
Do We Need Central Banks? (2017) - mendelsd
https://professorwerner.org/shifting-from-central-planning-to-a-decentralised-economy-do-we-need-central-banks/
======
sjehay
I zoned out at Section II ("The Central Banking Narrative Has Collapsed")
because every single paper he cites is written by him (and in fact so are 18
of the 20 publications he cites in the entire article)

~~~
notahacker
Weirdly, some of the organizations and theories he's attacking are also his
own (he was the lead author on the [weak] Positive Money paper which proposed
making the Bank of England directly control the money supply he's now
insinuating is some central banker astroturfing campaign, and the
unconventional recommendation central banks broaden their remit to tackle
Japanese economic stagnation by taking on some of the asset purchase and
lending roles of the commercial banking sector which he now appears to
consider to be a road to "Orwellian totalitarianism" is _literally how he made
his name_ )

~~~
emodendroket
Hey, if it were actually an astroturf campaign, who would be in a better
position to know than one of the principals?

~~~
notahacker
Extraordinary claims require slightly better evidence than someone darkly
hinting that one of the organizations whose policy objectives he helped shape
"appears well funded in the country of its founding (the UK), and it seems
suggestive that its members have appeared at national and international events
and conferences together – and apparently singing from the same hymn sheet –
with the Bank of England and the George Soros (Gyorgy Schwartz)-funded INET
(‘Institute for New Economic Thinking’)" whilst failing to acknowledge he was
its most reputable contributor and disavowing the policies he's advocated in
various capacities for quarter of a century before that only implicitly
(whilst continuing to cite other parts of the papers anyway).

Feels like the whole argument is going on inside his own head, and whilst I've
heard economists conclude policies they used to advocate wouldn't work before,
I've never seen them handwave their earlier beliefs away as "totalitarian"
without even acknowledging they actually used to hold them.

~~~
emodendroket
I intended the comment as tongue-in-cheek.

------
erikb
I'm surprised that the obvious isn't mentioned even by the "opponents" of the
current banking system. What increases the risk is that banks create
investments without safety backups and what destroys economic growth is the
huge bonuses they take out of these investments.

Maybe it's because I played poker in the past that I can intuitively see it?
In poker usually players play against each other in a zero sum game. The best
takes the biggest piece of the cake. But when you play in a Casino it will
take a "rake", meaning a tax from big payouts. Usually on higher stake games
that doesn't matter much, but on lower level stakes the average percentage of
rakes is so high, that even the best players can't make a profit. Everybody
will lose, no matter his skill.

And since the banking system got more and more deregulated they paid
themselves higher and higher bonuses. That means even if you are the best
investor today, as long as you pay banking fees it's likely you are paying all
your profit plus some more, considering a normal 5-digit yearly income.

Sometimes I wonder if in fact in this system the best approach is to borrow a
lot of money that you know you can't pay back and hope that for some lucky
coincidence you are not put into private bankruptcy, maybe keeping yourself
afloat by borrowing more money to pay off fees/interest on old debt.

~~~
a008t
That last paragraph sounds suspiciously close to what most governments with a
sovereign currency are doing.

~~~
osrec
Yes, the last paragraph is pretty much the system every country uses. Look at
the UK, for example, where the national debt continues to rise - there is no
real plan to pay it off - the system is designed in such a way that overall
debt issuance must rise in order to service older debt. It's a horribly
unstable system, but unfortunately we seem to have embraced it across the
world.

~~~
EGreg
Suppose all the sovereign debt defaults and is restructured to be 5% of the
original. Who loses?

Mostly the holders of treasuries. Holders of other assets would seem to be
fine!

So it seems to me to be like any other default, except on a larger scale.
Price the sovereign debt risk into the calculation and diversify into real
assets.

~~~
throwawayjava
_> Who loses? Mostly the holders of treasuries._

In the United States, defaulting on Sovereign Debt would basically guarantee
the death of social security. If you're in the USA, by far the best way you
can insulate yourself against sovereign debt is by:

1) organizing your life's expenses so that you can retire (or at least
continue to live) with $0.00 from social security.

