Federal Reserve Abolition Act

[npts2020]

I think the first thing you should be asking is if it can come anywhere close to satisfying existing demand for credit, and if it can't, what would the impact of that be upon the economy?

 

My guess: not good.

 

I guess it depends on what is "good". If expansion is considered to be the chief good then it would not be. If stability is considered to be the chief good then it may be very good for the economy in the long term. IMO if there has to be an extreme I would prefer the latter, but none of the solutions I have seen much publicized is a radical departure from what is already being done.

[ParanoiA]

I think the first thing you should be asking is if it can come anywhere close to satisfying existing demand for credit, and if it can't, what would the impact of that be upon the economy?

 

My guess: not good.

 

No, I think the first question I should be asking is what the goal of the economy is. Like NPTS2020 pointed out, it depends on the goal. I'm not interested in being the global superpower and growing an already-too-large and overextended empire. If you insist on maintaining your empire and your superpower international police station, then fraction reserve banking is an easy sell.

 

You do realize the obvious and predictable inherent marriage of power and money and why a government, all of the rich, industrialized ones, chooses that kind of control? It seems inflating the money supply so easily has too many benefits for responsible behavior. It's like arguing for a credit card. None of the arguments are actually sound - they just all boil down to "well, everyone else is doing it.". And we don't want to be left out. So much for the independent American resolve.

 

My first question is, why is credit good? If credit is good, then why isn't more credit = more good? Like all things in life, I suspect some credit is good, too much credit is bad.

 

So how do we rate in terms of how much we depend on credit? From what I can tell, we depend so much on credit, we're in the red zone of way too much credit. I'd like to find a way to quantify the potential credit available in a full reserve banking system (or at least full reserves on demand deposits), and compare that with the credit drain presently.

[bascule]

My first question is, why is credit good?

 

I think the best way to answer that question is to look at how society functioned prior to credit. You might try watching James Burke (of Connections fame) explain it in this episode of The Day the Universe Changed:

 

http://www.youtube.com/watch?v=62JDnxDSZaM

 

(you can find the rest of the episode in the related videos)

 

Credit kicked off international trade and with it the marketplace as well as the industrial revolution. Without it the economy was restrained and people lead a largely agrarian lifestyle with local craftsmen making goods by hand and most trade highly localized.

 

Credit revolutionized the way society operates by overcoming economic gridlock and allowing entrepreneurs to plan a better future ahead of time, financing their schemes on credit as opposed to a just in time approach which necessitates cash on hand. Imagine if a craftsman had to work his entire life to save up enough cash to build a factory to automate his craft, as opposed to seeking money from creditors on the condition that he could utilize the money and his expertise to repay his creditors, plus interest.

 

Credit underlies mechanization and mass production. This leads to commoditization of goods, which means we can all afford the things which were once only available to the rich.

 

But I am not doing James Burke justice. Watch the show, and I think it will improve your appreciation of how credit benefits society.

[npts2020]

Bascule; The problem with your scenario is that the craftsman did work his whole life to get the money to build that factory, he just did it by proxy (i.e. his parents, neighbors, etc. worked enough to accumulate the required wealth to do it--savings). This leads to one of the conundrums of economics I have never seen adequately explained, how can you have more "credit" available than there has been wealth produced and why don't they seem to be interconnected? As long as people have faith in the system it doesn't seem to matter but there has been enough Enron/AIG/Bernie Madoff/Lehman/WaMu/etc. scams in close enough succession to shake that faith. As long as there is a back-door way of manufacturing money, derivatives and government "printing" in our present case, it will be nearly impossible to keep from ending up with financial "lever" that doesn't end up so long (assets to debt ratio) as to break at the first shock. The question I have for any takers is, how long is it prudent to make the lever? IOW what kind of assets to debt ratio should financial (and maybe other) institutions be allowed to have?

