Jim Rogers: The FED will disappear!

[moonshot]

Re: Jim Rogers: The FED will disappear!

There was a Fed and a fractional reserve banking system in the 1930's. There were bank failures then too. Dr. Bernanke himself has predicted bank failures in a public address. The Fed has an "infinite" balance sheet in theory only.

Agreed. Many banks deserve to fail this time around as well. My point is that under a fractional reserve system, you could have a run on a bank that didn't make poor investments. Imagine a regional bank that made responsible small business loans (rather than construction loans at the height of a real estate boom). If all the depositors wanted out, the bank wouldn't be able to liquidate the loans in time (not enough time for buyers to conduct due diligence on the loans).

Naturally, depositors won't all show up unless they had something to fear, but even a well-placed rumor could kick start a self-fulfilling wave of fear about one bank.

I suppose there are other ways around this problem even without a central bank. As for fractional reserve lending, I don't think that's going away.

[GRG55]

Re: Jim Rogers: The FED will disappear!

In a fractional reserve banking system, no central bank means bank failures if the people decide to make a run on the bank, right? I suppose the banks would agree to backstop each other. It would certainly eliminate the excessive risk-taking that banks have embraced, but there are other ways to combat that without having the uncertainty that a fractional reserve system without a central bank would engender.

There was a Fed and a fractional reserve banking system in the 1930's. There were bank failures then too. Dr. Bernanke himself has predicted bank failures in a public address. The Fed has an "infinite" balance sheet in theory only.

[moonshot]

Re: Jim Rogers: The FED will disappear!

It would not be the first US central bank to be closed:

In a fractional reserve banking system, no central bank means bank failures if the people decide to make a run on the bank, right? I suppose the banks would agree to backstop each other. It would certainly eliminate the excessive risk-taking that banks have embraced, but there are other ways to combat that without having the uncertainty that a fractional reserve system without a central bank would engender.

[FRED]

Re: Jim Rogers: The FED will disappear!

As long as we have fractional reserve banking, we need a central bank, so I think Rogers' prediction is a very low probability event. But I can certainly see a central bank charged with one overriding mandate - price stability.

It would not be the first US central bank to be closed:

First Bank of the United States

First Bank of the United States was a bank chartered by the United States Congress on February 25, 1791. The charter was for 20 years. The Bank was created to handle the financial needs and requirements of the central government of the newly formed United States, which had previously been thirteen individual colonies with their own banks, currencies, and financial institutions and policies.

Officially proposed by Alexander Hamilton, Secretary of the Treasury, to the first session of the First Congress in 1790, the concept for the Bank had both its support and origin in and among Northern merchants and more than a few New England state governments. It was, however, eyed with great suspicion by the representatives of the Southern States, whose chief industry, agriculture, did not require centrally concentrated banks, and whose feelings of states' rights and suspicion of Northern motives ran strong.

The bank's charter expired in 1811. It followed the Bank of North America and it was succeeded by the Second Bank of the United States.

Second Bank of the United States

The Second Bank of the United States was a bank chartered in 1816, five years after the expiration of the First Bank of the United States. It was founded out of a desperation to stabilize the currency by the administration of U.S. President James Madison. The Second Bank of the United States was located in Philadelphia, Pennsylvania, where its building, designed by the architect William Strickland, still stands as part of Independence National Historical Park.

By the early 1830s, President Andrew Jackson had come to thoroughly dislike the Second Bank of the United States because of its fraud and corruption. Jackson then had an investigation done on the Bank which he said established “beyond question that this great and powerful institution had been actively engaged in attempting to influence the elections of the public officers by means of its money.” Although its charter was bound to run out in 1836, Jackson wanted to "kill" the Second Bank of the United States even earlier. Jackson is considered primarily responsible for its demise, seeing it as an instrument of political corruption and a threat to American liberties.[5] The head of the Second Bank during Jackson's presidency was Nicholas Biddle who decided to seek an extension of the bank's charter four years early, in 1832. Henry Clay helped to steer the bill through Congress. But Jackson vetoed the bill in July.

The Bank served as the depository for Federal funds until 1833, when President Andrew Jackson instructed his Secretaries of the Treasury to cease depositing the funds. Two refused to obey, so he fired them, one after the other, until he got one who obeyed: Roger B. Taney, his former Attorney General and the future Supreme Court Chief Justice. This decision, at least in part, grew out of Jackson's famous dispute with the Bank's president, Nicholas Biddle. The Bank, always a privately owned institution, lost its Federal charter in 1836, and ceased operations in 1841.

[moonshot]

Re: Jim Rogers: The FED will disappear!

As long as we have fractional reserve banking, we need a central bank, so I think Rogers' prediction is a very low probability event. But I can certainly see a central bank charged with one overriding mandate - price stability.

[Sapiens]