2) Ensuring that you don't rely on any federal pension (including military
retirement).

Of course, that isn't possible for most people. So in the USA, the answer to
"who loses?" is "old people".

3) Ensuring you will have be able to afford healthcare in old age without
medicare.

~~~
EGreg
Why can’t these funds including the social security funds diversify into real
assets ahead of a default?

~~~
JackFr
So lets the the economy has $X trillion (nominal) of real assets. You
privatize social securities $Y trillion assets with the stroke of a pen. You
now have $(X+Y) trillion chasing _the same_ real assets.

The rate of return on those assets will decline in proportion to the new money
chasing them. On the margin, (and more so over time) new productive
opportunities will occur as the cost of capital to business declines, but in
the short run all you are doing is inflating a bubble.

------
TekMol
It's interesting to think about how the role of central banks might change in
the age of crypto currencies.

Governments can print Euros and Dollars. But not Bitcoin and Ethereum. Popular
theory is that governments have a good grip on currency usage because they can
decide which currencies they accept for tax payments. And because they can
force merchants to accept certain currencies. It will be interesting to see if
this grip holds up.

~~~
dogma1138
Since there is no fractional reserve and the blockchain ensures that you have
the equivalent of fully correspondent banking with each node in the network
there is no need for a central bank on the other hand the blockchain itself
can be viewed as is the central bank with the large mining pools acting as its
board of directors.

That said since no blockchain currently offers a credit system it’s not really
possible to test this out fully since there is no true equivalency.

A better question would be not if we need central banks but rather should the
economic system be based on credit and interest or not.

~~~
pjc50
Bitcoin exchanges certainly can "print more bitcoin" in the same sense as
fractional reserve banking - the exchange doesn't have to have a stash of
coins that exactly corresponds to the sum of bitcoin-denominated customer
accounts. Mtgox blew up by being a fractional reserve "bank" destroyed by a
"bank run".

Heck, bitcoin exchanges can even print ""dollars"" in the form of USDT.

> should the economic system be based on credit and interest or not

This is almost unavoidable - remember that every not yet paid invoice is a
form of credit.

~~~
dogma1138
Ofc they can’t which is why I said that the crypto needs to support it for it
to work properly otherwise the only thing you are left with is some odd
options based scheme or a MtGox type ponzy racket.

------
nameless912
Ugh. Yes, we need central banks, if for no other reason than that distributed
systems are hard. Central banking helps prevent things like double-spends and
creating currency out of thin air. Yes, technically cryptocurrencies "solve"
the same problem, but at 1000x the energy expenditure and with no guarantee of
avoiding a 51% attack by a coordinated network of rogue actors.

It's almost like cryptocurrency zealots don't know shit about system design or
something.

~~~
Toine
Most "cryptocurrency zealots" don't know shit about crypto or currencies.

~~~
spookthesunset
Or math, computer science, finance, politics, government, sociology, scaling,
economics or seemingly. Crypto zealots have truly drunk the kool aid and have
shut off their critical thinking.

~~~
DickingAround
Let's try not to over-generalize a group of people. Crypto might be a fad, but
that doesn't mean there are no intelligent, knowledgeable people in it.

------
aaavl2821
Historically a big purpose of central banks or at least a rich institution was
to be a buyer of last resort and prop up the economy in times of panic.
Doesn't always have to be a central bank, but needs to be an institution big
enough and independent enough to save markets. A decentralized system would
almost by definition not have this, and probably result in disaster if there
was a panic.

Don't have an exhaustive list of financial panics offhand, but for ex:

Panic of 1837 was thought to be as bad as it was in part bc central banks
weren't strong enough to step in

American economy recovered from Great Depression in part due to increased govt
spending in ww2

Panic of 1907: Rockefeller and J.P. Morgan acted as financial backstop

2008 financial crisis response led largely by central banks

China's stock market is managed very tightly by central bank

------
sonnyblarney
This is a highly problematic article because the basis of his claims revolve
around two iffy concepts:

1) That interest rate movements follow the economy, not the other way around.
This is false if you simply consider a different time frame for action. If you
look at the graphs next to one another it may _appear_ that his theory is
correct, but if you consider a longer term causality ... then he's wrong and
the bankers are right.

