Yglesias tells us that some Occupy Wall Street protesters have picked up Ron Paulish monetary ideas — although some know better. I thought I’d say a word about one particular idea that sounds plausible to some people but is actually quite wrong: banning fractional reserve banking.
I know that’s a popular theme among some Austrians. But it’s actually neither a good idea nor even feasible.
The crucial thing is to understand what banks do. And it’s not mostly about money creation! Instead, what banks are for is helping to improve the tradeoff between returns and liquidity.
That's a very quaint notion. But were it true there wouldn't be any such thing as systemic risk!
Simple: If you only loan against actual asset values there is no systemic risk possible; if you get in trouble you simply sell down the assets until you no longer are. Since you've never "created money" there's no systemic risk that can arise. Ever.