Topic: Fractional Reserve Banking and the creation of the Debtcoin - page 6. (Read 5474 times)

Again, assuming that everyone who uses the notes does so voluntarily, what's the problem?

The idiots I'm talking about is the FR lenders themselves. If a community surrounding them are all using their notes, and the FR bank idiotically creates way too many notes and suffers a run and goes broke, all the note holders get screwed. You aren't "free to not do business with them" because the only way to achieve that is to never do any business with any of them ever, ie never use notes.

Note holders aren't ever "free" from this risk, even when they are perfectly free to choose whose notes they use. I agree that FR bankers will always be "free" to be idiots and go broke with note holders getting shafted.

However what about using cryptography and decentralized networks to somehow make a FR system bailout proof and idiot proof in order protect note users from this risk?

Now, there is a contradiction in terms!!! 

I see what you are saying but I don't see why it matters.  Idiots are perfectly qualified to do business in the idiotic ways they have always done so.  You will be perfectly free to not do business with them.  In a free market, if the currency is Bitcoin, there will be fractional reserve banking.  You of course will be able to keep your Bitcoin in a usb stick under your mattress but the vast majority of people will use banks that pay interest.

Fractional reserve lending means a lot of things. If the reserve type is bailout proof and idiot proof, then it can be a sustainable, useful thing. If the reserve type is something like "monetized government debt", then that's a joke. The system will devour itself like it is now. Gold obviously wasn't bailout proof. We fell off the gold standard by bailing out banks. I'm not sure crypto can be bailout proof, but maybe it can be by way of it's cryptographic nature.

Even if it is bailout proof, it probably can never be idiot proof. If you don't bail out an entity that is suffering a run on reserves due to stupidity or irresponsibility or whatever, they go broke, but yet it is still the note holders who suffer the most.

The links in my earlier post were calling for ideas on how to implement a decentralized note issuing mechanism, maybe with FRB if it can be bailout proof and idiot proof, but i can't see that's possible, but maybe it is, with the decentralized use of math to enforce various ratios.

With fractional reserve banking, the 21 million Bitcoin in existence would equate to 200 million or so Bitcoin certificates in circulation.  All banking is based on the assumption that if all depositors try to reclaim their deposits on the same day, the system collapses.  Bitcoin banking will be no different.

Got to disagree there.

Interest is the key driver or mechanism which gets money from the hands of savers who have spare money into the hands of producers who need it for expansion or more efficient production. Producers benefit society and living standards. This is the essence of capitalism.

Today the whole system has gone horribly wrong because borrowed money is being used for consumption (cars, holidays, houses), and reckless lenders (banks) are constantly bailed out by central banks. It is bankruptcy which is the cleansing process in capitalism releasing money from the banks back into society. Interest can work in an economy with an inflexible monetary base (Bitcoin).  In the example of a bank with 20 mil BTC offering 6%, it would soon go bankrupt, releasing BTC to the system and restoring normal conditions.

Central banks create moral hazard by manipulating interest rates, encouraging reckless lending (for consumption), excessive credit money, enabling excessive government funded by excessive debt, diverting funds from producers, stealth taxing savers, and thereby creating a system where eternal inflation is an essential feature.

Imagine, 20 million BTC are held in a bank offering 1% interest. They stay sitting for 6 years with compound interest, see the issue?

The reason interest had to exist in the first place, was to incentivize actually putting money into the banks, now the only reason to do it would be security. Additionally, if inflation didn't exist, I think people could learn to be happy with a 0% ROI in banks. With Bitcoin, it may even be reasonable for banks to charge anti-interest to accommodate the deflation that will arise. So long as the interest matches inflation, the system is fair, and you never lose purchasing power parity from your savings.

Fractional reserve banking means that you get more interest on your savings.  Its a good thing - not sure why you would want to go back to the Medieval period when it wasn't available.

This issue has been brought up before, nobody seems to understand or care very much for some reason. It's a hard problem maybe is why.
https://bitcointalksearch.org/topic/yet-another-vector-for-power-elite-takeover-193837
https://bitcointalksearch.org/topic/tech-details-needed-to-give-cryptocoins-the-benefits-mandatory-for-true-adoption-200175

In the years to come, if banks jump on the Bitcoin bandwagon and start offering Bitcoin deposit accounts, Bitcoin will become affected by Fractional Reserve Banking.

While I'm not entirely against FRB I am worried that, as a community and a society, we repeat the sames mistakes from ages past. In this case, believing that the coins deposited in our accounts are actually Bitcoins.

Both cash and gold require the existence of Banks in order to be transferred from one place of the world to another. This is the reason why, until now, almost everybody has and uses a bank account. With Bitcoin, though, being able to completely avoid this problem I don't need a bank account in order to receive money from China and I might not want to accept a Bank's debt.

It is important that the common man, or at least Bitcoin users, be aware that the dollars, euros or bitcoins they have in a bank account are not real dollars, euros or bitcoins, but just a promise of your bank to pay you back that amount when you need it. (While it uses the real currency for something else).

Why is this important?
Let's say the bank owes you $100 (ie. you have $100 in your account) and transfer that money to your friend's Bank account. You're not really transferring money but your debt. Instead of owing you one hundred dollars, the bank now owes your friend that amount.

As you might know, this increases the money supply allowing banks to create money out of thin air. This is only possible because virtually everybody accepts this debt thinking of it as actual dollars (or euros or bitcoins). In reality, as you can see, we are dealing with two completely different currencies: Actual bitcoins (M0) and a promise (M1).

With Bitcoin though, it is completely unnecessary that I accept such a promise in order to receive money from china. It is completely unnecesary that I even own a bank account. I can, at my own discretion, refuse to accept these promises and ask only for real Bitcoins. Even if I accepted this type of money with Bitcoin it would be feasible that I inmediately withdraw all my funds to a cold storage wallet leaving my account empty at almost all times.

For this reason, since we can easily avoid bitcoins created by fractional reserve banking, it might be necessary to call them something different. Call them Bank-bonds, Debtcoin or whatever but now we have the chance, as a community, to make a distiction between the two and start using different terms which, in the end, will increase public awareness.