2) More disturbingly - he basically looks at post-war China, German, Japan and
Korea as examples of where you can achieve 'high growth' without the
neoclassical market liberalism type approach.

This is ridiculous. It's very difficult to find value creating projects in
mature economies. When your country is flat on it's back after a war - it's
dam easy - especially if that country needs to 'rebuild what was already
there' after a war (i.e. social/governmental institutions intact) - as opposed
to 'building what was never there on the back of nothing' i.e. African
countries.

Heyzeus everyone knows this. Germany had no factories for gosh sakes. Maybe
build some factories? Some roads? Power stations? etc. etc..

Most civilized nations rebounds sharply after disaster and it can be done with
'government intervention' because the investments needed are generally fairly
obvious and lend to that governmental kind of stuff anyhow, i.e.
infrastructure.

So basically, his primary claims are false, the second one, surely so.

Surely there are other options than having Central Banks - and they could
feasibly operate more mechanically etc. - and surely we could just have
stricter rules about money ... but if we want monetary policy of some kind,
well then there's going to be a 'Central Bank' however you want to call it,
'committee' or whatever. Even if we go crypto, if there is flex in that
crypto, then someone will have to decide how that algorithm works and evolves,
and that team will effectively be 'the central bank'.

------
aaronhoffman
What free banking might look like [http://www.learnliberty.org/videos/what-
free-banking-and-why...](http://www.learnliberty.org/videos/what-free-banking-
and-why-should-i-care/)

~~~
notahacker
What free banking actually looked like:
[https://www.frbatlanta.org/-/media/documents/filelegacydocs/...](https://www.frbatlanta.org/-/media/documents/filelegacydocs/ACFCE.pdf)

TLDR: Banks regularly collapsed and not just because of fraud, but started to
collapse less as they got regulated more. The system functioned (for certain
values of "functioned"), but shockingly enough the man on the street did _not_
turn out to be better at evaluating a bank's solvency than central banks. They
were of course also less able to bail themselves out if they misjudged a
bank's solvency.

~~~
a008t
If you consider fractional reserve banking as fraud (banks should only be
allowed to lend out funds that you have lent to the bank for a period of time,
not funds that you are merely storing in your checking account; a bank run in
this context is when account holders want to withdraw their money and it is
not there), the system should be fairly stable without a "lender of last
resort".

I don't really see why fractional reserve banking is necessary.

~~~
Nasrudith
It is if you want passive interest rates above negative. Storing money without
touching it at all costs money. Worst of all to society the value is nill or
negative compared to investing it in something and collecting dividends. There
was even an ancient parable about that involving a lord giving money to
peasants for safekeeping for a few years. He scolded the one who buried it and
praised the one who used it for investments and started collecting the
profits.

Theoretically if it is that much of an anathema one could have a 1:1 reserve
and explicit money market style transactions for everything but the question
is what would be gained? The liquid cash would be "safe" from bank runs at the
cost of guaranteed losses to depreciation and storage fees. Keeping it insured
and interest generating is a winner as an option.

~~~
a008t
You are right - this will be a strong incentive to keep as little as possible
in a checking account, and either lend or invest the rest. There are two main
differences from the current system:

1\. Depositors will have to explicitly give up/lock their funds for a set
period of time if the funds are to be lent out and they are to earn interest.
Early withdrawals come with a significant fee. This makes bank runs very
unlikely, eliminating the need for a central bank. The longer you want to lend
the money for, the higher the interest. But you can also lend money overnight.

2\. No money creation, leading to proper alignment of time preferences of
investors/consumers and businesses. Interest rates correctly reflect this time
preference. If money represents a claim on real resources, then a business can
only use as many of these resources for investment as consumers are willing to
forego consuming. Interest rates reflect the actual supply and demand of
resources/consumption at different time horizons and do not get artificially
"set" or otherwise manipulated.