[iNow]

You're talking about the principle of leveraging, it sounds like. Where, for every one dollar you take in, you "leverage" that into some greater number. Many of the banking institutions were leveraging on a 1:20 or 1:30 basis, a few as high as 34 (for every one dollar they took in, they spread that into 34 dollars in other things). My own perspective (much informed after listening to John Mack, a really bright and seemingly good guy who happens to be the chairman and CEO of Morgan Stanley, on both Charlie Rose and his testimony with the other CEOs in DC on C-SPAN a week or two ago) is that we should only allow 1 to 6 or 1 to 7 at most. This allows growth, doesn't stifle economic need, and still allows us to use the system in ways to help everyone.

 

So, in answer to your question (IMO)... 1:7.

 

 

Everything is risk, you just have to make sure you take the smartest ones.

[ParanoiA]

Thanks for the link, bascule. I can't watch until I get home since they block that stuff from work. I have no doubt, though, that my appreciation for credit will stabilize. But I was asking the question to generate more questions - to reveal the structural issue with unlimited credit.

 

The issue with central management is the lack of check and balance - we allow "rationale" to be the check and balance when we empower a central manager. Well that problem there is obvious, humans can rationalize anything - any kind of behavior. We'll keep creating debt; creating money, until we're making promises a thousand years into the future. Credit has its limits - it's a marketable promise. And it has its own potential for cyclical consequence - huge consequence, in fact.

 

When money is created from debt, it is a lie. It is an artificial market condition, that doesn't really exist - it's all promises that cannot be fulfilled all at once. The condition requires that most of the promises be left to dangle. How many promises can we build upon, layer by layer?

 

I understand that a certain level of this is reasonable and is necessary due to the nature of the mechanics in compensating each other on a mass scale, planning, and etc. But there is a threshold where it becomes comedic, and the paper promises don't support the weight of the system any longer. Where is that limit, in your mind?

[npts2020]

iNow; allowing 1:7 leveraging would be a far cry from what exists now. As you point out, many (I believe most) of our financial institutions (and others) are operating in the 1:20-30+ range, which is exceeding the approximately 1:20 leveraging of the average financial institution just prior to the Great Depression. Thus far I have seen no concrete proposals for addressing this situation and very little discussion of it. It seems to me that the main thrust of all of the "bailouts/giveaways" has been to keep the derivative markets, which have been the lever for many if not most of these companies, from completely crashing. If there is $500 trillion+ of these IOU's out there how much of that amount will we have to put up to be able to make any significant difference and where does the money come from and how will it help?

[ecoli]

paranoiA - I recommend Mises's theory of money and credit. I'm plotting my way through it know and he's apparently making an important distinction between money, capital, bank notes, etc. I'll update when I know more about it.

 

 

Also there's something I don't understand - how could a bank operate at all on full reserve? Meaning, if they kept all their deposits on hand, how could they lend anything out (which is how they're making money)?

According to Austrian business cycle theory, the business cycle is created as a natural result of having monetary policy in a fractional reserve banking system, but I need to read a lot more of Hayek before I understand why.

[bascule]

I rewatched the episode of the Day the Universe Changed I linked earlier. Here's a YouTube playlist that will play the whole episode:

 

http://www.youtube.com/view_play_list?p=A502F5EC13753A1F&playnext=1

 

Everyone, please watch this. James Burke argues that a central bank and credit are what took England from a nation of desperately divided landowners and peasants living a mostly agrarian lifestyle to "Great Britain" with a burgeoning middle class.

[ecoli]

I rewatched the episode of the Day the Universe Changed I linked earlier. Here's a YouTube playlist that will play the whole episode:

 

http://www.youtube.com/view_play_list?p=A502F5EC13753A1F&playnext=1

 

Everyone, please watch this. James Burke argues that a central bank and credit are what took England from a nation of desperately divided landowners and peasants living a mostly agrarian lifestyle to "Great Britain" with a burgeoning middle class.

it's an interesting theory, but if I've learned one think from political science and economics, its that one theory or model isn't going to be able to explain everything.

