71 thoughts on “Who correctly predicted the financial crisis?

  1. So true ! But why would they listen? I don’t believe that the objective was to create a fair, honest or decent system for the normal guy.

  2. I’m a huge Ron Paul fan. However some Austrians have been predicting financial crisis for so long that they have in effect been wrong on this point more than right. If I was to believe some of the more dire Austrian Armageddon then I’d be pleased the central banks were trying to buy us a few more years of party time. However I don’t so I’m not.

  3. Clearly no one has actually read the article. Click the link “Ron Paul” and you will see some quite specific predictions made regarding the line of credit to Fannie Mae and Freddie Mac.

  4. I also suggest doing some research at the Mises Institute website to see some more specific predictions.

    Yes – they haven’t always been right, and have sometimes exagerrated matters. But it wasn’t that hard to predict the moral hazard and other problems with government internvention using basic economic theories. In fact, it was done repeatedly by the Austrian economists, but no one listened.

  5. Sukrit says:

    But it wasn’t that hard to predict the moral hazard and other problems with government internvention using basic economic theories.

    oh Ha. So tell us where exactly has been the moral hazard shown up in the past few weeks, Sukrit?

    Not surprising you’re a Ron Paul aficionado as he seems to have collected every nutball 911 Truther to currency/ fractional reserve/Federal Reserve conspirator around the world.

  6. I think you guys are being a bit hard on RP here and on the Austrian school of economics.

    If the mises institute could have predicted all this exactly , I am sure they would have and more importantly would probably not be the mises institute but multi billionaires living in the Caribbean.

    As for nutballs, lets be clear fractional reserve banking is not a conspiracy, it is a very sick fact of life and for me personally is quite abhorrent.

  7. What JohnZ said.

    If you keep predicting X will happen and it does 2 times out of 100, you’ve called it right 2 times and wrong 98. How is that a genuine prediction?

    I have no ill will towards RP, he means well. But there is nothing particularly great about his prediction record given the above.

  8. omg, what’s so ‘abhorrent’ about fractional reserve? Don’t tell me you’re one of those who thinks it’s fraud?

  9. “I have no ill will towards RP, he means well. But there is nothing particularly great about his prediction record given the above”

    What exactly did he predict that was so wrong, idk. I am not saying he didn’t get anything wrong, but I don’t really see RP’s comments as predictions, more like simply stating the obvious result of certain things. Like ” we are spending more than we are making, that can’t go on it will lead to disaster for the economy” – ok I paraphrased a little , but really I think RP just states the obvious.

    As for fractional reserve, fraud – thats a symantics game – It is unfair, and unnecesarry system of banking that allows banks to make a great deal of profit from, nothing. It is the creation of money as debt and that is never a good thing. Not to mention it is the root of this problem, the bending of the fraction reserve rules. The banks lent themselves into this lest we forget.

    I am not a subscriber to every half baked conspiracy that goes along with fractional reserve banking, but I have yet to meet anyone who thinks it fair or a good idea, apart from bankers ofc 🙂

  10. I think fractional reserve banking is a wonderful idea, and I’m not a banker.

    Indeed, the other word used for fractional reserve banking is “banking”, and I think that has been a major cause of good in the world.

    Banker do much more than “nothing”. They play a vital role in making the loanable funds market more efficient, which increases capital, which leads to wealth. That’s fairly important. They deserve a normal profit, which is roughly what they get.

  11. My God, here’s the anti-fractional reserve crowd on this thread. The central banksters are on the other thread.

    “Banksters are evil and fractional is even more evil”.

    Dudes, can i tell you something? Most of the regulars here are well versed in fractional reserve as we’ve lived it as a result of the critter we all know. This isn’t new to any of us. Don’t even bother trying to bring up all the reasons as we them.

  12. That is nonsense, fractional reserve is not banking, its a western banking ideology and practice. I am not saying banking is bad, I am saying fractional reserve banking is bad – there is a huge difference.

    jc – not everybody here understands fractional reserve banking as Temujin demonstrates in his last comment.

  13. no Temujin understands fractional full well. In fact he understands it better then most people. He’s a first class economist, so please stop it with the nonsense.

  14. Sorry, he is not showing it atm. It sounds more like an old well worn defence of an unfair system, plus of course he did not really address my point, he just defended banking , not the fractional reserve system. Why not let the debate play out jc? Maybe either I or Temujin will learn somthing new, or maybe not.

    Either way it’s all fun 🙂

  15. OMG — without fractional reserve banking, what do you think banking involves? What part of fractional reserve banking do you think is involuntary?

