The standard deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category. Deposits held in different ownership categories are separately insured, up to at least $250,000, even if held at the same bank
Do we need deposit insurance?
No, assuming a sound banking structure.
In response to Just in Time Stimulus: Fed Proposes Looser Rules for Large U.S. Banks a reader asked: “If we got rid of deposit insurance, what protection would savers have?”
That’s a good question.
The answer is none. But with 100% reserve requirements there would not need to be any, except to protect against theft and fraud. Banks would not be able to lend checking deposits. Savers take a risk on interest-bearing deposits, as they should.
My Proposal
- End the Fed
- End fractional reserve lending
- End the bailouts
- End deposit insurance
- Let the free market select what is money
Point number two is the key. A 100% reserve requirement eliminates the need for deposit insurance. Money held for deposit only, has no lending risk.
There is a tiny risk of theft or fraud which could be covered by private insurance. Warren Buffet would probably be willing to undertake the endeavor as risk of theft from banks is extremely small.
If you lend money for interest there should be risk. The risk is banks make bad loans.
Savings deposits and CDs are not really “savings” accounts at all. In both, you agree to let the bank lend your money in return for interest.
Checking accounts are supposed to be available on demand. Banks cannot lend checking accounts under my proposal.
Mike “Mish” Shedlock
“It would seem likely that one of the consequences of 100% Reserves Requirement would be to push normal people to an all cash economy.”
Disagree
Ponder a bank that does not make loans. It would need no loan officers. Few tellers. Almost nothing.
Al this bank would do is take deposits and charge fees. The fees would be minimum.
It would provide checks and do wires in and out for fees.
100% of the money would be available on demand.
A small 0.5% annual fee would likely be enough to make a profit.
Who would use such a bank?
Well, as soon as you end FDIC, damn near everyone who is thinking.
MIsh
Subsidies by the state and cross products need to stop. Lets say there is transparency regarding risk and return by product line in a bank (wishful thinking I know) and the government stops subsidies (even greater wishful thinking). Also lets say core money supply is formulaic. It is Item 2 on Mish’s list that I am not sure about. Whilst it is anchoring perhaps it is too anchoring for a society. Leverage is a form of optimism and permits experimentation and growth. I am not certain but my inclination is that as long as the targeted investors take the hit for the leverage item 2 is a solid positive add to society. It is kind of like, is bankruptcy law fair or does it permit risk taking so that net net it is a positive npv facilitator for society.
Ok, so Mish is actually not proposing Full Reserve Banking but rather Fractional Reserve Banking where everything is the same except banks have to offer a new product called “safe box secured checking account”.
The funny thing is that it does not change anything.
The requirement for banks to do duration matching between depositors and borrowers also does not change anything, because bank failures will still happen as bank’s asset side deteriorates (in case one of the borrowers default) or liability side explodes (in case interest rates are not fixed).
And Bank Runs will still happen under such system except they will be rate limited until deposits mature. Banks under current system already can rate-limit withdrawals by imposing withdrawal limits. So really no benefit here.
And the big question is whether in his system depositors can sell their deposits in secondary market or cancel by paying early withdrawal penalty? If yes, this would have immense upwards pressure on interest rates once everyone will dump their deposits in a failing bank.
Stop thinking of it in terms of A global BANK. But rather in terms of a depository institution that offers only the service of keeping dollars in a vault, and checking services. And charges a fee for that.
And then, a complete free-for all Casino Row outside of that. Where the only funds available, are provided by people explicitly for the purpose of gambling.
If some of the casinos on Casino Row should fail, they fail. Like Trump’s Casinos did. But this has absolutely no effect on the funds that people deposited for safekeeping with their non casino depository institution.
Again, I’m assuming sound money. If casinos, as part of their operation, is granted access to print up tokens indistinguishable from the currency that depository institutions store for safekeeping, all bets are obviously off.
I think it is minor technicalilty whether banks provide the depository service or special purpose institutions.
