Tag Archives: Gold

Economic Myths #5 – Banking is Capitalist


By both mainstream economists and the general public the cycle of “boom and bust” is believed to be a tendency inherent in any capitalist economy. The fact that the latest of such cycles, beginning in 2008 (and arguably not having ended), originated in the banking sector and that large banks and bankers ratcheted up huge earnings and bonuses only to cause disaster has implicated banking as representative of the very worst aspects of capitalism – the epitome of uncontrollable greed that ends in catastrophe.

Unfortunately this popular view of the mainstream could not be further from the truth. In fact, with its intimate ties to the state and its special, legal privileges it is hard to imagine a less capitalistic industry than banking. Part of the deception – wilfully inflamed by politicians and their lackeys – is one that engulfs other industries subject to state meddling such as utilities markets. This is the belief that, simply because the participants in the industry in question are private individuals or entities that are not officially part of the state, the enterprise must be classified as part of the free market and saddled with all of the supposed flaws of that system. Very often, however, private companies and brands are simply the public facade of what is essentially a state owned operation or state controlled cartel. Read more

I see that Gold is quite rocky, today…


David Davis

One of my pet achievements is to have been able to paste “widgets” such as the excellent Kitco charts that you see beside you on this sidebar. Not being a tech-guy, and not knowing even the square-root-of-effing-all about something called “HTML”, or even “cascading style sheets” (search me, guv!) I gave myself a pat on the back for these being on here at all.

It is an interesting and fun exercise to watch them, even down to the hour, as they react to what the loliticians on the MSM are saying and doing. Gold seems especially rocky today, I am not sure why, but it has not really tested the heights of the last week or fortnight or so. I wonder why it’s so jumpy, and yet not stratospheric? Can anyone enlighten us?

Gordon Brown and the Lost Gold


David Davis

It may all come out sometime, but I don’t think it will be soon.

You know something? Sometimes it is quite impossible for me to decide what the individual penalties ought to be, for deliberately carrying through a known and planned Act Of Destruction such as this.

The Poles, in 1945-46, at least got to hang hundreds and hundreds of minor socialist functionaries. The trouble is that they were hung by merely another sort of socialist functionary.

I can’t imagine anything we could do to Brown, Balls and Miliband and their Treasury apparatchiks, that could possibly atone for this amount of loss.

For them to say “Sorry” somehow does not cut the mustard.

We could make their eternal descendants pay, for ever and ever and ever, but this would begin to lose its meaning after a few hundred years and would merely become some sort of annual ceremony, the purpose of which has long been lost in legend by the MSM, such as the Armistice thing is going to be.

National Debts and a Tory Government


…or any for that matter, so long as it is not the GramscoFabiaNazis New Labour

David Davis

I am going to propose that an incoming Tory government state that it will repudiate all UK government debt incurred after the date and timestamp of the beginning of its conference and up to the time of a new government being announced next….election. AND furthermore, that neither capital nor interest on this debt will be honoured. This will concentrate lenders’ minds immediately as some will have been sold already, some will be in trading, and some will be comtemplated between now and say this Thursday. this will increase the value of the stuff already out there, which will become very heavily-bid, and will concentrate the minds of helot-voters in the “public sector”, whi will find their wages cheques dishonoured between  now and, well, whenever. Which is morally right.

Please read on:-

In a civilised society, it is right and moral to pay off debts, in due course, after they have been incurred. Insofar as libertarians believe that governments have some sort of de-facto legitimacy, and they might if either by consent of their electorates or by dint of the fact that we are for the time being stuck with them, then it is right for gvernments to make some sort of provision for repaying borrowings incurred honourably in the course of their “duties”. Since governments have no money of their own, this sadly has to be raised by taxation along with the “normal” course of expenditures.

But I now take  a different view about some of this National debt incurred recently: this is based on newer observations of acts against this nation which could, in certain lights, be construed as Acts of War.  A well-briefed Court-of-Enquiry – a “Star Chamber” if you will – might actually interpret their decisions and acts as treason, depending on where you stand regarding the relation between the English Sovereign head of State and the People, and which is actually more important jurisprudentially since 1215 and at various defining moments inbetween.

I now put it that the British Enemy Class, arising out of a mixture of corrupted-Christianity-turned-upside-down, self-generated-intellectual hubris, and misplaced condescension towards temporarily less fortunate classes in English Civil Society, has taken a conscious war decision against liberalism.

