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On so-called “insta-books” and their alleged faults

It is an interesting argument made here that so-called “instant books”, written in the aftermath of some crisis or big event, can be easily overturned by subsequent events, debate and analysis. Quite true. And it is also true that the internet, blogging and online debate is intensifying this process of making a book look dated within months of publication. But it seems to me that in the article I link to, the author of the item is making some mistakes about the book, Meltdown, written by Thomas Woods about a year ago.

For a start, I think that it is worthwhile that some authors, as soon as the hue and cry went up about “greedy bankers”, sought to challenge the establishment “narrative”, assiduously supported by parts of the mainstream media, that says that the meltdown in financial markets somehow proves that capitalism is flawed, needs more regulations, controls, etc. Getting a book out as quickly as possible makes sense because a book is a talking point. Even if some of its facts are challenged or overturned, the point is that the author gets invited to give talks, has to take questions, can be asked for more details, etc. A book, in other words, is a good starting point. No book, no launch party, no nothing.

And challenging the established narrative any way possible is important. The usual line is what I hear from David Cameron, Barack Obama, and of course our own government. To hear the contrary view, that what happened was primarily caused by state-established central banks distorting price signals of interest rates, and hence fuelling an asset bubble, is much rarer. For example, the other day I walked into Waterstones, and in the section on economics and current affairs were books such as Gillian Tett’s Fool’s Gold, or books with such racy titles as How I Caused The Credit Crunch. In these cases, the books will typically treat the issue as one where the crisis is caused by “greedy”, or naive bankers, who are treated as little different from wild animals, or caused by the supposed dangerous complexity of trading technologies.

The author of the article criticising Mr Woods’ book, Roger Donway, argues that Mr Woods’ book is flawed in many ways, as it, for example, does not give much of an idea of what caused the crisis beyond the standard “Austrian” analysis of what happens when central banks flood the world with fiat money. But why should Mr Woods write a 1,000-word tome to spell out the causes of the crisis in every last detail? The purpose of the book, as is pretty clear to someone like me who knows a thing or two about economics, is to spell out to the general reader what the broad, free market take on the crisis is. I happen to think that Mr Woods summary of the “Austrian” view on what money, banking, the business cycle, etc, are, is simply brilliant. There can never be enough books spelling out why, for example, it is necessary to understand the role of money, and what money is and more, what it is not.

Mr Donway just assumes that folk who might pick up Mr Woods’ book off the shelves are already well-versed in their von Mises, Hayek or Rothbard. But that is hardly likely. The sort of person who steps into a bookstore, and wants to read something about the current financial mayhem, and who might be the sort of person who doubts the current wisdom but who is not an economics specialist, is ideally suited to read this sort of book. Yet Mr Donway writes:

“Chapter 5 also presents material familiar to anyone who has perused some works of Austrian economists, particularly the works of Murray Rothbard. And this material is even less informative about the meltdown of 2008. Entitled “Great Myths about the Great Depression,” the chapter actually takes very brief looks at the depressions of the nineteenth century and the depression of 1920–21, as well as devoting 11 pages to the causes of the Great Depression. And how does an examination of the Great Depression help explain the collapse of 2008? “In both cases, an inflationary credit boom brought about by the Fed’s lowering of interest rates led to massive resource misallocation and a distorted capital structure.” (106) That’s not very helpful.”

The events of previous depressions/recessions will always be different in certain ways from what is happening now, but that is nitpicking. The point of why Mr Woods talks about the short-lived recession of 1920-21 (solved quickly without a Keynesian orgy of money-printing) and the decade-long stagnation in Japan in the 1990s, say, is to shed light on what ought to have been the approach of policymakers in the recent past. To say that an examination of the Great Depression gives no insight into what is happening now strikes me as a case of trying to shout debate down. After all, one can be sure that the advocates of Big Government and Keynesian demand management will call history in aid if they think it bolsters their case.