And do I undertand correctly that your “sound money” proposal would require a parallel currency that can’t be debased by “casino dollar bailouts”?
It would seem likely that one of the consequences of 100% Reserves Requirement would be to push normal people to an all cash economy. Since a bank would have no opportunity to earn income from checking deposits, we would all have to pay fees for having checking accounts. This would cause workers to pressure businesses to pay them in cash.
For lendable savings-type deposits, the problem of matching deposit duration to loan duration would become quite a high-overhead issue. Since it would not be possible to access deposits even in an emergency, most savers would probably go for short term deposits (3-6 months). That means the entrepreneur who needs a 5-year loan to build his business would likely end up with a series of short term loans that would have to be renegotiated frequently — and possibly would not be available at all at some point, depending on the flow of deposits.
I understand the positive features of 100% RR — but there would need to be a lot of thought given to how to ameliorate the downsides.
Some normal people who own Gold, keep it at home. But many also pay a custodian a small fee.
The yield curve, would sort out duration mismatches completely. People who need 5 year loans, would just end up paying enough to entice depositors to lend it to them for that duration, rather than for 6 months.
Maybe. Think about a realistic scenario for an entrepreneur going to a bank to get a loan which he expects to be able to pay off in 5 years. Bank tells him — 6 month loan will cost him x% interest, 5 year loan will cost him some multiple of x% interest. Most entrepreneurs would take the 6 month loan and hope to roll it over.
A similar dynamic would probably also influence depositor behavior to favor short term deposits. Even today, when emergency withdrawals from CDs are generally possible, most CDs have short terms of 3 – 18 months.
The duration mismatch problem has been with banking since the beginning. Going to 100% RR would not make it any easier.
As a general rule, very visibly borne out, even empirically, by the experience of Silicon Valley: Funding of highly speculative ventures is best done by way of equity investment. By the time Valley startups start borrowing instead of issuing shares; they’re either no longer speculative and hence have much more predictable cash flows; or they’ve switched from being interesting, to becoming just another part of the rackets, focused on nothing more than appropriating as much freshprint as possible (Funding executive lifestyles by selling paper rather than products…)
Expecting the average saver, or the average lending officer, to be able to properly price the risk of some speculative startup in the early phases, is just folly. The fact that this even occurs, is a failure of our system of excessively easy credit, rather than something that needs to be preserved.
IOW, formally, the steep yield curve for speculative investment you allude to, is perfectly rational. Hence economically optimal.
Stuki, we are in violent agreement! Yes, a steep yield curve for bank loans (and bank deposits) in a 100% RR world would be perfectly rational. As would be both depositors and borrowers likely preference for short-term commitments, albeit for different reasons. The end result would likely be to make financing more difficult for new businesses and business expansions which create jobs and tax revenues — which is what the real economy needs.
100% RR sounds like a smart idea, but we might be surprised about some of the consequences. Getting rid of “free” government-provided deposit insurance — now there is an idea we can all get behind.
It would make debt financing, for the sort of projects for which debt financing make no sense anyway, more difficult. Which is good for the economy. What an economy needs, is for scarce capital to be allocated efficiently.
Loan officers at banks attempting to pick winners amongst early stage startups, does not result in nearly as efficient an allocation, as leaving it to equity investors with sector specific experience and knowledge.
Just adding “more investment,” by throwing printed money at anyone who can fog a mirror, mock up a prospectus and call himself an “entrepreneur,” does not make for a healthier economy. All that does, is rob resources away from more productive alternative uses.
“For this to properly work, you also need sound money. Otherwise, banks can always lend out checking deposits by debasing them. Then lending out the share of them acquired by this, indirect, route.”
Stuki that makes no sense. In a 100% reserve setup, it would constitute fraud and executives would land in prison if they lent money available on demand (e.g. checking accounts).
If the total money supply consists of 100 $1 bills, and I have 10 of them in my savings account; you being a banker printing up another 100 and lending those out, have just stolen half my wealth; as long as the bills you printed up are indistinguishable from mine.
