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Capitalist Banking Laws?

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aleph_0

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I'm curious whether a capitalist society would have laws specifically about banks and their practice of lending money which they do not own. Would the government impose a limit upon the amount of credit they could issue and their rates of interest? I can't see a reason why it would be justifiable, but at the same time it seems dangerous not to limit these.

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No, there would not be such laws. If a person puts money in a bank, the bank could stipulate that they will simply keep all the money and not lend any of it out. Another bank may say that they will lend 50% of it. The government should not tell an individual that he cannot put his money in the second bank unless the bank keeps at least 60% of the funds as reserve.

There may be more to the deal than simply a percentage reserve. There's also an issue about quality of lending. For instance, suppose the money in certain accounts is lent against real-estate, with at least $1.25 of collateral for each, and that no more than 10% of the loan portfolio is in any particular state, and that all borrowers have a credit rating of 800 or more... and so on. As long as the terms are clear and there is no fraud, the government should not step in.

I'm not sure how bank-customers will choose, from the various accounts. Chances are that certain standards will evolve. Perhaps customers will choose to have a certain percentage of their assets in "100% Accounts", because these would be the only ones on which they could draw checks at face value that would acceptable to other people. However, for their "savings accounts", they might choose one that is "AAA+ Savings", or some such.

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The issue of fractional reserve banking is similar to the issue of reserves for claims kept by insurance companies. Insurers, over time, gradually determine the proper amount and type of financial and physical instruments to keep for claims. Whether and how much to keep in cash, bonds, stocks, real estate, etc., are determined by the type of risks they are insuring, and the frequency of claims pay-outs.

Fractional reserve banking would operate in a very similar manner. The type and quantity of reserves would depend on each bank's loan portfolio and the risk of not being repaid. It would also depend on the size of the bank and the degree to which it has back-up lending agreements with other banks.

Customers would choose their bank primarily on the basis of its reputation. Banks with a lot of branches and that have been around for a long time could only have built that up by responsibly managing their customers' deposits, and by lending to creditworthy people.

You can still see remnants of reputational competition in the insurance industry, where there are advertisements such as Prudential's "The Rock" symbol, or other ads such as those for Met Life that stress their tradition and reliability. In banking, there is very little reputational competition because of deposit insurance laws. With those laws, depositors know that they are indemnified against their bank failing. Regardless of what happens, they will always get their money back, up to the insurance limit.

Of course, truthful disclosure is always part of any successful banking or insurance enterprise. However, I doubt people would pay too much attention to different bank lending practices -- i.e., whether banks keep 100% of depositors money or banks lend out multiples of the deposited money. Rather, they would simply look to the bank's reputation and history.

In terms of safety of fractional reserve banking, it is quite safe. The problems in the United States stem from interventions in the banking market, such as laws limiting banks to a single branch or a single state. That is why many banks in teh United States failed during the Great Depression, but none apparently did in Canada, which had national banks. Canada had no restrictions on the number of branches. Richard Salsman's books "Gold and Liberty" goes into this.

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Addendum to my post: The book "Breaking the Banks" by Richard Salsman is more on point in addressing the issue of fractional reserve banking. It provides a history of banking from the pre-Civil War "free banking" era to the present, including the formation of the Federal Reserve in the early 1900s.

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Interesting. I wonder why the restriction on numbers of branches and locations of banks would cause instability. I can see why it would hinder expansion, but it seems highly non-obvious why it would leave a nation susceptible to recession or depression.

As an addendum, your suggestions about reputation were my first intuition, but what about extreme situations like Katrina, in which reputation would not have been a sufficient guarantor of ability to repay? The consequence of no government compensation would have been quite tragic--though that's not to say that government compensation was so wonderful in the first place.

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I wonder why the restriction on numbers of branches and locations of banks would cause instability. I can see why it would hinder expansion, but it seems highly non-obvious why it would leave a nation susceptible to recession or depression.

To clarify, the restriction on the number of bank branches caused financial instability of the banks. I wasn't addressing whether it caused economic recession (*see below). By being restricted to a few branches within a particular state, banks were vulnerable to any bad regional economic event, whether it was a regional economic crisis or a natural disaster such as Hurricane Katrina.

Contrast this with national banking. If there is a problem in one region, the strength of the rest of the country means that the bank remains solvent.

