FRB is fine in a free banking system. Competition would create an ideal level of reserves by means of some banks dying and some thriving. We do not have that. Large banks are shielded from their fuckups. This creates perverse incentives for them to make high risk/high reward investments with other people's money.
Exactly. All this massive discussions about creating new money somehow ingnores the elephant in the room: If banks with too much leverage would actually be able to default people will suddenly notice the problem and check their bank's reserves before opening a deposit or something like that (in historical timeframes, i.e. years ...).
Now the problem is obviously that everyone who went along for the ride, hoping for the best will go bust, too. Among them the top 0.1% (or at least a large part, you need to substract the Warren Buffet type). Obviously the rich and powerful don't like becoming poor and deprived of power, so the bailout themselves via the gov't/fed.
And as a strawmen they set up the crumbling 401k savings of the 99.9% normals.
An aside: I seriously wonder what would have happend if the gov't would have continued to let banks default. I don't think it'd be much worse than the Marshall plan for Germany with it's complete reset of the (liquid) wealth after WW2. And that went really well. And for a bit of fairness, resetting the clock every 80 (because people tend to forget the last utter economic catastrophe) probably won't hurt.