If the loans eventually get paid back and the money you created extinguished, you can sorta-kinda claim that things net out. But if you don’t get repaid, the money is still out there. Permanently debasing mine. So I’m stuck with lending risk. Regardless of whether the nominal number of bills is being touched or not.
The important thing being, that money is not wealth. It’s just claims on wealth. Hence, what’s important to someone, is not the exact number of arbitrary currency units he owns. But rather what share of the total number of currency units (money supply) his units represent.
If all real wealth in a country consist of 100 apples, the money supply is $100, and I have $10, I can lay claim to 10 apples. It is 100%, completely, irrelevant whether you take away my ability to obtain 5 of those apples by stealing 5 of my dollar bills the old fashioned way; or if you instead do so by printing up another 100 dollar bills indistinguishable from the ones I have. The real effect is 100% the same: I now only have access to 5 apples, rather than the previous 10. That theft of real wealth is what matters. Not the mechanism by which you accomplished it.
Because of this, it’s not enough that a bank can’t touch the exact bills sitting in people’s checking accounts. They need to be prevented from altering the share of the total money supply that those bills consist represent. Wrt money, it’s the share of the total money supply that is important. Not just the nominal number of currency units by itself.
Apples are a bad example because they rot over time.
Point taken…
That is an interesting analogy, Stuki. What happens in the fall when the country’s producers deliver another 100 applies? Suddenly, your $10 is worth twice as much in terms of real goods. As Mish has often asked, what is bad about deflation?
Classically, the mysterious human invention (belief system?) of money is (a) a convenient medium of exchange, and (b) a store of value. Arguably, the lesson we are reluctant to learn is that money is not very effective as a “store of value”. The only effective store of value is an enforceable claim on tangible property — a piece of real estate, a stock certificate, an Old Master painting, a gold bar. But the value of that tangible property depends entirely on what someone else is prepared to pay for it — Yes! Even for a gold bar. True “Stores of Value” are tough to find.
Maybe money is subject to the Second Law of Thermodynamics? Entropy gets us all in the end.
” What happens in the fall when the country’s producers deliver another 100 applies?”
In order to deliver those additional 100 apples, producers would require a mix of labor AND capital. Capital being provided by current owners of wealth. Who provide it, simply by choosing not to consume a share of the wealth they own; hence leaving that share available for production of future goods. The gain of new apples which current wealth owners get in return, is their reward for choosing to save/invest some of their wealth, rather than consume it all.
By the fiat pushers’ sleight of hand of getting dupes to focus on nominal “prices,” rather than on changes to the money supply; this gain for foregoing consumption, is now instead handed, in return for nothing, to those whom free, freshly printed money is handed to: Privileged banksters, and others with preferential access to freshly printed money. Who can lend their freely acquired fresh print out to apple producers, and hence obtain freshly made apples. In return for nothing.
Price wise, the original owners of the $100 worth of wealth, can lay claim to just as many apples as before. The nominal prices of apples have not changed. But the investment income those owners are due, in return for the foregoing of consumption that made those new apples possible, has now been stolen by the money printers, and handed to those they decide to give privileged access to fresh print to.
That’s how constant inflation of the money supply rob those who produce wealth and then saves some of it. For the benefit of those who happen to have privileged new money access. All by the seemingly innocuous, heck even “reasonable” sounding to people not particularly well versed in economics, focus on “maintaining purchasing power” of money. That’s what the famous Keynes attributed “…not one man in a million will detect the theft…” quote refers to.
Absent this form of theft, you simply cannot have a world where purchasing power of money does not increase over time. If you did, noone would save, hence no capital would be available to produce goods for future consumption; since immediate consumption is always preferred to deferred consumption. Noone has a negative time preference, preferring an apple in the future, to the same apple today.
