We had financial meltdowns long before fractional reserve banking, so that is not the only culprit. I don't see how we can get rid of the Fed now, but I do think it needs to be subject to much tighter rein regarding creation of money. But there still needs to be adequate regulation regarding reserve requirements. Credit default swaps are basically a form of insurance, but AIG was not required to keep adequare reserves against them largely because they were exempted from regulation by Phil Gramm's legislation.
***...but AIG was not required to keep adequare reserves against them...***
That’s my point. That isn’t a free market principle as far as I can tell.
Fractional Reserve Banking has pretty much been around for all of America’s existence, even when we were on “gold standards” (arguably they’re not really gold standards if paper money can inflate beyond the gold that backs it up).
But bubbles can form without fractional reserve banking, because fractional reserve banking isn’t the only way to massively increase the money supply and thus fuel rapid speculation. Tulipmania saw a 60% increase in the money supply, and the Bank of Amsterdam didn’t practice fractional reserve banking.