This comment in a Financial Times post by Willem Buiter, The end of American capitalism as we knew it, is a perfect illustration of Mises’s point that interventionism is not stable and tends to lead to more and more interventions until parts of the economy are outright socialized:
If financial behemoths like AIG are too large and/or too interconnected to fail but not too smart to get themselves into situations where they need to be bailed out, then what is the case for letting private firms engage in such kinds of activities in the first place?
…There is a long-standing argument that there is no real case for private ownership of deposit-taking banking institutions, because these cannot exist safely without a deposit guarantee and/or lender of last resort facilities, that are ultimately underwritten by the taxpayer.
It is important not to miss the hope in Mises’s gloomy thesis though. The chaos caused by interventions do not have to lead to more interventions. There is a fork we can take that leads to a road less travelled. In this particular case, it requires rejecting the notion that “deposit-taking banking institutions… cannot exist safely without a deposit guarantee and/or lender of last resort facilities, that are ultimately underwritten by the taxpayer.” Not only can they exist safely without state involvement, they would ultimately be more safe and stable then the house of cards we are now watching fall apart.
[Thanks Big Contrarian]
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Some are still saying that the recession is imaginary
http://iamned.com/blog/
seems like a possibility
Stephan stated “Not only can they exist safely without state involvement, they would ultimately be more safe and stable then the house of cards we are now watching fall apart” please justify, very curious how you can substantiate this based on AIG (to a limited extent Lehman/Bear) and more importantly the broader context of economy as we have come to see over the last few weeks. I think regulation targeted at LEVERAGE would end the who debacle. However I must concede your point has weight with regard to the double F’S.
Banks need government help to carry out their lending practices. The banks are based on fractional reserve banking. In order to stay in business and avoid “runs on the bank,” banks have lobbied the government for regulations, including the creation of the Federal Reserve. Thus, the government has helped the banks keep running, at the cost of causing instability.
Cycles occur in various industries. These cycles usually do not coincide with one another and are fairly predictable, so resources would shift between industries, but the economy as a whole would seem to be continuously productive.
Now, the banking industry has its own cycles. These cycles spur on credit expansion, and then eventually, credit contraction. The period of credit expansion creates cheap (low interest rates) money that provides a false sense of prosperity. Risky endeavors and malinvestment occurs during this “boom”. When the credit expansion eventually starts to run out of steam, suddenly these misdirected investments begin piling up losses. Businesses that seemed sound are now suffering. Credit contracts due to the increased risk in the market. The resulting recession/depression typically purges these bad investments out of the system (unless the government interferes).
If we got rid of the “lender of last resort” and deregulated the banks, banks would be forced to be more conservative with their loans and could not expand credit as much as they do today. Interest rates would more accurately reflect peoples desires (called time preference, the preference to consume or to save).
D
re your “if”: With bank deregulation and eliminating the “lender of last resort”, what would prevent a situation like the Panic of 1907,the Banker’s Panic, from recurring, when there was no Federal Reserve?
In that Panic I understand that JP Morgan et al provided liquidity. Do you think that would work nowadays?
Gordie,
the Depositors would act as the check on imprudent managers–the managers, fully knowing such, would keep their balance sheets tamped down, or would be paying higher premiums to private deposit insurers (yes, they would exist, they exist, even today)
M E Hoffer,
The check that Depositors could use would be withdrawals of their funds from the bank. If enough of them did that, in a “short” period of time, couldn’t that be a “run on the bank” or a “panic”?
REGULATION AND DEREGULATION
Guess what, deregulation was partly to blame. And once he’s in office, Obama should put stopgap measures in place to regulate the financial markets. But let’s face it, the Good Ol’ USA can weather **ANY** financial storm as long as our financial house is in order. But, our financial house is WAY out of order.
USA SOLD TO CHINA BY GEORGE BUSH AND JOHN McCAIN
WE ARE SPENDING $5,000 per SECOND = $12 BILLION DOLLARS PER MONTH BORROWED FROM CHINA TO FINANCE THE IRAQ WAR FOR OIL!!! If we didn’t have that debt, we could weather any financial storm. Here’s a link for George Bush, Karl Rove, DICK Cheney and John McCain, its called “Debt-a-holic’s Anonymous”
http://www.destroydebt.com/blogs/p/232-debtaholics-anonymous-6-steps-to-becoming-debt-sober.html
Somehow, with this HUGE NATIONAL 700 Billion dollar debt, George, Dick, Karl and John have managed to become MULIT-MULTI-MULTI-MILLIONAIRES!!!!
AND THEY HAVE LEFT THE REST OF US TAXPAYERS HOLDING THE BAG!!! WHAT A BUNCH OF SLIMEBALLS!!! OUR GOOD AMERICAN BOYS AND GIRLS ARE FIGHTING AND DYING IN IRAQ SO THAT GEORGE, DICK, KARL AND JOHNNIE CAN BECOME RICH BEYOND THEIR WILDEST DREAMS, AND AT THE COST OF OVER 4,000 AMERICAN TROOPS’ LIVES. ASK THE DEAD, THEIR FAMILIES AND THEIR CHILDREN IF THE OIL PROFITS WERE WORTH THEIR DEATHS.
The republicans have fought for deregulation and screamed about lowering the taxes for the Rich. How can the USA be expected to lower taxes when the GANG running the country spend money like drunken sailor’s???
Can we PLEASE stop calling the republican party “conservative”? My grandmother and grandfather were conservative Democrats, they were CAREFUL WITH THEIR MONEY. The republican party is the TRUE PARTY OF “SPENDING LIBERALLY” and not being conservative.
Middle-of-the-Road Policy Leads to Socialism
This is such a true statement. Where we as a nation find ourselves today is due to decades of one political point of view compromising with the other. One need not compromise one’s views if the view is the correct one.
When the view of government non interventionism compromises with government interventionism then we find “socialism creep” being the norm. It is apparent, through the looking glass of history, that this nation only takes it’s large leaps forward toward socialism when one view has the majority in Washington. Although both parties seem to agree with some portion of government intervention in the market, it appears the Republicans at least take smaller steps on their march toward socialism.
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