The LA Time article  Ron Paul’s ideas no longer fringe mentioned in the previous post is a gold-mine of misinformation.

Paul traces his economic views to his frugal upbringing in Pittsburgh at the tail end of the Depression. He saved pennies from delivering newspapers and helping out his father’s small dairy business.

And his first economics class at Gettysburg College was an eye-opener, Paul said. When a professor explained how banks keep only a tiny part of their deposits on hand and earn money by lending out the rest, Paul discovered one of the “tricks” of the financial system.

In this case, a little bit of knowledge is a dangerous thing.  What his professor explained is called fractional reserve banking.  It is not a trick, but an essential part of a smoothly running capitalist economy.

If banks were required to keep all deposits on reserve, they would have no ability to lend money and earn interest. They would have to charge you a fee for safeguarding your money. Corporations can take advantage of the stock market to raise capital if they are large enough.  For the ordinary citizen to finance a home mortgage would require some new institutions.

So one important arm for providing credit to the economy would be cut off if you did away with fractional reserve banking.

There is a good reason to want this type of credit in an economy.  It allows the available credit to be adjusted to keep the economy moving.  If credit is too tight for the needs of the economy, the reserve requirements can be loosened by the Fed.  If credit is too loose, then the reserve requirement can be tightened by the Fed.

Just because the Fed, under a particular set of circumstances and leadership, did not do as good a job as it should have doesn’t mean that the idea of the Fed is totally wrong.

It does mean that a person like Ron Paul can learn a snippet of information and then turn off his hearing aid and not learn the rest of the information he needed to learn.  He then runs off half-cocked to develop absurd theories of how to solve problems.  Half-cocked seems to be the appropriate term.  He was half-cocked with knowledge.  Had he continued his economics education and become fully-cocked, he might have been able to do some good.