This paragraph is perhaps a bit fairer:

“Now, some critics might blame this tendency to abstractionism on Woods’s “ideological” economics, but I do not. If he believes in the pure Austrian theory of boom-and-bust, fine. Let him present his analysis using that theory and let his explanation be judged by its adequacy, not by its origins. But in order to judge the adequacy of Woods’s case, we need to hear him make it against those economists who understand his theoretical approach but disagree with it or at least disagree with his application of it. It is no help to hear Woods rebut mainstream economists who do not take Austrian economics seriously.”

Quite possibly true. I know for a fact that people operating in the free market school of thought differ about quite a lot of things, such as whether fractional reserve banking should be illegal, whether state central banks are an evil to be abolished or institutions to be placed under better, tighter rules, etc. But Woods cannot be expected to go into vast reams of text to debate every real or potential objection from such quarters; and in any event, he does, I think, point out the differences that exist between say, the Chicago school – in some ways closer to the Keynesian one – and his “Austrian” point of view.

Of course, there is a need – and this is where I think Woods’ book falls short as a piece of work – in showing exactly what practical steps governments could take in putting financial systems on a sounder footing. There is, in the UK for example, a move by economists such as Kevin Dowd and the folks over at the Cobden Centre to flesh out in detail as to what an “honest money” banking and financial system would actually look like. And as I have previously mentioned on this site, Professor Dowd has sketched out how, for example, a failed bank could be restructured and bankrupt banks be let go without crippling an economy.

And Professor Dowd has, or is about, to release a book on these matters. But for all that the Woods book may be a bit lacking in some respects, I do believe he did me a favour in helping to marshall some of my own thoughts about how to think about the credit crunch. I am glad he did that, and most impressed that he did so in such a short space of time, by focusing on the core ideas at stake.

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21 comments to On so-called “insta-books” and their alleged faults

  • Robbo

    I don’t think this sentence is fair “It is no help to hear Woods rebut mainstream economists who do not take Austrian economics seriously.”

    It is exactly because many mainstream economists don’t take Austrian economics seriously that their conclusions are to be rebutted.

  • boniek

    “Of course, there is a need – and this is where I think Woods’ book falls short as a piece of work – in showing exactly what practical steps governments could take in putting financial systems on a sounder footing. ”

    Free market means market free from government intervention. Austrian school is all about completely FREE (as in freedom) market. Name free market itself implies solution and government policy to avoid such things in the future – government such just dissolve to ZERO its control over economy. That not really hard to grasp if you actually use your brain a little 😉

  • Johnathan Pearce

    Boniek, but your point begs the question
    of how government power is dissolved and in
    what stages.

  • Sam Duncan

    Exactly, Robbo. Donway appears to have misconstrued Woods’ purpose in Meltdown. It was obviously written for a general audience, as an introduction to Austrian ideas in light of the current crisis. And it does a very good job of it. Rebutting mainstream analyses of that crisis – which is pretty much all that audience will have been exposed to by the mainstream media – is extremely helpful.

    If Donway wants to hear Woods make his case against other free-market opinions – which I’m sure he can, and does – he’s reading the wrong book.

  • I sympathise with this discussion since our publishing house {Moving Toyshop Books} decided not to rush out a book on the financial crisis.

    Instead we waited until we had a list of authors contributing articles from a range of viewpoints {Austrian included}. Still waiting back from Ulrike Meinhof to see if she’ll do a Marxist take on the crisis for me, but she seems very quiet.

    The e-summary readable on iPhones comes out in a few days – printing the paper book will take another six weeks or so…

    ….should be perfect timing for the second wave of the crash, I reckon.

  • Paul Marks

    Robbo and others – agreed.

    On the charge that Woods does not suggest ways for government to put on the financial system on a sounder footing…..

