It’s nowhere near the demand for me to comment on Bitcoin–that article is still forthcoming; it has turned into my Apocalypse Now–but a lot of people were asking what I thought about Ron Paul’s proposal for the Treasury to cancel the debt held by the Fed. So here ya go. An excerpt that I want to emphasize on reserve requirements:
In other words, rather than eliminating the excess reserves by having the Fed sell assets, [Dean] Baker is proposing that the Fed simply mandate that banks keep a larger amount of cash in the vault (or electronic reserves on deposit with the Fed) in order to “back up” the checking-account balances of the banks’ customers. In this way, the banks won’t be able to pile a massive amount of new loans on top of the existing reserves.
This may or may not be a good solution in the grand scheme of things, but I do want to point out that it’s equivalent to stealing that money from the banks. Consider the following analogy: Suppose the government passed a new law requiring all bank customers to keep a checking account balance of at least $1,000. No matter the emergency, people wouldn’t be allowed to let their checking accounts fall below $1,000 at any time, under threat of a ten-year prison term and huge fine.
But as far as Karl Denninger–who had flipped out over the “raw printing of money” that Paul’s proposal would entail–here’s an observation:
[H]aving the dollar backed up by gold is qualitatively different from having it “backed up” by IOUs issued by the federal government. For one thing, Federal Reserve notes (and banks’ electronic deposits with the Fed) are legal tender, and we truly have a fiat currency. If you turn in a $20 bill to the Treasury or the Fed, they will give you two $10s or four $5s, but they don’t owe you anything besides the US dollar itself.
Furthermore, reflect for a moment on the absurdity of claiming that Treasury debt “backs up” the dollar reserves in the financial system. Suppose someone is holding a $100 bill, but he’s not sure if he trusts it as an asset. Would it reassure him to know that somewhere in the vaults of the Federal Reserve there is a piece of paper issued by the US Treasury promising to pay a $100 bill in the future?