  16. Adrien;

    if you don’t want the wrong answer then don’t ask …. lol.

    It’s very hard to predict as we’ve never seen anything like it. I was always optimistic we could get out of it. Clearly, clearly I was wrong then. i never find it hard to admit error.

  17. it’s very interesting market, possibly the most interesting I have ever seen, adrien.

    we keep having to move down a step as new information keeps hitting the market. So you discount the most recent into the price and then another freight train hits the market out of left field.

  18. Temujin – thank you for the reply. It’s the bit where money is created out of nothing that is so abhorent to me Temujin. That a $1000 dollar deposit can eventually become a far larger loan/debt depending on the ratio imposed. That is what is wrong – money being created as debt.

    Banking without fractional reserve – well there are few examples, 100% reserve, so more of a storage facility. Some of the traditional muslim banking practices/systems are much fairer with a genuine division of risk. And of course not creating money as debt.

    It is my firm view that only a government should create money, not private banks.

  19. Can you offer us an example of money being created by a bank for free. Not he central bank, but just a good old fashioned bank.


  20. I personally think that in such matters the discussion of “Money” makes for unclear logic and easy misunderstandings. It is better and more precise in my view to discuss the nature and relationship between currency and credit, whilst also appreciating that each of these in some circumstances and in some ways may substitute for the other.

    Today banks don’t create currency. They do create credit however they don’t do it in isolation or out of thin air. All credit creation requires a counter party so it is not something you can do alone.

  21. jc – I don’t know anything about free money. But if you are asking me for a bank that practices fractional reserve banking, and as a consequence lends money into existence in the form of debt, then you can take your pick. I am in the UK, so here are a few of ours, lloydstsb, barclays and natwest.

    From the NY fedres:

    Reserve Requirements and Money Creation
    Reserve requirements affect the potential of the banking system to create transaction deposits. If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+…=$1,000). In contrast, with a 20% reserve requirement, the banking system would be able to expand the initial $100 deposit into a maximum of $500 ($100+$80+$64+$51.20+…=$500). Thus, higher reserve requirements should result in reduced money creation and, in turn, in reduced economic activity.

    jc, hopefully from the above example you can see how private businesses are creating money as debt, somehow I am sure you knew this, so I am wondering what you are aiming at.

    TerjeP – Agreed, definitions in a discussion can help, I think cj wants to catch me out on symantics rather than a real point. Again you are quite right, for the creation of debt you do need two entities, none of this makes fractional reserve banking a good idea or a fair one.

  22. OMG — I agree that there will still be buildings with the word “bank” out the front in a non fractional-reserve world. But, as you admit, they would really be more of a giant safe. You would pay a regular fee to keep your money there.

    And the supply of credit would dry up. This is because, without FR-banking you could only borrow money from somebody directly who had the exact inverse financial and liquidity preferences you did. That is, if you want to borrow for 10 years, you would need to find somebody who wanted to lend for 10 years. This would lead to a massive increase in interest rates, which would massively decrease investment, leading to less capital, which is the base of wealth.

    Money supply by banks are backed by assets. It’s just that those assets aren’t all liquid and come in lots of shapes and sizes.

    It’s true that FR-banking isn’t as secure as a safe. However, the absolutely massive benefits from having greater supply of loanable funds offsets this by 1000 times. Note that this increase in loanable funds does not happen as a result of increasing the supply of money. It happens because banks are able to match assets with liabilities in more efficient ways.

    It is true that under a FR-banking system, banks can contribute to changes in broad money supply by changing the credit multiplier. But that isn’t the end of the world. You also have a variable multiplier (which would exist even with FR-banking) as well as variable growth and variable liquidity preferences. All of these things we can deal with. They do not justify throwing away banking and destroying all of the consequent capital.

  23. My example of perfectly matching financial preferences isn’t strictly true. You could match illiquid savings with more liquid borrowing. And there are a few other little tricks you could do. But the general point remains that without FR-banking you are significantly decreasing the supply of loanable funds, and therefore driving up interest rates and decreasing investment.

  24. There are also many ways banks can match liquidity preferences when they have a mismatched book (called duration risk.)

    Interest rate swaps allow banks to swap the duration risk amongst themselves and their clients, OMG.

    I wasn’t trying to catch you on any point. I was interested in trying to understand how you thought free money was being created.

  25. Temujin – You seem to make some conclusions that I would contest and also some statements that in light of the current financial predicament the world is in would appear on the surface of things to be blatantly untrue.

