I like this proposal but for one thing -- it leaves the corporate veil in place, so stockholders can't be reached. (Or even board members in many cases -- because most banks in the US are incorporated in Delaware, where board members are immune from liability for corporate fraud.)

I would ban all corporations from the businesses of banking, brokering, and financial advising. Let those fields be inhabited only by limited partnerships, so that if the guy you entrust with your life savings screws up and loses them, he loses his own, too. It's only fair.

And don't tell me it's impossible. Adam Smith wrote about the Scottish banks of his time, which worked this way.

Unfortunately... the 'outside insurance agency' was something like AIG. They gave out insurance policies for a fee with a maximum exposure thousands of times more than their ability to pay. "Nothing bad will ever happen, we'll just keep collecting premiums and banks will just pay us and feel better".

They even sold insurance policies (credit default swaps) to entities that had no interest in whether a loss occurred or not - such as a neutral 3rd party wanting to make a bet on how the US housing market might be going, with nothing actually at stake other than the wager they are placing in the form of a premium. In any other form of insurance, that is not allowed (I can't take out an insurance policy on my neighbor's house because the guy is a clown and plays with matches & gasoline in the garage).

The only reason I support government-provided or subsidized forms of depositor insurance, calamity risk - such as natural catastrophes, and other things like that (or at least re-insure the insurers), is because of the amount of unpredictable risk:

1.) The bank depositor has no idea what the bank is doing with their money, or how solvent the bank's insurance company is - marketing can do a heck of a spin on the solvency (or lack thereof). The average consumer just wants a checking account at a convenient location, not worried about or understanding the banking business. I understand it a little, but I also doubt the bankers (or more than 1 out of 100,000 people) can write consistently-winning 300 page professional services proposals to US & foreign governments. That's my specialty.. not many in that field. Just like there isn't that many people in the insurance actuarial business. People specialize, the economy is better for it than having some jack-of-all-trades & barter system.

2.) Always comes to the ability of the insurer to pay. If the potential loss is something like Hurricane Sandy, how does an insurer develop adequate risk tables for that? Or how does new competition with say "trillions of reserves" lying around enter a market? Does that stifle competition?

The problem is, something like Hurricane Sandy can happen again this year, and the year after, or not for 10 years, or 3 times in the same year in the same place. Kind of like living in Moore, Oklahoma... I personally wouldn't want to bet that there would never be another F4 or F5 tornado there, but they could easily go 4 years, or 10 years, then have 3 in the same year. (although maybe the loss from #2 & #3 might not be much after the first one flattened the town anyway).

My point is, in some cases, the unlimited resources & borrowing power of the government/economy kind of have to be in play for something as complex as the US with so many threats and the size of the economy itself.

In the case of Iceland, I don't know, although they have hundreds or thousands of volcanoes... their risk to their economy, large swaths of populated areas destroyed, etc., are always a possibility. Hurricanes & tornadoes like we have that can destroy a city are not a threat to them, but I'm sure they have other things.

" The insurance company will see to it that the bank complies with good banking standards. "
There were money market funds (like money market accounts but not FDIC insured) and Fannie bonds that were tacitly insured by the gov't. They could take risks b/c they knew the gov't kind-of sort-of guaranteed them. If gov't must be involved, it should at least be clear that anything else absolutely will not be guaranteed or bailed out, and it should stick to it.

Once the gov't offered to back money market funds, their rates instantly adjusted to be the same as money market accounts. That's been true now for six years.

The best answer would be for the government to not be in the money business. People can decide what they want to use as money and banks can decide, at their own risk and disclosure, what reserve ratio they want to maintain.

I think your view is correct. Presently, I would imagine a lot of the money lent by banks in the US right now is borrowed from the federal reserve & marked up, because the rates there are so cheap (almost zero), but if they were more 'normal' - say 5% for the lending window, you would see the banks add 4-6% to that, and you would be looking at market rates of say - 11%, just for a mortgage, at least, with perfect credit history / excellent cash reserves/etc.. Add risk premiums on top of that - .

Iceland took a killing though during the recession, their banks had been buying subprime debt from he US like there was no tomorrow. It was a favorite place to dump the worst of the sh*t.

Some knee-jerk reactions, even if 7 years later... are probably still kind of expected. Their economy will suffer as a result, and we'll see what they do after.

Of course, it's all easy to do stuff like this if you are the world's reserve currency and you can just print enough money to re-inflate the world. Iceland doesn't have that luxury.

There have been 100% reserve ratio banks in history and they did not make loans. And as you point out they had to charge for bank accounts and checks etc.

I'm guessing this is in the early stages. I'll have to see if I can find a follow up with more details.

I think you're correct in that the author doesn't reall understand the system...he would have been correct had he said, "Unfettered fractional reserve lending allow banks to lend out a nearly infinite amount of credit with essentially no backing."

Banks started running into serious problems because of the Community Redevelopment Act, a well meaning but thoroughly misguided attempt to help people get into a home of their own. You know...the American Dream. Unfortunately, as usual, the pols writing this piece of garbage hadn't considered the law of unintended consequences. As the CRA was expanded over the years (most notably under the Clinton Administration) banks realized that the government was effectively guaranteeing bad loans. Happy Days Are Here Again! When it was realized what was happening, the Congress allowed banking institutions to change the way the books were kept. Now a mortgaged home was carried as an asset no matter what was owed. And with real estate prices skyrocketing, the "assets" we're getting more valuable by the hour. Banks were rolling in cash! At least on paper. Now the Greater Fool Principle would ask, "What makes your widget worth $1?" The answer is that I can find some fool to give me $1.01 for it. And so on, and so on. The metal meets the meat when you get to the last fool. Then the whole house of cards collapses. Now government's solution to this was the Troubled Asset Relief Progam, or TARP. I for one believe that all they've done is put in another quarter, reset the game, and are doing the same thing all over again, the difference being that they're now playing with tens of TRILLIONS of dollars, not just billions. And the presses keep on rolling.

That is true. The collateral pledged for a loan - say a farm in exchange for the farm loan, is always added as an asset by the bank for future lending purposes, just like deposits in accounts. "Good Banking" would dictate that they always have a little more asset in collateral than the loan held against - the buyer's/owner's downpayment or equity for example. Every time they place a loan, the assets actually grow in relation to money out on loan, then you do some smart assumptions on how many loans would typically fail out of every billion dollars worth, etc.

Not sure why this comment got a down vote???

I know I don't fully understand it. From what I have read it can get out of control and ultimately over time ruins the currency.

Yes, but Austrians want to outlaw fraction reserve banks as fraud.

Well, yes and no. Government public servants were arguably bribed by private bankers to give government authorization to private bankers.
The centralized power to create legal tender without assets to back it is a big problem and government is the ultimate source, but government agents may be manipulated by and for private interests.

What they're trying to do is create THEIR OWN federal reserve, rather than depend on those of either the dollar, Euro, or Danish krone. That's probably a good idea, considering what is likely to happen to the dollar, Euro, and krone in the next few years.

True, it would be more sound if it were real (gold-backed) money. On the other hand, a gold standard might mean that some much larger countries attempt to use the Icelandic currency as their own reserve, which would leave Iceland back in the situation they are in now -- a mouse trying to stay on the back of a galloping elephant.

There may not be a very good answer. I can't think of much of a better one than what they're trying to do, except maybe to ask the Danes to re-annex their country.

Hard to tell from the limited info in the article, but Iceland was the only country that didn't prop up their banksters with taxpayer funding after the bankster financial "crisis", so it wouldn't surprise me if the banksters were planning a way to regain control.

Not real familiar with Iceland. Not sure if they can pull it off.