Not necessarily. You could introduce some other mechanism than reserve deposits to limit leverage, I'm just unsure what that might be, and Bernanke's failure to explain that is evidence of a colossal tin ear.
Mind you, people who argue for abolishing the fed never seem to have an answer for this either, other than asserting that gold has mystical properties which can ward off fiscal Armageddon.
My rather unpopular proposal is not necessarily to return to a gold standard, although a fractional gold standard would certainly not hurt.
Rather it is this:
First, to eliminate fractional lending entirely. If money is to be loaned, then only that money may be loaned that has been deposited for the express purpose of loaning it out. In other words - think CD's as the standard mechanism for the funding of loans. Essentially, this would mean that banks have no more lending ability than any private citizen or institution. Currently, only a bank is allowed to lend money that does not exist. When an individual does this, it is a crime.
Second: To allow congress to create a fixed percentage of fiat currency in any given year. This would remove from the banks the ability to expand the money supply, and leave it in the hands of congress, and congress alone. They would accomplish such expansion, essentially, by printing money and spending it.
I appreciate your non-snarky reply to my snarky comment.
Isn't this a solution just as bad as the problem, though? It would destroy liquidity, and do little to alleviate risk, since bankers would not be assured of making sufficient income to offset the cost of bad debt. Furthermore, profits from banking would be so low as to fall below the level of transfer earnings, that is to say banks and bankers might well be able to make more money doing something else and would have no incentive to operate, and the economy would go the way of North Korea (unless this system were implemented and enforced globally).
Since people always want money to do stuff, the demand for credit would likely be filled by illegal lenders charging usurious rates (although there's a reason I cut up all my credit cards...), and profiteering would ensue. Such illegal lenders would probably not bank their gains starving the system further of liquidity - a case of bad credit driving out good, so to speak. I imagine the likely result would be that the government would become the biggest guarantor of loans and cronyism and other kinds of corruption would become endemic. Doubtless you don't intend for this outcome, but I can't help feeling your proposal would rapidly result in a soviet-style economy, which I can attest from first-hand experience does not work very well.
Incidentally, not only is it illegal for an individual to lend money that does not exist, it is illegal for them to lend more than a certain sum of their own money at interest, I believe under the same laws that require investor accreditation.
Mind you, people who argue for abolishing the fed never seem to have an answer for this either, other than asserting that gold has mystical properties which can ward off fiscal Armageddon.