    Your main premise for the retention of FRB seems to be that FRB allows for the creation of liquid capital and also provides a means of delivering that capital to where it is required.

    In a non FR world, banks could still lend money. I never suggested usury should be scrapped. In fact there are several banking models that do just this. One of the bigger headline grabbers is the online social lending web sites. This is based on, or at least similar to older Indian banking traditions. Banks could also lend on behalf of customers, for fixed terms. This does happen now, but should be far more specific, and work in a way similar to social lending where you know what you are lending to and for how long. I like the sharia banking ideas a little more, that of shared risk.

    Your suggestion that credit would dry up would only be true if removed FRB and didn’t introduce an alternative means of bringing capital in to the economy. That argument is a bit like saying we will remove all lead pipe from drinking water and you asking how the water will get to the tap, naturally it would be replaced. I never suggested we do not add capital to the economy. Any growing (in any way) economy needs more capital. regarding interest rates, they would go up if you just removed FRB and put nothing in its place, so I would suggest we do replace it.

    You claim that money supply by banks is backed by assets, I would suggest where an asset does not reach even one tenth of the money created against that asset and realistically never had a possibility of doing so, it is not really an asset. Certainly it’s not matched well in many cases. Not all promises to pay are equal.

    FRB isn’t very safe at all, as history has shown. when you say that massive benefits easily offset the inherent weakness in the FR system it presumes that there is no other way to bring liquidity to the economy.

    FRB does change the broad money supply all the time. The required reserve ratio and money creation in the form of debt shows this. While I don’t have the figures to hand money created as debt far outweighs the real money in circulation.

    If we were to drop FRB then we do not have to destroy all capital and throw away all banking. But surely there are better ways to introduce capital into an economy when needed. This is, as I said before a governments sovereign right and duty, it is not for business and private banking to do.

    Once my hangover has cleared up I will try and post a coherent alternative to FRB, and summarise a little more clearly why I think FRB should go.

  26. Got to stop you right at the start OMG. My main argument for keeping FR-banking is that it is a voluntary exchange, and you haven’t shown how your piece of government intervention is going to make the world better. I believe in voluntary exchanges and freedom. If you want to justify government programs over-ruling freedom, then the burden of proof is on you.

    Usary has nothing to do with this discussion.

    Your example of social lending proves my point. You need to match financial & liquidity preferences. That’s an extremely inefficient way to allocate capital around an economy.

    My “suggestion” that there would be less supply of loanable funds without FR-banking is not an opinion, any more than gravity is an opinion. I’m not saying there would be no capital. As I clearly explained, you could still match savings with investments… but only under much more limited scenarios.

    For example, you would not allow a bank to use my regular savings as part of a loan to a person buying a house. That is an artificial (government-mandated) reduction in the supply of loanable funds. Banking being able to match funds with different liquidity was a brilliant banking innovation that significantly increased efficiency of capital allocation. You want to ban that. There is absolutely no doubt that this would increase interest rates, decrease investment, decrease capital and decrease wealth.

    If you can think of other ways to increase the supply of loanable funds, that’s fine. Tell the world. But that is a separate issue from whether you want to ban banking.

    The banks do have assets behind their loans. It’s just that those assets are not liquid. Once again, it’s useful to think of the “savings account paying for a home loan” example. If everybody tries to withdraw their money, they can’t do it, because the money is tied up in houses. The assets are there… they’re just not liquid. You’re saying there is no asset backing because not enough physical notes exist. But that doesn’t matter. The houses (and businesses) actually exist. They are real assets.

    History has not shown any real problem with FR-banking. Of course, all markets have failures. That doesn’t mean the best solution is to abolish the market!

    When you say I assume “that there is no other way to bring liquidity to the economy” I have no idea what you’re talking about. I never said anything like that. I said that the ban on banks mixing & matching liquidities will reduce the supply of loanable funds. This is self-evident and I’m confused why you would try to deny it.

    I mean no offense, but it’s not clear to me that you fully understand monetary economics. The amazing “insights” that some anti FR types come up with are standard boring-old 1st year monetary economics. There is no conspiracy.

    Note that I’m not saying the current system is perfect. Like JC I would like us go back to managing money quantities instead of the price of loanable funds. Like Terje I’m sympathetic to the gold standard. Like Jason (and others) I like the idea of free banking.

    But like all of those guys (and all sensible monetary economists on earth) I do not believe in banning banking and replacing it with safes and social-lending. Freedom is good. And in banking (as with other parts of the economy & life) it does actually work relatively well.

