100% Reserve Ratio

If banks were allowed to fail then wouldn't the commercial banking industry evolve to have 100% reserve ratio's?

With out regulation, banks would have to market themselves and compete agaisnt one another as being the SAFEST bank to which to deposit money into. Then with their 100% Reserve ratio, bubble's would not be allowed to grow because their would be no increase in the money supply (ignoring actions by the fed, which I too think they should be replaced) via the money multiplier.

Furthermore, with the activities of the banks such as taking depositors money and lending them out (the 3-6-3 club, thanks Michael Lewis) prevented, this would cause a shorten supply of loanable funds pushing the savings market interests higher . This would signal two things:

1) That investments of higher quality and better earnings growth be funded since they can bear the higher interest rate and

2) The increase in the interest rates for loanable funds from the savings market would encourage depositors to allocate more of their money into the savings market (since they're getting 0% on their deposits) encouraging more Americans to save.

With 100% reserve ratio's there would be no concern for a run on the banks. Lesser regulation reduces moral hazard (i.e. discourages banks from taking more risks). Surely then the ability for your clients to trust you, being trustworthy, becomes a profitable advantage.

Capitalism works even if it hurts.

"I want people to take thought about their condition and to recognize that the maintenance of a free society is a very difficult and complicated thing and it requires a self-denying ordinance of the most extreme kind. It requires a willingness to put up with temporary evils on the basis of the subtle and sophisticated understanding that if you step in to do something about them you not only may make them worse, you will spread your tentacles and get bad results elsewhere."

--Milton Friedman

Nobel Prize Winning Economist

If you believe in Freedom, you believe in Capitalism?

The other week I had dinner with a Professor I had during my Freshmen year in economics. A couple hours into dinner we got into a deep discussion about freedom. He argued that in all of history no politico-economic system has been freer and more prosperous than Capitalism. He argued that in Capitalism, and unlike any other system, people make deals with one another through voluntary action. And it is this freedom, the ability to pursue your own rational self interest, that has unleashed such productive genius and prosperity equaled by no other time in history.

He had a great point. One shared by many Ayn Rand, Adam Smith, Milton Friedman, Hayek, and/or Mises fan.

However I had one question for him which he walked around. Let me set it up for you:

In my microeconomics class we talked about the concept of price elasticites and inelasticies. That is the % change in demand/supply in response to a % change in price. Take something like an Oscar Meyer hot dog. If tomorrow Oscar Meyer suddenly raised the price of their hot dogs by $100 dollars than most people would have no problem easily switching to something like Ball Park Frank hot dogs because it's a good substitute (and did I mention they plump when you cook 'em).
That is an example of a good that is relatively price elastic, the demand for it changes a lot when you change the price.

Now let's take a look at the prescription drug Elaprase. It's a drug used in replacement therapy for people with Hunter's Syndrome. It costs $4,215 for a 6mg vial and has no close substitutes. Suppose tomorrow the makers of Elaprase decide to raise the price of the drug by a $1,000. I would argue not very many people with Hunter's Syndrome currently using the drug would stop buying it. In economics we say that this good is relatively price inelastic.

My point here is that goods of certain types have some "sticky" prices. That the demand for it doesn't really change all that much if the prices change a bit perhaps alot.

This comes down to the question that I had for my Professor: If goods have varying price elasticities then does freedom truly exist in every transaction you make? I argue that there are varying degree's of freedom depending on the transaction. And that when it comes to goods like MP3 players and coffee mugs yeah there is a lot of freedom but when it comes to cutting edge prescprtion drugs that might save your life there's a lot less freedom. Yeah noone's holding a gun to your head forcing you to make the transaction but in some instances the ability to say no mean your the one pulling the trigger.

I'm convinced that Capitalism is blind.