The best example of this was the Great Depression, when an enormous number of banks across the United States collapsed, but there were no major bank failures in Canada. At the time, unlike the United States, Canada permitted national banking. Of Canada's five major national bank chains, none collapsed during the Great Depression. In contrast, the United States had a highly fragmented, regionalized, polyglot assortment of thousands of banks. A large percentage of them went bankrupt.

Today the United States permits national banking. I have heard of no large national bank chain having more than a temporary earnings dip from problems in New Orleans following Hurricane Katrina. No large bank was placed in financial jeopardy because of Hurricane Katrina.

The best protection against any form of disaster is free enterprise. Free entrepreneurs create financially strong businesses that can withstand natural disasters such as hurricanes. However, when the government intervenes in the economy, for example through branch banking laws, it makes businesses poorer and weaker, and much more vulnerable when catastrophe strikes.

As an addendum, your suggestions about reputation were my first intuition, but what about extreme situations like Katrina, in which reputation would not have been a sufficient guarantor of ability to repay? The consequence of no government compensation would have been quite tragic--though that's not to say that government compensation was so wonderful in the first place.

No "magic wand" government program such as deposit insurance can insulate people from natural disasters. All those programs do is take money from the rest of the country to forcibly give to depositors whose bank went bankrupt. However, if the economy is free from any forms of government intervention (which includes deposit insurance), it is as strong and robust as it can possibly be to withstand shocks such as Hurricane Katrina.

***

*I agree that branch banking restrictions would have not been a major cause of the Great Depression. Because the banks were weakened by those laws, many banks collapsed which made the Great Depression worse, but I do not think those laws in themselves were a primary cause. Rather, the Great Depression was caused by other major government economic interventions in the 1920s.

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To clarify, the restriction on the number of bank branches caused financial instability of the banks. I wasn't addressing whether it caused economic recession (*see below). By being restricted to a few branches within a particular state, banks were vulnerable to any bad regional economic event, whether it was a regional economic crisis or a natural disaster such as Hurricane Katrina.

That makes sense. I'll have to think on it some more, but prima facie it looks right.

Today the United States permits national banking. I have heard of no large national bank chain having more than a temporary earnings dip from problems in New Orleans following Hurricane Katrina. No large bank was placed in financial jeopardy because of Hurricane Katrina.
Why, then, did banks request federal compensation in order to avoid total bankruptcy and why was it granted?

No "magic wand" government program such as deposit insurance can insulate people from natural disasters. All those programs do is take money from the rest of the country to forcibly give to depositors whose bank went bankrupt. However, if the economy is free from any forms of government intervention (which includes deposit insurance), it is as strong and robust as it can possibly be to withstand shocks such as Hurricane Katrina.

I agree with this, but it seems to me--qua a purely pragmatic discussion, and not one considering the issue of justice--that it is a trade-off. You can either have an extremely dynamic but vulnerable system in which there is no taxation and banks produce explosive benefits; or you can have a somewhat slower but more stable system in which you tax businesses to create a "rainy day" fund, even though this money would otherwise have gone into great economic investment. I could be entirely off-base, though.

*I agree that branch banking restrictions would have not been a major cause of the Great Depression. Because the banks were weakened by those laws, many banks collapsed which made the Great Depression worse, but I do not think those laws in themselves were a primary cause. Rather, the Great Depression was caused by other major government economic interventions in the 1920s.

Do you know of any specific examples?

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... tax businesses to create a "rainy day" fund, ...
Taxes bad; rainy day fund good :)

Free markets would evolve ways of protecting and insuring against certain types of failure. That's what happens, for instance, with reinsurance. Insurance companies who cover Florida home-owners, then "re-insure" with other companies. Many banks do not assume the whole risk of their home-loans; instead, the mortgages are "securitized" and sold to someone who is willing to assume the particular risk, for a price. Airline companies do not assume the whole risk of oil-price changes from unexpected disruptions, instead insuring themselves (to some extent) against price-rises in oil.

Risks do not disappear; someone has to bear the costs of failure and disaster. However, the modern financial system is extremely adept at packaging various kinds of risks and trading these risks almost like commodities. In such a market, each "player" can take on as much risk as he likes or insure away as much risk as he likes.

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To clarify, the restriction on the number of bank branches caused financial instability of the banks. I wasn't addressing whether it caused economic recession (*see below). By being restricted to a few branches within a particular state, banks were vulnerable to any bad regional economic event, whether it was a regional economic crisis or a natural disaster such as Hurricane Katrina.

Contrast this with national banking. If there is a problem in one region, the strength of the rest of the country means that the bank remains solvent.

