The fractional reserve banking operating model is the ‘Landline phone’ of this day and age. Both concepts were once essential to how we lived and operated but have become outdated with the introduction of modern technology and changing societal needs.
The fractional reserve banking model was developed when it was well-suited to the economy and financial system of the time. However, as technology and the economy have evolved, this model has become less effective in meeting the changing needs of our society. With the emergence of new financial technologies and alternative financing methods ( yes, I’m banging on about Bitcoin again ), such as crowdfunding and peer-to-peer lending, the traditional fractional reserve banking model may no longer be the best fit for our modern economy.
Similarly, landline phones were once a primary means of communication in households and businesses, but with the rise of cell phones and other mobile technologies, they have become less relevant and may no longer be necessary for many people unless you are ‘Commissioner Gordan ‘needing to call Batman.
As our society and technology evolve, old models and concepts may need to be updated and more effective. It is essential to continuously evaluate and adapt to these changes to ensure that our systems and practices meet our modern world’s needs. This can be challenging, but it is essential to staying relevant and effective in a rapidly changing world. Just ask the US Central Bankers …
A bank without funds is like a hotel with no rooms – both are mere buildings without their essential functions. While this fact is widely recognized, the US economy is heading toward a precarious situation. The concept of ‘unrealized losses’ is a convenient loophole that has raised alarm bells, which is particularly concerning since it is not well-publicized and may be contributing to the looming crisis. It is crucial to address this issue and implement measures to safeguard the financial stability of our economy. Maybe we Credit Check the Banks before deposits are made?
The financial system’s current state leaves much to be desired, with central bankers, banks, and regulators failing to provide adequate guidance and stability for dollar holders and depositors. This has led to uncertainty and a lack of confidence in the financial system, as individuals are left without a clear path forward.
Promoting transparency in the financial system is essential to address this issue.
Depositors should have access to information on the state of their bank, including any unrealized losses, to help them make informed decisions about where to put their money.
It is like how a hotel’s reviews and ratings are publicly available, allowing potential guests to decide where to stay. By providing this information, banks can help to restore confidence in the financial system and ensure its long-term sustainability.
In hindsight, we, as depositors, should have paid more attention to the signs that the financial system was approaching a crisis. However, the reality is that the system is complex, and information about the state of banks is only sometimes readily available.
For example, in August 2021, banks faced a situation where they had an abundance of deposits, but their customers needed to take out more loans. This led banks to buy up government debt, even though it was not a lucrative investment. The low rates on Treasury bonds meant that buying them was almost guaranteed to result in skimpy profits, which banks were not thrilled about. However, they felt they needed more choice but to take this action.
Again, I echo that this situation highlights the need for increased transparency in the financial system. By promoting transparency and providing information on the financial health of banks, we can help ensure the financial system’s long-term stability and sustainability.
The lackluster demand for loans during the pandemic reflected the success of government efforts in protecting companies and households from financial ruin. Congress appropriated about $4.7 trillion for Covid-19 relief programs, much of which poured into the bank accounts of American homes and businesses. By May 2021, stimulus checks totaling nearly $830 billion had been sent to individuals, and companies received around $800 billion in programs such as the Paycheck Protection Program.
However, the rapid increase in interest rates by the Federal Reserve caused significant unrealized losses in U.S. banks’ bond portfolios. The value of many bonds owned by banks dropped, resulting in total losses of $423.58 billion in the first six months of 2022. The Federal Deposit Insurance Corp. expressed concern about the increase in unrealized losses, warning that it could become problematic for banks in 2023, even though they had strong liquidity at the time.
But look at us now, Banks are disappearing like Keyser Soze , as the financial system continues to face challenges. However, in this movie, all the suspects played their part in the upcoming ending, resulting in a crash. In society, it is natural to search for the cause of such crashes to prevent them from happening again. Yet, history has shown that we often fail to learn from our mistakes.
The Covid pandemic, generous stimulus checks, poor risk management, and insufficient transparency are some of the factors that have contributed to the current state of the financial system, which has shaken the USD to its core. Despite our inability to learn from our past mistakes, one thing is for sure: we will always have Bitcoin.
So let us learn from our past and take heed,to ensure our financial system can indeed,
Meet the needs of our modern age, with transparency, accountability, and a new financial page.