 

And, of course, even if a central bank was necessary to create credit (which I'm not sure is true - see de Soto's hypothesis about property rights and real estate leveraging) doesn't mean that it doesn't come without costs as well.

[iNow]

iNow; allowing 1:7 leveraging would be a far cry from what exists now. As you point out, many (I believe most) of our financial institutions (and others) are operating in the 1:20-30+ range, which is exceeding the approximately 1:20 leveraging of the average financial institution just prior to the Great Depression. Thus far I have seen no concrete proposals for addressing this situation and very little discussion of it.

Absolutely. This is precisely where regulation comes in, and why that's so vital to our economic health, despite claims to the contrary from those looking to lose regulation in favor of short-term gain and likely long-term ill.

[npts2020]

ecoli; You are correct that banks would not be able to function by retaining all of their deposits. The real question is how much of those deposits should have to be kept in reserve (IIRC it was 10% but may have been changed when banks were deregulated). IMO as soon as they allowed banks to do things like trading in derivatives, the amount of "reserve" became meaningless. Here is an FDIC summary of the derivative market from 2003 that pretty much explains what is happening now. Basically,1) banks were given permission to go into the derivative market according to a complex risk assessment model come up with by federal regulators. 2) some banks jumped in with both feet, notably; JP Morgan-Chase, Citibank, Bank of America, Bank One, Wachovia (I wonder if any of these 5 banks are in trouble) 3) the risk assessment models are prone to widely variant outcomes with even small changes in some of the variables, and I would think also have more susceptibility to manipulation 4) the derivative market grows so quickly, it dwarfs (all?) other financial markets and even regulators can't assess the total value of the market (the best current estimates I can get range from a little more than $300 trillion to well over a quadrillion dollars U S) although $500 trillion is most often cited. How can anyone claim to be regulating a market they don't even know the value of? 5) the inevitable situation that is the result of the above that we are faced with today. I feel like I have a fair grasp of what derivatives are but can anyone tell me why they are necessary? It seems to me like it is just a back door of being able to borrow more money than you are able to borrow to begin with, i.e. the subprime lending of the corporate world.

[Pangloss]

it's an interesting theory, but if I've learned one think from political science and economics, its that one theory or model isn't going to be able to explain everything.

 

Actually it's the predominant economic theory of this age of man, ecoli. Your Mises and pure-market folks are the ones who are lacking in up-to-date pedigree and trying to microwave-defrost some very old reasoning. Personally I don't think academic arguments are appropriate here -- I think this is a matter for gut-punching realities. But if you're going to take a stand on academic grounds you might want to dig a little deeper.

[ParanoiA]

Actually it's the predominant economic theory of this age of man, ecoli. Your Mises and pure-market folks are the ones who are lacking in up-to-date pedigree and trying to microwave-defrost some very old reasoning. Personally I don't think academic arguments are appropriate here -- I think this is a matter for gut-punching realities. But if you're going to take a stand on academic grounds you might want to dig a little deeper.

 

Translation: The majority doesn't think this way, and it's old fashioned, therefore you're wrong.

 

While that's a terrific argument, I think I'll stick with the academics since that's where the meat and potatoes are. You can go with the gut-punching rationalizations that got us to this point, if that makes you feel better, but I hardly think that insulting ecoli's thoughtful approach with nothing more than an anachronistic appeal is useful.

 

Sorry, we're not impressed with the modern approach, and yes, there are plenty of economic egg heads to sing in your choir, but just like political ideologies, it's generally more about preference than performance. Today's typical American has an irresponsible expectation of life and credit and the philosophy that supports that irresponsibility is part of what is being questioned here.

 

It's virtually impossible to get an opinion from someone outside of that vacuum. So, it's of little value when minds like Bernanke advocate this system. They are of the same school of thought that rationalized this system in the first place - that invented the freaking federal reserve.

