What’s Wrong with the World

The men signed of the cross of Christ go gaily in the dark.

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What’s Wrong with the World is dedicated to the defense of what remains of Christendom, the civilization made by the men of the Cross of Christ. Athwart two hostile Powers we stand: the Jihad and Liberalism...read more

Around the Interwebs

1) Mike Konczal (aka. Rortybomb) lays waste to a rather silly - in my estimation - meme that has been replicating itself in the minds of the right-leaning of late, namely, the notion that the very existence of FDIC deposit insurance is a great sinkhole of moral hazard, and responsible for the Great Recession. Not only does the meme in question confuse the very different funding, asset, and risk structures of depository institutions and investment banks, it also presupposes, in this Brave New World of engineered finance, that ordinary depositors must become conversant with the kabbalistic financial techniques of this Brave New World, if they are to evaluate their banks. Not bloody likely. The fact that such a meme could even gain some traction among the commentariat is a reflection of widespread confusion regarding the existence and nature of public goods; moreover, it is illustrative of the consequences of rejecting such public goods, of which basic deposit insurance in commercial banks is one: the fanatical pursuit of every last possibility of moral hazard, however small and remote, however deeply buried beneath layers of asymmetrical information, results in systemic hazard, as the absence of such insurance would leave the average depositor recourseless before the machinations of the calculating and dishonourable. Then again, it is a blind and stupid liberalism (or libertarianism) that suffers the depositor and the speculator alike to suffer ruination.

2) Mark Thoma links to a brief paper on the political origins of widening measure of inequality in the US over the past 30-40 years. John Schmitt discounts both of the common explanations for the increase in inequality, regarding the 'technological progress' and 'globalization' theories as inadequate. The fundamental problem with the former is that, even if technological change were a wholly exogenous force, this would still underdetermine our political and social responses to it; the problem with the latter is that, to appeal to my own preferred terminology, globalization is not a self-subsisting, self-sustaining project, but an artifactual one, embedded in discrete political decisions. Whether one thinks widening inequality is good, bad, or neutral, we have chosen it, not had it thrust upon us as a force of nature. Why is inequality potentially bad? Because, as has been known at least since Aristotle, a representative government cannot survive vast extremes of wealth and privation.

There was one passage of Schmitt's paper that I wanted to spend more time discussing; it comes on page seven, and concerns the shift, in recent decades, towards the privatization of many formerly public services. Like highway maintenance and traffic engineering, areas with which I have some familiarity. Back in the late 80s, before the privatization push had really achieved its full head of steam, traffic engineering studies were typically conducted either by a small handful of consultancy firms, or dedicated public employees; the studies were well-funded, the people responsible for them almost uniformly competent; and the relevant agencies willing to spend more to acquire superior instruments, which produced superior data. Superior data entailed superior planning, which entailed superior infrastructure. The privatization push introduced a double cost-sensitivity, at the level of the state agencies paying for the studies, and within the consultancy firms that sprouted like mushrooms; the consequence of this was the slashing of public works staffs, and an increasing reliance on private firms, which themselves sought to slash costs at every turn, to maximize the take of the principals. Hence, they often purchase inexpensive, shoddy, unreliable instruments, and employ marginally competent technicians to use them, with the result that the quality of the data is poor, and highway planning that much poorer. Long-run costs will increase, of course, as this sort of privatization is merely a strategy of deferral, and it is but one factor behind our deteriorating road networks, but it is one I can speak to from experience.

3) Conor Friedersdorf, writing at the Daily Beast, discusses last week's disclosure by DNI Blair that the Obama Administration will now authorize the assassination of American citizens who pose an "imminent" threat. Given the capacious powers arrogated by the previous administration, the inherent fuzziness of terrorism determinations, the tendency of such precedents to gradually engulf adjacent categories of circumstances, and the inherent reluctance of government to relinquish powers once exercised, one would think this an occasion for deep, prudential reflection. Apparently not. Discussion of the matter at The American Scene featured a Mr. Sargent assuming the politically "conservative" posture, justifying the assassinations as wholly consonant with precedent and law. When, I ask, did conservatism become, not merely an errand boy for unaccountable powers over life and death, but a bastion of rank positivism: it's legal, so let's not think about it too deeply? Gone, apparently, is the old conservatism of prudence, and skepticism about unanswerable power. In conversation with Paul, he has averred that republican government might not survive a protracted encounter with the jihad. At the present rate, it might not survive even a brief - in historical terms - encounter. Off at the theoretical end, that would present us with the choice of our despotism, or theirs. "Our despotism", complete with administrative detentions, arbitrary and unaccountable law enforcement, and the whole run of it, isn't much of a rallying cry. A hangman is just a hangman.

4) Bernard-Henry Lévy has published an intemperate critique of Kant - all on the basis of the work of a non-existent philosopher, an elaborate satire. Cue jokes, resentful and schadenfreude-tinged or not, about academics.

5) David Schaengold discusses a nascent movement, in the preservationist community, to save mid-twentieth century modernist buildings. Just say no, I say.

Comments (27)

1)You do know there is such a thing as private insurance, right? It really seems like you are saying the only options are 1)FDIC or 2)Grandma having to read quarterly statements from her bank. Is this what you are trying to convey or am I missing something?