Because of these two properties, the boom-bust leverage cycle is greatly
dampened, if not completely eliminated.

~~~
notahacker
An alternative way of putting it is that

(1) Because maturity transformation is no longer permitted, every time
somebody wishes to take out, say, a mortgage, the bank has to find somebody
who has >$200k they're not even going to consider spending for quarter of a
century. As a result, costs of borrowing go massively up, which is bad for
everybody except for a small proportion of rentiers sufficiently wealthy to be
entirely unworried by liquidity. Joe Sixpack proves to be even less adept at
managing an overnight lending portfolio than full time professional bankers,
and loses money as a result.

(2) The money supply is artificially "set" at a particular level on the basis
of the unambiguously false assumption that real resources do not change over
time rather than being allowed to fluctuate and grow to properly align itself
with creditworthy borrowers' growth projections in a way commensurate with
price stability. The boom bust cycle is replaced by permanent bust.

~~~
a008t
1\. Could maturity transformation not be done by the markets? E.g. if you want
a mortgage, you essentially issue a bond; lenders may then decide to hold the
bond for a short period of time and then sell it on the secondary market. With
regards to consumer products, I am sure the market would come up with
something user-friendly. But I see your point.

2\. The money supply could grow predictably, e.g. like Friedman's proposal of
replacing the Fed with a computer that expands the money supply in a
predictable manner.

~~~
notahacker
1\. Banks _are_ a market solution to maturity transformation (it's just that
doing maturity transformation without frequent liquidity crises needs access
to more short term borrowing facilities than private capital markets can
offer). Treating mortgages as tradable financial products instead of
obligations the issuer should be happy to keep on their balance sheet was the
cause of the bad underwriting that led to the financial crisis, not the
solution to it.

2\. Friedman's k% rule is better than a fixed money supply, but it's still
every bit as arbitrary and further removed from the relevant market indicators
of resource constraints (creditworthy borrower demand and price inflation)
than the current system.

------
alexhutton
The purpose of central banking is to protect private banks from bank runs.
Free banking operated prior to the introduction of central banking and it was
less stable. In free banking a bank either had the capital to pay its
depositors or it didn't, and if it didn't it failed. Although this was a less
stable situation it meant that credit couldn't expand indefinitely because
each time one of the periodic bank failures occurred it would would reduce the
money supply.

Another way to prevent credit expanding indefinitely would be to eliminate
fractional reserve lending. But that wouldn't work out well for governments
who often borrowed from banks to finance wars and other actions that were not
supported by their citizens.

~~~
beefield
It is difficult for me to see how fractional reserve lending could be
eliminated given the current level of technology and economical incentives
there are for fractional reserve lending. I mean, of course, you _could_ say
that regulated financial institutions are not allowed to do fractional reserve
banking, but _only_ result of that would be _unregulated_ shadow banking
institutions doing the same.

(Which, as a side note, is something I would be more than curious to know from
cryptocoiners, how they are going to stop fractional reserve banking to flood
crypto currency supply, as for sure there is no regulator that is going to
stop that.)

~~~
soVeryTired
Fractional reserve banking doesn't exist anymore. Banks lend against their
loss-absorbing capital, not their reserves. Reserves are just used for inter-
bank settlement.

Frances Coppola [0] has written fairly extensively on this topic, as has the
Bank of England [1]

[0] [http://www.coppolacomment.com/2017/10/money-creation-in-
post...](http://www.coppolacomment.com/2017/10/money-creation-in-post-crisis-
world.html) [1] [https://www.bankofengland.co.uk/quarterly-
bulletin/2014/q1/m...](https://www.bankofengland.co.uk/quarterly-
bulletin/2014/q1/money-creation-in-the-modern-economy)

~~~
beefield
Coppola (and most other people claiming to "reveal" something profound of
financial system when they tell that banks do technically not lend deposits
forward) is confused in my humble opinion.