  27. I normally stay out of these debates, since IANAEconomist, and know little about all this banking stuff.

    omgdidisaythat, how do you claim that banks are creating money? It seems to me, that this so-called “checkbook money” you worry about is just the standard multiplier effect of money… maybe I’m missing something.

  28. It does seem you guys have had this conversation many times before. So thank you for going through it one more time with me.

    I would like to clear a couple of things up though. Some of the language you guys use, I haven’t used at all, such as conspiracy , free money, checkbook money. I only bring this up because I do not believe FR is a conspiracy, and that banks make free money or any other such youtube rot.

    I do however think the following two things:

    A democratic government should be the sole creator of money (I mean all forms of money – not just hard currency)

    I believe FRB to be an essentially unfair means of money creation because it creates money as debt + interest.

    I will try and justify these points of view in a minute.

    Temujin, no offence taken, I do not claim to be even a student of economics, let alone a master. I certainly don’t claim to have great insights, nor as I mentioned earlier believe there to be a conspiracy. However my views are not very dissimilar to many economists, theologians , politicians and philosophers, both alive and dead. I am not sure if your comment about boring-old 1st year monetary economics was also a comment about me.

    I am sorry that I misunderstood your reason for wishing to maintain FRB. You hadn’t previously mentioned freedom, only the benefits FRB brings. I think there are many options where two people can make an agreement to exchange of their own free will and it not be based on FRB. I don’t see that FRB has so much to do with freedom. You can still enter into an agreement to borrow or lend without FRB.
    Or are you suggesting that it is the flexibility of FRB that leads to the greatest chance of making that agreement. On this I would agree, but at what cost is this freedom.

    ok, onto my points.

    While FRB does do all the things you say Temujin, it does some other things to. It means that a government and hence its people have lost control of their own currency. Of course the population play a part in this, if they do not take any loans no matter what the banks would like, it suddenly becomes 100% reserve banking. But this is pretty unlikely to happen. So now that the amount of money in circulation is out of the hands of the government, it has a lot less control over the country. Yes I am aware there are many ways for a government to influence the amount of debt money created but it is no longer in control.
    What’s wrong with that?
    Well without control of money you are not in control of your country. Not that banks mean us all harm, but there first thought is always to their investors and to making a profit. Nothing wrong with that at all. That’s what business is, but when banks issue money as debt it takes a big step into politics and then into the everyday life of everyday people.
    The fact that no government in the world can currently calm the markets and that we here over and over again, “it’s a world economy” or “It’s a global economy” is evidence enough that governments no longer control their own economy and this starts with no longer controlling their own money supply.

    It is a government’s duty to ensure that there is enough money in the economy to get it working at an optimum level. It should not be the job of the banks to do this. Governments are voted for, banks are not. Banks currently choose when to restrict the money supply by restricting lending. This is normally at the banks convenience and when it realises further lending would be bad for its business, it gives very little thought to the wider economy and the country as a whole. Let alone the social implications. When the banks wish to loan more in times of growth it can often be over eager for the accumulation of profits at the expense of a more planned and safer economic growth. For these reason alone we should seek effective alternatives to FRB.

    Now tell the guy who is homeless with his family, who cannot feed his children and wonders how he came to lose his job, home, self respect through no fault of his own, just a disorganised and selfish restriction of the money supply operated by banks for banks.

    Yes, FRB has helped economies to grow and opportunities to be taken advantage of at a rate that probably is not possible under any other system, but full speed growth is not necessarily a good thing.

    Yes I am aware that loans created by the banks creating money as debt through the FR system are backed by assets, but as we can see and will continue to do so, in times where that same money supply is restricted, that assets often do not cover the debt and sometimes cannot be made liquid at all. At that point they lose the characteristic of an asset completely the money created as debt is not balanced against an illiquid asset. The main asset, a promise to pay is also severely tested as people lose their jobs and income on the basis of the money supply drying up.

    So, if we can provide a way of getting liquidity to the market, probably in the form of loans, that is similar to FRB success at getting money to the market, we could be onto a winner, the good part of FRB without the bad.

    I would prefer to see government begin to take over lending. In the first instance this would probably be residential mortgages, although I think this should be tied to some form of social housing which has been the back bone of accommodation fulfilment for centuries. This money could and should be loaned without interest. It is far more productive like this. This could soon be followed by business lending, which the government in the UK could bring into play as an extension of the grant system which is available to most businesses. I am not sure what other countries do, but I imagine most other countries have in some form or another. Of course all this lending would continue to be against assets, such as property and promises to pay.

