European "Austerity" Measures [Archive]

TheCultofAbeLincoln

9th June 2010, 05:53

Germany plans to cut 15,000 civil servants and apply taxes on airlines and energy companies to save €11bn this year. In Britain, the TUC reports that government cuts have already spelled the end for at least one affordable housing programme worth £100m, free prescriptions for people with a long-term health problems in England saving £430m, and the multimillion-pound refurbishment of hundreds of schools.

These measures are supported by a wide range of economists, including leftist US academic Jeffrey Sachs. Sachs said he wanted to see an end to naive Keynesianism that meant pumping endless cash into economies that were already up to their eyes in debt.

The febrile international money markets, increasingly reluctant to lend money to European governments, are cited as the main reason for accelerating cuts in public services. Ratings agencies Fitch, Moody's and Standard & Poor's agree that Europe has failed sufficiently to cut its debts. The ratings agencies, which get their income from wealthy investment funds, want to reduce the risk of countries defaulting on their debts.

Rightwing economists add that only when the public sector has stopped soaking up national income can the private sector expand. Far from supporting the economy while the private sector gets back on its feet, the public sector must shrink to allow business the space to grow.
Yet the argument over whether to cut immediately or wait until western economies are further down the road to recovery is anything but one-sided.

According to one respected economics consultancy, Britain and Germany are preparing to "out-stupid" each other with self-defeating cuts.
"Why? Because they will induce a renewed recession that will hammer tax revenue and enforce greater relief spending. The result of Anglo-German fiscal policy will almost certainly be renewed European recession, quite possibly a prolonged depression," said Charles Dumas of Lombard Street Research.

The case against cuts is supported by liberal economists such as Paul Krugman and Joseph Stiglitz, both US academics and Nobel prize winners, to battle-hardened City fund managers

http://www.guardian.co.uk/business/2010/jun/09/europe-public-spending-cuts-deficit

I'm not European, but really, what the fuck?

Am I missing something drastic? Yes, many of these economies are in debt, badly, but it would behoove the more fiscally responsible to write their more "irresponsible" neighbors a check, and take one on the chin for now, would it not?

Austerity should wait until, you know, we aren't in the very early stages of recovery from a pretty nasty recession...begining austerity now is like someone running out of open heart surgery and immediately jumping in the English Channel to swim to the other side.

Spain has announced a 5% wage cut for all public service workers and a hiring freeze (prompting a 1 day strike). Meanwhile, the unemployment rate in Spain is 20% (as of April), 19.8% are below the poverty line (as of 2005), and the economy shrunk by 3.1% in 2009.

What the fuck?

Hoover's economics didn't work. Trying to balance the budget in a down economy is a horrible, horrible idea. If you're lucky, you get an FDR to save you, if you're unlucky, well....here's hoping the Left does better and there isn't a right turn.

Speaking of which, the dutch results should be interesting, to say the least.

Die Neue Zeit

9th June 2010, 06:16

How about mass struggles to force all the major countries to default and for the bourgeoisie and petit-bourgeoisie themselves to be austere in their personal lives?

RGacky3

9th June 2010, 13:38

This is rediculous, the problem is not pumping money into the economy, nor is it a large public sector, the problem is unaccountability of the major institutions. Obviously pumping money into the system without regulating it and public control is not going to work, but the solution is'nt just cut the public sector, its having the control over it.

You know what you do in these instances? Nationalize the major banks, and put them under public accountability, the banks major profits become public profits and not cuts have to be made.

Whats gonna end up happening is that the economy will collapse again, mass unemployment, you think that private companies will take up things like affordable housing??? Your out of your mind.

This is exactly the Hoobert Hoover stretegy and it did'nt work.

Guerrilla22

10th June 2010, 12:14

inyourhouse

10th June 2010, 16:43

Hoover's economics didn't work. Trying to balance the budget in a down economy is a horrible, horrible idea. If you're lucky, you get an FDR to save you, if you're unlucky, well....here's hoping the Left does better and there isn't a right turn.