There is no need for double entry accounting trickery nor loans to create
money. All bank needs to do is to say that they owe me money and they have
created money at that very moment.[1] Simple as that. And they _do_ create
money without lending all the time! It is nothing special. When a bank "pays
interest" to your account, do you think there exist some new loan that is
needed for that money to exist? Nope. Bank just decides that now it is time to
add some more money to your account. That's it. Or when bank pays salaries to
the personnel or dividends to the shareholders? Nope. No lending associated
whatsoever. Just money added to their bank accounts. (for simplicity's sake, I
assume that the stakeholders have their bank accounts in the same bank)

[1] Which to me implies that there is not that much interesting happening at
that point. I mean, a bank could enter a few centillion dollars to my account,
and _technically_ the money would be created. But in practice that is
laughable. Nobody in their right mind would imagine a second that the bank
would be solvent and actually be able to pay me the money, so _in reality_
that money does not exists (no credit...). So even if the traditional model of
banks lending deposits forward is technically even more wrong than the banks
create money from double entry accounting trickery, in reality that describes
much better what actually economically is happening in the financial industry.
But that is just my opinion...

~~~
soVeryTired
Where are you getting this information from? Surely interest on deposits is
accounted for as a funding cost and is paid out of the bank's revenues (same
for staff costs).

I don't know why you're calling double accounting "trickery". It's literally
the way a bank operates. I mean, it's enshrined in law for god's sake. A
public company has to publish accounts every year, and the double-entry
analysis you see in most discussions of money creation shows where assets are
entered on the balance sheet.

~~~
beefield
> Where are you getting this information from?

Mainly my own personal thinking. No other sources.

> Surely interest on deposits is accounted for as a funding cost and is paid
> out of the bank's revenues (same for staff costs).

Of course. But before those are paid, they do not (need to) exist anywhere
(but in the profit account if you want to take an accounting view)

> I don't know why you're calling double accounting "trickery".

Because that's what these people claim that double entry accounting is some
magic wand that is needed to create money. You _could_ operate a bank without
double entry accounting that would not change the economics of the bank
operations anyhow. You do not need to have double entry accounting to make a
loan nor write an IOU. _I_ Can write you an IOU that says that beefield will
pay 10 bucks to the holder of this paper and you could use that as a money to
buy stuff at least from me and my mom. Not sure if anyone else would trust
that... No lending, no double entry accounting needed.

~~~
soVeryTired
> Mainly my own personal thinking. No other sources.

I'd suggest reading a summary of the Basel rules before contributing to a
discussion on money creation and banking. Wikipedia has a halfway decent one.

------
krmmalik
This is a good paper and presents some really good arguments. For those that
want an easier summary of the situation, i interviewed an expert on banking
and economics in the middle of last year where he explained how inflation was
a tax on the people and a real crime and that it was created by the banks.

You can see the full interview here:
[https://www.youtube.com/watch?v=NfNgntAQ6EM&t=35s](https://www.youtube.com/watch?v=NfNgntAQ6EM&t=35s)

------
ckastner
It's a long article and I admit to not heaving read it in its entirety, but...

> There are overcapacities in the banking sector of some countries” in the
> Eurozone. Which country could he have been talking about? Germany boasts by
> far the largest number of banks – about ten times as many as the global
> centre of international finance, the UK.

Same here in Austria. Per capita, the people employed in the banking sector is
significantly higher than in other countries.

I work in this sector, and the overcapacity is notable. To question this is
basically a statement of ignorance.

> 80% of these banks in Germany are local, not-for-profit community banks,
> which do not pay bankers’ bonuses, and which serve ordinary people and small
> firms, creating a strong SME sector (the main employer in most countries).

Without knowing the German banking sector that well, this is almost certainly
hyperbole.

I believe he is talking about Genossenschaftsbanken, Raiffeisen et al. There's
a historical reason why these banks have most of the banking licenses issued
(the 80% he alludes to), but that reason is no longer relevant. It's also
misleading, since most of these banks are tiny, basically your typical savings
& loan.

> Why is the ECB taking policies that are killing the majority of banks in the
> Eurozone – the beneficial not-for-profit community banks – while helping big
> banks with its asset purchases?

Because it's an anachronism. There was a time in Austria when we had the
saying "A Raika (Raiffeisen Bank) and Post in every village", _regardless of
the village size_. This is where the insane 80%-number comes from!

This is _horribly_ inefficient. It might have been a valid approach at a time
when everything was rural and a village was effectively a microcosm, but in
today's world with online banking and such, it's horribly outdated.

Operating these banks costs _money_. These costs are passed on _to the
customers_. Reducing the banking sector size is therefore _in the interest of
the customers_.

> Central banks have proposed the abolition of cash

No, they haven't. Some guys employed there might have toyed with the idea as a
thought experiment, but _nobody_ even close to policy-making has proposed such
nonsense, not that it would work anyway.

> Central banks have proposed the introduction of central bank cybercurrency

I'd trust a central bank far more than Coinbase or any other of the
centralized controllers of currently-so-popular cybercurrencies.

I've spotted numerous other smells in the article, but the above were the
easiest to point out.