    As a general rule, when a bank gets it wrong and essentially goes bankrupt or illiquid, the normal person in the street bails them out, or , they are allowed to fold taking peoples money with them. So by bypassing the current mechanism of FRB for most loaning we mitigate this problem. We also increase the chance of business success by not charging interest.

    Now, banks can still lend and invest in this system. They simply are no longer able to create money as debt.

    This suggestion is clearly not my own and propounded far better by others. It’s not new and has never been tried that I am aware of. There are far too many people who would have a vested interest in our current status quo to simply stand aside for this.

    As for getting a fiscally responsible government, well that is another discussion.

    I want to be free to work in a stable economic climate that is geared towards normal people living normal lives in a normal community. That is the kind of freedom I want. That’s what the majority want.

    I realise that I am on a libertarian blog so these views are probably about as welcome as a fart in a spacesuit, but that does not make them wrong 🙂

    Temujin, I hope you would also be sympathetic to suggestions of removing FRB, as long as a well thought out and planned alternative is put in its place. FRB is not the monster that the conspiracy theorists would suggest, nor is it the great banking revelation and stalwart that I have the feeling you are implying.

    Fleeced, I don’t think you are missing anything at all, my earlier post about money creation(27), which I copied from the NY fedres site explained it as clearly as I am able.

  29. Talk about an alternative to FR-banking doesn’t make sense. Whatever alternative methods you have for increasing investment can happen along with FR-banking. The alternative to FR-banking is no-FR-banking… which by definition decreases investment. You have no way out of this situation. You either support FR-banking, or you support lower investment and higher interest rates and less efficient money-matching.

    So, no. I am not sympathetic to any ban on banking.

    Talk about “full-speed growth” is also nonscense. What does that mean? Is there some sort of speed limit determined by government? And are you arguing for lower growth? You would prefer if we were poor, as long as there was less risk in life? And then you have the chutzpah to talk about some poor guy on the streets!! WTF?

    Yes, some businesses will fail in a market system. And some people will die in planes. That doesn’t mean we should ban the market or planes, and such suggestions are hard to take seriously.

    FR-banking has allowed more efficient matching between savings and investment. That is clearly a good thing. Banning a good thing is clearly a bad thing.

    You “it’s the governments responsibility” line is equally BS. First, the government does take responsibility under “inflation-targetting”, a system that I doubt you properly understand. Second, the market works better than government. Socialism failed. Third, it’s not possible to perfectly manage broad money, as I’ve already explained. It is not at all clear to me that you’re fully across this issue.

    Your comment about businesses not paying interest is truely bizzare. And saying this is more productive is an abuse of the english language. If I was the english language, I would slap you. 🙂

    This argument is so far out of kilter with reality I don’t know where to start. The massive misallocation of resources. The inevitable inflation, and then recession when prices adjust. The lack of competition leading to less efficient banking services. What part of government run business in the past (or government run banks in the past) makes you think they can do the job properly? Perhaps you may have heard the rumours that the Soviet Union has collapsed.

    That fact that a few other people have mentioned banning banking before does not lend the idea credibility. Nobody respected in monetary economics takes these ideas seriously. And the only people who advocate government banks handing out interest-free loans are Pauline Hanson and a few wacko Nth Korean supporters!

  30. John:
    To digress…

    There is a serious problem with interest rate targeting using the CPI as a marker in my book.

    Third, it’s not possible to perfectly manage broad money, as I’ve already explained.

    I really think we need to move towards quantitative targeting and and allowing interest to float freely set by the market if we’re going to use fiat.

    M1 could be used, or if not M1 then say targeting the size of bank assets as an extreme measure. We can’t say that money isn’t neutral, allow M1 to grow 10% per year and suggest we can’t account for it because it’s too problematic to account for money.

    Inflation isn’t the CPI by the way. However that’s what these guys are targeting. If you control the price of money through short-term interest rates not only do you not control the supply of money, but also we have to also concede that the price of money is basically a socialist exercise. We all know what happens then.

    If we are to have fiat then the quantity of money has to be targeted and not the price as at least that is closer to allowing market forces to determine the price.

  31. There is no doubt that the economic crisis was something that has been forecasted by many economists. Without being an economist, I could see that the american society is simplly living on loans and fueled by lack of saving, the average american has become a spending subject.