So, everywhere, there will be positive future returns generated in exchange for foregoing consumption. The only question is whether those returns go to the ones doing the foregoing. Or if they instead go to someone else; who are simply granted a privileged license to appropriate returns accruing from OTHERS’ foregoing consumption.
“I’m not sure why anyone would want to operate a bank if there is a 100% reserve ratio requirement.”
Lots of misconceptions. 100% reserve requirements does not mean banks would be unable to lend. Rather, it implies that lending would be duration matched. And banks would up fees for checking accounts and safekeeping.
Mish, I still believe that your prescriptions of ending fractional lending and deposit insurance would be a disaster. The last sentence of your original post states that “banks cannot lend checking accounts under my proposal”. So I guess I’m still not understanding 1) why banks would stay in the deposit holding business as there would be no point (or profit), and 2) where would the bank get the capital to lend for housing and commercial business loans? Savings accounts? But with no deposit insurance depositors would likely demand a higher rate to compensate for the higher risk thereby squeezing bank profitability even more. Banks will always make bad loans, so yes there would be real risk that depositors will lose a portion of their deposits from time to time. But couldn’t a couple of high profile blow ups result in more bank runs? I would certainly be prepared to pull my deposit at the drop of a hat if I thought there was trouble brewing, even if it were merely a rumor.
I believe that under your proposal thousands of small community banks would close. You would see many smaller communities left without a banking operation. You would see mortgage rates rise sharply in response to the reduction of loan making capacity by 70% to 80%. You would likely see the reintroduction of “points” and higher fees for those looking for mortgage financing. Remember the old days when you had to pay points as part of your loan closing cost?
I think housing values would collapse under your proposal, given the significant reduction in loan making capacity. The reduction in property values would have a devastating impact on local government financing, which is derived mainly through property taxes tied to real estate values. I think you would see millions of existing mortgage holders left with loans that are much higher than the value of their property.
I believe that you would see part of the void filled by mortgage origination firms (not regulated banks) that would write mortgages and sell them for securitization. But isn’t that how we got into trouble in the first place? I’m not sure that would be a good trade off.
I still believe that the real problem boils down to central bankers who think that they can tinker with and control the economy by emphasizing ultra-loose monetary policies and prioritizing incentives toward the large, too big to fail banks.
Custodial operations for Gold already exist. And are doing fine. Charging a percent to a few of the amount they store. Nothing prevents dollar custodians from doing the same. Of course, some keep their Gold at home, preferring to not pay the fee. Which is neither good nor bad. Ditto dollars.
Banks would get funds to lend out, by people deciding to allocate some funds explicitly for interest bearing lending activities. Rather than by people having no option but to assume risk. If banks paid a quadrillion percent a second in interest, lots of people would lend them lots of money. If they paid none, noone would. Somewhere in between, a market clearing equilibrium will be found. Where the bank pays just enough, to obtain just the amount of funds it feels it can profitably lend out.
Lots of smaller communities are left without a cinematic megaplex as well. And without an Opera house. But, they have fresh air, plenty of deer and no rush hour traffic. It’s all about the priorities of those who choose to live, or not live, there.
If mortgage rates in a free market without intervention would be higher than they are today, that just means mortgages are currently mispriced. Such that resources today are misallocated. Misallocation is never a good thing. The sooner and more completely the misallocation is corrected, the better.
……
Again, if house prices in a free market without intervention would be lower than they are today, that just means housing is currently too expensive. Which is something anyone with enough grey matter to successfully figure out a way to fog a mirror can verify, by simply comparing the price of a house and it’s cost of production, in Pacific Heights in San Francisco.
If people are left paying mortgages on houses worth less than the mortgage, they can default. They’ll lose title to the house, but also be free of the mortgage. And, since the house is now worth less, they can rebuy it for less. After all, the house is still sitting there. In practice, during a mass default and reprising wave with certain finality, mortgage holders will be willing to reduce the loan amount unilaterally, for existing owners, to the new price level, or even a bit below, simply to avoid the costs of remarketing the house. The important point being: There remains the same number of households, and the same number of houses…. Hence no systemic loss of roofs over heads. People, on average, just get to live in the same place for cheaper than before. For anyone who has ever struggled with a mortgage payment, that’s hardly some calamity.