This is essentially a form of regional diversification to manage risk, right?

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Risks do not disappear; someone has to bear the costs of failure and disaster. However, the modern financial system is extremely adept at packaging various kinds of risks and trading these risks almost like commodities. In such a market, each "player" can take on as much risk as he likes or insure away as much risk as he likes.

This is a phenomenal observation. I didn't realize the scope of the ability of financial markets to package and shift risk from party to party until business school. Now, I'm a true believer. once you understand the mechanism by which this happens, then you realize that most financial transactions are really about trading risk.

The futures and derivatives markets for instance are about trading away risk.

It starts with peole understanding the risk that one takes, which is exactly the opposite of what government regulations do, take away that understanding.

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Why, then, did banks request federal compensation in order to avoid total bankruptcy and why was it granted?

I was going by memory; I was unaware of large banks that were brought to the edge of bankruptcy by Hurricane Katrina and needed to be rescued.

In any case, national banking does spread risks just the same way as reinsurance or securitization does.

Parenthetically, I might add that Hurricane Katrina isn't such a great example for this discussion, since that disaster was itself man-made. In a laissez faire society, the residents of the city of New Orleans would have built a much stronger wall, or they would have prudently chosen not to build in low-lying areas. Why? Besides being more rational in a laissez faire society (the culture would have to be more rational for such a society to be possible), residents would be encouraged through insurance rates to avoid living in overly risky areas. Also, there would be no such thing as national flood insurance which subsidizes building in those risky, flood-prone areas.

Katrina was not a natural disaster; it was entirely a man-made disaster.

...but it seems to me--qua a purely pragmatic discussion, and not one considering the issue of justice--that it is a trade-off. You can either have an extremely dynamic but vulnerable system in which there is no taxation and banks produce explosive benefits; or you can have a somewhat slower but more stable system in which you tax businesses to create a "rainy day" fund, even though this money would otherwise have gone into great economic investment. I could be entirely off-base, though.

But it is a moral issue. It is immoral to take from Peter to give to Paul, for any reason at all. You can fill in the blank for the reason. Take from Peter to give to Paul for [blank]. Blank could be: medical care, housing, food, clothing, education, emergency help, or... indemnification against losses from bank failures.

It is also impractical in every case to take money from Peter to give to Paul, regardless of the purpose. The impracticality of any forcible transfer of wealth is that there is no way to limit its practice. Once government can take from someone for some purpose, there is no way to limit that power. The only way that power can be limited is through inviolable individual rights.

The impracticality in the specific case of banks is that deposit insurance destroys the incentive of banks to innovate and compete on reputation and soundness of banking practices. Because the cost to banks of failing is socialized by the government, banks will be more willing to lend to risky borrowers. This is exactly what happened during the savings & loan banking crisis of the 1980s. Ultimately, many tens of billions of dollars in losses had to be picked up by the federal government to meet its obligation of protecting depositors from failed banks. This is impractical and inefficient, no matter how you look at it.

If there had been no deposit insurance, the banks would have had to jealously guard the soundness of their balance sheets, and they could not have made so many loans to uncreditworthy borrowers. Banks would have actually competed on the soundness of their financial practices. This competition for financial reputation would have limited their ability to lend to risky borrowers. Such a competition for financial reputation would tremendously benefit depositors, who could use those reputations as a guide to decide where to deposit their money. Customers could choose the level of risk they want to take of a bank default by choosing a bank with a particular reputation. For example, someone might deposit money with a newer bank because it pays a higher interest rate, knowing that there is some additional risk of the bank failing. Or, a customer could deposit funds with a very safe bank, and be willing to accept a lower interest rate. Banks would have an incentive to earn the best possible reputation in the marketplace so that they could lower the interest rate they have to pay for deposited funds.

Contrast this with deposit insurance which, by socializing risk, severely undercuts the whole process of competition for financial reputation. Since depositors' funds are "guaranteed" by the government, depositors don't care with whom they deposit their money. Furthermore, banks are encouraged to recklessly offer to pay very high interest rates to depositors knowing that the bank will be bailed out by the government's deposit insurance program if it fails.

As for stability, a system allowing government intervention in banking has proven itself to be quite unstable. For example, the restrictions on branch banking led to thousands of bankruptcies during the Great Depression, whereas in Canada which had no branch banking restrictions, there were no bankruptcies. Deposit insurance, far from creating stability, led to an unprecedented series of bank failures during the savings & loan crisis of the 1980s. Laissez faire banking, as I describe it above, would be more stable. It would be free from frequent, arbitrary and unpredictable government intervention. Moreover, it would foster competition where stability and prudence was rewarded, not dis-incentivized as it is under a system like ours where deposit insurance socializes risk.

