The Federal Reserve’s “lender of last resort” role enables fractional reserve banking through regulations and backing, creating an environment for bank risk-taking and malinvestment, driving business cycles and artificial booms.
Central banks’ primary concern is funding governments, especially for wars, not helping banks or employment, as evidenced by the Fed’s $35 trillion debt and need to manage excess supply at low interest rates.
Fractional Reserve banking poses a mismatch risk between deposited funds and available reserves, exposing banks to runs and crises if depositors withdraw funds simultaneously, leading to instability in the banking system.
Banks are not constrained by deposits or assets in determining loans, focusing more on politically influenced bailouts than depositors’ interests, relying on central bank intervention for survival.
Austrian business cycle theory blames the Federal Reserve for monetary inflation and business cycles, remaining applicable despite changes in banking operations, as it focuses on the Fed’s enabling of fractional reserve banking.
The Fed’s unprecedented policies since 2008, including lending to corporations and buying mortgage-backed securities, are brand new and untested, with officials acknowledging uncertainty about their legality during the crisis response.