Private insurance does not, and cannot, overcome the informational asymmetries that already exist with respect to financial statements from banks and other financial institutions; private deposit insurance would merely create a daisy chain of such informational problems, thrusting upon the ordinary depositor the responsibility and necessity of properly understanding and applying information that he is not equipped to understand, would be partial by the nature of the case, and would be vulnerable, also by the nature of the case, to manipulation by corporate principals. Moreover, any systemic crisis, akin to the one we experienced in the autumn of 2008, would expose both large numbers of depositors, and insurers as well, to loss, with the consequence that payout on the insurance would become impossible for a certain subset of the nation's depositors; this is the lesson of the CDS aspect of the crisis. In that event, certain transpire at some point in time, deposit insurance would either be worthless, or backed, in the crunch, by the full faith and credit of the government.

Just cut out the middleman.

I also pause to the note the absolute absurdity of this particular libertarian response to the crisis: a crisis, betokening a second Great Depression, originates in the perverse nexus of government and haute finance, and the response of some libertarians is.... to advocate abolition of programmes which protect people, most of whom are not involved in either poor regulatory and deregulatory decisions, or haute finance, from mischief at the levels of governance and haute finance. It's not merely a red herring, an utter distraction from the actual origins of the crisis; it's positively perverse: no matter how remote from the actual crisis, they have to fight a 75-year old battle, in this case for the "principle" that the operative logic of the financial system should be, "ordinary depositors and savers, BEWARE!" Yes, beware that the sharps, quants, and stupid gamblers will steal your money, in heads-they-win, tails-you-lose sorts of chicanery. It not seldom seems that some libertarians stand for the principle that the clever should be able to exploit the unawares, and that the law should say nothing about this. How this is different from the strong and bold exploiting the weak, for example, by breaking into their homes, I do not perceive.

I believe I said that constitutional government cannot long survive a protracted confrontation with the Jihad; which may seem a trivial distinction, but it is not. I note, for instance, the irony that the conservative positivist commenter you adduce is defending the policy of President Obama, who is hardly a conservative. If he speaks for a majority of Americans (whether he does or not I do not know) who prepared to lend a similar positivistic support to the assassination policy, then it is plain enough that republican government has survived, though of a markedly more lawless variety. In other words, abandoning principled constitutional prudence, that collection of checks on Executive power in waging war, may well prove a popular policy. Indeed, the people's representatives may be actually pushed into it. This, precisely, is my worry about protracted exposure to the razzias of the Jihad: in time the people will weary of what appears to them half-measures. I am reminded of the episode in late Byzantium where Greek statesmen pushed hard to induce the Orthodox Church to embrace a version of Christian Jihad, granting absolution for service, not merely in defensive war, war waged to check the aggressor, but also in offensive war, including offensive war against nonmilitary targets. That effort failed (thank God), but one would have to read history with a notable antipathy for Byzantium (hardly uncommon in the West) not to feel some sympathy for said statesmen, who were after all only reaching for ways to strengthen their martial resources in the teeth of a fearsome enemy to the East.

I take the distinction. I suppose, though, that I'm looking off to the medium-term and beyond. Constitutional government, I'm afraid, has already fallen, responses to the jihad essentially ratifying and deepening already problematic structures and tendencies born during the Cold War. These very tendencies, however, if indulged for a generation or two, will bring the end of republican government in the United States. Republican government will be transformed, gradually and almost inexorably, into a system more nearly resembling, say, the Russian authoritarian democracy.

It not seldom seems that some libertarians stand for the principle that the clever should be able to exploit the unawares, and that the law should say nothing about this. How this is different from the strong and bold exploiting the weak, for example, by breaking into their homes, I do not perceive.

Libertarians almost invariably believe that man is rational, not rationalizing, and that buyer and seller are inherently equals. From this perspective, the buyer is always ignorant in such circumstances, and ignorant due to their own fault, not malfeasance on the part of the seller.

While they may go too far, liberals and conservatives often go too far in protecting people from the consequences of their actions, such as trying to mitigate the harm done to home buyers who never bothered to read the terms of their mortgage or pay a lawyer to read it. There has to be a healthy balance between letting the irresponsible, especially the incorrigibly irresponsible, get burned by their irresponsibility and restraining blatantly predatory behavior. Unfortunately, all sides are extremists in their views here which precludes a balanced approach.

The Konczal post is inane. Here's just one example:

We are currently in a political environment where making sure that poor people with pre-existing medical conditions will have healthcare is a radical notion, so I run out of language very quickly and have to resort to the italics tag, but this is a really radical notion of how to reform the banking system. Is this what the anti-FDIC people have in mind?

First of all, it's completely false and unfair to say that "we are currently in a political environment where making sure that poor people with pre-existing medical conditions will have healthcare is a radical notion." Should we expect more of these kinds of silly cheap shots?

But is that the goal, better policy? Or is the goal to kill it? Because I have no time for that.
At this point, I don't think it's a good idea to get rid of the FDIC. That said, what if the better policy is to kill it? His argument is basically: "OMG the change would be too radical for my tastes. We therefore shouldn't do it." Great. I suppose the same should be said for the 16th, 17th and 19th amendments? Too radical, so don't think about it?