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Risks do not disappear; someone has to bear the costs of failure and disaster.
Just to clarify (and play devil's advocate with myself), this is true in the context where one assumes that risky decisions have already been made (e.g. where to locate a house, how much a loan to take out on one's business or property, and so on). In the broader context, actions can be more or less risky.

As KendallJ said: "It starts with people understanding the risk that one takes, which is exactly the opposite of what government regulations do, take away that understanding."

The government cannot be relied upon to make good decisions about risk (apart from the immorality of allowing it to do so).

Aleph: Do you have a citation to a news-item or something like that about banks being at risk after Katrina? I can easily see that small banks could have been hit, but was any large-to-medium bank (US Top-50 banks) at risk of going under without government help?

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The government cannot be relied upon to make good decisions about risk...

This is a profound statement and gets to the heart of why so much regulation is economically destructive. Government officials have a different attitude towards risk than customers and producers in the marketplace. Government officials care primarily about not losing their jobs, which means avoiding scandal. They clearly do not have the incentive to encourage risk-taking the way a private citizen does. A private citizen, if he understands the risks correctly, can be induced to take on all kinds of risk because of the benefits it offers. For example, a coal miner will be paid a huge premium to work in the mines compared with an above-ground laborer and takes on the greater risk of death willingly. A financier will finance a risky business start-up because he negotiates a higher interest rate or profit margin, in order to compensate for the greater risk that the firm will not succeed.

With risk-taking properly priced in the market, things like mining can get done, or business start-ups can get financed, etc. In place of market-determined risk-taking, which is productive and encourages the creation of values, government regulators substitute command-and-control one-size-fits-all dictums into the commercial realm. Miners are prevented from going into the mines because it is too dangerous. Risky new businesses don't get financed because it is deemed inadvisable for investors to take on these risks. Etc.

Government officials are overly risk-averse compared to the rational risk-taking that market participants willingly choose. That non-market-determined fear of risk retards production.

(A big area where the government intolerance for risk destroys values is in pharmaceutical research. Because drug companies have to spend hundreds of millions of dollars on unnecessary tests to validate drugs to please the regulators at the FDA, many potential drugs never make it to market. Any drug that requires cutting-edge research with a low probability of success, or a drug that targets a smaller segment of potential customers, will not make it to market. In the case of drugs, the risk-aversion of the regulator kills people.)

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In a capitalist country, I think fractional reserve banking would be considered fraud. In essence, it is lending the same thing to two or more people at the same time and in the same way. This is obviously impossible, and can only be accomplished through deception.

From a practical stand-point, there are also a myriad of harms caused by this practice, but that is not the proper reason why it should be a criminal activity. If I was a car dealer and sold the same car to 10 different people and tried to keep the money from all of them I would be sent to jail. Fractional reserve banking is an exactly analagous situation, it is just more common place.

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I can't imagine that telling the truth in my car selling example would result in any people buying cars. I don't see why banking would be any different if the concept were honestly described.

That's why it would be wrong to outlaw the practice, or any other particular commercial practice. The only thing necessary is to maintain the prohibition against fraud.

As to the merits of fractional reserve banking, it makes a lot of sense to me. It operates on the recognition of a statistical fact: not everyone wants to withdraw all of their money at the same time. In fact, over the course of days, only a very small percentage of the bank's funds would be withdrawn by depositors. Therefore, the bank can prudently lend out a multiple of the deposits on hand. How much to lend out would be up to the bank. It would be determined by its knowledge of depositors' behavior, the market for loans, and the existence of back-up plans such as emergency lending agreements between banks.

The insurance industry operates in a similar manner. An insurer can safely invest a large percentage of premiums it receives in fixed assets such as real estate, knowing that its day-to-day liquidity needs are small, since claims are paid out infrequently. How much it can invest in hard assets, and how much it needs to keep in liquid reserves are determined by the particular type of insurance sold and the insurer's knowledge of claims patterns. The insurer also protects himself financially through mechanisms such as selling a portion of his risk in the reinsurance market. This would be similar to a bank having an emergency lending agreement with other banks.