~~~
tehabe
Many co-op banks are merging into bigger ones these days, they are still local
banks which are owned by members of the co-op which are usually people from
the region. There are also several bigger co-op banks or rather supra-regional
banks. But even small and medium sized banks need regulations and that is what
the central bank can really do.

------
partycoder
It has been only 200 years since the industrial revolution and we have managed
to completely _waste_ the planet.

[https://en.wikipedia.org/wiki/Anthropocene_extinction](https://en.wikipedia.org/wiki/Anthropocene_extinction)

We are running out of topsoil, fresh water, fish, pollinators, oil... the
oceans are becoming an acid mess full of plastic, species are going extinct,
forests and the ecosystems they contain are disappearing.

And all of this has been done in the name of a dumb belief system we call
modern economics. A better name for it is collective suicide, because that's
what it is in the long term.

The idea that you can have a bunch of banks making infinite money to fund an
endless amount of economic activities for infinite people has nothing to do
with reality: a finite planet with finite resources with finite species that
can only go extinct once, and a fragile ecosystem that needs to be taken care
of and is beyond our means to repair.

Maybe we don't need central banks, but we need fucking reason governing our
economy, not the greed of a few shortsighted apes.

~~~
a008t
I think the question of what is the optimum human population of a country,
continent, planet that maximizes prosperity and welfare is an interesting one.

Yet, apart from the problem of humans still having to be in actual close
physical proximity to each other for economic activity, which results in
housing problems in major cities, I do not see the signs of overpopulation or
too much economic activity in Western countries. If anything, the situation in
terms of the ecology seems to be getting better, not worse.

~~~
emodendroket
In what way is ecology getting better, rather than rapidly worse?

~~~
a008t
Car emissions are getting cleaner, leading to cleaner air. That would be one
example.

Deindustrialization of the West led to improvements in ecology as well, I
imagine.

~~~
emodendroket
> Car emissions are getting cleaner, leading to cleaner air. That would be one
> example.

Is it enough? Aren't these changes being more than offset by increased
emissions elsewhere?

> Deindustrialization of the West led to improvements in ecology as well, I
> imagine.

It seems doubtful, since production didn't stop but simply moved to other
places, often with much looser regulatory regimes.

------
known
We Central Banks to offset/dilute
[https://en.wikipedia.org/wiki/Information_asymmetry](https://en.wikipedia.org/wiki/Information_asymmetry)

------
nealdt
I would recommend the 'Princes of the Yen' as an incredibly insightful
documentary based on Werner's analysis of the Japanese economy.

------
devnull791101
there are good arguments against central banks (optimum currency areas,
central planning limitations etc) but this is not one of them

------
yasp
Probably not. I suspect the Austrian school of economics will be proven right
about money and credit eventually.

~~~
dogma1138
That’s the gist of it the blockchain offers most of the “services” provided by
the central banking primarily correspondent banking (well sort off since you
don’t have to manage correspondent accounts as you have a single ledger) and
it also offers a consensus forum (most of them do at least) which acts as the
board of directors of a central bank. The big difference is that unlikely most
fiat currencies there is no credit and interest system built into any
(mainstream) crypto currency that I am aware off, hence there is also no
fractional reserve (outside of what shady exchanges may or may not do).