It has decided on purpose, at some time in the past 120 years and probably quite early on, to unravel liberal English civilisation and society, this stemming from its view that we are a nationalist nation, of wicked evil imperialist repressive globally-colonizing culturally-hegemonic white anglo-saxon male slave-traders-and-drivers. And anything else you care to name. It hates us, because by promoting the virtues of individual liberty and responsibility and also of Natural Rights, we as a civilisation have never hitherto failed to point loudly and visibly towards what I call “The Door Out Of Hell”,

It has tried, hitherto only more or less partially successfully, to dismantle parts of what it hates. Although the general trend of progressive big-statism did advance from about 1874 onwards as both liberals and Tories started to doze off, not very much damage was done to liberty except during and immediately after war years. It is true that some evil things were done: private firearms began to be regulated in 1922 – passports (French word too) were introduced – whole industries were stolen nationalised – the NHS was founded – education was tampered with – and so on.  But in general the rot took some time to set in, and the GramscoFabiaNazis were getting impatient. Too many of their older ranks were beginning to die, before being able to reap the imperial political rewards of their self-promotion as noble freethinking spirits. Like literature-writers of unreadably pretentious twaddle, “artistic” pornographers, child-rapists and cradle-snatchers positioned as “artists”, “educationists” and the like, “political philosophers”, “influential economists”, “admired playwrights”,and so on. The “movement”, the “project” was rinning out of time: new or invonvenient opponents kept suddenly popping up and exhibiting dangerously high amouonts of mass support, such as Reagan and Thatcher, and the populace showed marked disinclination to meekly toe the Gramscian hegemonic cultural line.

But never fear, for a few clever Enemy Class people had begun to subvert the Universities some decades earlier. By the 90s and 2000s, this tactical assault was to become very crucial.

All was ready for 1997 and Blair. John Smith (too “old labour”, too transparently honest not to dissemble in public and therefore a strategic risk) was got rid of – a strange heart-attack and no medical history of problems – and a top project-guy was put in (you can see the point of the Granita deal now). Brown wanted to mallet away too fast, and would have spoiled things, so he was asked to wait 10 years and his turn would come, by which time the “project” would be irreversible and he might do what pleased him. As he has done.

But even after ten years of Stalinism by 2007, and the pissing-away of the Gold, the savings, the pension funds and the day-to-day-revenue in the buying of a clientariat (a necessary but in itself an insufficient condition for success,) the fabric and economic structure of English society was still very strong. The rot takes time to set in. A reasonably quick cave-in seemed improbable. Something had to be done, and fast, to being about swift collapse of confidence and morale of the entire people, and of international confidence in the structure of our finances and banking industry, a major earner and secondary/tertiary empoyer and trigger of other businesses, especially small private ones (which would have to be destroyed in the wash-flood as they’d never vote for the “project”or its droids) via trickle-down.

So the failure of a minor Rotten-Borough-Bank (Northern Rock) could be used at the right time as a method of mis-managing a “banking crisis” triggerable on top of it, if it could be (mis)handled correctly. If done right, the State could say that “the taxpayer” (itself) was “baling out and preventing the failure of” (the State was nationalising”) our “national banking assets and industry (and jobs of course)” and “your money” (now its.)

Since by 2007, there were very few individuals alive on the planet who knew what “inflation” really is, “call for” “injection of” £££££trillions would seem to have nothing to do with inflating a money’s supply, and everything to do with “saving banks and jobs and the economy world”…”quantitative easing” was a dead-giveaway, surely?

In fact the true understanding of the word “inflation” is probably limited to the few thousand people on earth who read libertarian blogs, plus maybe a few City Analysts who keep quiet about it for safety reasons.

So where does that leave the “national debt” and the Tories (IF they are elected…) Since it has been inflated out of all proportion under false pretences and by a clique of evil reactionaries who want to undo Western Civilisation, those parts of it that correspond to what they’ve taken out in order to deliberately liquidate and beggar us here, should be disowned. I wonder if they’ll be brave enough to do it?

The Kevin Dowd lecture on free banking | Samizdata.net


Sean Gabb

The Kevin Dowd lecture on free banking | Samizdata.net

The Kevin Dowd lecture on free banking

Johnathan Pearce (London) Globalization/economics

As promised, I have some thoughts following on from the talk given by Kevin Dowd, a professor at the Nottingham University Business School and a noted advocate of what is called “free banking”. He gave his talk at the annual Chris R. Tame Memorial Lecture as hosted by the Libertarian Alliance. (The LA was founded by Mr Tame, who died three years ago at a distressingly young age after losing a battle against cancer.)

