Fractional Reserve Policy, Roman Law, and the Financial Crisis

I agree with Greg that the blame for the current financial crisis is shared equally by members of both parties, and I agree that the proper response is not a knee-jerk reaction toward MORE regulation, but rather a careful, deliberate, consideration of BETTER regulation.  But I disagree with his characterization of the belief that "our current credit crisis was caused by lax regulation generally of financial markets" as "historical revisionism."  Blaming the Republicans for that lax regulation might be historical revisionism, but I do not think there is any doubt that lack of regulation contributed significantly to the current situation.

Here's what another reader who knows much more about monetary policy (and about Roman law's position on fractional reserve banking) than I do has to add to this discussion.  He also raises a subsidiarity concern.

I think you are correct in your assessment that "the market's hunger for speculative instruments (and the profits they were seeming to generate) fueled the push to make unwise loans..." No pun intended here, but what fed the market's hunger?

If we look at money supply figures, we see that there has been a general steepening of the M3 growth curve since the Y2K fear and the 2001 terrorist attacks. While money aggregates have been shunned from the general economic discourse, I think it is a mistake to assume that they do not have a substantial economic effect.

http://www.nowandfutures.com/key_stats.html

(scroll down to "M3 plus credit, longer-term chart").

Without the massive money and credit expansion of the last 10 years, market participants would not have been able to feed their hunger for speculative instruments in the manner they have. Under Fed policy, when interest rates are lowered and money is injected into the system, the banks are the first recipients who then lend out that money throughout the economy. From there, banks in the last 10 or so years have exhibited a herd like mentality moving from tech-internet bubble in the late 90's, to the Enron-energy bubble, to the Housing bubble, ending with the Derivatives bubble. A look at Chase-Manhattan's (now JPM) financial reports over that tenor will illustrate how banks have moved within these bubbles. What we have had lately with Fed policy is a monetary permissiveness which has allowed the banking system to continue in putting off the inevitable banking corrections necessary to clean out the system and let more prudent market participants manage the assets.

Catholic Social Thought needs to look closer at the larger issues surrounding the Anglo-American method of fractional reserve central banking. If somebody has promised in trust to hold a deposit, which can be immediately demanded, are there moral-ethical issues with lending that money out? The Roman law tradition did not allow for lending to occur with a floating demand for principal (callable loans), but it did allow for lending under fixed contracts like in a CD, it seems the policy behind such a banking regime was that it led to greater stability than one of reserves fractional to demand deposits. See Jesus Huerta de Soto, Money, Bank Credit, and Economic Cycles. Also from a subsidiarity standpoint, is national central banking the best way to order banking? What about smaller central banking regimes? What about alternative methods of banking that are currently foreclosed by the US banking system (100% reserve banking)? Such questions, I think, are not being considered today in our economic discourse, but should be.