The “factional reserve lending” problem is starting to heat up in other blogs–the question being is it systemic fraud from the banking system or is it a normal part of the system? Denninger surprisingly claims its not, its just a “normal” acceleration of money velocity, Mish thinks its fraud.
I was asked to reply to Karl Denninger’s Rebuttal To Mish On Fractional Reserve Lending.
Here goes: Denninger does not phrase my arguments correctly on points 2-5, however he thinks they are immaterial so the points are somewhat moot. The crux of the matter is not whether assets are backed by collateral as Denninger suggests, but rather whether the same money has been lent out multiple times.
All things being unequal between banks and ordinary people, an ordinary person and other people do not take $1000 and loan it back and forth between each other creating smaller and smaller loans–because eventually the “interest” becomes unsustainable and the scheme collapses with a bunch of losers and winners. Substitute “banks” for “people” and you can see that there is no difference in the mechanism. Banks merely get to do it because they get a special “pass” on this irrationality from the government.