Fellows, please be nice to anyone with actual banking system knowledge.

I’m looking for real answers.

Why was Glas-Stegal repealed? Was it useful?

Why does fractional reserve lending make sense?

What happens to the system if it were done away with?


So, my list:
Anti-trust enforcement for the grocery industry/food distribution/food manufacturing.

All investors in a profession, need to be of that profession. (Only lawyers invest in law firms, Hippocratic oath takers in hospitals/offices, etc. Engineers in engineering firms, etc.

Essentially, if you are in a profession, with its own internal set of ethics, those ethical standards need to extend to capital.)

Eliminate corporate stock trading, and go back to all investment houses being partnerships.

I'm not a banker but I have studied finance.

The Glas-Stegal came to be in the aftermath of the Great Depression. It was thought to be instrumental in the collapse of the stock market. How it came to be was that investors could buy stocks on margin. They want to buy a stock share priced at $100 but they only need to put up a small amount, say $10 borrowing money from the investment bank with the stock as collateral. If the stock price goes up, all the investor has to do is pay the interest on the loan. It's similar to the leverage when you buy a house.

But if the stock price decreases, the value of the loan's collateral decreases and it may decrease to where it will trigger a margin call. That's when the investment bank demands the investor to deposit more money as part of the collateral. If the investor doesn't have money to pay down the loan, then the broker will sell enough of the stock to satisfy the minimum margin ratio.

For example, you buy a $100 stock on margin using just $10 (margin requirements were very low before the stock market crash). If the stock goes to $110, just a 10% increase, you actually earned a 100% return on your $10 investment before interest payments on the loan. It's similar to buying a house on mortgage. If the stock price goes to $90, the investment bank wants to maintain the original 10:1 ratio so it will require you to pay down your loan by $1 so that your loan is $9 against a collateral that's worth $90. But if your account does not have the money and you can't come up with it, the broker has to sell how ever many shares to get cash to pay down the loan. But selling the stock will cause the stock price to further decline. You multiply this with so many margin accounts across so many stocks and it becomes a downward spiral. This is what happened to trigger the stock market crash. Today, margins are set at 50%, last time I used it. That means you have to put up $50 instead of just $10 to buy a $100 stock.

Glas-Steagal was repealed because "things are different now." And they said consumer banking never did cause the stock market crash. They repealed the law so now commercial banks can have brokerages with investment bank services and investment banks can have consumer banking services. Was it really useful? It depends on which premise you believe. I only know the narratives being said, I don't know the "true" story.

Why does fractional reserve lending make sense? Fractional reserve lending is part of the central banking system of the US known as the Federal Reserve. It's how they control the money supply and how money is created. The Reserve requirement used to be one of the tools to manage the money supply in the economy along with the Federal Funds Rate and the discount rate. If the Reserve requirement is 10%, for every savings account deposit (not checking), they can loan out 90%. So if someone deposits $100 in bank A, bank A can loan out $90. That $90 gets circulated and ends up being deposited in other banks and those banks can collectively loan out $81. That $81 can generate $72.90 in turn. And so on and so forth. There's a math formula Total Money Created = Initial Deposit X 1 / Reserve Requirement. So a 10% reserve requirement of 10% multiplies the initial deposit by 10; 1/10%. And the total money created by a $100 deposit is $1,000. But, interestingly, the Federal Reserve removed the Reserve Requirement in 2020 to 0%, meaning the bank gets a deposit of $100, it can loan out $100. They supposedly did this to support the economy in response to Covid.

So, what happens if fractional reserve lending were to go away? The immediate result would be a total collapse of the economy as there won't be money in the economy to facilitate transactions. Prices of goods would crater. My answer is based on my perspective that money is just like any commodity. It's price is based on supply and demand. If a commodity's supply is relatively high compared to demand for that commodity, then it's price is cheap. You need more of that commodity to exchange for another commodity; that's inflation, there's a high supply of money so you need more money to exchange for a can of tuna. If the supply of money became small relative to the demand for money then you need more of the other goods in order to exchange it for money. You'll need to offer two cans of tuna for the same amount of money that use to buy just one can of tuna.

You don't have to worry about all those things on your list because if we got rid of fractional reserve lending, we won't have an economy to speak of.

So, as if I follow it correctly.

If we still had fractional reserve lending, the depositor puts 100 in at 3% interest, and the bank could loan $1000 out, at 5% interest., giving it a rather staggering profit margin.

Now, it loans out as much as it wants, based on…. Whatever the Reserve agrees to?

And the interest charged is meaningless, given the lack of a need for deposits, other than to get people to buy into the system .

So, it has no reason to even pay despositors anything, because their deposits are valueless, except that it keeps the system spinning?

I didn’t mean to connect the reforms. I just listed ones with which I am personally familiar.

quote:

Originally posted by Aglifter:
So, as if I follow it correctly.

If we still had fractional reserve lending, the depositor puts 100 in at 3% interest, and the bank could loan $1000 out, at 5% interest., giving it a rather staggering profit margin.

That’s not what I intended you to understand. With zero fractional lending, a person deposits $100 into a savings account and the money just sits there. The bank can’t loan it out, the bank can’t earn money on the money deposited, and the bank should charge a fee for keeping the money. No money is created. That’s the base line.

With a 10% Federal Reserve Requirement, Person A deposits $100 into a savings account at Bank 1. Bank 1 can now lend $90 to Person B based on that initial deposit. Bank 1 makes money on the difference between the interest it charges Person B and the interest it pays Person A. On the books, Person A has $100 in their savings account and Person B has $90. Thus, $90 was “created” and added into the economy; there’s now a total of $190 in the economy supported by that $10 reserve in that single account in Bank 1. This works on a large scale because not all of a bank’s customers is going to withdraw all of their money on the same day. When they do, they call it a run on the banks and it’s a financial crisis.

Person B takes the money he borrowed to buy something and the $90 borrowed by Person B ends up being deposited into a savings account at Bank 2. Bank 2 can then loan out 90% or $81 to Person C. At this point, Person A has $100 in a savings account, Person B’s loan generated $90, and now Person C has $81. From that $100 taken out of the economy and deposited in a savings account, $90 and $81 have been generated into the economy. $90 + $81 =$171.00; that’s $71 more than the $100 initially deposited.

You follow the chain of the cascading amounts borrowed by different people and ending up as deposited amounts into different banks: $81 creates $72.90 creates $65.61 creates $59.05 creates $53 and so on.

The formula for what’s generated is = amount X (1/reserve requirement)

That’s how money is created by fractional reserve lending and introduced into the economy. If the Federal Reserve wanted to decrease the amount of money to fight inflation, they would increase the Reserve Requirement. If they wanted to increase the amount of money to stimulate the economy, they would lower the requirement. As I said, in March 2020, the Reserve Requirement was lowered all the way down to zero in response to Covid.