    Not true – in fact Woods suggests the only possible way. Government should GET OUT of the financial system – no more Federal Reserve, no more Fannie Mae and Freddie Mac (and so on). And (as a Rothbardian on money and banking) Woods would note even allow governments to “protect” bankers against legal action by their “depositors” over the money leaving the bank (although that would mean that the depositors would have to accept that they would NOT be paid interest on their, literal, “deposits” and that, indeed, they would have to PAY THE BANK for looking after the money for them). Either money is lent out (which means it is NOT “on deposit” and the person who put it in the bank does NOT have the money till when and IF it is paid back) or the money is not lent out – only in the latter case (as with safe deposit boxes) is it logical to talk about “deposits”.

    “Woods does not cover every detailed internal and external debate concerning the Austrian School and boom-busts”.

    Quite true – as J.P. says the book is 194 pages long (including the index), not 2000 pages long.

    A book that is too long (and covers too many issues) for people to read would have been useless for fighting back against people who wanted (and still want – for the children of Hell have not gone away) to use the failure of statism as an excuse for yet more statism.

    “But Woods does not prove that the crises was caused by government internentionism”

    I could point such a person at Hunter Lewis’ “Where Keynes Went Wrong” book – which contains some of the details of government action not to be found in Wood’s book.

    Or I could point such a person at Thomas Sowell’s “The Housing Boom and Bust” (half Chicago school) book – which goes into the specific details not only of how Alan Greenspan repeated “saving of the world” pumped up the credit money supply, but how this money was specifically pushed BY GOVERNMENT POLICY into the real estate market.

    But let us face it – someone who reads Thomas Wood’s “Meltdown” and still believes the government was innocent (apart from not having enough “regulations” on top of the endless regulations that already exist) and that it was all the fault of “reckless bankers” is going to carry on believing that WHATEVER BOOKS ARE PUT IN FRONT OF THEIR NOSES.

    There are even “libertarians” out that who think that Alan Greenspan was a fine fellow (I suppose Ayn Rand shoved that dinner plate in his face all those years ago because of his committment to sound money and to the principle that all borrowing should be 100% from real savings) and that the problem was casued by the “Chinese saving too much” or a Klingon military plot (or whatever other excuse Greenspan has come up with).

    However, when dealing with such people it is well to rember that they have their own “ideology” (based central banking, “stable price levels” and other such Fisher in the 1920’s stuff) that has nothing to do with what others among us (such as myself) would consider sound economics or sound political philosophy.

    On Dowd’s book:

    Now this is one for the “internal debates among Austrians” subject.

    On hearing him talk I can see two points possibly comming up.

    Firstly Dowd does not seem to have fully accepted that all borrowing must be 100% from real savings – i.e. that different people can not (sanely) do different things with the same money at the same time.

    For example, if I lend J.P. a hundred Pounds – I can not ALSO spent that hundred Pounds. And me putting that hundred Pounds in a bank and them lending it to J.P. SHOULD NOT ALTER THIS.

    Also Dowd seems to be hostile to the whole idea of the corporate form – although he does not seem to make the mistake of thinking it is the creation of 19th century statutes (a view that would have amused lawyers even in the Middle Ages – indeed would have raised a laugh even in Classical times).

    I am not a great fan of corporate form myself – but the idea that it is unlibertarian is false.

    If a group of people get together and form a trading company and put money in the “trading pot” (or whatever) of this trading company that is fine – AS LONG AS EVERYONE WHO DOES BUSINESS WITH THEM KNOWS THE SCORE AND SO CAN CHOOSE.

    For example, if someone only wants to buy insurance from a unlimited liability Lloyds synidcate that is fine.

    But allowing “Paul Marks insurance Inc” (or “Paul Marks insurance Ltd” in Britain) is also fine – as long as everyone knows that the shareholders have only put a certain amount of money (capital) into the trading pot of the firm – and are NOT liable for losses from their personal possessions.

    You do not want to do business with “Paul Marks insurance Inc” or “Paul Marks Bank Limited” – that is fine, but do not forbid others to trust their money to such an enterprise, and do not ask me to give them my underpants if the business goes bust. They made a CHOICE.