So, is he right that deposits have nothing to do with the abuses in derivatives markets as he says here:

These supercharged credit markets were subject to a supercharged bank run. Deposits weren’t anywhere in sight of this problem.
Apparently, all those people who blamed the repeal of Glass-Steagall for allowing investment banks to take deposits like commercials banks were completely wrong since investment banks don't take huge risks in their investment activities that therefore endanger insured deposits, allowing investment bankers to privately profit off of the public taxpayer. Wait a second, no, that's exactly what happened and is currently happening. Credit/debt is leveraged off of assets, including deposits, which is why if the bets go bad, the assets are at risk, including deposits. Right?

In the end, I think you're wrong about public insurance somehow being inherently clearer and symmetrical with respect to information than private insurance. But you don't actually give an argument; you just assert that this must necessarily be so.

So let me ask you this: can Grandma read her private car insurance policy? Does the private car insurance policy necessarily give information more asymmetric than a hypothetical public car insurance, i.e. would Grandma have an easier time reading her government insurance policy? Are you in favor of nationalized car insurance?

Is there any insurance you're not in favor of nationalizing, since public insurance is inherently superior to private insurance, due to the presumed asymmetric information that private insurance suffers from, but not public?

Also, yes, fractional-reserve lending should go. It is not necessary: it merely accelerates growth in the good times and pain in the bad times. That sort of volatility is unwise. Konczal quotes Rothbard, but does not actually argue that he is wrong. Konczal merely is shocked, just shocked, that anyone could propose that something is radically wrong with our financial system. Here's the Rothbard quote:

…in what sense is a bank “sound” when one whisper of doom, one faltering of public confidence, should quickly bring the bank down [subject it to a bank run]? In what other industry does a mere rumor or hint of doubt swiftly bring down a mighty and seemingly solid firm? What is there about banking that public confidence should play such a decisive and overwhelmingly important role?

The answer lies in the nature of our banking system, in the fact that both commercial banks and thrift banks (mutual-savings and savings-and-loan) have been systematically engaging in fractional-reserve banking…

It is impossible to “insure” a firm, even less so an industry, that is inherently insolvent. Fractional reserve banks, being inherently insolvent, are uninsurable….

Yes, the FDIC and FSLIC “work,” but only because the unlimited monopoly power to print money can “work” to bail out any firm or person on earth. For it was precisely bank runs, as severe as they were that, before 1933, kept the banking system under check, and prevented any substantial amount of inflation.

Eh, all the paragraphs following the blockquote are also Rothbard.

Is there any insurance you're not in favor of nationalizing, since public insurance is inherently superior to private insurance, due to the presumed asymmetric information that private insurance suffers from, but not public?

I wondered that myself, Albert. There's something extremely odd about an argument of approximately this form: "Ordinary people can't be expected to understand X, because X is too complicated. Therefore, risks involving X must be insured against by the government, which is, because of this complexity, automatically somehow an improvement on the situation otherwise."

Albert, look at the chart in the Konczal post. There is a clear area of overlap between the commercial banks and the investment banks, an area which can only be explained precisely by referring to the repeal of Glass-Steagall; the repeal was thus one component of a larger systemic failure, though not necessarily the largest or most consequential. Konczal has also written on the subject of the Volcker rules, arguing that, for the very reasons made visible in that chart, they do not go far enough.

Auto insurance is not nearly so complicated as modern finance. Certain credit-card contracts approach the complexity of modern financial engineering, which is itself another failing of the system. Beyond this, however, there is the simple matter of history: we tried a system of "depositor beware" up until the Great Depression, and it failed, miserably, and repeatedly, for the very reasons of asymmetrical information Konczal has cited in this case. Banksters speculated, and stashed away their gains, and when the banks failed, the depositors were left chasing the wind. I have no patience for the notion that manifestly unequal parties should be treated as identical under the law, which is what this silly jihad against deposit insurance entails. It is a reflection of an ideological mindset, as indicated by the recurrence of Rothbardian quotations in this context - and, frankly speaking, the notion that we will not only return to the gold standard, but abolish fractional reserve banking, returning us to the banking standards of five-hundred years ago, is utopian. And I've scant patience for that, as well. If you want a modern economy, you must have modern banking, at least the sort of banking that existed in 1950; and if you have modern banking, you must have the federal backstop; that's just the way it is.

Maximos, I guess I was flummoxed as to how someone like Konczal, who you indicate supports Glass-Steagall among other reforms, which was repealed in 1999 and were (partly) about regulating banks that receive deposits because of moral hazard issues, could say that deposits/FDIC weren't anywhere in sight of the problem. If he was only saying that the abuse of FDIC insured deposits by Big Banks were only part of a systemic regulatory and cultural failure within the finance world, then fine; few would disagree. But it seemed he was demonizing those who criticize the FDIC. And I still think he is not critical (at all) of fractional reserve lending, which made me suspect his judgment.

My roommate works for State Farm insurance as a auto claims adjuster and he tells me stories every week. It's true that car insurance is not nearly so complicated as modern finance, but it is about as complicated as a private insurance policy strictly for savings deposits might be. There is no shortage of very educated people who don't read their car insurance policy and think that is okay; laziness is the main problem, not complexity. Regardless, why do we suppose that insurance in complex world can responsibly and sustainably be provided with policies that mal-educated and lazy 18-year-olds can understand? The only possible way for an insurance company (or most businesses) to function is in the context of a well-educated people with well-formed characters (no, there is no magical threshold, there's only a gradient). Attempts to dumb down insurance policies in theory could work, but in the concrete reality we are in, policies to do that are addressing symptoms rather than root causes. Low expectations cannot be the way forward.

