110 sats \ 9 replies \ @siggy47 18 Oct 2023 \ parent \ on: _Broken Money_ book club, part 2 bitcoin
Did you listen to the What Bitcoin Did episode with Jeff Booth and George Gammon? A big part of the discussion involves whether an inevitable fractional reserve system would emerge under a bitcoin standard.
https://fountain.fm/episode/LsJM0bmcjFAiElUzUlH1
I didn't, but I have pretty much always been in the camp that believes fractional reserve banking is inevitable (on any monetary standard). The incentive to cheat is just too high, as is the ability to get away with it for awhile.
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Do you think fractional reserve can only emerge as a result of cheating, and has no actual utility?
This is something I'm wrestling with, drawing inspiration from the history of free banking, and from Selgin's book Good Money which probably was the single-biggest influence in getting me to think about btc seriously, which is ironic.
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I haven't done a deep dive into this debate. I know much ink has been spilled on the question.
However, I think even in a framework of contract based fractional reserve banking, the temptation to cheat would prove irresistible. If the contractual arrangement specifies a 10% reserve, some lenders are going to push it to 9.9% and hope they get away with it.
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Agreed, that has historically been the temptation. In the brave new world of blockchains, though, I think we have a means to put an end to that -- define the fractional reserve limit in advance, and make it visible to all. I suspect this is inevitable, and we'll see in practice how it shakes out.
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People thought gold was safe, too. Then bankers invented paper gold certificates.
You're right that this new verification technology makes it possible for people who really care to have high confidence in the integrity of the reserves. However, there will be bad actors who obfuscate what they're actually doing and lure in customers with the promise of higher returns.
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I agree. I know this is heretical to some, but a fractional reserve system could be much less susceptible to fraud and manipulation with bitcoin as the asset. Gold is notoriously difficult to audit, even with good intentions. Bitcoin's ease of custody and transparent ledger could foster a whole new credit system.
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I'm with you on this one -- fractional reserve is a tool that affords certain things, and you pay for those affordances w/ certain failure modes. If you make a drastic change to some underlying aspect of how it works, you should expect different outcomes to ensue.
Given the (what seems to me) genuine utility in institutions that do a good job in assessing something akin to credit-worthiness, deploying capital, etc., I can see an explosion of new types of fractional-reserve constructs and institutions made possible because of btc.
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Where bitcoin strikes me as particularly interesting in this regard, is that the free market remedy for fractional reserve banking is bank runs and those can occur very rapidly with digital money.
That means you're probably right that bitcoin will greatly reign in the amount of fractional reserve banking that occurs.
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Yeah, this is one of those really interesting cases where velocity would seem to unlock some new possibilities -- kind of like the financial analogue of more is different.
It's hard (for me) to reason about what this will actually mean, but also obvious (to me) that it will mean something.
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