Saturday, September 21, 2013

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis


Is Risk-Free Banking Possible? What About Fractional Reserve Lending? 30-Year Mortgages?

Posted: 21 Sep 2013 08:58 PM PDT

Reader "Nate" noted that Bloomberg columnist Megan McArdle stated that banning Fractional Reserve banking won't work.

Nate asked "What would a future without fractional-reserve banking look like?"

Let's start with a look at Megan McArdle's article: Banking Without Risk Is Impossible.
The fundamental fact of a banking crisis, which is different from a crisis in any other industry, is that if people believe a financial institution to be bankrupt, it actually is bankrupt.

As Arnold Kling puts it, banks exist to reconcile the desire of households to lend short and borrow long -- we want to have bank accounts we can empty at any time we want, but we want mortgage loans that carry fixed payments and last for decades.

This creates a vulnerability at the heart of modern banks: If too many depositors try to turn their bank accounts into cash at the same time, the bank will be insolvent, because it cannot liquidate the mortgages fast enough to pay the depositors. And when are you most likely to get a flood of people trying to empty their accounts? When they think the bank is insolvent.

So why not build a banking system where this can't happen? Well, alright. How shall we do that? Are we going to forbid the structure of modern banks ("fractional reserve banking," for those who are interested in the technical term).

Leave aside the irony that outlawing a practice engaged in by millions of upstanding Americans is not, at first blush, a particularly libertarian solution.

I've heard arguments that you could fix this by allowing banks to freeze withdrawals in the event of a liquidity crisis. But I'm unpersuaded because during the Great Depression many places did freeze withdrawals. ....
Megan McArdle Wrong Twice

For starters a 100% reserve system is indeed a "particularly libertarian solution" for the simple reason fractional reserve lending is fraud.

If I lent you a house that I did not have ownership of (or rights of control to), I surely would be convicted of fraud. If I sold you 100 tons of wheat, and only had 10, I likewise would be convicted of fraud.

Reflections on "Legitimate" Right-To-Use

Some argue that as long as customers agree to these various banking schemes it is OK.

However, it's not OK because such lending is nothing more than a gigantic kiting scheme. Moreover, it affects others by cheapening the value of money, pushing up asset prices for the benefit of those with first access to money, the banks and the wealthy.

Logically, two people cannot have the right to use the same money at the same time, whether they agree to such a scheme or not!

Banks are allowed to lend money that does not exist, but if you or I did it, we would be convicted of kiting (fraud).

100% Reserve System Does Not Mean There Will Be No Loans

Megan McArdle is also wrong about lending. A 100% reserve system does not mean there will be no loans. Instead it means banks cannot make loans for longer duration than they have ownership or control of the money.

If banks want to lend money for 30 years then need to have 30-year term deposits. If banks want to lend for 5-years then they need to secure money for 5 years. Might this mean the end of 30-year mortgages?

Perhaps, perhaps not. Perhaps it just means the end of cheap 30-year mortgages. As far as I am concerned that would be a good thing. 30-year mortgages with credit created out of nowhere fueled the property bubble.

Would it mean the end of mortgages? Certainly not but 10 and 15-year mortgages would carry a far lower rate than 30-year mortgages than they do now. And why shouldn't they? Are not 30-year mortgages inherently more risky?

Checking Accounts vs. CDs

Since checking accounts represent money on demand, banks could not lend them at all in a 100% reserve system. Such deposits would indeed be risk-free. They would be fee-based, but without risk.

Want to collect interest on CDs? OK, but such deposits would no longer be risk-free.

Notice that a run on the banks in a full reserve system is not likely. 100% of demand deposits are always available. And term deposits would match term-loans and no longer.

Of course, banks can foolishly lend money and not be able to return it at the end of the period. But that is the risk people take when they lend banks money. If people do not want to take those risks, they can leave the money in checking accounts and pay a fee for storage.

For more on the case against Fractional Reserve Lending please see


Please click on the second link above and read it.

On page 46 of the book Case Against The Fed Rothbard says "By the very nature of fractional Reserve Lending, banks cannot honor all its contracts".

Does knowingly entering a contract that one cannot possibly honor, constitute fraud? Of course it does.

I have talked about these issues many times before. For a synopsis, please see Central Bank Authorized Fraud; Fractional Reserve Lending Problems Go Far Beyond "Duration Mismatch" .

Megan McArdle seriously needs to read the eBooks above, starting with Case Against The Fed.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com   

What Colleges Have the Highest Tuition? How To Save $244,000 On Your Education; Avoid the College Debt-Trap

Posted: 21 Sep 2013 12:29 PM PDT

The data is a bit out of date, but the US Department of Education has a College Affordability and Transparency Center where you can see the highest and lowest tuition and net tuition (including aid) of various types of two and four-year colleges.

The highest costs are over $60,000 per year. And that is just tuition and books, not just room and board.

Business Insider
commented on the costs in America's REAL Most Expensive Colleges.

Fast Company also commented on the sad cost situation in How To Save $244,000 On Your Education.
You, too, can experience the best that American education has to offer--without enrolling at NYU. Might I recommend that the curious would-be undergraduate or returning student check out:

Coursera, one of the three major Massive Open Online Course platforms, just announced a $43 million Series B round of funding to expand its mobile apps, API, and its "Signature Series" classes, which can be taken for a small fee and applied for college credit. The company offers free video versions of almost 400 courses created by professors from Stanford, Penn, Princeton, Yale, and other universities--in all, these courses have had about 4 million signups to date. The State University of New York, the largest public university system in the country, has a special partnership with Coursera , developing shared solutions to enable more of its students to follow flexible paths toward a degree.

Enstitute, an apprenticeship program created by two Millennials, is heading into its second successful year placing 18-to-24-year-olds with top New York City tech startups, nonprofits, and media companies. The Fellows, who pay $1500 tuition but also receive a stipend to cover living expenses, live together and complete a core curriculum and digital portfolio in addition to their hands-on experience learning business, creative, and technology skills.

General Assembly, a Silicon Alley incubator turned education provider, offers classes and workshops ranging in length from a few hours to full semesters, and ranging in cost from free to $3,500, in highly relevant areas such as business, marketing, mobile, web, and product development. They also offer networking and mentoring opportunities, and a growing online course channel.
About Coursera

The above links to Coursera, Enstitute, and General Assembly are Fast Company reports on those organizations, and well worth a look for those seeking alternatives to extremely costly education.

I also encourage readers to go to the actual Coursera site.
About Coursera®

We believe in connecting people to a great education so that anyone around the world can learn without limits.

Coursera is an education company that partners with the top universities and organizations in the world to offer courses online for anyone to take, for free. Our technology enables our partners to teach millions of students rather than hundreds.

We envision a future where everyone has access to a world-class education that has so far been available to a select few. We aim to empower people with education that will improve their lives, the lives of their families, and the communities they live in.;

We offer courses in a wide range of topics, spanning the Humanities, Medicine, Biology, Social Sciences, Mathematics, Business, Computer Science, and many others. Whether you're looking to improve your resume, advance your career, or just learn more and expand your knowledge, we hope there will be multiple courses that you find interesting.
Future of Education is At Hand: Online, Accredited, Affordable, Useful

On September 3, I wrote Future of Education is At Hand: Online, Accredited, Affordable, Useful.

Please check it out.

Avoid the College Debt-Trap

Those with money to burn may wish to go (or wish to send their children to go) to 4-year brick-and-mortar colleges for $60,000 a year plus room and board.

For everyone else who wants to avoid the college debt-trap, I strongly suggest exploring alternative approaches.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com  

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