Restoring Confidence in an Age of Fractional Reserve Banking

The Fed has admitted that there is a leverage bubble, and this comes with interest rates being too low and from fractional reserve lending in a risky environment. There is risk in the banking sector when collateral is subpar. There is risk when banks are way bigger than the GDP of a nation, as in Cyprus.

But it is tough to maintain confidence when the ECB seeks to tear down confidence by raiding bank accounts. This is unacceptable bank behavior and is purely confiscatory. This could happen elsewhere in the poorer Eurozone countries and makes keeping money in a bank dangerous. Since the ECB has spoken of taking insured deposits as well, no deposits are safe.

It is destroying confidence in the banking system to seek to have government or bank depositors pay for the insolvency of banks. It is high time the bondholders of the banks pay as well. But that never seems to happen.

In a low interest rate environment, capital gets misallocated. Yet we will have low interest rates for a long, long time, as that is how banks are making their money nowadays. This is a dangerous state of affairs for other investors, as they will no doubt seek protection from high inflation that will never come. Add that to this ECB raid on deposits and Will Rogers looks right when he admonished people to never trust bankers.


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