This is a common misconception, because Hoover actually increased deficit spending (http://www.presidency.ucsb.edu/data/budget.php). His first budget was a deficit of 0.6% of GDP and his last budget was a deficit of 5.9% of GDP, with the deficit increasing each year. The average budget deficit as a percentage of GDP during his reign was 3.75% of GDP. By contrast, the average budget deficit during FDR's first term (when the recovery began) was 1.78% of GDP, and FDR never ran a budget deficit greater than Hoover's 5.9% of GDP until the US entry into World War II.

This is the general problem with the narrative that Hoover caused the Depression with "Treasury view" economics, while FDR saved the economy with Keynesian theory. It simply doesn't fit the facts. What caused the Depression? A collapse of nominal GDP, driven by a collapse in the money supply. What cured the Depression? A significant increase in nominal GDP, driven by a significant increase in the money supply. This narrative fits the facts.

Havet

10th June 2010, 16:48

The sad part is that these measures do not remove the ruling class' privileges one bit. They remove the privileges of the working class (more "flexible" work hours, pension reduction, etc) but still allow government/corporate employers to, for example, enjoy of a +50.000€/month for having worked 6 months on a major state/private company, and still allow them to accumulate more than one pension.

Obviously one could "stabilize" the government deficit in risk countries such as greece, spain and portugal by stopping these privileges. But the benefactors will use every power available to remain with the privilege.

RebelDog

12th June 2010, 05:13

There is about £120billion in uncollected UK taxes every year which the super-rich scum get away with that would instantly fix the UK deficit. But these uncollected taxes remain effectly part of the deficit. The whole system is about lining the pockets of the rich and they have no morals about how this is done. We are actually seeing money being shifted from public services in to the pockets of billionaires. This is what is happening. The UK people must face the fact that public services in this country are going to be utterly mutilated through cuts and privatisation. The biggest con in history is taking place. War is being waged on public services and the working class standard of living, whist an elite minority walk between the raindrops with pockets full of public cash. I wonder how many dead people in an underfunded NHS A&E it takes to fund a bentley?

Skooma Addict

12th June 2010, 22:04

I don't see what all the fuss is about. This was clearly going to have to happen at some point.

You know what you do in these instances? Nationalize the major banks, and put them under public accountability, the banks major profits become public profits and not cuts have to be made.

You implement free banking in order to make it far more difficult for the government to run up its debt to such an extent.

Usui

13th June 2010, 16:55

I don't see what all the fuss is about. This was clearly going to have to happen at some point.

You implement free banking in order to make it far more difficult for the government to run up its debt to such an extent.

Free banking won't stop a government from getting a loan from the IMF.
e: Free banking is also a bad idea in general.

RGacky3

13th June 2010, 19:19

You implement free banking in order to make it far more difficult for the government to run up its debt to such an extent.

Yeah, and have private unaccountable banks control the economy, and thus make the government subject to them, great idea.

Usui

13th June 2010, 23:49

Free banking sounds good... in theory, bahahahah

Skooma Addict

14th June 2010, 00:37

Yeah, and have private unaccountable banks control the economy, and thus make the government subject to them, great idea.

They are more accountable than nationalized banks, and free banking makes it more difficult to run a large deficit.

Free banking sounds good... in theory, bahahahah

It worked pretty well in Scotland.

Usui

14th June 2010, 01:06

It worked pretty well in Scotland.

Cool, glad to hear of a single case where it worked. Where it didn't work: Argentina, South Africa.. doesn't look like it's working very well in the USA... pretty much everywhere else that tried liberal reforms..

Jazzratt

14th June 2010, 01:17

They are more accountable than nationalized banks

Accountable to whom exactly? As far as I see they're only accountable to the market which, as far as I can see, is a euphamism for totally fucking unnacountable.

Skooma Addict

14th June 2010, 02:53

Yeah, and have private unaccountable banks control the economy, and thus make the government subject to them, great idea.

They aren't granted any power over the government, and if they did control the economy we wouldn't expect them to fail.

Cool, glad to hear of a single case where it worked. Where it didn't work: Argentina, South Africa.. doesn't look like it's working very well in the USA... pretty much everywhere else that tried liberal reforms..You clearly don't know what free banking is.

