industry, then fractional reserve banking would not be possible to a large, sustainable degree because of the risk of going bust--which would govern the behavior of both bank managers and bank depositors.

Regulations that curtail banks' capacity for credit creation should therefore be a good thing, says Shostak. I hadn't thought about it quite this way but it is an interesting point.

On the other hand, regulations tend to give consumers a false sense of security, and are likely to encourage excessive risk taking. In other words, regs seem likely to perpetuate the bogus system currently in place, when perhaps the only hope of ever obtaining monetary freedom if the current system fractures.

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