Is history so simple? As I've said, I do not oppose FDIC insurance; there are bigger, more dangerous fish to fry and FDIC insurance is a buffer for a (relatively) foolish, immoral people. But should we not recognize first that private insurance existed before the Great Depression, so it wasn't "depositor beware," and second that the only reason the FDIC did not fail is because it had access to the money printing press, which it used and is using (the FDIC is in the red and has had to ask for more funds, which the govt borrows), resulting in inflation which destroys the value of wealth and forces little guys like me to have to find, research, and understand risky investments yielding 8+% interest just to break even? Do you think the existence of the FDIC saves us from having to learn complex finances? Please.

The pre-FDIC system failed primarily because of fractional reserve lending, which Konzcal supports, and not primarily because of "asymmetric information." Fractional reserve lending means that bank runs will happen because there is not the full amount of deposits in the bank and so people panic that they will not get their deposits back, which leads to a domino effect collapse. Konzcal supports this. Why? Apparently because anything else is too radical. Or maybe he loves economic growth ueber alles? Banksters can speculate all they want; it would not hurt the depositors unless fractional reserve lending is in place because the depositors will always be able to get their money. Yet Konzcal supports fractional reserve lending.

Yes, the FDIC had benefits. But it is foolish to think that it does not have costs; the cost is inflation which primarily hurts the little guy who doesn't have technocratic access to the best financial "instruments" and "wisdom" and so his wealth is destroyed in his low-yield savings accounts while Goldman Sachs and Bank of America can leverage what remains of it to finance their bonuses.

Maximos, your faithful support for modernity's banking system is frankly surprising. You have no trouble admitting the problems with modern politics. To hear you say "if you want a modern economy, you must have modern banking" is like hearing you say "if you want a modern polis, you must have modern identity politics." That is cynically "true" yet completely misses the point in its ugly despair and pretends that an all-or-nothing approach rather than an incremental approach is what is called for. But even incremental approaches are rejected out-of-hand by those who would not question the sacred modern order of fractional reserve lending.

Lydia, that seems right to me. That bureaucrats responsible for the federal tax code are presumed to be able to write clearer insurance policies than private insurance companies is implausible to me. I don't assume that private insurance companies are necessarily clearer policy writers, but the absolute superiority of government insurance is simply the flip-side of the ideological coin.

Maximos wants to retain the existence of common, public goods, but the problem is he does not recognize that the public=government/private=business distinction is an illusion of modernity perpetuated by the modern State which seeks to claim the public sphere of community for itself only, relegating all other communities "private" and therefore un-communal. But the private vs. public is facile; what actually matters is ownership and control. A tyrannical government ruling from afar with the superficial consent of the people does not create public, common goods for citizens any more than a tyrannically distant CEO and Board of Directors does for its shareholders who also have superficial levels of control, i.e. voting.

Public, common goods can and should be created by non-governmental entities which nonetheless have binding authority (or have we believed the lie that only the government has legitimate authority?) on its members. Some of these non-government entities are called non-profits, others for-profit businesses. But the notion that public goods can only be created and sustained by the modern State is Enlightenment horseshit.

In regards to insurance, do people really think the insurance companies come up with policies out of thin air? They don't. Different states have different regulations defining what auto insurance is, combined with the default position that qualification under a peril is to be construed broadly and exclusions are to be construed narrowly. That way, when you go to buy your insurance you can compare apples with apples. Comparing apples to oranges is very difficult, and the disparity of cost between the purchaser and originator in creating and interpreting a contract is such as to always significantly favor the originator. After all, the cost of coming up with a contract is spread over all the policy holders whereas the cost of a prospective purchaser is always going to be greater than the person the purchaser that just signs the contract.

This is also why deposit insurance is necessarily provider funded except in the smallest number of cases. It would cost far too much money for the consumer to insure it. I can pay $3000/year for auto insurance that protects me from liability claims of $300K and damage or theft of my vehicle. I simply don't have the funds to pay a 3rd party to insure my bank deposits, particularly if I'm going to do deligance on the insurer, at least compared with buying a safe and putting my cash in my house. Now it is certainly possible, to regulate banks and require them to insure demand deposits against insolvency. We might even be able to do it for 80% or more of the institutions. But then you have places like Citigroup where the solvency of the counterparty would be a real question in an insurable event. These aren't easy questions with easy answers. And this all assumes that there is a market deposit insurance. There is the not insignificant risk that the market for deposit insurance would become a rent extraction scheme rather than insurance. Such is the nature of captive markets, and this would be a captive market.