If mortgage originators can find people to sell securitized loans to, good for them. But all risk will then rest on the shoulders of those choosing to buy the securities. Not on taxpayers, via having to bail out depositors, of a bank that gambled and lost.
So you want to prevent hysteric bank runs by introducing requirement that depositors (with interest bearing accounts) have to wait for their deposit due date before they would be able to make withdrawal?
If so, then we already have a solution for this bank run problem under current system where banks can limit daily withdrawals for all customers in case there is bank run hysteria.
And, when I was living in Europe, I did not receive any interest on my checking account. If I wanted to receive any interest I had to commit deposit for X months and there was early withdrawal penalty. However, bank failures still happened in Europe. I am not sure what were the laws for banks to lend out deposits from non interest bearing accounts.
Your proposal simply moves the problem elsewhere. If deleveraging would happen at the end of business cycle, then everyone will try to sell-off their committed deposits at discount (if you don’t plan to ban selling these deposits in secondary market). You will have the same bank failures.
I’m not sure why anyone would want to operate a bank if there is a 100% reserve ratio requirement. I mean it costs a lot to operate a bank and provide depositor services. What would be the incentive to provide that service? Or would the bank then pass through those costs to the depositor, who would then find that it is too expensive to keep their money in a bank. I’m not sure that this is a rational solution.
Having worked at the FDIC, they do a very good job of overseeing bank lending activities, particularly for the small local and community banks that they oversee. When a bank gets into trouble, the FDIC immediately takes on an oversight role and limits the bank’s future lending activities. The FDIC is funded by premiums paid by the banks. I don’t think there is a big problem at the local and community bank level. The oversight is really quite good.
On the other hand, it’s the big banks, those overseen by the Fed and the former Comptroller of the Currency, that flex their size and leverage to have already low reserve requirements reduced even further and take extraordinary risks through their investment banking arms, with the full understanding that they will be bailed out if they ever get into trouble. I think that is where your real problem lies.
For this to properly work, you also need sound money. Otherwise, banks can always lend out checking deposits by debasing them. Then lending out the share of them acquired by this, indirect, route..
Often institutions don’t do what they claim. A small depositor would have recourse in the law for fraud etc. But practically only the wealthy have full access. Winning and collecting for a small deposit subject to fraud could cost more than the original loss.
Small depositors would then always need a reliable party to audit the bank regularly and guarantee their accounts. Who best to serve that function ? The government with infinite resources of printed cash or some company with only a good reputation to maintain. Since the 1980’s the government has been doing a poor job with the regular audits but at least printed enough cash to cover their poor monitoring of the banks.
There is precious few cases of pure deposit taking institutions, stealing their depositors’ deposits. All those guys have, is their reputation for solidity. People always have the opportunity to keep their funds under the mattress, if they don’t trust the depository.
“It not clear what the implications of 100% reserve requirement would be”
It’s completely clear there would be less speculation by banks and zero bailouts.
Less opportunity for systemic theft.
Or, at a minimum, less opportunity for covering the theft up. The guy with the gun can still stick it in your face, but with a watertight 100% reserve requirement, at least he has to be a bit more obvious about it.
Less speculation and zero bailouts would be good — but we always have to remember the Iron Law of human actions: The Law of Unintended Consequences.
Money is a human invention, a mere symbol whose only use is to be exchanged (now or in the future) for real goods and services, the real products of human effort & ingenuity & investment. Maybe 100% Reserve Requirement would reduce the amount of investment, and thus have a negative impact on the real economy? I don’t know if this would be the Unintended Consequence of 100% RR, but it would be unusual if there were not some Unintended Consequences.
