Dave Knaack Says

Regarding fractional reserve lending. After spending lots of time reading about how banking systems work (including lots of really dry stuff like international settlement systems) I’ve come to the conclusion that fractional reserve practices fill critically important and likely delicate roles in highly interconnected and critical global systems and that leading the charge to change those rules would be tilting at windmills. This is not the sort of problem where we should write a new system, reinstall and reboot.
We should instead address one of the major flaws of the system, the accumulation of debt in excess of the money supply (think of it as an in-memory patch).
Perhaps this issue could be solved with by tasking the Treasury with issuing into circulation of non-debt dollars in a quantity equal to the interest paid for each reporting period (quarterly I’d suppose).
I’m not convinced that the ‘boom and bust’ cycle is solely the result of Fed control of the monetary system (seems to me that complex social factors probably also play in important role; consider the development of CDOs and MBSs), or that it is /necessarily/ a bad thing. Booms encourage and enable new ideas (lots of money available results in funding of wild and harebrained ideas that just might work but that wouldn’t be able to pay off in an environment of higher interest rates one would expect in a completely stable economy), and busts weed out marginal or weak practices (the harebrained ideas). The cycle (provided it describes mild recessions rather than Great Depressions) may help to prevent stagnation.
What is bad is that in conjunction with the current practice of creating only principle rather than principle+interest the system can be managed to (or perhaps must) cause an accumulation of debt obligation toward the entities permitted to practice fractional reserve lending.
Perhaps we can greatly improve the system simply by causing to exist each quarter all the money required to pay off the interest on loans. This would begin the injection of credit money into the system with minimal impact on business.