Now that Europe’s fractionally reserved banking system has been regulated into complete inertia, it is a good time to assess the current bottom line, so to speak. We should mention here that there are essentially two ways of dealing with the banking system. One is to introduce an unhampered free market banking system based on strong property rights and nothing else. Such a system would work best if it were based on sound money, i.e., a market-chosen medium of exchange. The regulations governing such a system would fit on a napkin.

Image credit: Warner Bros, processing fmh

The Euro-Stoxx bank index, weekly, over the past 10 years.

Recently the index has been unable to overcome resistance in the 160-162 area. The bust and the reaction of the authorities to the bust has made zombies out of Europe’s big banks.

The other way is to construct what we have now: a banking cartel administered and backstopped by a central bank, based on fiat money the supply of which can be expanded at will and involving continual violations of property rights. Fractional reserve banking represents a violation of property rights, because it is based on the assumption that two or more persons can have a legally valid claim on the same originally deposited sum of money (for an extensive backgrounder on this, see our series on FR banking – part 1, part 2 and part 3). This legal fiction is very convenient for the banks and the State, but it sooner or later renders the banking system inherently insolvent (a de facto, but not a de iure insolvency).

Given this system’s inherent insolvency, the regulations governing it obviously won’t fit on a napkin. Instead they fill several volumes the size of telephone directories and keep growing like weeds. In their infinite wisdom, Western regulators and authorities have decided to react to the crash of the banking system in 2008 by suspending the rules of capitalism. In short, they have done precisely what Japan’s authorities did after the 1989 bubble peak: They have completely zombified the banks. Amusingly, the very same people have criticized Japan’s actions sotto voce for decades.

Bank bailouts have proved to be politically unpopular. However, European and US politicians realized of course that it would be even more unpopular if depositors were to find out the hard way that the money they believe the banks to be “warehousing” on their behalf doesn’t actually exist. And so they decided to go with Plan A. Bailing out the banks has of course always been Plan A. One of the main reasons why e.g. the Federal Reserve system was established in the first place was precisely that it makes it possible to privatize the banks’ profits and socialize their losses. The other reason is that fiat money and a central-bank administered fractionally reserved banking system enable governments to impose the vile “inflation tax” and spend money they don’t have with both hands. This is extremely convenient for the financing of both welfare and, perhaps more importantly, warfare.