Tag Archives: Iceland Ponders Radical Money Plan Including Elimination Of Fractional Reserve Lending And Deposit Insurance

Mish/ Mike Shedlock – Iceland Ponders Radical Money Plan Including Elimination Of Fractional Reserve Lending And Deposit Insurance – 1 April 2015

MishMikeShedlockI have long railed against fractional reserve lending, duration mismatches (e.g. banks issuing 2-year CDs and lending money for 15-year mortgages), bank’s ability to lend money into existence, and deposit insurance.

Fractional reserve lending allows banks to lend out a near infinite amount of credit with essentially no backing. Money inevitably creates asset bubbles, but as long as the bubbles are expanding it appears the system is solvent.

Money that depositors believe is available on demand in their checking accounts is not actually present at all. And banks are not required to hold any reserves on savings accounts at all.

Deposit insurance is the epitome of moral hazard. It guarantees money will flow to banks offering the highest yield. Of course, banks offering the highest yields on deposits need to take the highest risks to be able to pay that interest. Depositors do not care because the deposits are insured. Continue reading