  32. JC — I am sympathetic to your point, as I mentioned in comment #33. I don’t think it is a big issue, but I would be interested for us to try out a return to quantity control rather than price control. This would make Terje a bit more happy too… and we all want to please Terje. 🙂

    The reason I say it isn’t a big issue is that we would still need to use the CPI (and perhaps other indicators) to indicate when we need to adjust the quantity. We certainly couldn’t used a fixed quantity rule, because it is not possible to control for the other factors that impact on broad money (velocity, credit multplier, liquidity preference, growth).

    By the way, interest rates are the price of loanable funds. The price of money is whatever you can buy with that money. It’s a small distinction, but useful to keep in mind to make sure we’re all speaking the same language.

  33. OMG, if FR banking is such a big problem then how come we’ve managed to have so much long term wealth creation despite the odd depression or recession? The computer you are using for your comments probably would not have been invented if sharia was the basis for capital allocation.

    JC and John, are not central bank rates also a form of quantity control in the sense that the price (for loanable funds) impacts on the quantity demanded?

  34. Temujin jests. I fundamentally oppose quantity targeting. I would rather stick with the current mess. The only time quantity targeting was tried it’s only virtue was that it was better than the preceding Keynesian mess. However quantity targeting was also a mess.

    So long as we are listing our preferences here are mine.

    1. I don’t think governments should have any hand in currency creation. Private currencies were more accountable and stable. See my longer post on the topic:-


    2. I don’t think governments should fix the price of credit either via laws that specify a price or via market intervention. See my recent post on the topic:-


    3. I don’t think monetary authorities should manage money multipliers of quantities of broad money. My thoughts on this are littered through old comments but I should actually write a post on the issue.

    4. In spite of point 1 above I do believe fundamentally that any government with applies a tax rate above 0% should and must define a unit of account. It should choose a stable unit of account for the sake of society. It should not mandate that private contracts use this unit of account but most will.

    The unit of account is the only component of money that should entail any involvement by government. And as Temujin has stated above I would personally suggest that they use the market value of a fixed weight of gold as the unit of account. However the Bancor idea of a commodity basket wasn’t such a bad proposition either.

  35. p.s. I forgot to mention in my list above that I do oppose any ban on fractional reserve banking.

    Removing peoples freedom to manage their own credit relationships is akin to blowing the legs of capitalism. The suggestion that the government should ban people from lending in order to allow people to control the destiny of their nation is the ultimate in doublespeak.

  36. Pedro, yes. Any control of price impacts quantity and any control of quantity impacts price. It is an open question about whether it’s better to control the quantity or price of money.

    Terje, I’m suprised. The only time quantity-management was done before, it was done without inflation-targeting. Of course a fixed quantity rule is going to get you in trouble, but inflation-targetting quantity-management will give you more flexibility. Interest rates will be free to roam. And we won’t have the risk of a Japanese style problem were even 0% overnight interest rate wasn’t low enough.

    Oh, and another question for the anti-FR crowd. Would you ban me giving you a loan? If not, why not? And if so, how would you stop me giving lots of loans? And if I give lots of loans, how am I different to a bank “creating money”?

  37. It should not mandate that private contracts use this unit of account but most will.

    People can always opt out of legal tender, Terje. all they have to do is agree to it in a contract. As far as I know the government only prescribes that money can be used to satisfy debts. It doesn’t say it has to be used.

  38. JC – On #44 I agree.

    Temujin – Yes quantitative easing make sense in the context of Japanese syle 1990s deflation. It does overcome that limitation of interest rate targeting. It is more flexible in that sense. However quantitative easing isn’t quantity targeting. It is only manageable if you use a price benchmark such as exchange rates or the gold price or if escaping deflation then even interest rates (the price of credit) as a guide. Inferring anything from direct measurements of money supply quantities, be they M0, M1, M3 or any other quantity doesn’t give you the requisit feedback about market dynamics. It tells you the supply not the demand. Only a price signal incorporates the necessary balancing of the two.

    So to qualify these three preferences in order.

    1. Gold Standard. ie fix the price of the currency.
    2. Inflation targeting via interest rate targets. At least your linking to a price signal. If you cross into the deflation zone then print money until real interest rates go positive again.
    3. Quantity Targeting. Next to useless without a price signal of some sort. The CPI might be your price signal but it is too long term and can’t be targetted day to day.

    You also can’t directly target the M3 quantities (or whatever measure you prefer) on a day to day basis because there is too much lag in the data. You could try fixing the exchange rate at some target between monetary board meetings and move that peg peridically to adjust to your money quanity target as market dynamics vary but I think you open yourself up to being gamed by the speculators.

    At least targeting the price of credit entails a price rule. A poor price rule but a price rule none the less.

