I have heard many comments that there is a plethora of information for liberty-minded Americans, but relatively little for foreigners. In Spain, Universidad Rey Juan Carlos student Brian O’Caithnia has recently started just such a meeting place for Europeans (especially Irish people) to meet and share ideas of liberty and discuss the current crisis: The Irish Liberty Forum.

Brian is committed to free markets, and his recent Mises.org daily article “The Death of the Celtic Tiger” received much positive feedback. With this start the forum should be a fruitful meeting place for like-minded individuals to meet and share ideas.

Much confusion reigns over what the defenders of 100 percent reserves for banks would imply for the investment community. Free bankers argue that fractional reserves are necessary and beneficial for a healthy financial system. Credit (via fractional reserves) must be allowed lest the financial community find themselves with a dearth of capital.

The arguments in favor of 100 percent reserves for banks, when properly understood, lead to no capital shortage. The argument centers on loan and deposit contracts. There are three specific differences between the two.

First, loan contracts involve an exchange of present for future goods. A borrower receives a good now, and will pay something back in the future. Loans entail a transfer of the availability of the good lent. The lender renunciates the availability and use of a good until the termination point of the contract. Finally, as loans represent a transfer of present for future goods, an interest payment is involved (although this can be waived out of a myriad of reasons).

The result of an adherence to the legal norms surrounding the distinction between deposit and loan contracts is that deposits must be available on demand. As such a full and continual reserve must be kept. In the banking system, this implies a 100 percent reserve to back up the redemption requests of demand deposits.

This in no way curtails financing availability for the investment community. Guido Hülsmann points out in his The Ethics of Money Production that a shift to equity financing would result if banks adhered to these norms. No longer would debt be the primary means to fund projects. Philipp Bagus and I have recently clarified the point that the legal norm in no way impedes bank lending in an article in the Journal of Business Ethics. Time deposits, which are not available on demand, will entail no such reserve requirement. Lending practices as exist today could continue uninterrupted provided that the money they are based on was lent (or available via a modern “time deposit”).

Full reserve banking would involve no curtailment of credit. Businesses would still have full access to funding based on either equity or time deposits. Adherence to 100 percent reserves fulfills legal obligations, thus diminishing the ambiguity of modern banking. In no way does this also entail a denial of financing for businesses in need.

Drastic times call for drastic measures. The current crisis has brought global central banks to their knees. Interest rates have been lowered to zero, or nearly so, in a concerted attempt to stimulate investment and consumption spending. The effect has been minimal.

While quantitative easing – the method central bankers employ to lower interest rates – has received much press coverage there remains a more salient, if latent, monetary policy going overlooked. As Philipp Bagus and I have outlined in a recent Economic Affairs article, the current crisis response has seen a high degree of qualitative easing to mitigate liquidity pressures. Central banks, especially the ECB and the Fed, have purchased low quality, typically subprime, debt from the private banking sector. The result has been a marginally improved situation for private banks as the average quality of their assets, and hence their value and liquidity, has been improved. As there is no such thing as a free lunch, it should come as no surprise that the central banks’ balance sheets have commensurately deteriorated.

Central bank leverage – the use of debt to finance its operations – has increased significantly. The ECB’s equity ratio, the amount of equity available to cushion any losses suffered on asset prices, has varied throughout the year between 11 and 14 percent. Effectively, a 14 percent loss on its assets would bring the ECB to insolvency.

The Fed is not much better off. Over 43 percent of its assets are now loans to Freddie Mac and Fannie Mae, or loans secured by them. How would you feel if your personal bank shouldered such an over-weighted, and risky, loan portfolio?

When central banks ran out of high quality assets to exchange with the banking sector the period of quantitative easing commenced. We now find banks awash in liquidity and reserves, with the contingent possibility of excessive inflation should these stop being held and loaned to the business community. The quantitative and qualitative easing policies were easy to enact. We have much less faith that these same central bankers will be able to unwind them in a timely manner when the time arises.

Central bankers have pursued extreme policies during the current crisis, with little positive effects. More worrisome is the fact that they are now placed in precarious financial positions, with relatively small loses exposing them as insolvent. If you thought a reckless central bank was difficult enough to live with, wait until you see one go bust (as Iceland recently did).