Re-posting this comment from the other thread where I mistakenly sent it first:

It can be demonstrated that fractional reserve lending is inflationary and cannot generate genuine economic growth which can only come about through savings and capital accumulation. Interest rates are powerful signals which carry very important information regarding the time preferences of consumers. High interest rates indicate a high time preference for consumption and low savings available for investment. Low interest rates indicate the opposite, that consumers are willing to become savers by forgoing present for future consumption. Fractional reserve banking and loose monetary policy (the default policy of all central banks) artifically suppress interest rates sending the false signal to producers that present consumption is being traded in for future consumption. Except that this really isn't the case, consumers are still consuming and so the physical resources have not actually been freed up in order to lengthen the production process to produce more future goods. The boom period is the period when present consumption is still taking place while at the same time new long-term projects are being undertaken. The bust comes when it is revealed that the resources are not in fact available to complete the long-term projects that were begun under the guise of low interest rates. Liquidation, if allowed to, follows and the process repeats.

In the present day under central banking and fiat currency the bust takes the form of a recession with the currency constantly losing purchasing power, whereas in the old days under a partial gold standard and fractional reserve banking the bust takes the form of a bank run and the currency retains or increases its purchasing power over time. Under the old (still not ideal) system savers were rewarded, under our current system savers are punished.

I would say it is very likely that under a banking system largely free from government intervention (no legal tender laws), deposit and lending banking would separate on their own without the need for Glass-Steagall-type legislation. Banking regulation is absolutely necessary though until the government gives up its monopoly control of the money supply which it should do as soon as possible.

Maximos, I guess I was flummoxed...

Konczal would be supportive of the underlying principle of Glass-Steagall, were it adapted to the perverse circumstances of hyper-modern finance; this post on the recently-proposed Volcker rules indicates the direction of his thinking. The charts in the post should suffice to indicate the nexus of speculative finance and depository banking, which is to say, the extent to which the repeal of G-S contributed to the crisis.

Regardless, why do we suppose that insurance in complex world can responsibly and sustainably be provided with policies that mal-educated and lazy 18-year-olds can understand? The only possible way for an insurance company (or most businesses) to function is in the context of a well-educated people with well-formed characters (no, there is no magical threshold, there's only a gradient).

You establish a legal regimen for the people you actually have, not for the people you wish you had, particularly where the wishing is for something utterly impossible. People possessed of an average IQ of 100 lack the cognitive abilities to figure this stuff out, period. Many people possessed of the requisite endowments simply lack the opportunity, as any father of young children could inform you.

The pre-FDIC system failed primarily because of fractional reserve lending, which Konzcal supports, and not primarily because of "asymmetric information." Fractional reserve lending means that bank runs will happen because there is not the full amount of deposits in the bank and so people panic that they will not get their deposits back, which leads to a domino effect collapse.

Actually, this is much too simplistic a narrative. Banks runs could occur, and did, even without FR banking; all it takes is some bad investments on the part of the bank, and the depositors still will not get their capital returned them whole and entire. Unless the bank is just a glorified mattress stuffed with cash, it will loan out capital, meaning that it will no longer have 100% of the depositors' funds; if those loans fail to pan out, the capital is lost, and depositors seeking to recover their capital will be partially compensated, at best. Fractional reserve banking is neither necessary nor sufficient for the occurrence of financial crisis; the material cause of financial crisis is simply malinvestment, under whatever system of banking and political economy, with that combination of avarice, hubris, and irrationality being the thing that sets it in motion.

But it is foolish to think that it does not have costs...

The cost of a hard-money banking system is a recurrent cycle of deflationary crises, in which the real value of debts owed by people who needed capital increase; it's a glorious system, I suppose, if one is desirous of a society with little social mobility, in which those who lack capital are likely to remain in a state of debt peonage, while those who, by the favours of fortune, or the cunning of criminality, possess capital, not only retain it, but acquire claims upon the lacking part of society.

There is no perfect financial system, no analogue of Newtonian physics which, when set in motion, functions smoothly, the 'gravitational' force of each man's self-interest aggregating into a global harmony. Every system has its faults, its ineradicable weaknesses, which we can, at best, hedge and mitigate for a time, before prudence is summoned again to adjust to new circumstances. We have the system we have because we muddled through to it over the course of centuries; it is as much the product of the cumulation of knowledge as any other social artifact.

Maximos, your faithful support for modernity's banking system is frankly surprising.

Trial and error. We tried what must obviously be a pre-modern banking system, on this conception, and found it wanting; historical experience and evidence led us away from it. The proposal that modern banking be abolished is a radicalism far more profound than anything I have ever advocated, even in my most reactionary, distributist writing; at least there are actually-existing examples of distributist practice to which a John Médaille can direct the interested, whereas there are no examples of modern societies, with modern amenities, functioning with pre-modern banking systems.

Maximos wants to retain the existence of common, public goods, but the problem is he does not recognize that the public=government/private=business distinction is an illusion of modernity perpetuated by the modern State which seeks to claim the public sphere of community for itself only, relegating all other communities "private" and therefore un-communal.

Pish-posh. There can certainly exist public, common goods, administered authoritatively, that do not originate with government; whether there are any in any given instance depends upon the nature of the case, the specific circumstances, and so forth. For example, health insurance is nothing if not a public good, but there is no necessity of its public administration; it could easily be privately administered, provided the operating principles are appropriate.

Badger, excellent comment.

Maximos,

Do you believe it is right and proper and Constitutional that the federal government should have monopoly control of the money supply?

I also don't understand what's so fundamentally different about today's economy as compared to the economy of 100 or 500 years ago. People still work, save, produce and consume. The markets may be new and different but the underlying economic activity is exactly the same.