Professor Dowd covered some territory that is already pretty well-trodden ground for Samizdata’s regular readers, so I will skim over the part of the lecture that focused on the damage done by unwisely loose monetary policy of state organisations such as central banks, or the moral-hazard engines of tax bailouts for banks.

Instead, I want to focus on those aspects of Professor Dowd’s talk in which he tried to sketch out what a laissez faire, free market banking system would actually look like. This is essential; a great deal of commentary so far – while it is very good – has mainly focused on how we got into this fix and why the fixes being attempted by Western governments are proving so stupid. As PJ Rourke said recently, the attempt by the Obama administration to flood the market with cheap money as a “solution” is a bit like the case of when your Dad has burned the dinner, so you ask the dog to cook it instead. No, what Professor Dowd did this week was lay out three broad areas for reform.

Firstly, he says we should remove many of the existing regulations, government-mandated deposit protection schemes, bank capital adequacy rules and other restrictions on what banks can do and how they work. For example, government support for depositors – who are also effectively creditors to their banks – means that there is a moral hazard problem; the banks have less incentive than they would otherwise have to act prudently if there is always the government, acting like a sort of 7th Cavalry, able to ride to the rescue. That has to go. Professor Dowd also wants to hack away at the morass of rules and regulations that violate client/banker confidentiality, or those rules that force banks to lend to people, as is the case in the US, where banks are forced to lend to certain groups or else violate laws about racial discrimination, etc.

Secondly, Professor Dowd addresses the issue of letting banks fail. At the present, policymakers adopt a sort of “too big to fail” doctrine; this doctrine, while not explicitly laid down in any form of statute or operating manual – as far as I know – is a rule that says that some institutions are so large, and the attendant systemic risks posed by their failure so catastrophic, that they should not be allowed to go out of business. The problem of course is that this rule of thumb is often arbitrary and subject to political horse-trading. To wit: the US government’s decision to let Lehman Brothers go down last September, followed shortly by the $85 billion bailout for AIG, showed a total lack of clear message to the markets, and to bankers, one way or the other.

Professor Dowd believes that banks should be allowed to fail and furthermore, if modern limited liability laws were weakened or abolished completely, then such massive conglomerates would be economically and legally unsustainable in the first place.

As a result, banks would probably be smaller, and there would be a lot more of them, so the failure of any individual bank, while unpleasant for some, would not wreck the system as could happen if a mega-bank goes wrong. Also, instead of wide-ranging and hideously expensive bailouts, Professor Dowd favours putting banks into administration, writing down, in full, the value of their loan books, and getting depositors to exchange their status as creditors for that of an equity holder.

This “debt for equity swap” arrangement, while it would anger depositors who lose money, would come with the promise, and hopefully the reality, of a rise in the capital value of their equity stake in a bank if confidence returns to a more robust banking sector, as the debt/equity swap recapitalisation is designed to achieve. And of course banks are entirely free, as are their clients, to take out deposit insurance in a commercial market.

The third leg of his solution is broader, and more long-term, although there are some immediate measures that could be taken. Professor Dowd is against fiat money – money not backed by actual commodities or real assets of any kind – and in moving to a commodity-based/asset-based system. He is not, by the way, necessarily arguing for the gold standard or some gold-based system, although he points out that in the 200 years up to the First World War, the UK enjoyed a remarkable period of stable prices, with the odd blip. What he is arguing, however, is that the message on a banknote that says “I promise to pay the bearer on demand the sum of X” should be an enforceable legal contract, not what amounts to the jeering joke that it now is.

In the subsequent Q&A session afterwards, one person made the excellent point that a simple reform would be to ban legal tender laws. Such laws currently require a person to accept as legal tender a currency that the state has mandated for a particular region. Instead, if a person wants to refuse to accept sterling and only wants to accept dollars, euros or Swiss francs instead, he can do so. He can also choose to trade in whatever medium of exchange he wants, and with whoever wants to accept it.

Inevitable questions arise. First of all, in thinking about free banking, private monetary systems and the like, the first objection will be is that this will be very messy; there has been no real experience of such monetary systems in the past, etc.

But this is incorrect. Free banking, as defined by Professor Dowd, in fact operated in Scotland, for example, up until legal changes in 1845. South of the River Tweed, the English system had operated under what amounted to state-controlled banking under the Bank of England, set up in 1692. In the 18th and 19th centuries, England saw a number of booms and recessions, such as the 1840s railway boom and the downturn of 1870s. One should remember that the BoE was established by the-then post-Glorious Revolution government as a way to raise money for wars without having to keep asking a fractious public for taxes, and without having to borrow at expensive rates in the money markets. N.A.M. Roger has explained this issue of financing for naval warfare brilliantly. Indeed, it reminds us that state monopoly money systems typically arose in order to finance wars, while the welfarist aspects came later.