    However, on the important matters Dowd is in full agreement.

    No to “central banking” (no more “lenders of last resort” or other such).

    And NO BAILOUTS – and no phony government backed “insurance schemes”.

    One can insure against fire and flood – but one can not insure against bad business JUDGEMENT.

    Bad business choices are not random events (that one can calculate using the rules of propability) they are CHOICES, JUDGEMENTS, EXAMPLES OF FREE WILL.

    Things that are not suitable for “insurance” schemes.

    This is why even the most “abstract” philosophy (such as the agency versus determinism clash) has direct relevance to the most “practical” things – such as bank “insurance”.

  • Paul Marks

    In case a Roger Dunway supporter comes back and says “but the pro Greenpan people also want the Federal Reserve abolished”.

    They are pro Greenspan – they think increasing the money supply to bailout bubbles (sorry to “save the world” i.e. prevent the needed mass liquidation when a speculative credit bubble bursts) is fine as long as the “price level” is stable.

    They have not even learned the lessons of the late 1920’s – these Cato Insitute people think that Ben Strong was a wise man also.

    So do not bother to say “we want the Fed abolished” as, according to your doctrines, it is doing a fine job.

    As for Thomas Woods book being mostly “theory” not “news”.

    That is because it is a BOOK – Thomas Woods knows of the internet and of television and of radio (and newspapers and so on). Those are the places to deal with the news of the each passing day.

    But a a BOOK was needed – something to give the layman some guidence about what all this news meant, what was just BEHIND it.

  • James Tyler

    Just a quick comment on the “fractional reserve banking should be illegal” line.

    This makes the 100% idea seem like a draconian and illiberal measure (I know that is not the aim, but I feel it is a valid criticism which should be adressed).

    As I see it, the 100% reservist argument is that this represents the correct application of property rights and common law contract with regard to money, thus taking away the peculiar legal mechanisms that allow a mode of buiness operation that could happen in the same way elsewhere.

    I can understand, from a philosophical point of view, that in a ‘free’ society (i.e. an anarcho capitalistic one) it would be down to a spontaneous order to redefine what ‘property’ and ‘contract’ meant, and that the free interaction of people would decide the FRB vs. 100% debate without the need of us, but that is not a situation we are likely to find ourselves soon.

    To my mind, the 100% argument is an attempt to apply a level playing field and prevent big banking from unfairly competing for talent/resources with other modes of business, and doing it in such a way as to consistent with common and natural law.

  • The problem with 100%-reserve banking is that, historically, it has ALWAYS tended toward fractionalization. This dates back to the original goldsmith banks, who were not the beneficiaries of government privileges when they engaged in fractional banking.

    Why? Because 100%-reserve banking is inefficient. In a free market, it would rapidly disappear. (Those so inclined should read up on the “Suffolk System,” which amounted to a free-market central bank permitting fractional backing of notes.)

    The problem is that supporters of 100% reserves are confusing money with commodities, in which case it would certainly be illogical to spend the same commodity twice. But the map is not the territory. Money is a promise, not the thing promised.

    Consider:

    Suppose I am a barber, and I start to pay my bills with gift certificates that entitle the bearer to a free haircut. The gift certificate is not the haircut.

    On the other hand, the certificates lose value to the extent that they are all redeemed at once, overwhelming my ability to actually give haircuts. This possibility becomes more likely if I abuse the privilege and issue too many certificates for the market to bear.

    Yet the Rothbardians would argue that the act of issuing certificates itself, beyond some arbitrarily small amount, is somehow theft.

  • James Tyler

    Mastiff: The original Goldsmiths were clearly committing fraud – and the authorities knew it. That’s why they were heavily punished when caught – including torture, execution and so on.

    And, whilst you can say that money has now been so perverted by the state it now has no true value, the Misesian line is that money is a commodity the same as anything else.