I would point out that bank runs tend to be contagious and the primary purpose of deposit insurance is immunization. Prior to deposit insurance, runs had started on sound institutions because of unfounded rumors and the failure of a poorly run one has led to runs on sound banks because, like our simian cousins, we are prone to group think and irrational panic.

"but there is no necessity of its public administration;" - as long regulation renders them utilities.

This is submitted for the benefit of those innocent folks who still believe in rationality and markets - http://motherjones.com/politics/2010/02/subprime-goes-hollywood

You establish a legal regimen for the people you actually have, not for the people you wish you had, particularly where the wishing is for something utterly impossible.
Wrong. You establish a legal regimen for the people you actually have AND to help bring about the people you wish to have. Your false dichotomy is foolish, which is at least part of why you continue to support policies that dumb down the difficulties of life with disastrous consequences and call it "establishing a legal regimen for the people you actually have." No wonder you get so defensive when people bring up "moral hazard."
People possessed of an average IQ of 100 lack the cognitive abilities to figure this stuff out, period.
Evidence? That's a dubious claim, since "this stuff" merely refers to auto insurance policies and a deposit insurance policies. But if it's true, then obviously it would be wise for them to learn more before they accept the responsibilities of life that require a degree of knowledge and wisdom.
Many people possessed of the requisite endowments simply lack the opportunity, as any father of young children could inform you.
Yes, things are so hard in modern times; we have machines to wash our clothes and our dishes, fewer children than ever, and we still can't be bothered to read and understand our auto insurance policies.
Actually, this is much too simplistic a narrative. Banks runs could occur, and did, even without FR banking; all it takes is some bad investments on the part of the bank, and the depositors still will not get their capital returned them whole and entire. Unless the bank is just a glorified mattress stuffed with cash, it will loan out capital, meaning that it will no longer have 100% of the depositors' funds; if those loans fail to pan out, the capital is lost, and depositors seeking to recover their capital will be partially compensated, at best.
Um. I guess you didn't know that "without FR banking" is full reserve banking, which means bank runs--that people legitimately fear not getting all their deposits back and so a domino effect occurs--can only happen with fractional reserve banking.

Honestly, it just sounds like you literally cannot imagine a reasonable alternative to fractional reserve banking and lending, and so you are necessarily ignorant. Here are two illustrations of a reasonable alternative:

Loan Banking

You loan $1000 to Bank A. Bank A loans out that $1000 (I won't include interest and such). Bank A then after the specified date gives you back the $1000. No new money has been created.

Fractional Reserve Banking

You deposit $1000 to Bank A. Bank A opens a demand deposit (checking account) for you, allowing you spend your $1000 at any time. Bank A, however, issues 50% of the $1000(so its easier) to Person B by opening a demand account for them, meaning that Bank A gave them a $500 loan. You have the power to $1000 whenever you likes and Person B has a $500 loan. However there is only $1000 to back both of you up. The Bank just created $500 out of thin air.

Technically it is not inflationary as long as Person A doesn't spend his deposit money. Once starts spending the money the inflation will kick in.
Fractional reserve banking is when banks take money out of demand deposits and lend them out. Since you can take your money out of demand deposits at any time, money is essentially created. If the reserves at two separate banks are 10%, and I deposit $100 in Bank 1, which then lends out $90, they essentially just created $90 because in my account it shows $100 + $90 that they created. When the borrower takes this money and deposits it in the bank, the money is again multiplied from $90 to a total of $171 (90*1.9=171) and loans out $81. So from savings of $100, the banking system just created $171 worth of credit, driving down interest rates.

Full reserve banking, on the other hand, is only when banks take money from time deposits, which may not be accessed by the time deposit holder at any time. In other words, you can't take money out of the bank while it's loaned out. So if I put $100 in a time deposit, $100 is loaned out. The borrower may then put it in a demand deposit, where $0 would be loaned out, or they could put it in another time deposit where all the money would be loaned out. However, no additional money is being created here because the deposit holder cannot use the money in the deposit while it's being used by borrowers.
Now, what is so unreasonable about that? The only "problem" with full reserve banking is that, unlike fractional reserve banking, it does not accelerate "growth" (which may or may not have much fundamental substance to it) in the good times and accelerate "busts" during the deleveraging times. So, if you like volatility, inflation which destroys the wealth of the little guys and forces them to hand over their capital to risky, complex, high-yield investments (I notice you did not address that point in my post above; perhaps it hit home?), and an irresponsibility and a lack of accountability that inevitably comes during "exhilarating" times of growth, fractional reserve banking is for you.

You are so obviously wrong that fractional reserve banking is necessary for the little guys to use their capital, i.e. socioeconomic mobility, that I can only believe you haven't looked into alternatives much.

We tried what must obviously be a pre-modern banking system, on this conception, and found it wanting; historical experience and evidence led us away from it.
What the HECK are you talking about? Should all our modern institutions be defended with such "progressive" assumptions? Did we try it and find it lacking? Or did we simply fail because we are fallen people, latch on to a newer, "better" system that functioned well until the creative destruction whittled away at our sense of responsibility: "Oh my goodness, you mean I should be aware of where my savings are being invested and hold my lending institutions accountable, rather than abdicate responsibility for the consequences of my decision to give capital? Does specialization really free us from having to take responsibility for things we've outsourced away and blame only the ones to which we've outsourced our responsibilities?
Pish-posh. There can certainly exist public, common goods, administered authoritatively, that do not originate with government; whether there are any in any given instance depends upon the nature of the case, the specific circumstances, and so forth. For example, health insurance is nothing if not a public good, but there is no necessity of its public administration; it could easily be privately administered, provided the operating principles are appropriate.
Thank you. I was almost afraid you had fallen off the deep end with your statements as to the inherit superiority of government insurance.