Accountable to whom exactly? As far as I see they're only accountable to the market which, as far as I can see, is a euphamism for totally fucking unnacountable.They are more accountable for their actions in general. It is easier for them to go bankrupt, and they need to take the demand for and the value of their currency into account more seriously when determining how much to inflate. Even in America when our banking system more closely resembled free banking, business cycles were generally milder and the government found it more difficult to fund completely wasteful programs.

IcarusAngel

14th June 2010, 04:38

This is a common misconception, because Hoover actually increased deficit spending (http://www.presidency.ucsb.edu/data/budget.php). His first budget was a deficit of 0.6% of GDP and his last budget was a deficit of 5.9% of GDP, with the deficit increasing each year. The average budget deficit as a percentage of GDP during his reign was 3.75% of GDP. By contrast, the average budget deficit during FDR's first term (when the recovery began) was 1.78% of GDP, and FDR never ran a budget deficit greater than Hoover's 5.9% of GDP until the US entry into World War II.

This is the general problem with the narrative that Hoover caused the Depression with "Treasury view" economics, while FDR saved the economy with Keynesian theory. It simply doesn't fit the facts. What caused the Depression? A collapse of nominal GDP, driven by a collapse in the money supply. What cured the Depression? A significant increase in nominal GDP, driven by a significant increase in the money supply. This narrative fits the facts.

I think this is an example of another economist missing the forest for the trees.

Even if Hoover increased GDP spending he wasn't increasing it on productive things for the economy and thus not following Keynesian economics. Reagan, for example, tripled the deficit and the economy still suffered because he was spending money on war and stationing tanks outside of the Whitehouse to protect the country from tiny little Laos etc. This only helps the upper echelons of society.

Dean

14th June 2010, 05:19

They are more accountable than nationalized banks, and free banking makes it more difficult to run a large deficit.

Hah! The current state of affairs:
-80% of the Greek bailout is going to be transferred to French and German banks http://english.aljazeera.net/focus/2010/05/201053164054408658.html
-Bankruptcy is the alternative for Greece

Why "free banking" would be a colossal terror:
-The Shared Euro currency has directly impacted Greece, Ireland and Spain by disempowering their fiscal strength
-The US and Japan would be completely fucked for the exact same reasons if we had a shared currency: http://krugman.blogs.nytimes.com/2010/05/01/why-devalue/
http://krugman.blogs.nytimes.com/2010/04/30/why-isnt-britain-in-more-trouble/
-Bankruptcy probably wouldn't be a valid choice in a "free banking system" so nations like Greece, Japan and the US would have but one option: bend over
-What particular services would banks cut credit to in order to maintain "fiscal responsibility"? Would they even want to? Wouldn't a system of revolving-door credit be the most valuable in terms of Debt confidence for investment? In turn, the actual value of the credit consistently gets worse: if "freer" markets for financial distribution are "more efficient," doesn't that mean that the "most efficient" medical industry norms are the decreased distribution and increased costs associated with the US market?

In other words, what indication is there, if any, that the specific services that economic liberals denounce in state structures - that is welfare, state subsidies for housing and medicine and the like - should be uprooted in the furtherance of the free market paradigm?

Skooma Addict

14th June 2010, 05:32

Why "free banking" would be a colossal terror:

-The Shared Euro currency has directly impacted Greece, Ireland and Spain by disempowering their fiscal strength

How on earth does this explain how free banking would be a "colossal terror?" You are making an argument for why free banking is superior here you idiot.

-The US and Japan would be completely fucked for the exact same reasons if we had a shared currency: http://krugman.blogs.nytimes.com/201...1/why-devalue/ (http://krugman.blogs.nytimes.com/2010/05/01/why-devalue/)
http://krugman.blogs.nytimes.com/201...-more-trouble/ (http://krugman.blogs.nytimes.com/2010/04/30/why-isnt-britain-in-more-trouble/)

What does two countries sharing the same currency have to do with free banking, where many privately owned banks issue their own currencies?

-Bankruptcy probably wouldn't be a valid choice in a "free banking system" so nations like Greece, Japan and the US would have but one option: bend over

Idk what you are even talking about here.