    Money is the most ‘barter-able’ commodity – to such an extent that it is accepted by all (unfortunately, with the added enforcement of the guns of the state now!).

    The free market created money itself out of need to escape the double coincidence of wants problem, and it chose Gold due to a number of important, commonly accepted, characteristics. At least this is the way I see things, which is why I fret about the concept of two people having an instant claim (or ownership) to the same thing (that I see as a commodity).

    I get what you are trying to say in your example, but your barber certificates could never act as money because they are not uniform, portable, substantial, desirable, durable and commonly valued. Gold was all of this, before the machinations of governments turned the world upside down and turned it into an oppressive tool.

  • James Tyler,

    Gold also has a serious problem: it is expensive to store. Indeed, Charles Goodhart has argued in that it is precisely the reliance on gold as a reserve currency that generated one of the mechanisms by which central banks formed, naturally out of rational market behavior.

    Briefly, if you are a small rural bank, it is expensive to store gold. Furthermore, you are foregoing the interest that might have been earned if that gold were invested. So it was common for banks to deposit their reserves with other, larger and more respected, banks. This was called “correspondent banking,” and accounted for the preeminence of the New York banks in America.

    Over time, the reserves of the entire industry may concentrate in the vaults of a handful of respected banks, or even one. From here to central banking is a short step, and solves several conflicts of interest between the depositor banks and the holding bank.

    I am familiar with Mises’s argument, but it is too narrow. It is possible to have money that is not a commodity. As mentioned by someone else recently, modern money is given value by being accepted for taxes.

  • Nuke Gray

    Fractional Reserve is impossible to stop, because it is so easy to re-invent it! And it is me doing what I want with my gold, which is what liberty is all about!
    If everyone knows about it, is it a fraud? I think, NO!

  • Current

    “Misesian line is that money is a commodity the same as anything else. ”

    No it isn’t. Read his book “The Theory of Money and Credit”. In Mises terms “money-in-the-narrower-sense” is a commodity, but “money-in-the-broader-sense” can also be a promise.

    I think the 100% reservists are wrong and don’t understand the situation. A bank can use a fractional reserve because it can estimate the half-life of it’s notes and checking accounts. It can find out by experience that if it issues approximately £X then a certain percentage of that will be demanded for redemption.

    Of course doing so involves some risk, but so does everything in life. When we sign a contract that means that both sides will try to uphold there ends, it doesn’t guarantee that they will.

  • James Tyler

    Current: Fair enough, I should read Mises instead of relying on what Rothbard says that Mises said…. my bad.

    These are all very interesting comments, that at the very least make me pause for thought. In a free world I would relax. But…

    I do not want to be a 100% head banger, but *practically* I still cannot get past the idea, as a businessman, that FRB allows banks a leg up that the rest if us cannot use.

    That banks use my grocery money to set up 30 year alphabet soup liabilities, marked-to-fiction, npv’d using ‘risk free’ rates implied by bankrupt government bonds to then repo out and use as collateral against lending to politically connected plutocrats and brain dead resource poor kingdoms, to build mile high vanity phalluses that make no economic sense at all.

  • “I still cannot get past the idea, as a businessman, that FRB allows banks a leg up that the rest if us cannot use.”

    No argument here. While the present structure has sound historical reasons behind it, the reasons become less sound as we move closer to the present, when you consider modern communications technology and modern finance.

    In short, our banking system is in many respects an artifact of the 1920s, even though it has managed to adapt in certain limited ways. Much of the real action is going on in nonbank financial firms, such as equipment-leasing firms and credit-card companies.

  • James Tyler

    “No argument here. While the present structure has sound historical reasons behind it, the reasons become less sound as we move closer to the present, when you consider modern communications technology and modern finance.”

    So how can we justify a different set of rules for FRB-er’s?

  • Paul Marks

    Mastiff.

    “The problem with saying that fraud is a crime is that people still commit fraud – so it is pointless”.

