I don't think it's a "burn it all down" mentality as much as it is a "let the market play out without government intervention" mentality. I don't want to see people get burned, but I also don't want the governmemt to subsidize risky behavior on the part of banks.
Discussion
FRB hasn't engaged in any specifically risky behavior. There are many institutions that are worse capitalized than them. The only reason they're facing a run on the bank is due to market psychology. This is a tragedy of the commons problem.
I get it, but this issue is baked into the bread of a fractional reserve system. You can't really blame human psychology for... well, the actions of humans. It's a bit of a prisoner's dilemma type of situation, no?
I genuinely hope things work out, as I agree a slow transition is required or else we'll have loads of pain as a society, but I believe the entire financial system is broken and further breaking.
There is nothing particularly new happening right here. That’s just a narrative coming from people who take moral and ethical stances on the immorality of fractional reserve banking. 100% of banks in the Western world would collapse if they had a run on them. This isn’t a mystery. Everyone understands this. Both people who are pro-FRB and anti-FRB. It’s not like some mind-blowing wisdom.
Banks take deposits and they make loans or buy assets with those deposits. That’s what they do. There’s nothing new about that. The same was true when we were on the gold standard. And honestly, I have made the argument that even in a hyperbitcoinized world, that would STILL be true.
I think the argument that bitcoin will bring an end to fraction reserve models — which are fundamentally about adjusting time preference to maximize capital efficiency — will continue to happen!
I think the main difference would be that people would understand that loaning your money to a bank carries a certain amount of risk vs. the alternative of self custody. That has been completely ignored in our modern society and it's just the standard to leave all your cash in the custody of a bank. Lending money means risk. Period.
This is a completely anodyne point. I don’t know anybody of average intelligence that doesn’t understand that there is some form of risk in the banking system connected to how banks make loans or invest in assets. You don’t think the people who lived through the 2008 Financial Crisis understand that?
You clearly don't. Because you're arguing that everyone should get bailed out. So you're entirely erasing the risk.
I am arguing for the FDIC to address an irrational market psychology before it turns into systemic risk, yes. And I don’t think it would cost taxpayers or anyone a dime to stop it. Because FRB *has* enough assets to cover liabilities. The issue is going to be a duration/maturity mis-match. I am really bored of the conversation about the immorality of that system, though. I get it. And I don’t need anyone to recommend the “Mystery of Banking” by Murray Rothbard to me to get people’s point. Not that you are. But I’m sure someone will. Which I’ve already read.
I wouldn't be so sure! At least that's not the perception I have from the majority of people!
You’ve conducted a survey and found a majority of people think banks have “zero risk”?
And part of this is the amount of reserves that banks hold. I'm not going to claim I know anything about the reserves of FR, but many banks have a tiny fraction of their liabilities on hand. Because the more you lend out, the higher the potential profit, but also the greater risk. Again, the risk is inherent in the lending. Depositors SHOULD understand this risk.