Monday, October 05, 2009

"One Must Never Lend Out More Unsecured Than One Has In Excess Capital"

Excellent Denninger tutorial on the principles of sound banking. He makes a good case against the idea that fractional reserve banking is at the root of our troubles. He summarizes:

Note that this has exactly nothing to do with whether you are on a Gold Standard nor does it have anything to do with fractional reserve lending. In fact the Depressions of both 1873 and the 1929/1930s occurred while on "hard money". A gold standard (or any other "hard" currency) will do nothing to stop this, because the problem has never been the fiat nature of currency - it is the fact that credit is being extended without collateral beyond the actual cash reserves of the institution in question.

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