    How is that different from your position?

    First of all I think the use of the word “reserve” is a fundemental error (it is the same loose use of language that leads us into the errors of a gold “standard” and of commodity “backed” money).

    If I “deposit” money (whether it be gold, silver or some other commodity) in a bank – then I should pay for them to look after this “deposit” would (of course) remains in the bank.

    If I agree for the bank to lend out the money (so they can pay me interest) then it is NOT a “deposit” – I have in fact loaned the money out (via a middle man) and I NO LONGER HAVE THE MONEY (and so have no right to demand it back till the contract is over).

    When the loan contract is over I get the money back – IF THE BORROWING PAYS IT BACK.

    At no time (sanely) can two different people use the same bit of money for different things (either the money stays in the depositors account – or it is lent out to a borrower or borrowers, it can not be BOTH AT THE SAME TIME).

    Still – you may reject all the above (although that is the same as denying that A is A – or denying other parts of basic logic).

    Let us say I took YOUR position (I do not – but let us say I did).

    O.K. so credit bubble banking is fine – very “efficient”.

    Right – so when these “efficient” banks go bust, one allows them to go bankrupt (the “depositors” lose their money and so on).

    Correct?

    If you say “yes” – you undermine your claim that credit bubble banking is “efficient”, as it is only profitable till the bubble bursts (then everyone loses their shirt – including the “depositors”) .

    And if you say “no” (i.e. the government must bailout the system) then you are right down on all fours with the “mainstream” media (i.e. scum like Time magazine and the Economist).

    Which is it?

    Please remember that about 98% of the population of Iceland have just voted to uphold the legal position that there was no bailout provision (in Icelandic law) for large depositors.

    What gives you the right to demand that these people be taxed (against the will of the vast majority of the population) to bailout your “efficient” system?

    “But they will not be allowed in the European Union if they do not pay” – and why should they not remain an independent nation?

    “But they will not get IMF money unless they pay” – and why should Iceland need this money? Why should the people not just stop their government spending money it has not got?

    What sort of pro freedom position is a pro E.U., pro IMF, pro Central Banking, stance anyway?

    Even if one accepts that lending should NOT be 100% from real savings (which I do not – as it violates one of the most basic principles of logic) when such credit bubble institutions go bust surely they must be allowed to go bust (with both the shareholders AND THE DEPOSITORS) getting no bailout.

    Surely you would agree with this?

    Otherwise your “efficient” system is just a cover for government subsidy.

  • Laird

    Paul, if you want to “deposit” your money (be it a stack of paper bills, or a bag of gold coins, or whatever you have) without worrying about the bank lending it out, you can certainly do so. It’s called a safety deposit box. You pay a few dollars per year and your valuables are locked away in the vault, inviolable. But if you want to earn interest on your money (i.e., “lend” it to the bank), or have the bank process your checks free of charge, you’re going to take a modicum of risk that: (a) the money might not all be readily available precisely when you want it (as is specified in the disclosure forms you signed when you opened the account), and (b) if the bank fails, you might not get it all back. Many people might not understand that, but if so it’s only because they’re either stupid or simply too lazy to read the disclosures and understand what they’re agreeing to when they open their accounts. Neither is my problem. Fractional reserve banking is a consensual activity and it’s not going away.

    Here in the US we have deposit insurance on accounts up to $250,000 (which, in my opinion, is too large an amount), and there are numerous problems with a government-run insurance scheme such as this (which I won’t go into here), but at least the basic premise is decent: banks are changed a small amount on all deposits as the “premium” for that insurance, so it’s essentially paid for by the depositors, and as a consequence small depositors don’t have to worry on a daily basis about the safety of their money. Large depositors do have to worry, though (or at least they are supposed to), which is just as it should be. If the bank fails they lose, too, because they are creditors of the bank.

