The volatility of fractional reserve banking

Cold Fusion Guy links a very interesting piece from the New York Times about how things started to fall apart for major financial institutions like Goldman Sachs and Bear Stearns in the past couple of months. Flight to quality can take a terrible toll, and very quickly.

The Mises Institute shares a bit from Murray Rothbard about why this is, and why we have business cycles. More or less, it boils down to the very nature of fractional reserve banking; the very nature of "leverage" via debt is to accelerate the ordinary ups and downs of life. For example, if you've got a mortgage for 95% of the house's value, you're going to be very concerned when the housing market drops 5%--or ecstatic when it rises 5%. Not so the man who owns his house outright, right?

And if you wonder why Democrats in Congress prevented meaningful reform of Fannie Mae and Freddie Mac in the past decade, take a look at the American Spectator. Apparently, Barney Frank and others have been on any number of "events" paid for by the bankrupt companies, and it may even turn out that a fair number of them were not just metaphorically "in bed" with their executives.

What to do when Congress appears poised for a bailout? Remember that in reality, it may be a tradeoff between paying that money in a bailout bill, and paying out that money for a massive FDIC payout. We're probably on the hook for this either way, and what can be done, realistically speaking, is to take steps to reduce one's exposure to the volatility imposed by fractional reserve banking. In other words, listen to people like Dave Ramsey and take steps to reduce your debt.