I would say fractional reserve banking is fine as long as it is administered correctly by central bankers - which it clearly has not over the last several decades.
They need to set money supply growth at a level that promotes productivity rather than asset speculation.
Central banks have been allowing money supply growth of 15-20% annually for years and then claiming inflation is almost non existent - as they have managed to exclude property prices, energy, food etc from the inflation calculation.
So where is all this easy money going, straight into debt fuelled asset speculation, as with easy money the perception is it's much easier to make money speculating than it is to do something more economically productive.
It would seem common sense that money supply growth should be constrained to something like (inflation expectation (3%) + population growth + productivity growth). That way the incentive is to be productive rather than speculative and we dont end up with this ridiculously unbalanced economy.
Problem is central banks have been taking the speculative option for so long and asset prices are so high that it would be very painful to revert to the productive option. As is human nature we will always look for the short term solution (short term gain, long term pain) which is to keep the speculative gravy train going. I suppose given most of the central banks are allegedly owned by the banks themselves it is not that surprising they take this option.
Long term pain will be bought about by public protest (such as we are seeing in tunisia/egypt) as the poor can no longer put up with a system that seems to exclusively cater to the rich. You only have to look at the US, the bankers/hedgies/fed who caused the GFC, have come out with more power and profits then ever without any cost. The lower classes however have no job and are paying more for food/gas etc then ever as a primary result of feds efforts to help the banks. Will they keep putting up with it?
Or maybe the re-balance will be because of a broader country based protest resulting in protectionist based policies.
Whatever it is it will happen, the question is when. The following is a good take on it all.
(20min delay)