Hi Joe2baba,
The first thing we need to clear up is that the federal reserve bank is NOT the fractional reserve banking system (FRB). FRB has been around for a very long time, long before the FedRes, and will be after the FedRes has gone I would think. The FedRes is the lender of last resort, and in real terms that has and always will be YOU, the taxpayer, But if you scrapped the FedRes today, FRB would still exist, most likely with 0% reserve.
When we are thinking about this problem, we need to remember that it is actually several different problems. The temptation is always just to find someone to blame. Someone responsible for the whole lot. As you have seen from Chris’s crash course there are alot of factors involved here. But lets split up this economic one a bit.
I think the issue can be divided in to two main problem areas. Private banking and public finances.
Public Finance can be summed up pretty easily - spending more than you make. Here are a few things that have contributed to this.
- USA running out of its own resources and needing to buy them abroad
- Ambitious social spending plans
- Workers refusing to take market rates of pay (the free market is very unforgiving of such things)
- Erosion of the manufacturing base - not competitive - see the previous
- The emergence of more competitive nations
- War - This is very expensive and the USA has been at war along time now
Quite some time ago the government was unable to tax you enough to meet it’s debt and spending obligations, so it was forced into a cycle of borrowing that has never ended.
As you can see there are several reasons there already, and that is hardly an exhaustive list. I don’t think there was ever an option for the treasury to ask the fedres to print money without simply monetizing the debt, money always had to be borrowed. now that borrowing is becoming difficult if the treasury does turn on the printing press it will be a complete diaster for America. Everything was in a pretty bad way along time before the President volunteered your future to the private banks in the form of bailouts.
Simply put - America has borrowed money for a lifestyle it could not afford
Private Banking - Boy thats an even bigger mess, at least in terms of understanding it all. But still it is quite easy to point out that there are issues other than FRB that have contributed to this mess.
FRB is essentially an unstable system of banking. As I am sure you are aware; everyone asks for their money at the same time = unhappiness and banks going out of business. So ideally if FRB is in use, and there are quite a few good arguments why it should be, there ought to be very tight controls on the amount of reserve that a bank should keep. Sadly this has not been the case, in fact, it has been the otherway around.
For many many years now the reserve requirements have been reduced alot. This has led to SIV’s and other packages of mortgages being moved off the main books of banks. These reductions where allowed by government.
Now with most restictions on lending out the window, guess what happened?
You cannot blame the fox for killing the chickens if you put it in the hen house. Lest we forget, Banks are essentially greedy, with relatively short term interests.
Banks began lending to anyone and everyone regardless of their position to pay the full term of the contract.
So , lets summarise some of those factors.
- Reduction in regulation from the government
- Greedy banking practices of lending to everyone/anyone
- People entering agreements they could never meet or only meet in specific circumstances.
Lets put it this way, France has had FRB since before the USA existed, and they do not have this problem, the government would never let the banks be so irresonsible in france, and the populace probably has a better understanding of money, so simply do not borrow as much.
I am not claiming that FRB and the Federal Reserve did not play a part or do not have responsibility here, they do. But to lay the blame of all these ills at the door of the fedres and a system of banking is not useful or conducive of getting anything to change in a meaningful way.
Personnally I am against FRB, I simply think it is immoral, and I don’t see much point in a central bank either really, other than it makes it a little harder( not much) for the governement to manipulate the economic postion for political gain. I think when wishing to get rid of systems and institutions it is very important to come to the table with good arguments why and good alternatives. While Chris’ video on money and FRB is 100% correct, it does leave out alot of information about what FRB does and any of the reasons its good. To really argue against the use FRB you need to be armed with these too or the libetarians will chew you up and spit you out at the discussion table ![:slight_smile: :slight_smile:](/images/emoji/twitter/slight_smile.png?v=12)
Even though this answer is longish, it is really only skimming the surface, hence my thought that a few guides would be very helpful for everyone.
I hope this helped.
regards
Gary
PS - It was never my intention that this explanation be exhaustive, or to explain the cause of what happened, simply to demonstate it was not all the fault of the FedRes and FRB.