    But I agree with you that banks should be permitted to fail, and not be bailed out by the government. Such bailouts create what is called “moral hazard”, which is part (but only part) of the credit bubble. Bankers and large depositors get to play a “heads I win, tails you lose” game, which always ends badly for the taxpayers.

  • Paul Marks

    Laird – I already mentioned safe deposit boxes.

    My point (which you seem to have missed) is that when one lends money out it is not a “deposit”, because THE MONEY IS NOT THERE ANY MORE.

    Two points here (which I stated – but will now state again). Firstly there should be truth in language – one should not say “deposit” when one means “loan” (even if a bank is acting as midde man for a loan).

    Also one should be very careful not to pretend the money is still there – i.e. that the lender (the so called “depositor”) and the borrower HAVE THE SAME MONEY AT THE SAME TIME.

    That leads to multiplication of money via so called “franctional reserves” (i.e. a build up of an inverted pyramid of debt “money” – that always and MUST end badly).

    Having repeated myself on this I will now repeat my self on “bank insurance”.

    It is not a “decent” concept, it is an INSANE concept Laird.

    Think about a butcher or a baker (or a candle stick maker or a ……) going into an insurance company and saying…..

    “I want to insure against bankruptcy”.

    If the insurance company was not run by lunatics (no sure thing these days) they would say “sorry Sir, whether you go bankrupt depends on your business judgement it is BY DEFINITION not something that can be rationally insured against”.

    A BANK IS NO DIFFERENT.

    Insurance is about dealing with events (fire, flood earthquake, robbery and so on) it is not about business judgement.

    True one can “insure” against crop failure (or whatnot) by selling the risk to a speculator – but “bank insurance” is not the same thing at all.

    I repeat – bank insurance is an insane concept.

    No private insurance company (other than one run by lunatics) would offer such a product – and the government should not either. It simply gives a false sense of security to people who lend their money to banks (i.e. so called “depositors” – most of whom do not even know that they are NOT “depositors” in any real sense, after all the legal cases went against them almost two centuries ago).

    As for charging banks themselves for the failure of other banks – well it is unwise to discuss the thinking behind that concept (unless one wishes to have a stroke).

    It all goes back to agency (free will) – business judgement is an example of this. It is a matter of INDIVIDUAL CHOICE (agency – free will, the exercise of reason), not an event with a “probability” that can be calculated for insurance purposes.

    Actually it was Ludwig Von Mises’ brother Richard (who was not even a free maket person) who showed how things of this sort are not suitable for probability mathematics – and without that the whole basis of “insurance” is destroyed.

    Still back to banking…….

    When someone lends money to a bank that is what they should be told they are doing.

    They are NOT “depositing” the money – they are INVESTING the money.

    And investments can go wrong – “depositers” (i.e. lenders – people who are lending their money to the bank for the bank to lend out) should carefully enquire what sort of person and enterprise the bank lends money to and on what terms (against what assets if things go wrong).

    None of this happens.

    The average bank “depositor” (i.e. person who is lending their money to a bank for the bank to lend out) has not got a clue what sort of person or enterprise the bank lends money to, or on what terms (against what assets and so on).

    Also they expect the money back ON DEMAND (or almost on demand) whereas the bank can not get the money it lends out back on this basis.

    In short the bank is supposed to “borrow short” (on demand from “depositors” who are not depositors at all – I repeat the legal cases declared they were not depositors almost two centuries ago, they do not have the rights of people who, for example, deposit grain and a grain storage centre), and “lend long” to individuals and business enterprises.

    Does that system make sense?

    Of couse it does not.

    Which is why banks (organized on this basis) are always “technically” insolvent.

    Of course one can make profits (huge profits) for a time – but, eventually, the whole house of cards comes down.

    Still I thank you Laird (I am not being sarcastic here – I am being sincere, as will become clear).

    Normally “fractional reserve free bankers” are careful to say that they OPPOSE “deposit insurance” – you have let the cat out of the bag.

    A system that depends on government organzed “deposit insurance” (and other such) is clearly a scam – a shell game.

