If Banks Are Outlawed, Only Outlaws Will Have Banks

[Kennah]

Source: NY Times

Yglesias tells us that some Occupy Wall Street protesters have picked up Ron Paulish monetary ideas — although some know better. I thought I’d say a word about one particular idea that sounds plausible to some people but is actually quite wrong: banning fractional reserve banking.

I know that’s a popular theme among some Austrians. But it’s actually neither a good idea nor even feasible.

The crucial thing is to understand what banks do. And it’s not mostly about money creation! Instead, what banks are for is helping to improve the tradeoff between returns and liquidity.

Like a lot of people, my insights draw heavily on Diamond-Dybvig (pdf), one of those papers that just opens your mind to a wider reality. What DD argue is that there is a tension between the needs of individual savers — who want ready access to their funds in case a sudden need arises — and the requirements of productive investment, which requires sustained commitment of resources.


Read more: http://krugman.blogs.nytimes.com/2011/10/10/if-banks-are-outlawed-only-outlaws-will-have-banks/

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A good read for Randian acquaintances and foes of fractional banking.

[Old Codger]

1. They

Already do......