-What particular services would banks cut credit to in order to maintain "fiscal responsibility"? Would they even want to? Wouldn't a system of revolving-door credit be the most valuable in terms of Debt confidence for investment? In turn, the actual value of the credit consistently gets worse: if "freer" markets for financial distribution are "more efficient," doesn't that mean that the "most efficient" medical industry norms are the decreased distribution and increased costs associated with the US market?

How would I know what particular industries an imaginary privately owned bank would cut credit to in order to maintain fiscal responsibility?

Dean

14th June 2010, 05:49

How on earth does this explain how free banking would be a "colossal terror?" You are making an argument for why free banking is superior here you idiot.
How? Would "free banking" not rely on state-imposed currencies? It is precisely the shared currency, not the state-imposition of it that is to blame.

What does two countries sharing the same currency have to do with free banking, where many privately owned banks issue their own currencies?
In what ways would these currencies actually fulfill the needs provided for by protectionist currency measures by states?

Idk what you are even talking about here.
Bankruptcy. Does your free-market idealism allow for such measures?

How would I know what particular industries an imaginary privately owned bank would cut credit to in order to maintain fiscal responsibility?
If you don't know, you also don't know what industries the market itself would credit, and therefore you don't have critical data necessary to say whether or not housing, medicine and even subsistence industry would be backed by the financial regime. If you don't have an indication for favorable conditions for these social assets under free banking, you don't have an indication that free banking is a sound social policy.

Skooma Addict

14th June 2010, 06:11

I can't discuss the merits/faults of free banking with a person who doesn't know what free banking is.

Die Neue Zeit

14th June 2010, 06:23

It is you who doesn't know what "free banking" is.

The first problem with private ownership in the financial system is that financial rents are extracted for private benefit. This takes the form of something called "interest." Governmental budgets always prioritize paying its private financiers first (domestic and foreign) before tending to regular spending areas. How exactly, then, are these private financiers held accountable for issuing their credit?

The second problem is very similar to Austrian critiques re. the money supply, except that the Austrians just don't get it: control over the money supply. Private banks can expand and contract the money supply as they see fit, to say nothing about the Austrian bogeymen of central banking and fractional reserve banking. How are these institutions accountable?

The third problem is that privatized banking fosters derivatives and all that speculation. Again, how are the speculators held accountable?

No, the answer is turning the entire financial system into a publicly owned utility comprised of either a single bank or a savings bank and a commercial/development bank. A separate publicly owned utility would deal with the recent financial foray into the insurance business.

RGacky3

14th June 2010, 11:01

They are more accountable than nationalized banks, and free banking makes it more difficult to run a large deficit.

Accountable to who?

Nationalized banks are accountable to the electorate.

Dean

14th June 2010, 13:04

I can't discuss the merits/faults of free banking with a person who doesn't know what free banking is.
That isn't a defense for the specific criticisms I put forward. In fact, it indicates that you've thought less about the future character of free banking than I have, which is pretty pathetic.

You can't even answer whether or not bankruptcy would occur in the context of a free banking financial system. It seems obvious to me that it would not, but your refusal to address the point says a lot more about you than it does me.

inyourhouse

14th June 2010, 15:44

I think this is an example of another economist missing the forest for the trees.

Even if Hoover increased GDP spending he wasn't increasing it on productive things for the economy and thus not following Keynesian economics.

I'm not sure that's correct. Standard Keynesian economics doesn't differentiate between "productive" and "unproductive" government spending with regards to increasing GDP. Certainly, different types of spending may have other benefits (e.g. reducing crime), but with regards to increasing GDP I don't think there is a distinction. Keynes famously wrote (http://www.marxists.org/reference/subject/economics/keynes/general-theory/ch10.htm):

"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is"

Clearly that is not a productive activity, but it would nevertheless increase GDP according to Keynesian theory. As Keynes points out, it would of course be more sensible to build houses or do something else with added social benefits, but these activities would do no more to help GDP. In any case, I'm not sure that Hoover did increase spending on things that you would consider unproductive. Federal spending (http://www.usgovernmentspending.com/) on education, welfare and transportation increased, while defense spending fell. Wouldn't a leftist consider this productive?

inyourhouse

14th June 2010, 16:00

Cool, glad to hear of a single case where it worked.