    Normally to get a “fractional free banker” to admit that his system has nothing to do with the free market (that it depends on government organized “deposit insurance” and other Ponzi schemes) is like getting blood out of a stone.

    Whereas you just came straight out and honestly admitted it.

    Sadly honesty and directness are rare among “fractional free banking” people, they sometimes spend great effort making the clear unclear.

    Of course there are people who say “I am not a free banker of any type” – which is fair enough. Such people need not concern a free market supporter – as they openly admit that they wish for a banking system that is dependent on government subsdy (open and hidden).

    Such Tim Congdon types are not worth serious consideration.

  • Paul Marks

    There is in Britain great hostility to the desire of banks to charge for current accounts. Hence the banks resorting to tricks like charging people an arm and a leg if they go one Pound over their account (even for a day) and so on.

    However, if the money really was just sitting in the banks (i.e. the banks were not lending it out) then the desire of the banks to charge for current accounts would be perfectly just and sensible – after all the bank would be incurring great cost looking after someone’s money and making it available to them in easy ways regardless of what town they were in (via cards or cash machines).

    A bank SHOULD BE PAID FOR THESE SERVICES.

    Otherwise a bank would be quite justified in saying the following….

    “We do not offer current accounts – if you wish to lend money to us (what is falsely called a “deposit” account as if one were depositing grain at a grain store or whatever) we will lend it out for the best interest we can (on the basis of our judgement of the ability of the borrower to pay the money back) and pay you X per cent interest. OF COURSE YOU MUST AGREE NOT TO ASK FOR THE MONEY BACK TILL SUCH AND SUCH A DATE OR HAVING GIVEN SUCH AND SUCH AN AMOUNT OF NOTICE.

    The money is not “on deposit” (it is lent out). And people must not treat it as part of their wealth – as money they can buy things with.

    Because THEY DO NOT HAVE THIS MONEY (it has been lent out to someone else). And they will not have it till when and IF it is paid back.

    The principles of honest money lending are not complicated – so if complications are brought in (and complicated language used) it is almost certain a scam (a con game) is in progress.

    Actually I think things were better when bankers understood they were playing a con game (which they actually did once).

    There was always “fractional reserve” elements in Britain but it was very limited and careful (bankers understood they were shaking containers filled with nitro) – so when things went wrong (as eventually they always did) the bust was small and the bank was not destroyed.

    Somewhere sometime bankers started to believe the B.S. that loans were “assets”, that deposits were really there in the vaults and AT THE SAME TIME in the hand of the borrowers (and so on and so on).

    I am not just guessing – I have talked to retired bankers (indeed I work with one) and they tell me that a lot of this is so, that things became more reckless over time, because THE NEW PEOPLE DID NOT UNDERSTAND THE BASIC TRUTH THAT FR BANKING IS A WILDLY DANGERIOUS GAME.

    It is indeed like shaking a container filled with nitro.

    The final absurdity for last.

    In recent decades a new fashion has come into banking.

    “Payment according to results”.

    Instead of being paid a certain amount of money per month the bank employee (from quite high to quite low) is paid on the basis of deals made.

    Not money REPAID (really repaid – not just interest payments) – but money LOANED OUT.

    Think about that.

    But do not think about it too long – as you will find you are laughing and crying at the same time, and people will look at you oddly and cross the street to avoid you.

  • Andrew

    I understand the “moral hazard” concept regarding bank insurance, but I fail to see that other types of insurance are all that different. Human judgement is a factor in fires and auto accidents also. These are not mathematically perfect random events.

    Few people WANT their houses to burn down, yet some people are going to be more careful than others regarding smoking in bed or plugging 30 appliances into one electrical outlet. Some people drive more recklessly than others.

    There is “moral hazard” of sorts inherent in all insurance. For instance, I guarantee that at least some of us would drive a bit more cautiously if we knew that damages would be coming out of our own pockets.