 

How could you think academia is not useful here? Really? You said that? Economics is quite a thick subject, prolific with terms and concepts most don't really understand. And they all build on each other, and interact with each other, in ways that experts on the material still debate about. If we're going to talk about abolishing the federal reserve, then we had better be talking about the details of its function - and that requires understanding those details...money, debt, money as debt, credit, exchange...you know, the meat and potatoes.

 

What we need is a whole lot more academia, and a whole lot less politics.

[Pangloss]

What the heck? Do you just not understand what I meant? I mean I know I'm not the clearest SOB sometimes, but yeesh.

 

To clarify:

 

Translation: The majority doesn't think this way, and it's old fashioned, therefore you're wrong.

 

Sorry, we're not impressed with the modern approach

 

I'm not making that argument. I'm pointing out that if ecoli wants to stray into that territory, he's got the academic validity assignment backwards.

Edited February 27, 2009 by Pangloss
Consecutive posts merged.

[ParanoiA]

Alright, then what exactly is backward in this statement?

 

it's an interesting theory, but if I've learned one think from political science and economics, its that one theory or model isn't going to be able to explain everything.

 

I'm not seeing any forward or backward there. To me, it clearly looked like you were being condescending in response to his apparent lack of obligatory appreciation for James Burke's and this age of man's central banking and credit theory by stating merely "it's an interesting theory". Clearly, ecoli is not impressed by reputation but rather by logical merit.

 

Maybe I'm on a hair trigger since you've tried to marginalize our economic positions in the past using the same logic - that it's old, presupposes a zero-sum game (which it doesn't), been there done that, etc. Some of that might even matter if we were arguing for a repeat pre-1913 framework, but most of our discussions have been about elements and their impact on the whole.

 

In other words, we can talk about free banking, full reserve verses fractional reserve banking, legal tender laws, central planning, federal reserve - all without advocating the same antiquated framework that didn't work before. Just because we're discussing fundamentals of economy, which are timeless I might add, doesn't mean we're discussing whether or not we should return to the 1907 economic design.

 

There may be elements that resemble that time, sure, hell toilet paper hasn't changed much in a hundred years, but that doesn't mean we're going backward, that means we backtracked and found that 'dead end' sign was faced the wrong way.

 

If I have you pegged entirely wrong, then I'm sorry.

[Pangloss]

Wouldn't you have a problem with any phrase that began with "Gravity is an interesting theory, but..."? What the hell is that "but" doing in there, why is "interesting" being used in a belittling manner, and what's the point of even reading the rest of any statement that follows an opening like that?

[ParanoiA]

The point in reading the rest of the statement is to give enough respect to the writer, whom in this case has proven intellectual credentials, that he might be qualifed to view it with less appreciation than yourself. I think ecoli has the background to do that. So it would seem to me if you must challenge his position it would be more appropriate to give him the respect of arguing on his level rather than insult him with 'look at the score board bitch' type replies. But that's just me.

[Pangloss]

I don't think I've been disrespectful at all. Ecoli simply made an misleading (or perhaps misunderstanding) statement and I corrected it.

 

I'm not marginalizing your opinion about the value of free-market economics. I'm simply responding to it with a different perspective. My personal opinion is that free-market has a useful place in the modern economic discourse. So does socialism. I view them as absolutes, and I believe they have a place in that they remind us of our options, allowing us to sway this way and that on specific actions, in order to find the right middle course from A to B, which in my opinion is the best way to go.

 

But that has nothing to do with my response to this post from ecoli:

 

it's an interesting theory, but if I've learned one think from political science and economics, its that one theory or model isn't going to be able to explain everything.

 

What bascule posted about the non-gold-standard-based leveraging approach used to build the modern economy wasn't an "interesting theory". It was a history lesson. He posted fact based on more than a century of economic growth and development. It's you Austrians that are carrying on about an "interesting theory" (just as I am when I rant about centrism).

 

Like I said, I don't stand on academic arguments -- I think this is a matter for gut-punching realities. But if you're going to take a stand on academic grounds and stake a claim of objective truth, then you can expect to be held to the same standard as anyone else.