~~~
brian_cloutier
As I pointed out in another comment in this thread, fractional reserve is just
as possible with Bitcoin as it is with cash, it's not like banks increase the
money supply by printing cash.

If you give your money to a bank it won't be sitting in an account you have
the key to, it'll be the bank's to control and they'll be free to lend it to
other people.

This might even be a desirable state of affairs: money which you don't give to
a bank collects 0% interest.

~~~
QML
Talks about a credit system built upon a blockchain naturally transition to
talks about an identity system; otherwise, how would you prevent Sybil attacks
[1]?

However, I am unsure to how the latter will be solved without a central,
trusted party. What is the digital analogue of a passport or driver's license,
a piece of identification that is hard to forge?

To add on to why fractional reserve will be hard to implement with
cryptocurrencies, another unexplained problem is the issue of collateral
backed by a volatile asset.

If that underlying asset rises in value, then the effective interest rate
would be equal to the original interest rate + % increase in value; if the
opposite occurs, a decrease in value, the 'bank' in this scenario might lose
money on that lend.

You might argue that a digital stable-coin is a possible solution. But a
digital asset backed by a physical object is probably bound to encounter
regulations; and the performance of a stable-coin backed by algorithms is
currently unknown to work.

These are two hard problems that have to be solve before fractional reserve is
viable on a blockchain.

[1]
[https://en.wikipedia.org/wiki/Sybil_attack](https://en.wikipedia.org/wiki/Sybil_attack)

~~~
brian_cloutier
Okay, I think I see where the misunderstanding is. I'm not imagining an on-
chain and fully decentralized solution. You're right that that sounds
difficult.

I'm imagining a contract with a bank. As in, you literally go and talk to
Chase bank and draw up a contract and give them Bitcoin and they promise to
give it back to you later plus interest.

Such a system is very possible today, and in that sense Bitcoin _does_ support
fractional reserve. Fractional reserve is not a feature you explicitly add,
it's an emergent property of a banking system, you really don't need to do
very much to "support" it.

~~~
mseebach
I'm with you so far, but the bit I don't understand is that for bitcoin to be
said to support fractional reserve, don't you need to have the balance of your
loan issued in bitcoin as well, so that you can pay other people for services
in bitcoin, and they can use that to get a new loan etc? It doesn't seem fair
to say that bitcoin works for a given purpose, if "working" presumes the
presence of a trusted fiat money system?

~~~
brian_cloutier
Sorry, I don't quite understand your objection.

It's true that today you would probably find it difficult to find someone who
will take your Bitcoin and pay you Bitcoin-denominated interest with it.
However, there's no fundamental reason why it couldn't happen.

The process is: You give your Bitcoin to a bank. It is put into a UTXO which
they control, and you don't control. In exchange, you have a balance in the
bank which you can withdraw when you choose. Your balance is "virtual
bitcoin", but is still real money, because it represents your ability to ask
the bank to pay people for things. (By swiping your debit card)

At the same time, the bank has the original on-chain Bitcoin, and is free to
use it however it wants, probably by lending it out to somebody else.

In this way, there is now more Bitcoin than there were previously. Fiat
currency is not involved in any way. I'm not an economist, but I'm pretty sure
it's exactly the same as the difference between M0 and M1.

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tehabe
The short answer is: Yes. The long answer is, that central banks are in my
opinion a way to regulate banking and money supply so that it is useful for
the economy and the people. His point that deregulation, liberalisation, and
privatisation are bad ideas which are likely to fail is something I can agree
on. Also his point that central banks are usually not really accountable for
they do and that banking consolidation wasn't a good idea to begin with. I'm
still glad to live in a country where they are a lot of local banks, which can
help SME much better than big banks, which have only a little branch in town.
It matters where decisions are made.

The central bank's job is still important, it is lender of last resort and it
is an important regulatory body for the banking and financial sector. It is
something we need if we want to prevent those financial crisis like in 2008.

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rado
"They" do.

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narven
No

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chvid
Long winded political statement by some economics professor. Why is this
interesting?

~~~
swebs
Who would you rather give an opinion on this topic if not an economics
professor?