  39. Actually there are posters all over Melb Uni campus featuring La Rouche saying: N’ah n’ah n’ah I told you so.
    Is La Rouche one of the Austrians?

  40. Terje… you miss the very option I suggested. That is, quantity management aimed at inflation targetting. You don’t need to target exchange rates or the gold price at all.

    Don’t confuse mechanism with goal. Interest rates or quantity of money are mechanisms. Targetting gold price, exchange rates or inflation are goals.

  41. Temujin,

    Inflation as measured by what? If you mean the CPI then I don’t think you can conduct open market operations on a daily basis targeting the CPI. The CPI figures don’t get revised every hour. They are a lagging price indicator way too slow for daily liquidity decisions. They are not updated around the clock like commodity prices (eg gold price). Where do you set the lever in between quartly CPI updates?

    Markets are dynamic. You could have a major cyclone wipe out a major section of the farm sector tomorrow or an earthquake destroy a major trade hub. You could have a sharp shift in the balance between production and consumer desire at any time and you need a system that can adjust to such dynamics. Even leaving aside major disasters the simple daily shifts in sentiment apply a constant drift that you need to deal with.

    A feedback loop is integral to system stability. When they launch a rocket and target the moon it would never get there unless it’s guidance system included some second to second update on it’s position and it’s targets position. Cut off the feedback and it will miss the moon every time.

    A sailor that sets out for a day trip can check the compass and then set the sails and the rudder accordingly. However without constantly checking and revising of those settings the boat will never reach it’s destination. You need the fine tuning that every sailor does instinctively otherwise suttle unseen currents will take you miles off course.

    Interest rate targeting gives the guys that hold the monetary rudder on an hourly and daily basis a means of feedback. You could say “please yourself fellas just get me to port” but that’s merely like delegating the decision about how to sail in a discussion about the best way to sail.

    Targeting interest rates (the price of credit), exchange rates or the gold price all provide a minute to minute reading on whether you are on your chosen tragectory. You can use nearly any spot price to navigate you to your desination but some will get you there with less fuss and less wasted fuel. Merely meditating on the desirability of being at your destination is not a mechanism for getting there.

    You seem to be saying that you sail with levers. You seem to be missing the fact that without a compass and chart to look at during the journey levers are not enough. You can’t sail a boat if the only feedback you have is where you were yesterday and that is all the CPI ever tells you.

  42. I am now convinced I was right about Ron Paul. He’s a nut case first and libertarian second.

    He has now has decided to endorse the Constitution Party. Not the Republicans, which he joined so he could run in the primaries, or the Libertarian Party, which might be a logical alternative. It seems he doesn’t agree 100% with Bob Barr. http://blogs.wsj.com/washwire/2008/09/24/dismissing-bob-barr-ron-paul-endorses-constitution-party-candidate/

    The Constitution Party, (http://www.constitutionparty.com/) has nominated a Baptist pastor and former Moral Majority activist as its candidate. The party’s policies include opposition to abortion and NAFTA, and isolationism.

  43. TP’s question is one I’d like the answer to. How do you manage the quantity of money? Logically it seems easier and more sensible to me to have a policy of managing the interest rate with a goal of trying to ensure you don’t drive interest rates so low that systemic problems start to build.

    Mind you, I’m just a lawyer so the mechanisms for those things are beyond my experience.

  44. To me the quantity of money in itself isn’t important.

    Target the long term differential between money and GDP growth with interest rates with large short term variances and long term narrow targets. I suggest too keeping the ratio of gold to cash the same as it reduces the quantity of money required and thus reduces the impact of monetary policy. I suggest too the long term target be zero inflation. (i.e target real base money growth to zero).

    The mechanics of such a system would eliminate short term volatility and shut down manipulation of central bank credit, which engender credit misallocation and macroeconomic cycles.

    Of course, free banking does this or something very similar to this on it’s own.

  45. Mark – what do you mean by “keeping the ration of gold to cash the same”. Do you mean the price ratio of the quantity ratio? And what exactly is the “long term differential between money and GDP”. I’m sure you have a point to make but the above comment is gibberish.

  46. here, I’ll try:

    1. NAFTA

    failing global free trade multilateral agreements are have merit. Closing down NAFTA would be a protectionist act of the worst order.

    2. Abortion.

    Restrictions..Nothing more needs to be said

    3. Isolationism.

    They can do that. There’s nothing in libertarian philosophy which suggests this is wrong. However it would be a huge mistake.

    2 out of three.