Fractional reserve banking allows a bank to make more money by lending out a multiple of deposited funds. By doing so, it also allows a bank to pay more in interest to depositors. It appears that everyone wins. Apart from fraud, which doesn't apply if the laws against fraud are enforced, what is the argument that it hurts people?

In any case, whether fractional reserve banking is viable should be determined by the market. As long as no one is committing fraud, fractional reserve banks are free to compete side-by-side with 100%-reserve banks. May the best bank win, or may they all win, if there is room for both.

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Parenthetically, I might add that Hurricane Katrina isn't such a great example for this discussion, since that disaster was itself man-made.

...

But it is a moral issue. It is immoral to take from Peter to give to Paul, for any reason at all. You can fill in the blank for the reason. Take from Peter to give to Paul for [blank]. Blank could be: medical care, housing, food, clothing, education, emergency help, or... indemnification against losses from bank failures.

...

As for stability, a system allowing government intervention in banking has proven itself to be quite unstable. For example, the restrictions on branch banking led to thousands of bankruptcies during the Great Depression, whereas in Canada which had no branch banking restrictions, there were no bankruptcies. Deposit insurance, far from creating stability, led to an unprecedented series of bank failures during the savings & loan crisis of the 1980s. Laissez faire banking, as I describe it above, would be more stable. It would be free from frequent, arbitrary and unpredictable government intervention. Moreover, it would foster competition where stability and prudence was rewarded, not dis-incentivized as it is under a system like ours where deposit insurance socializes risk.

Katrina is not a perfect example, but take any given natural disaster of some roughly similar magnitude?#8221;the hurricanes that hit Florida in 2005, for example. Imagine if the hurricanes had been of larger magnitude. Certainly even a capitalistic society could not, at our present technological level, have withstood such a thing with minimal damage.

Moreover, I entirely disagree that the assumption of a capitalist society allows for the assumption that a place like New Orleans would remain unpopulated. Even granted a significant population of rational actors, I doubt (a) that none of them would have built in the area and that ( b ) the remaining people who would settle there would not constitute a large population. If people resist building there, building prices?#8221;largely in diminishing real-estate costs?#8221;will shrink and so it will attract the poorer members of the economy. They might either plan on living there briefly, willing to accept the risk, or judge that there’s no better option given their financial situation. In any case, I don’t think a rational society would have necessarily evacuated New Orleans long before or even shortly before Katrina.

I know that it is a moral issue, but I am looking at the issue qua a non-moral perspective (In the same way that you can look at a bronze circle qua manifold properties. You can consider it qua a geometric shape and so concentrate on the “circle” property, or you can consider it qua a chemical object and so concentrate on the “bronze” property.) Here I consider banking practice qua total economic prosperity rather than qua justice.

While I agree that such a legal practice as I am discussing diminishes the incentive for banks to operate, they clearly still do it and so the practice cannot “destroy” their incentive. You may well argue successfully that the principle behind the practice, carried to its most consistent conclusion, is the destruction of their incentive. That is yet to be seen.

As for previous government intervention, I don’t see sufficient reason to believe that it, as such, creates instability. Perhaps it does, but I only see governmental control which, as an accidental quality produce regulations which create instability. In fact, looking at the economies of medieval times and before, they were incredibly stable relative to modern economies. They changed noticeably, barring outrageous economic practice like unchecked inflation, over periods of centuries rather than years, months, and days. Like I said, such instances seem to be trade-offs between stability and dynamism.

In regards to all other points and arguments you made, I agree.

Aleph: Do you have a citation to a news-item or something like that about banks being at risk after Katrina? I can easily see that small banks could have been hit, but was any large-to-medium bank (US Top-50 banks) at risk of going under without government help?

Do only the top 50 US banks qualify as medium-to-large? I would think at least the top 500 would need to be considered. In any case, I got the information from my girlfriend who is editor of the local CNN morning news in Pittsburgh. If you like, I can ask her for details and a source.

It can also be accomplished by telling the truth, by disclosing it to all parties.

I agree with this. So long as the bank advertises itself as a fractional reserve bank, there is no lie and so there is no fraud. This amounts to it admitting, “At any given moment, we lend more money than we are able to pay at that moment.” Anybody who does business with a bank so advertised will (or should be) fully aware of the implications. I, knowing this, would still use a fractional reserve bank because unlike a car, the guarantees for money reimbursement can be spread out over time amongst depositors and debtors.

