Cash on hand + Investments > Outstanding liabilities (Deposits).
A ponzi scheme is where:
Cash on hand + Investments < Outstanding liabilities.
A fractional reserve bank doesn't have the cash to let 100% of its depositors withdraw their accounts tomorrow. It does have the assets to let 100% of its depositors withdraw their accounts once its investments mature, or if they are sold at market value.
A ponzi scheme can't do either of the above. It's a pure scam.
>It does have the assets to let 100% of its depositors withdraw their accounts once its investments mature
This line of thinking is what caused the 2008 crisis. The two metrics are interdependent. If a bank doesn't have liquidity, it can't make loans, which cant support the prices of the assets it owns which results in financial collapse.
Ponzi schemes are 'investment' promises that require ever growing layers of patsies to be recruited for each patsies' pay off to occur.
Fractional Reserve is a practice where an institution leverages themselves by only keeping the expected liquidity needs in reserve and using the other capital for other means. Eventually they blowing up, when the market demands the apparent liquidity.
A ponzi scheme has to continue to grow or else it will collapse. Frantional reserve risks can perpetuate indefinitely until the liquidity is request:
StableCoin takes $100MM in USD deposits. Issues 100MM StableCoins. StableCo notices that it's 'never' had more than $10MM in USD of liquidity tapped. It decides "Hey we could make a stack of cash investing the remaining $90MM USD in XYZ" not until X years later does the fractional reserve issue arise as 'unforeseen circumstances' cause a liquidity demand of $15MM
Yes, what led to the 2008 crisis was a misvaluation of investments. Fortunately, there exist solutions to that problem, built into the system. Short-term interbank loans, the FDIC, and nationalization. Notice how not a single American bank stole it's depositor's money... And that the rules of fractional reserves were changed, to reduce the likely hood of such a catastrophe.
There is a world of difference between that and a Ponzi scheme. How many investors took a haircut from Madoff's little game, again?
Ponzi schemes are 'investment' promises that require ever growing layers of patsies to be recruited for each patsies' pay off to occur.
Fractional Reserve is a practice where an institution leverages themselves by only keeping the expected liquidity needs in reserve and using the other capital for other means.
Eventually they blowing up, when the market demands the apparent liquidity.
The only difference is that ponzi schemes promise a positive return on investment while fractional reserves just make the people holding the fractional reserve more money.