There are also current, not just old, examples of banks that operate with unlimited liability partnership structures – Pictet, the Swiss bank, and Lombard Odier, are just two examples. There are dozens of such banks using these structures in Switzerland and by no coincidence; they have avoided the worst of the credit crunch. These banks are typically for the rich but it seems to me that there is no logical reason why such an approach could not be used more widely. So there are different ways of doing banking right now. And do not forget the humble UK mutual building society: they have their limitations, but as a business model they had a lot to recommend them.

Another objection might be that the debt-for-equity swap way of restructuring failed banks under bankruptcy protection laws would be politically unfeasible, since depositors would be hit. I understand that, but Professor Dowd is not trying to imagine what sort of reforms would appeal to David Cameron, say, but what sort of reforms would be workable. That is a rather massive difference, as I am sure readers will agree.

Another objection is that “real money”, as opposed to the state-arranged fiction that we have now, cannot work for as long as governments take such a large slice of GDP. That is probably correct. One of the reasons why so many advocates of Big Government regard “gold bugs” or free bankers as dangerous nutters is that they realise their welfare states would be unworkable under such monetary arrangements. The Ponzi schemes of most welfare states would not be able to function. Even so, as long as governments retain the ability to tax, they have the ability to raise debt in the financial markets in the knowledge that their collateral can be collected at the point of a gun. But a real-money system still hampers such activity considerably.

In the longest run, the best hope of avoiding such financial disasters in the future is to wean the public and policymakers off the seductive delusion that one can create wealth by turning on a printing press. Sooner or later, if you try to fake reality, it bites you hard in the arse. Of course, it is a mark of the kind of man Professor Dowd is that he is too polite to put it as bluntly as that.

I await comments!

Comments

It sounds all very interesting and I really wish now I had been there as the other event I was at did not afford me the opportunity I had hoped to grab my local Oxfordshire MPs and try and sell them my idea for a “Bank of Oxfordshire” using, believe it or not, partnerships and asset based scrip.

I particularly like his ideas about what to do now, practically speaking, because I guess I always focus on the “hereafter” policies of competitive currencies and so on which are probably still a bit far up the Overton window for most peoples’ comfort.

There was an interesting piece about C Hoare & Co in one of yesterday’s newspapers just so people recall that there is at least one UK based bank on an unlimited liability model.

Was any mention made of Gesell, WIR Bank and similar alternative structures that often started up in the Depression and some of which, such as WIR, are still going from strength to strength?

Posted by Jock at March 19, 2009 02:05 PM

Firstly thank you for organising an enjoyable evening and thought provoking talk.

One additional area that will be critical to moving in the direction of free banking is reform of the insolvency laws and procedures. However desirable it may be to put a bank into an enforced reconstruction the law, particularly in England, makes it impossible to complete in a realistic time scale. The timescale for advertising ceditor claims, the lack of sufficient powers of an administrator to cut a deal amongst creditors and make it stick without protracted legal action, and the absence of any legal recognition (in statute or precedence) of priority for the counterparties of many of the new financial instruments mean that any administration process under current law would take months or probably years to resolve. A bank will go under if the uncertainty lasts more than a few days.

Sorting out the legislation and enforcing the current competiton rule to break up the major banks into more managable units will be preconditions of Prof Dowd’s approach.

A further and slightly off topic thought. The Sarbanes-Oxley laws in the US require CEO’s and CFO’s of companies, including banks and other financial institutions, to sign declarations that their organisation has fully effective internal controls, the records are complete and accurate, and that the financial statements can be relied upon. Clearly these representation for AIG, Citibank and other were patently false. Why are there no CEOs and CFOs in handcuffs awaiting trial??

Posted by RobertD at March 19, 2009 02:16 PM

It certainly appears to have been an excellent talk; I look forward to seeing a video of it.

Johnathan’s summary mentions two points which I think could be implemented fairly quickly and do much to improve on the current system: repeal of “legal tender” laws and elimination of deposit insurance. The former is fairly straightforward and explained in the article. The second bears more discussion.

Deposit insurance (in the US, anyway) is an artifact of the Great Depression, installed to prevent catastrophic “runs” on banks, sometimes sparked by mere rumor. It was (and is) a legitimate concern, and while the problem is exacerbated by a fractional reserve system (as I’m sure Paul will interject here at some point), it would also be a problem even without fractional reserve lending. The US’s solution was to create a new federal agency (the FDIC) to run the insurance fund, and (not coincidentally) directly regulate most banks. Therein lies the flaw.