Jeff, on review, I apologize for my increasingly flippant and rude, alternatively sarcastic tone. I became upset by my perception of what I thought (justified or not) were comments fitting for modern liberals, but that is no excuse at all.

Sorry.

What do you think of my comment?

"Um. I guess you didn't know that "without FR banking" is full reserve banking, which means bank runs--that people legitimately fear not getting all their deposits back and so a domino effect occurs--can only happen with fractional reserve banking."

"You loan $1000 to Bank A. Bank A loans out that $1000 (I won't include interest and such). Bank A then after the specified date gives you back the $1000. No new money has been created."

You are describing different things, and the example you give is more bond-like then deposit like. Banks as depository institutions, borrow short and lend long. Since even CDs can be withdrawn early (with a penalty), there is no way the institution you describe fulfills the functions of a commercial bank.

al, I don't know the reasons for your misinterpretation, but I will assume it's because you are unfamiliar with the topic at hand.

Of course I'm describing different things. That's because full reserve banking and fractional reserve banking are different things. Everyone on the planet is aware of the positive functions a modern fractional reserve bank performs; what I am describing is an alternative that doesn't suffer from the bad functions of fractional reserve banking, namely ridiculously high inflation that distorts a investment/consumption spending balance and so leads to boom/bust cycles (accelerated growth followed by accelerated decline during deleveraging) and deteriorates the value of wealth by inflation such that we are forced to make investments in complex financial instruments created by virtually unaccountable banksters ideally (but not always) returning 8+% annually just to break even in terms of real value.

You establish a legal regimen for the people you actually have AND to help bring about the people you wish to have.

One's wishes must be consonant with the capabilities of the people in question, lest they become expressive of a utopian and misanthropic impulse, a rejection of concrete persons and circumstances in favour of an unreal projection.



So there are a lot of people out there who think that we need to kill the moral hazard of having your savings account insured. Grandma has $12,000 in her savings account, and doesn’t worry about whether or not the bank is solvent – so let’s force her to worry by removing the FDIC protection. This worrying will result in her providing discipline to her bank on their risk. Here’s my question: How will grandma know what to do?

The obvious problem is that the information disclosed in the quarterly reports is really, really poorly targeted to knowing this kind of information. But let’s pretend by magic that the quarterly reports are good enough. Again, here’s the question: how to judge? And don’t give me that “common sense” stuff. Be specific.

I know the simple way you do it, some techniques that I’ve had some training in: You place out the payment structures using monte-carlo simulations with lognormal random walks; you take a metric of correlation in the market, perhaps in a gaussian copula structure and use that to run correlations at each step between the instruments; you take the distribution you generate and apply a “value-at-risk” logic to it, looking at some piece of the tail distribution.

Now are the libertarians saying that a 16-year old who wants to open a savings account for his part-time job will need to know these techniques? I’m very interested in ideas of “financial literacy” – will capital reserving VaR based models be required for the definition of financial literacy? And even if we train a generation of savings-account holders in basic financial engineering techniques, how does this overcome basic Diamond-Dybvig bank run mechanics?



Grandma is not going to master these techniques, intended both to facilitate and evaluate the products of financial engineering; Grandma not only lacks the time - ie., the opportunity costs are massive - but, in all likelihood, lacks the capacity to master these heavily g-loaded procedures. Even on the assumption that such techniques would not be required, and on the further assumption that the information provided in quarterly bank statements were both comprehensive and comprehensible, Grandma would have to become conversant with fundamental entrepreneurial functions, such as evaluating the business prospects, and market conditions, of borrowers. This is also highly improbable, for the very same reasons. Bankers often fail to accurately assess such prospects. How then is Grandma, whose CV is doubtless not that of the banker - whose job it is to know these things - going to master them? The simple reality, anthropological and historical, is the Grandma neither will, nor can, become sufficiently conversant in these matters to provide a check upon the ambition and avarice of the bankers; the world has seen countless bank runs, and the reason for this is not simply that depositors did not exercise oversight, but that they could not. The intellectually average will not exercise oversight and restraint of the above average, even exceptional, on the very fields in which the latter excel and specialize.

There is yet another difficulty I have with this notion, and that is its inconsistency with a fundamental precondition of civilization, whether or not one gives that precondition a specifically capitalist twist (and, I should note, one should take Adam Smith's nuanced perspective on the issue, namely, that it is at once necessary in the generality, and often monstrous and dehumanizing in concrete application); the very notion of the division of labour is inconsistent with the idea that the depositor should, in her evaluation of all of the financial particulars of her bank(s) and its/their counterparties, perform basically the same social function as the banker himself. The reason it falls to the banker to perform the function of financial intermediation, linking the capital of depositors with worthy enterprises, is that it is his job; he is able to specialize in this function, whereas depositors are an inherently diverse lot of persons, from all walks and conditions of life; he performs for them what they could not perform for themselves, either individually or in concert. It is for the same reason that we consult physicians or surgeons when we suffer from physical maladies.

