Dan W, "Fractional Reserve Banking is Fraud"

"Karl Denninger wrote a piece that explains why, in his opinion, fractional reserve banking is not fraud. Now, here's an excerpt from Karl's essay: 'My screed on "Mark To Market" brought the tinfoil brigade out of the woodwork in spades, and one of their most common "attack points" is that "reserve banking is fraud." Simply put, "no its not." Let's prove it....Jane's mortgage has value. Provided I properly underwrote it, that paper is actually worth more than $90,000 - it is in fact likely worth 102 or 103% of "par", because there's a discounted cash flow in the form of interest payments and so long as the interest charged is higher than the inflation rate (or alternatively, the risk-free return I can obtain in, for example, Treasury bonds of equivalent duration) and the collateral protects against default that paper is in fact more valuable than its $90,000 face value. So if Joe and Rich both come in at the same time and demand their money, I can sell Jane's mortgage to someone for the $90,000 face value plus a profit, pay both Joe and Rich, and (since I now have no money left in my bank) close my doors. No harm, no foul and no fraud.'

Dan W: When I was in college, the leaders of student government used to set up and moderate debates about any number of various "hot" topics in the realm of geopolitics. To make things interesting, the debaters, if you will, were recruited from the school's most outspoken elements and included representatives from the institution's political poles: me from the fringe Left of course, and some rabid, ultra-conservative member of the college Republicans from the Right. The "debates"- they were more like informal panel discussions- would take place in the student commons, and the vitriol was often as thick as an August New Orleans night.

Anyway, one day I was debating a fellow named Matthew Schwartz, the president of the college Republicans- a nice guy, frankly- about the Reagan policy of supporting the "Contra" insurgency in Nicaragua. And we of course were going back and forth about such issues as "doctrines of containment" and "mercenaryism" and "self-determination" and "class struggle", etc., and all of a sudden- man I remember this like it was yesterday!- I had this mind-boggling epiphany. While it appeared to the casual observer that a debate between two individuals possessing two opposing viewpoints ON THE SAME ISSUE was taking place, in fact there were TWO entirely unique, separate debates happening on this day. TWO individuals, Matt and I, were putting forward positions about U.S. involvement in Nicaragua, but we had absolutely no common ground. We were proceeding from two entirely different points of reference, two entirely different realities. Matt was discussing U.S. foreign policy. I was discussing self-determination. Since I believed that Nicaragua should have the right to decide for itself what it wanted to "be", any discussion of U.S. foreign policy, in my mind, was not only off topic, but was nonsensical. Do you see what I mean? All of a sudden the debate became totally capital "A" absurd to me. Two participants, coming from two entirely disparate frames of reference and babbling at each other in two totally different languages, were engaged in an admittedly entertaining drama, but were unable to communicate on any level- other than the shared pitcher of Budweiser after the debate. He was speaking Urdu, I Swahili. He had no clue what I was saying and vice-versa. We shared no common reality!

Karl Denninger calls the folks who claim that fractional reserve banking is fraudulent "the tinfoil brigade" because, in his reality, Capitalism and free-market systems and "money-as-debt" are completely reasonable systems. For many of us- me included- fractional reserve banking is fraudulent because it creates wealth for people based upon profits through lending and debt-service, plain and simple. In a system of fractional reserves, banks make money by creating money and lending that money to people who promise to pay back that money with interest. In my world, that is usury, and in my world usury is fraud. So Karl and I are proceeding from two entirely disparate systems of belief, and as such our definition of what constitutes fraud is completely different. I see our market system as fraudulent to the core and he doesn't. And so when Karl implicitly accuses me of not getting the math right, in this case he is incorrect. And he is incorrect not because his math is wrong, but because he and I are proceeding from two entirely unique perspectives vis-a-vis the definition of fraud."

- Dan W, http://ashizashiz.blogspot.com/