The only way investment would decrease, is if 100% reserve requirements somehow increased consumption. As all real wealth is either consumed or saved/invested (Assuming leisure is treated as consumption, rather than treated by sticking ones head in the sand like an ostrich and pretending it’s not an economic good). Nothing is left in some limbo state.
Also, economic utility, or well being, is not a rising function of investment for all levels of investment. At any given time, there is an optimal split between how much is invested, and how much is consumed. Just pumping up investment by all manners of artificial means, is just as destructive as pumping up consumption. Investment is not “good” a priori. Just as consumption is not “bad.”
The only thing that can be said for certain, is that that optimal levels of both consumption and investment is only ferreted out by a free market. Not a rigged one, where some are given special privileges to appropriate others’s wealth at will, such as is the case with a central bank backed fractional reserve lending racket.
“Full Reserve Lending is anti-libertarian because it would require to introduce a new regulation that prohibits entities to lend money and borrow it back (through any intermediaries).”
Total bullshit for obvious reasons
(facepalm)
The only thing I sense here is bitterness from an old man who called bubbles, missed out bull market, lost money shorting and now blames the system for his bad decisions.
It is really unclear what solutions you are proposing here. There are really only three possible solutions:
Technically we already have #2 because one of my banks allow to rent a safe box where I can put all my cash. Though, It does not come with check writing features. Would not be surprised that there are banks that would provide such service for fee.
So, if your proposal is #1, then good luck banning Not-a-Bank (a.k.a. entity in shadow banking system who most likely will be a private person that has borrowed and lent out money at the same time) from taking deposits and lending them out. Once enough leverage is reached in FRL shadow banking system the whole economy will still come down just like under over-leveraged FRL. Maybe quicker because no one will have audit “Not-a-bank” books.
To be correct AND complete, 1 needs to read: “Ban banks from accessing deposits at all, for any other reason than under direct order by the checking account holder. Come what may. No matter what judges, lawyers, creditors nor Congress may tell them.” Otherwise, as you hint at, banks will just engage in lending practices that puts them in a position where one of the exceptions to the rule of no access applies.
If we had sound money, we would technically have #2. But because we don’t, there is no opt out. Due to lack of sound money, banks can now access even dollars deposited in vaults, even in Switzerland, or even under your mattress. Simply by having the Fed steal them by way of debasement. Then hand the proceeds of that theft to the bank. So, the “No access” rule above, also means “No access to checking account funds via debasement.” Meaning sound money is a prerequisite. Otherwise, checking account money can always be accessed by the debasement route.
I think the definition to call something “a bank” only after they have registerd with government is kinda dumb.
So In my dictionary anyone who borrows and lends out money at the same time is de-facto a bank. Once you have borrowed and lent money to and from enough people, the clearer it becomes that you are acting like a bank.
Now, if Mish’s main goal is to introduce concept of “cash secured accounts” and let lending to happen as usual through interest bearing accounts, then it really does not solve anything, because banks can still lend money in loop through interest bearing accounts and “leverage up”. Once asset side on any of those banks deteriorate (e.g. if someone misses their mortgage payments) then you have a bank failure that may cascade into multiple bank failutres.
“FRL is okay with interest-bearing accounts because the ‘depositor’ (investor) is risking his money”
Ridiculous – That is like saying it’s OK to steal your neighbor’s cow if another neighbor agrees.
They all agree just by opening the account. (Money isn’t like cows, either).
Actually, though, all lending should be collateralized, with savings accounts backed by shares in the bank’s portfolio or some other arrangement. With full collateralization, nothing gets borrowed that wasn’t first saved (no borrowing from the future).
????
There is no need for barring people from depositing money into accounts which banks CAN lend from.
No-lend, fully reserved, checking accounts will obviously not pay interest. But rather cost a safe keeping fee.
So, if you want interest, you have little choice but to allow the bank you deposited money with, some opportunity to make money, aka take risk, with it. It’s up to you whether you find the interest they offer, is commensurate with the risk.