  47. Isolationism depends on your definition of a lot of things so I’m glad you leave it off the list.

    Abortion all hinges on whether you give more rights to the mother or the unborn child. Within the libertarian philosophy there is room for debate. I tend to come down on the side of a womans choice but I don’t think it is a clear cut libertarian position. Ron Pauls position was that like murder it should be a state issue not a federal issue. That doesn’t seems unreasonable to me.

    Closing down NAFTA is fine if you remove tariffs and subsidies on a unilateral basis. That is what Ron Paul preached but I’m not sure what the fella he endorse is saying.

    Catallaxy has a longer list of complaints. I think the anti-immigration tone is of concern. Personally I think Ron Paul should have endorsed nobody.

  48. I’ll try too.

    1. NAFTA – Not as good as total free trade, but to oppose it is protectionist. Not libertarian.

    2. Abortion – There’s a libertarian argument based on life beginning at conception, but it’s ///fluffy///. Women are not simply incubating a life as important as their own. They have a right to choose, at least until the life is independently viable.

    3. Isolationism – Often conflated with libertarianism due to the source of the “trade with all and no entangling alliances” attitude, but not based on libertarian principles. Gives absurd significance to national sovereignty, leading to anti-libertarian outcomes.

    ///Edit by TerjeP – this comment was moved to moderation and I have manually restore it. I presume it was moved by the automatic moderation fascility because it contained the “f” word. I have sanitised the “f” word.///

  49. JC – “Restrictions” do not make something non-libertarian. Libertarians support restrictions on theft, assault and murder, for example.

    With abortion, it all comes down to definitions. If you believe that abortion is murder, then as a libertarian, you would support its restriction. If you don’t, then you would support the right to abort.

  50. Terje
    No one here believes any of these losers have the slightest chance of winning the Presidency. That’s not the concern here. It’s the fact that Ron Paul is now associated with libertarianism and now he endorses a fellow that was part of Jerry Falwell’s Moral Majority for crying out loud, someone who thinks that saying ‘Happy holidays’ is wrong because America is only for Christians, who thinks that ‘homosexuals’ have taken over the Republican party, who thinks that Mexico is trying to undermine the US and lots more. In this context why you believe in something is as important as what you believe in.

  51. Quite possibly the most idiotic thing Ron Paul has done. Amongst other things, the party he endorsed:

    – is pro-tariffs;
    – believes “government plays a vital role in establishing and maintaining the highest level of decency in our community standards”;
    – opposes FR banking;
    – proposes a complete moratorium on all immigration;
    – supports the war on drugs;
    – would ban gambling;
    – would ban porn;
    – opposes gay marriage – “The law of our Creator defines marriage as the union between one man and one woman”;
    – opposes gays in general – “We reject the notion that sexual offenders are deserving of legal favor or special protection, and affirm the rights of states and localities to proscribe offensive sexual behavior.”; and
    – opposes efforts to confer statehood on Puerto Rico, or to expand states beyond current 50 (OK, I get the anti-expansionist angle – but PRicans are US citizens – if they want statehood, why not?);

    Source: http://www.constitutionparty.com/party_platform.php

  52. DavidL – comment 58 is back now. See edit notes on the comment itself.

    JC – some of yours appear to be in moderation for similar reasons. When I get time I may edit and restore a few. No promises however.

  53. Basically I agree with Davids points as articulated in comment 58. Whilst not all abortions are early in the process I don’t see any good libertarian argument for banning the morning after pill.

  54. Terje – it isn’t gibberish. Just hastily written.

    The ratio of gold reserves (quantity) should be tied to the quantity of cash. You more or less agree given your comments about Bretton Woods. The idea isn’t to fix prices ( it won’t) but to make the creation of money more neutral on the real economy. If you are going to point out that it wouldn’t work as well as price targeting and keeping us on a fixed currency, that doesn’t matter. A floating exchnage rate is better for Australia but under free banking, banks would coordinate prices as they saw fit, as arbitrage would eliminate systems that were unstable. In that case, we needn’t worry as the market would end up deciding what banks float and what banks fix. A gold market would be the counter trade to this.

    The inflation rate is the rate of monetary growth less the growth rate of the economy. I think the best inflation target is zero, over the long run. This should be the target.

    Now do you understand?

  55. I think I understand but I don’t think I agree. In my book the price of cash should be fixed relative to gold. Whether you have any gold reserves at all is a different question. I’d argue that you could have zero gold reserves and still have a well functioning, low inflation gold standard. The asset portfolio that you back the currency with is quite separate from the issue of linking the currency value to gold.

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