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Weaknesses of Fractional Reserve Lending |
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| Uploaded on Thursday 18 June, 2020 to the illusion of money |
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| How a fractional reserve banking system reacts to boom and bust cycles |
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A fractional reserve banking system is intrinsically geared towards banks lending money because of the big profits derived from interest payments on loans. Providing liquidity is advantageous to business and good for growth, but an economy that expands much too rapidly can overcook and trigger a recession; and so too can a lack of confidence in the banking system do likewise. The process of economic expansion and contraction which characteristically occurs on a repeated basis is coined the boom and bust cycle. In boom times, credit is abundant and there is no shortage of risk takers. After the bust, credit is restricted as lenders become risk-averse. One of the roles that a central bank plays in boom times is to keep inflation above a certain target, usually at 2% growth per annum, whereas in times of bust, it is to inject liquidity to steamroll the economy out of a slump. This tutorial looks into the disciplines and practices of commercial banks in this regard.
This video is courtesy of the Khan Academy whose YouTube channel is available here. |
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