The Steev (seregost) wrote,
The Steev

Ramblings on Free Banking

Yes I am still alive. As has been historically the case, I return here to post when I have something relevant to say that I want subject to public scrutiny. What I want to blog about is my reflections on the current economic climate - how and why I believe we got into this CF, and where I believe we should go from here.

The current situation has caused me to read up on monetary policy. I have come to side with a widely held belief: at it's core, the US banking system is setup *fundamentally* to privatize profit and socialize risk.

There are many reasons why this is the case, but I believe the fundamental underlying mechanism that causes this is reserve banking. In the US at least, this means that the central bank has control of the money supply primarily by enforcing reserve requirements on all traditional banks in the United States.

This causes banks to be focused on gaming their reserve - as the reserve (rather than the underlying economy's demand for money) is what dictates the amount of money the bank can create. Studying this reserve system leads one to realize that banks are so tightly controlled by the central bank that it is ludicrous to make the claim that they are private institutions.

Systemic failures like present happen precisely because the federal reserve system is a *monolithic* structure and *not* a network of independent banks. Hence, risk is naturally socialized because the real shareholders of the system are the same shareholders that own the central bank and the government - US government account holders (aka citizens and bond holders). It is therefore unjust to privatize the profits of these banks as they are *not* private organizations.

The way I see it, there are at least two possible solutions to the fundamental problem.

The first solution is to abolish the central bank and eliminate the reserve requirement - hence establishing a free banking system. Internet economies like SecondLife showcase the mechanics and possibilities of a pure free banking system.

The primary concern I have with this solution is that there will likely be a chaotic period in which banks will be forced to reorganize their incentive structure. Many would fail (i.e. lose depositor trust), and this period would be very lengthy and painful. However, in the end I believe the most efficient structure for a private banking institution would be to align the role of depositor and shareholder. This would turn banks into cooperatives similar to modern credit unions - with the exception that they would have full control over their own money supply.

The second solution to the problem would be to fully "nationalize" the traditional banking system by having the treasury or federal reserve repurchase the shares of all banks in the reserve system. This would therefore restore banking profits to the true shareholders of the reserve system - the US citizens. With this move, the revenue from banks would become government revenue and should theoretically move us away from a taxpayer based revenue system. In this regard, I believe the government would be steered into a more robust incentive structure. It could be operated similar to a cooperative bank, and hence rather than nationalizing the banking system, this could be viewed as "privatizing" the whole government (in so much as a cooperative is a private organization).

The second solution is probably the better policy decision in order to ensure stability, but I think the second alternative is just the first step in establishing a truly pure free banking system.
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