You loan $1000 to Bank A. Bank A loans out that $1000 (I won't include interest and such). Bank A then after the specified date gives you back the $1000. No new money has been created.

And, as I have been at pains to emphasize, if it happens either that Bank A loans that money imprudently, or that circumstances prevent the recipient of that loan from repaying it, then I do not receive my money at a specified date. If we add multiple depositors into the scenario, then, if this circumstance precipitates a run on the bank, most of the depositors will not receive the totality of funds they have left with the bank.


The Austrian economists have demonstrated why a bank run could not occur under a 100% gold reserve system. See the Bank of Amsterdam for an example. Depository and lending entities would be separated. Demand deposits would be fully backed by definition and while lending institutions would certainly make bad loans they would not make so many bad loans at once as to make them fundamentally insolvent.

Under such a monetary system there would be virtually no inflation, no business cycle and money would gain in purchasing power every year, effective saving could be achieved without investing any money. Granny could save by simply keeping her (gold) earnings in a depository bank and pay a nominal annual fee for storage or keep her earnings at home and pay no fee or invest them in low-risk bond securities and earn a 2% or 3% real return. At the appropriate time she could convert her savings into an annuity and live off of a secure income stream that would buy more each year instead of less each year as is the case today. The annuity could be backed by ultra-safe government securities, a government that would be solvent because under this system it is forced to clear its expenses every year since it could no longer reckon its books in its own scrip. Granny wouldn't have to go anywhere near the stock market roulette or mess with gaussian copulas to live a dignified, comfortable existence.

If the Founders believed in anything, they believed that the value of our labor (ie. money) should not be held hostage by the Federal Government.

Yes, yes, I know that's the theory. In practice any system predicated upon the gold standard will generate debt deflation crises, as the constraint upon the money supply results in an increase in the real value of outstanding debts. What this implies for those who have loaned capital I leave it to the reader to infer; what it implies for most of those who have borrowed capital, Gilded Age American history attests.

And, as I have been at pains to emphasize, if it happens either that Bank A loans that money imprudently, or that circumstances prevent the recipient of that loan from repaying it, then I do not receive my money at a specified date.
Yes. That is how loans work, and why savings accounts used to be different from checking accounts (this is generally no longer the case; money is transferred between such accounts with no limits). If I loan someone money (through an intermediary called a Bank), then those principal funds should be unavailable to me for the duration of the loan; if that loanee loses it all, then the loaner does not get (all) his money back (unless there is insurance, etc.). That is how it should be, contrary to a situation where I loan someone money (through a Bank) and still can spend it via a check, which is what happens in fractional reserve banking and which leads to inflation and economic volatility.
If we add multiple depositors into the scenario, then, if this circumstance precipitates a run on the bank, most of the depositors will not receive the totality of funds they have left with the bank.
No, Maximos. Are you trying not to understand? Bank runs are impossible because (in a full reserve system) deposits used for lending cannot be taken out/spent before the maturation of the loan, so losses on the loan are 1) isolated to each lender/depositor's account, and 2) are capped at the deposit amount (since there is no fractional reserves and no leveraging, deposit losses cannot be a multiple of deposits, which would indeed result in bank runs).

Bank runs can only happen if you can, at anytime, demand monies already lent out by the bank, because then the bank has to take from other accounts to give you money (since yours was lent out), which leads to a chain reaction because it's essentially a Ponzi scheme.

One's wishes must be consonant with the capabilities of the people in question, lest they become expressive of a utopian and misanthropic impulse, a rejection of concrete persons and circumstances in favour of an unreal projection.
But "people in question" have the capability of learning, sanctification, and growing wiser. One should therefore respect that capability, which all men have, rather embody an implicit denial of the capacity for sanctification and greater wisdom.

No, Maximos. Are you trying not to understand?

You don't think that, if my loan to some enterprising capitalist went south, causing me to lose that portion of funds I had permitted to be lent, other depositors at that bank would withdraw their savings, and forbid their funds to be loaned to other enterprising capitalists, fearing that the judgment of the bank in this regard would be deficient? Moreover, that this circumstance wouldn't prompt depositors to advocate the abolition of such a system of banking, in which savers and depositors would be fully liable for the loans made by the bankers, and the failed business plans of the borrowers, despite the informational asymmetries (which you have never addressed in any remotely satisfactory manner)? Moreover, that in the event of such a circumstance, the bankers would meekly hand over all of the depositors' funds, forthrightly admitting that they had made poor loans with those portions of them allocated for that purpose - that, in a word, the bankers would engage in no frauds, no tunneling? Please. All that would be required for my hypothetical to obtain is the slightest dishonesty on the part of the bankers, the slightest chicanery in the handling of deposits, or the allocation of loans.

So, either I, as a depositor, should be wholly liable for financial matters beyond my control, which circumstance would afford the opportunity for financial ruin by various means, or there shall occur bank runs. It is not to be marveled that we do not have a full-reserve banking system, which essentially creates financial intermediation without any responsibility falling upon the intermediaries, and all of the liability falling upon the depositor.

By the way, insult me again, and you'll not be commenting here. Got it?