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Comment by minimax | Hacker News Reader

Right? Banks making loans? It's preposterous.

Sigh. It's a fallacy that making loans implies fractional reserves as normally understood.

Banks can still make loans simply by offering certificates of deposit. This is the above-board way of loaning out people's money -- you make it absolutely clear that taking it out early has a cost, because the money is locked up in (hopefully) profitable ventures.

Would that be less profitable for the banks? Not really -- they would just adjust their prices to compensate, by charging fees on idle money that's instantly redeemable.

And if you let a secondary market for CDs flower, customers can still get good liquidity. Just in a way that's better subject to market discipline.

What you are saying is that you would replace interest bearing savings accounts with fee charging "idle money" accounts, and that if you want to earn any interest on your savings you have to lock it up for a fixed term.

That doesn't really sound like a better alternative.

Traditional paradigms of banking might have to change when each person can be his or her own bank.

You may think it sounds better after a few more rounds of banking crises. TANSTAFL.

Fractional reserve is sort of a misappropriated term as applied to bitcoin exchanges. Such exchanges aren't making loans, so where would the money be going? There's no good reason for them not to have 100% of the funds in reserve.

Some of them offer margin trading which is a loan.

This proposal doesn't prevent loans and fractional reserve or whatever schemes people may want. What it does is makes it much harder to fail to disclose the truth of the matter.

What kinds of terms people choose to transact under is their own business— but all the better when we can be more confident those terms are being followed.

Full reserve banks are possible. You just have to maturity match everything, meaning every loan of term t has a matching deposit with a maturity of t. Deposits in demand accounts could not be lended.

I have no idea whether this is a good idea or if it would work as a business.

That's sort of the idea behind securitized mortgages, except once the bank makes the loan the bank leaves the picture (except perhaps as a custodian responsible for payment collection sometimes.) This is one reason securitization of mortgages led to lower interest rates and was generally considered a good thing for a while.

In the alternative scenario, economists describe loaning from demand deposits (at a higher interest rate) with a phrase like "the bank is selling liquidity".

The retail markets have voted overwhelmingly for interest bearing demand deposit accounts. I'm not sure if a fee-based DDA is available anywhere but it certainly is not popular in the US where we get "free" deposit insurance.

Full Reserve banks don't make loans?

Fractional Reserve banks enable you to have your money and be loaned out at the same time(thereby stretching the money supply like an elastic rubber band).

Full Reserve banks ONLY loan out money which was specifically deposited to them for the purposes of being able to be loaned out.

You're mistaken if you think full reserve banking somehow doesn't "stretch" the money supply. Let's say I deposit $10K in a "full reserve" bank. The bank then loans it to someone who buys a car. The car dealer goes back to the bank and deposits the proceeds of the sale. Another fella comes in for a loan and the bank gives him dealer's $10K. He then goes to buy a car. Now there are 2 cars bought with "my" $10K. And this can go on ad infinitum. So there is nothing superior about full reserve banking. The only thing you're doing is preventing me from getting my money unless the guy who took the loan pays it back. That will surely incentivize people to keep their money in a bank.

What you get is interest fit allowing your part of their reserve to be used for loans. It's why certificates of deposit have a higher interest rate at /r/ActualMoney banks.

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