[ParanoiA]

What bascule posted about the non-gold-standard-based leveraging approach used to build the modern economy wasn't an "interesting theory". It was a history lesson. He posted fact based on more than a century of economic growth and development. It's you Austrians that are carrying on about an "interesting theory" (just as I am when I rant about centrism).

 

I don't think that particular dynamic is what ecoli was unimpressed with. Bascule posted an hour long historical review essentially on how moving from bullion coins to paper money and banking systems blew open the bottle neck on the flow of money. But bascule was making the statement that central banking and credit did those things. That's what is arguable. That's adding too many specific elements to the concept of paper promises for one to label as "fact", as you have.

 

Sure, that was the method employed in England, but that implies that paper money and credit alone wouldn't have done any of those things - that it required central banking. That's what bascule's statement was loaded with, and I believe that's why ecoli responded by calling it "an interesting theory".

 

Also, I'm not an austrian and I don't think ecoli is either. I am attracted to Austrian theory because I'm attracted to systems. Particularly over managers. But ecoli and I both have shared plenty of misgivings about Austrian theory - for instance, the notion that regulations aren't necessary.

 

Instead, I think we're doing the responsible thing every american ought to be doing - learning economics for ourselves. If you think about it, the public school system in america is making an egregious error in graduating students that aren't business and economic experts. We're a capitalist country and are largely defined by our self interested business model - yet we graduate kids that don't know what fiat money means, let alone the detail of our economic model.

 

It's playing into the idea that an ignorant public is a controllable public. We're all a product of the philosophical economic environment that we live in presently. There isn't enough thorough economic comprehension in the public to initiate such questioning of our system, or even the elements of it. I never questioned economic models in any way until I came to this forum and was humbled by the detail some of the members here shared on the subject. I should have already known those things.

[Pangloss]

Both of those things -- central banking and separation from the gold standard -- enabled the modern economy as a matter of historical fact, not conjecture. I suppose it's still theory in the sense of (as I said before) gravity or evolution or any other well-established theory. And economics is not a precise science, so such things are always at least a little more interperable than established scientific theories.

 

But I won't support the reduction of historical facts to the level of "interesting theories" in order to legitimize an ideological agenda. Anything along those lines can expect a reply from me just as it did here.

 

If you want to prosecute those facts with opposing evidence, you can start a thread on that. 'Nuff said, let's move on.

[ParanoiA]

....original post deleted to preserve the thread...

Edited February 28, 2009 by ParanoiA

[bascule]

it's an interesting theory, but if I've learned one think from political science and economics, its that one theory or model isn't going to be able to explain everything.

 

Do you have another "theory" as to where else besides credit peasants got enough money to stop being peasants and start being landowners themselves?

[tomgwyther]

One theory as to how peasants were able to stop being peasants and become land owners them selfs was to do it by force.

To have an armed conflict over the right to self-govern and to issue and control their own money supply, free from a fractional reserve banking system.

[ParanoiA]

Do you have another "theory" as to where else besides credit peasants got enough money to stop being peasants and start being landowners themselves?

 

Now you're moving the goal posts too. Sheesh. I don't know how many times I'm going to have to re-post that same quote to put it in context...

 

Everyone' date=' please watch this. James Burke argues that a [b']central bank and credit [/b']are what took England from a nation of desperately divided landowners and peasants living a mostly agrarian lifestyle to "Great Britain" with a burgeoning middle class.

 

it's an interesting theory, but if I've learned one think from political science and economics, its that one theory or model isn't going to be able to explain everything.

 

And, of course, even if a central bank was necessary to create credit (which I'm not sure is true - see de Soto's hypothesis about property rights and real estate leveraging) doesn't mean that it doesn't come without costs as well.

 

You and Pangloss both keep forgetting ALL of the qualifiers in your statement when you take issue with this response to that statement. ecoli is clearly taking issue with the CENTRAL BANK qualifier. NOT CREDIT.