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Samizdata quote of the day Corporatism in finance has brought ruin onto the world. Letting banks fail is messy, disruptive and ugly (though not as much as people think). But bailing them out creates moral hazard – it gives a blank cheque to reckless banks. Unless bad banks are allowed to fail, good ones cannot take their place. Preventing failure is good for established banks, but bad for everybody else.
Cheap credit created by central banks inflated the housing bubble that burst in 2008. The combination of artificially cheap credit and banks expecting a bailout led to the crisis. Money should emerge from markets, not be imposed by governments. Without radical changes to money and banking policy, we will sleepwalk into the next crisis, and it may be even bigger.
Somebody needs to speak up for the freedoms of the many against the protections of the few. Corporatism – not capitalism – was at the root of the last crisis and it will be at the root of the next one. Britain needs to reject protections for businesses. It needs a free market revolution.
– Sam Bowman
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Who Are We? The Samizdata people are a bunch of sinister and heavily armed globalist illuminati who seek to infect the entire world with the values of personal liberty and several property. Amongst our many crimes is a sense of humour and the intermittent use of British spelling.
We are also a varied group made up of social individualists, classical liberals, whigs, libertarians, extropians, futurists, ‘Porcupines’, Karl Popper fetishists, recovering neo-conservatives, crazed Ayn Rand worshipers, over-caffeinated Virginia Postrel devotees, witty Frédéric Bastiat wannabes, cypherpunks, minarchists, kritarchists and wild-eyed anarcho-capitalists from Britain, North America, Australia and Europe.
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I have no brief from the banks but I’m sure they would point out they were “just obeying orders” in regard to sub-prime and that spreading risk, i.e. interconnectedness, is just good practice.
However, the simplest answer is to go back to gold. Then the government can’t simply issue some new numbers to replace the ones (and zeroes) the banks lost. I also can’t help thinking that banks would have been a bit more wary of lending, e.g. to Greece, if it was irreplaceable gold they were lending rather than easily replaceable digits.
Roue is right about “Just following orders” the Clinton era Community Reinvestment Act” is the source of the subprime disaster. The corruption at Fannie and Freddie made things worse.
But I don’t see how going back to a Gold Standard would help. Politicians and their cronies were just as corrupt under the Gold Standard as they are now. Strict US adherence to the Gold Standard didn’t stop Teapot Dome in the 1920s.
A Gold Standard would probably put some worthwhile limits on the political class, but they would find ways around it. For example, how long did FDR’s prohibition on the private ownership of gold last ? Thirty or forty years ?
Taylor: corruption, as damaging as it may be in and of itself, is the least of the issue here – it’s the financial and economical consequences of fiat money that are the most serious problem. Unless I’m missing your point?
For those interested in the courses taken by Capitalism (which unlike other “isms,” such as socialism, collectivism, etc., really is not an “ism” since it has no social objective for its operations) I suggest a revival of interest in two specific works of Carroll Quigley: The Evolution of Civilizations (1961; Liberty Fund Reprint 1979) [differs from the Toynbee approach] and Tragedy and Hope (1966 Still available at Amazon).
Capital can be understood as the Surplus accreted by a social organization (an economy) how Surpluses are deployed and re-deployed correlate to the expansions, stagnations and declines of civilizations.
History has recorded: Mercantile Capitalism, Commercial Capitalism, Financial Capitalism, Industrial Capitalism, and what I label today as Managerial Capitalism which has evolved along with the now highly fragmented ownership of what today represents Capital in most of Western Civilization.
Perhaps Corporatism has a definition, but Corporations are certainly one of the forms of voluntary human associations, as are other forms of business organizations. They all come into existence and subsist to implement human objectives (read: Douglas C. North, et al.). To “demonize” those instruments requires demonizing the objectives of the human activities that operate them; which today is the Managerial Class.
Despite the Adam Smith Institute origins of the assertions, one may question whether this is a Libertarian view.
Taylor, I wasn’t so much arguing for gold as pointing out the psychological problem of a fiat currency. The banks know in their hearts that the digits on their screens could be replaced by their chums at the central bank should they choose to do so. This gives rise to a different mental attitude than if this were not the case. If you know with absolute certainty that something is irreplaceable, you take more care of it.
I jumped in to comments only to see that you’ve been nicely corrected already, so I’ll just pile on instead. Long as I’m already here, ya’ know.