Free banking also worked well in Australia, Canada, Columbia, France, Ireland, Sweden, Switzerland and the US. There is a good little book by Kevin Dowd, The Experience of Free Banking, which gives an overview of the experience in most of these countries. Of course, not all of them implemented free banking to the same degree. For example, in the US branch banking was prohibited, which is thought to have caused the much higher number of bank failures there than in other countries (indeed, in Sweden only 1 bank failed in 70 years).

Where it didn't work: Argentina, South Africa.. doesn't look like it's working very well in the USA... pretty much everywhere else that tried liberal reforms..

I'm not aware of free banking ever existing in Argentina or South Africa, but it worked very well in the US. In a post a couple of months ago (http://www.revleft.com/vb/showpost.php?p=1715437&postcount=53) I calculated the average rate and volatility of real GDP growth and inflation under various US monetary regimes. I found that:

"It's quite clear that the most successful monetary systems were the classical gold standard and free banking. Growth was significantly higher under these two systems than any other system, with free banking performing slightly better. It was also less volatile than under other systems, with the gold standard performing slightly better in this regard. Furthermore, inflation was extremely low under both systems (and during the national bank era), although interestingly it was the most volatile under the gold standard and least volatile under free banking. For that reason, free banking probably edges the classical gold standard as the best monetary system, but either would be an improvement over the current system."

Here is an image of the data: img52.imageshack.us/img52/8650/usstats.png

Skooma Addict

14th June 2010, 18:11

That isn't a defense for the specific criticisms I put forward. In fact, it indicates that you've thought less about the future character of free banking than I have, which is pretty pathetic.

No it does not, as half of your criticisms have nothing to do with free banking, and the other half can be answered by just looking at the history of free banking.

For example,

You can't even answer whether or not bankruptcy would occur in the context of a free banking financial system. It seems obvious to me that it would not, but your refusal to address the point says a lot more about you than it does me.

Yes, private banks can go bankrupt like every other failed business can.

Dean

14th June 2010, 19:57

No it does not, as half of your criticisms have nothing to do with free banking, and the other half can be answered by just looking at the history of free banking.
Then, please, answer them with the historical evidence you refer to. I've looked into the issue a bit and I don't see how my criticisms are invalid.

You shouldn't just say "you obviously don't know what you're talking about." If its so obvious, you should have a very easy time refuting my points. So please, do. Your ad hominems are simply not useful.

For example,

Yes, private banks can go bankrupt like every other failed business can.
Why? Bankruptcy is a state-gifted financial-legal procedure. If banking is "free," how can such protections exist?

IcarusAngel

14th June 2010, 20:11

I'm not sure that's correct. Standard Keynesian economics doesn't differentiate between "productive" and "unproductive" government spending with regards to increasing GDP. Certainly, different types of spending may have other benefits (e.g. reducing crime), but with regards to increasing GDP I don't think there is a distinction. Keynes famously wrote (http://www.marxists.org/reference/subject/economics/keynes/general-theory/ch10.htm):

"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is"

Clearly that is not a productive activity, but it would nevertheless increase GDP according to Keynesian theory. As Keynes points out, it would of course be more sensible to build houses or do something else with added social benefits, but these activities would do no more to help GDP. In any case, I'm not sure that Hoover did increase spending on things that you would consider unproductive. Federal spending (http://www.usgovernmentspending.com/) on education, welfare and transportation increased, while defense spending fell. Wouldn't a leftist consider this productive?

Interesting info.

I think what Keynes had in mind was that shifting power around was generally a good thing for society and that such shifting is no more "unnatural" than the free-market itself. I agree with this assessment. Some spending will benefit economic growth while other spending will hamper it, and certainly economists like Brad de Long make this distinction.

Also, a majority of economists favor trying to break up the naturally occurring monopolies of the free-market:

http://www.revleft.com/vb/fact-studying-economics-t136730/index.html

The study is cited in that thread:

http://www.newyorkfed.org/research/staff_reports/sr450.pdf

Bottom of study.

IcarusAngel

23rd July 2010, 12:43

Stiglitz:

The “innovations” unleashed by modern finance did not lead to higher long-term efficiency, faster growth, or more prosperity for all. Instead, they were designed to circumvent accounting standards and to evade and avoid taxes that are required to finance the public investments in infrastructure and technology – like the Internet – that underlie real growth, not the phantom growth promoted by the financial sector.

