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This is the fractional reserve banking versus full reserve banking argument. And it’s HORRENDOUSLY complicated. Here is some reading material.George Selgin is pro fractional reserve. See:http://www.independent.org/pdf/tir/tir_05_1_selgin.pdfAlso Selgin’s book is available online for free: http://oll.libertyfund.org/?option=com_staticxt&staticfile=show.php%3Ftitle=2307I'm pro full reserve (with reservations).Two blog posts of mine which have links to other works:http://ralphanomics.blogspot.com/2012/02/does-expanding-amount-of-debt-free.htmlhttp://ralphanomics.blogspot.com/2011/10/george-selgins-flawed-pro-fractional.htmlMilton Friedman was pro full reserve, as was Abraham Lincoln.This is a well informed blogger who is pro fractional reserve: http://socialdemocracy21stcentury.blogspot.com/
Isn't 100% reserve tantamount to nationalized banking? Stephen Zarlenga of the American Monitary Institute endorses 100% reserve and at one of the AMI conferences Michael Hudson was tweaking Zarlenga's nose a bit saying that the situation where the gov. guaranteed all the bankers bad debt was kind of like 100% reserve. I was thinking it was more like the government being bankerized rather than the banks being nationalized. This is bsically Irving Fischer's idea from the '30's and Hudson also gently scolded the AMI people for having economic models that were stuck in that era. The MMT adherents would probably say the same thing, since they consider the money multiplier to be a myth.
I think that the AMI people equate 100% reserve banking to a 100% capital requirement. But there is a big difference. Changing the reserve requirement just influences the bank's own borrowing cost in making a loan. With change in capital requirements, the amount of bank equity is changed. so that a 100% capital requirement means a bank is loaning $4$ against equity.In other words, its not the reserve requirement that gives bank's leverage, it is the capital requirement.
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