The FDIC is staffed by government bureaucrats with no personal economic stake in the game. They are, by and large, decent and well-meaning people, but they aren’t the “best and brightest” (such people don’t work for bureaucracies) and they are hampered by hidebound rules and a lumbering, ineffecient and inflexible system. Insurance “premiums” are not established on any actuarial basis, but are essentially identical for all banks, however well or badly managed [1], and setting the rate is quite politicized. The proper response should be to use private deposit insurance.

With private deposit insurance, banks could shop around for insurance companies with the best rates and service. The insurance companies themselves would more accurately and carefully assess “risk” than it would ever be possible for the government to do, and would price accordingly. They would set capital levels which make sense given the specific nature of the bank’s business (rather than one-size-fits-all rules), assess the true value of its assets and liabilities (including, where appropriate, off-balance-sheet contingent liabilities), and in general do a better job of assessing the because it is their (and their shareholders’) money which is at risk. If the FDIC misprices, the insurance fund gets depleted and they go to the government for more money. If a private insurance company misprices, its capital gets depleted and shareholders replace the management. Competition among insurance companies would keep any from becoming unduly risk-averse in their regulations or expensive in their pricing. It’s a true free-market solution, and would work.

[1] There has been a move in recent years to incorporate some sort of “risk-adjusted” element to the premiums, but if this has actually been implemented (I’m not sure about that) the differential was essentially nominal.

Posted by Laird at March 19, 2009 04:28 PM

RobertD, you make a good point about the speed of administration process under existing English law. Prof. Dowd made the point that the debt-for-equity swap and recapitalisation of a bank would have to be done very fast, over a weekend. A long delay would be a disaster, in particular, because of the need for businesses etc to make payments and handle invoices, etc.

Laird, thanks for the detail on the insurance angle.

Posted by Johnathan Pearce at March 19, 2009 05:01 PM

I am delighted to see articles like this posted on Samizdata Jonathan – excellent, more in this vein as and when you can please.

Posted by mike at March 19, 2009 05:19 PM

This is the problem I see with insurance: How can an actuarial table be constructed?

Do bank failures follow a known statistical pattern? Clearly not.

I wouldn’t believe any private agency offering deposit insurance. Gold reserves are all that can be believed. At least until an actuarial table can be constructed.

Posted by Current at March 19, 2009 05:23 PM

Two questions:

1. As Laird pointed out above, the bank guarantees were specifically made to avoid panics, wouldn’t the removal of these guarantees necessarily cause panics? With the advent of instantaneous communication available to even the stupidest among us, wouldn’t ‘runs on the bank’ become a regular event?

2. Fiat money v. asset backed currency –
With fiat money there is a good deal of leverage that is not possible with the asset backed. This seems to imply that under a asset backed regime the economy would be significantly less dynamic one, and growth could be curtailed. Yes, a blessing in the possible smoother booms and busts, but it would seem a curse in reducing growth, productivity.

Looking at the historical rates of inflation / deflation it really appears that prior to the 1930’s, this cycle was much more dynamic than after: (UK) Consumer Price Inflation Since 1750(Link)
I realize this study is a reconstruction and I have no way of evaluating the methodologies but it seems relevant.

Posted by Will Anjin at March 19, 2009 07:26 PM

This isn’t life insurance; there are no “actuarial tables”. That doesn’t mean that the risks can’t be rationally assessed. How do you think an insurance company insures any one-time event? Lloyd’s has known how to do this for centuries (even if they’ve fallen off course a bit lately). [I need help here from someone with better knowledge than mine about probability; is this a Bayesian analysis?]

Moreover, the real point isn’t whether there is going to be deposit insurance; that’s a given, after the experiences of the Great Depression. The only question is who provides it, and at what cost? I submit that government is the least qualified entity to do so, for a variety of reasons (some noted in my previous post). In a truly free market each bank would decide whether to offer it or not and the market would reward or punish that decision, but even in a regulated environment the government could simply mandate that banks carry some minimal level of deposit insurance as a condition to maintaining their charter. Banks could choose to carry more than the minimum amount, and again the market would determine whether or not that was a wise decision, but it’s still a market solution. (Probably a market would develop for banks with different insurance levels: minimal for those with relatively small balances wanting cheap banking services, higher for those with more money who are willing to pay a bit more for peace of mind. Let the market sort it out.)

Posted by Laird at March 19, 2009 07:36 PM

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