The banks gave out stupidly inappropriate home loans because a faction of government and its minions in the community organizer ranks made what everyone considered to be realistic and dangerous threats against the banks should the banks NOT give out stupidly inappropriate home loans. They threatened to go to the bank regulators and report that the bank was out of compliance with the legislatively-mandated stupid-loan stats, and they promised that the bank regulators were going to be taking notes and remembering names when banks decided to ask permission for just about anything later. Banks, being run by sentient beings, heard those threats and asked “how high?”
Banks tried to say no based on the horrendous losses those Stupid Loans would cause them once the borrowers tired of making payments. Fannie and Freddie, two tired old queens who ran around buying up mortgages from banks with government-provided money (so that the banks could afford to make MORE Stupid Loans), quietly told the banks that their Uncle Sam, who sort of owned part of the queens’ business (wink, wink), would make their losses good if anything bad happened, which it wouldn’t because all of those poor people just needed a big house and a mortgage to make them feel like they were participating in society and so now they’d never miss a house payment again, so the banks loaned out more Stupid Loans.
And then the poor people remembered that they were poor and stopped making the payments on their home loans, and Fannie and Freddie stopped coming around to the banks’ parties, and the banks got nervous and said “hey, we’re not your bi . . . we’re not your scapegoats, Fannie and Freddie!”, and they took those bad loans and sold them off amongst all of the other banks who thought they were getting some great government-guaranteed no-loss deal (which turned out to be true anyway).
So the people complaining that the banks caused the crash are just damn thrilled that everyone appears to be buying this piece of utterly dishonest crap, because they’re still claiming that Fannie and Freddie ought to get billions and billions of dollars more that they can hand out to the Perpetually Poor which will end the recession and stop abortion and cause us all to wear more hemp, but if the enraged townspeople attack Fannie’s castle with pitchforks and torches and kill everyone inside because they’ve learned that Fannie caused this recession, future large gifts for all of their friends and family will be in doubt.
The bankers’ only crime was to refuse to eat the entire Barney Frank disaster by themselves. Instead, they sold those Stupid Loans off to other banks across the world – a normal occurrence in banking – and so Barney managed to almost kill the entire industry instead of just those sucker bankers who believed him about those government guarantees.
Taylor – the gold STANDARD certainly would not help.
As under a “standard” we have the “useful myth” that the money is something (in this case gold) whilst in practice (as in the late 1920s) a credit money bubble can be built up regardless.
Either the gold is the money or it is not (ditto silver or whatever else is used as money – by buyers and sellers in private contracts).
“Standards” are (at base) deceptions.
By the way there was no “Community Reinvestment Act” in the 1920s.
And (whilst the CRA of Carter and Clinton was a very bad thing) without it the credit money bubble (pushed for years by Alan Greenspan) would still have created a boom/bust.
Please read Thomas Woods’ “Meltdown” on this point.
As for “moral hazard”.
It is a bit more than that.
A vast increase in the MONETARY BASE has been created by the Federal Reseve (in order to save the politically connected banks and the corporations connected to them).
Bank credit (“broad money”) would otherwise have collapsed. The whole credit bubble house-of-cards – the “financial system”.
But this vast inflation of the monetary base has its own consequences.
And have the bankers learned from their experiences?
Not at all.
Jamie Dimon (the head of J.P. Morgan Chase, the largest bank in the United States, and one of the people who put Barack Obama into the Whitehouse) has this reaction to the idea that he increase the percentage of credit covered by capital (i.e. actual money – if of the fiat kind).
Such as thing would be “unAmerican” – he must be allowed to lend out money (THAT DOES NOT EXIST) as much as he likes, to any level at all.
And when (not if) his bank is on the verge of bankruptcy again – why then the hidden subsidies (that it gets every day) must (again) be supplemented by a vast open bailout.
To say that Mr Dimon is corrupt might be regarded as “stating the obvious” – but it is not just financial corruption (out of control greed), it is more serious than that.
It is a form of mental corruption that has undermined his reason.
And he is not unusual.
In many ways he is the norm (and not just in the United States, see the example of UBS in Switzerland).
The expansion of the money supply (since 2007 the explsion of the monetary base itself) has done more than “corrupt the capital structure” it has corrupted (or rather completed the corruption) of the MINDS of many of the financial elite.
They are now so used to this madness – that they see it as normal and right.