FRL is okay with interest-bearing accounts because the ‘depositor’ (investor) is risking his money (slightly) for a (minuscule) return. FDIC not warranted for risk-taking, ‘savings’ accounts.
Demand deposit account money should go in the vault and remain until the depositor writes a check against it or otherwise withdraws it. FDIC not needed for such ‘checking’ accounts because there is very little chance of loss and private insurance could easily handle those cases.
Full Reserve Lending is anti-libertarian because it would require to introduce a new regulation that prohibits entities to lend money and borrow it back (through any intermediaries).
If you don’t have that regulation and allow some entities in your system to lend and borrow money (at the same time) you have de-facto Fractional Reserve Lending. You can call those entities “unregulated banks”, if you want.
We have never had Full Reserve Lending in the whole history of humanity. And Full Reserve Lending would never work, because any attempt to introduce it would cause Shadow Banking System to thrive which paradoxically would be de-facto Fractional Reserve Lending.
Fractional Reserve Lending is government’s admittance that they can’t ban entities that are lending and borrowing money at the same time. If you can’t ban something, then just legalize it and introduce requirement that those entities have to maintain reserve ratio between their liabilities and their cash reserves. Call those entities “regulated banks”.
Anyone in Computer Science should understand that Full Reserve Lending has to be acyclical graph, where nodes are entities and edges are money lent between them. Once you have local loop in the graph, you have unregulated Fractional Reserve Lending system.
Having said that, Fractional Reserve Lending system is unavoidable and people should rather embrace it instead of hoping that mythical Full Reserve Lending possibly with Gold Standard will somehow solve all the financial problems. And as long as we have FRL we will also have deposit insurance. We are at mercy of Federal Reserve whether they will bail out FDIC in case FDIC can’t satisfy all the claims in case of systematic banking failures.
In Mish’ proposal, fully reserved only applies to checking/demand accounts. There is no lending of those. Those engaged in that business, are not banks. Just deposit institutions. Charging a fee for keeping your Gold in a vault. That’s what, and all, that they do.
If some bank, even if nominally under same ownership as the deposit institution, is also engaged in the entirely separate business of borrowing and lending, that is entirely orthogonal to deposit taking. Those banks can lend and borrow to their hearts content, and if they fail, money deposited in checking accounts, are not theirs to take, hence are entirely unaffected.
That last part is singularly important, though: Just as checking account money is not available for lending, neither can they they be available for anything else. Not for day to day expenses, not for paying off creditors even in bankruptcy,; not for paying back taxes; not for paying fines for having engaged in terrorism funding; not for preventing every single man, woman and child on earth from immediately, inevitably and as a direct result of lack off access to checking account funds, dying the most gruesome of all possible deaths….. Nothing period. Once there is even the tiniest crack in that wall, every scumbag-on-the-make will pile in through that crack (by way of newspeakian hobgoblin production, language redefinition, votes and courts), and the theft racketeers will be off to the races again.
If this is indeed what Mish proposed then I would still call it Fractional Reserve Lending system, where banks simply have introduced a new type of product called “safe box secured checking account”.
However, under such system, everything else would operate almost exactly like today.
How do we get there from here? Realistically is it even plausible given where things are at?
As long as people grow up, stop believing hobgoblins are somehow not all imaginary, all it takes is for the current “system,” which is built, 100%, simply to facilitate systemic theft, to collapse. But yes, some slave drivers did end up temporarily unemployed after the end of the Civil War. As their system collapsed. The horrors, the horrors!!
#6. End duration mismatch.
It would be nice if I could find a reputable institution which would lend my savings in return for paying me meaningful interest. (Joke!)
It not clear what the implications of 100% reserve requirement would be. Banks still would have the age-old problem of borrowing short to lend long.
Big problems with Deposit Insurance today are (a) that it is “free”, versus being paid explicitly by the depositor, and (b) we all know it is a sham anyway; if there is a real run on a major bank, the FDIC will not have the funds to cover the losses.