If a car were so fluid that ten people could simultaneously use it without interests conflicting (say, it is rarely the case that I need it while someone else needs it, and it is never a problem transferring use of the car from one person to another) I wouldn't mind using a car sold to me from a fractional reserve car dealer.

Edited by aleph_0
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Here I consider banking practice qua total economic prosperity rather than qua justice.

I cannot separate considerations of economic prosperity from considerations of justice. The two go hand-in-hand. It is not possible to have one without the other. To the extent societies are unjust, they impoverish themselves. Conversely, a just society, i.e., a society that enforces and respects individual rights, will grow in wealth.

Can you provide an example of a society that is unjust, but wealthy, or a society that is just, but poor? Or, to ask the question more precisely, can you provide an example of a society that is unjust and creates its own wealth. Conversely, can you give an example of a society that is just and is not gaining in wealth?

Capitalism is the system where the rights to life and liberty are protected. And, when these rights are protected, people tend to accumulate capital and become wealthy. Justice and wealth-creation go hand-in-hand.

Using the example of banking, I cannot conceive of a prosperous, robust banking industry existing in a society that was fundamentally unjust such as, say, Libya or North Korea. In a just society, banking would not be regulated. Therefore, the banking industry would be robust. By robust, I don't just mean stable, but one that is fulfilling in an entrepreneurial and creative manner the banking needs of people.

All of this exists on a continuum. In a mixed economy, like that of the United States, there is considerable accumulation of wealth. However, to the extent that there is regulation -- i.e., to the extent there is injustice -- a certain measure of wealth is not accumulated.

Sometimes, it is confusing that mixed economies or economies emerging from statism such as China's, can grow in wealth. However, the confusion only exists to the extent cause and effect are not properly identified. Regulation or statism is not the cause of the growth in wealth. Rather, wealth is growing despite the existence of regulation. It is the existence of freedom, to the extent it is present or growing, that accounts for the growth in wealth of mixed economies. Therefore, if there were more freedom, wealth would be accumulated more easily. Conversely, if new regulations are imposed on the economy, wealth creation becomes more difficult.

I'll leave aside your other responses. I think my posts have largely addressed them. Rather, I am focusing on this one issue of wealth versus justice, because I think it is the key premise behind your arguments. Do you agree?

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If I was a car dealer and sold the same car to 10 different people and tried to keep the money from all of them I would be sent to jail. Fractional reserve banking is an exactly analagous situation, it is just more common place.

No it's not, because people don't all use the money simultaneously, and it is the investment of reserves that allows the bank to pay interest. When you put money in a savings account to earn interest, the common phrase is you are putting your "money to work". Well, the money has to go somewhere in order for it to work for you.

There used to be a big distinction in the old days between savings and checking accounts. Savings accounts had limitations on the ability to withdrawal, whilst checking accounts were immediate. Savings accounts paid interest while checking did not. This is how a bank discloses its terms to you of placing its money with it.

By the way, fractional ownership of private jets is already a reality. Your used car salesman example is invalid.

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Do only the top 50 US banks qualify as medium-to-large? I would think at least the top 500 would need to be considered.
Well, I'm not wedded to the number "50". :) Still, when I used the figure "50" it was not because I specifically knew about those banks. I simply meant to ask if there was any significant risk of bank-failure. I do know the following: the top 50 banks have 10 times the deposits that banks #51 through #100 have. So, if many Lousiana banks outside the top-50 went bankrupt, it would not be as big a deal to the US economy as one might imagine.

Further, the number of small banks in the US is a government-encouraged anomaly. Old laws (that have been changing over the last decade) kept banks small and -- worse still - curtailed them from diversifying their loan base, and therefore their risk.

Anyhow, that's a digression.

Back to the main issue of who is better placed to estimate risk. Surely New Orleans could have been saved from a lot of Katrina's damage if the levees had been more like the huge ones in the Netherlands. So, this is an example of the government deciding on how much risk it will take with the lives and property of the inhabitants of New Orleans. Was that the right level of risk? Too low? Too high? How can it ever be figured out? As Ludwig von Mises pointed out in "Human Action", the calculation is impossible, in principle, because it involves more than money: it involves having the government decide how much people value the things they stand to lose.

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As Ludwig von Mises pointed out in "Human Action", the calculation is impossible, in principle, because it involves more than money: it involves having the government decide how much people value the things they stand to lose.

softwareNerd, that is another profound statement. It contains the essence of why all forms of government redistribution of money from one person to another and all forms of regulation are impractical (and immoral). That is why all attempts to intervene in the economy fail.

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