...

timulus spending, the deficit hawks’ favorite bogeyman, did not cause most of the increased deficits and debt, which are the result of “automatic stabilizers” – the tax cuts and spending increases that automatically accompany economic fluctuations. So, as austerity undermines growth, debt reduction will be marginal at best.

Keynesian economics worked: if not for stimulus measures and automatic stabilizers, the recession would have been far deeper and longer, and unemployment much higher. This does not mean that we should ignore the level of debt. But what matters is long-term debt.

There is a simple Keynesian recipe: First, shift spending away from unproductive uses – such as wars in Afghanistan and Iraq, or unconditional bank bailouts that do not revive lending – toward high-return investments. Second, encourage spending and promote equity and efficiency by raising taxes on corporations that don’t reinvest, for example, and lowering them on those that do, or by raising taxes on speculative capital gains (say, in real estate) and on carbon- and pollution-intensive energy, while cutting taxes for lower-income payers.

So, just for the record, modern Keynesian theory does make this distinction as I said.

I understand what inyourhouse was saying though, that at that time perhaps the distinction wasn't made. But Hoover actually engaged in the wrong kind of spending too late to make a large difference.

Also, inyourhouse acted surprised once when I said capitalism leads toward centralization, as if no one has ever made this claim. Bradford DeLong has pointed out all capitalist economies lead towards centralization

Dean

23rd July 2010, 20:11

They are more accountable for their actions in general. It is easier for them to go bankrupt, and they need to take the demand for and the value of their currency into account more seriously when determining how much to inflate. Even in America when our banking system more closely resembled free banking, business cycles were generally milder and the government found it more difficult to fund completely wasteful programs.

Yeah, I'm sure banking institutions have a lot of incentive to have rigorous accounting to make sure that they go bankrupt as soon as they don't look good. And they wouldn't engage in fractional reserve banking because its fraud and not in their self interest somehow :laugh:

Skooma Addict

23rd July 2010, 20:35

Yeah, I'm sure banking institutions have a lot of incentive to have rigorous accounting to make sure that they go bankrupt as soon as they don't look good. And they wouldn't engage in fractional reserve banking because its fraud and not in their self interest somehow :laugh:

Isn't this a little late?

The funny thing is that supporters of free banking are not against fractional reserve banking, and they don't believe that it is fraud. :laugh:

Publius

23rd July 2010, 22:13

I can't discuss the merits/faults of free banking with a person who doesn't know what free banking is.

Private banks issue their own money backed by gold?

M-26-7

23rd July 2010, 23:58

Austerity should wait until, you know, we aren't in the very early stages of recovery from a pretty nasty recession...begining austerity now is like someone running out of open heart surgery and immediately jumping in the English Channel to swim to the other side.

Yes, it's absolutely insane. But this is the neoliberal way of dealing with crises--cut public spending at all costs, without the slightest consideration for the ripple effects. It is the absolute opposite of Keynsianism. Radical leftists frequently bash Keynsianism, and rightly so, since according to its own chief architects its purpose was to save capitalism. But at least it does save capitalism. Neoliberalism has a certain self-destructive quality when it comes to the way it approaches economic depressions. I don't think I am being too optimistic when I speculate that this could be neoliberalism's last gasp. A philosophy built on "unleashing the creativity of markets", and confining the governmental role to the control of inflation, is inherently more suited to a boom economy; I don't know if it can survive a bust, and it certainly doesn't have a good game plan for doing so.

We could be approaching a time of immense opportunities for the radical left in Europe. Of course, far-right nationalists will jump at the opportunity as well. This is the kind of time when outcomes really can depend greatly on how well the left organizes and educates people, since material conditions are ripe for a swing in either direction.

Skooma Addict

24th July 2010, 04:11

Private banks issue their own money backed by gold?

Doesn't have to be backed by gold. Hayek claimed it could be backed by a basket of commodities.

Publius

24th July 2010, 06:14

Doesn't have to be backed by gold. Hayek claimed it could be backed by a basket of commodities.

I'd definitely know my money was secure if it was backed by a mutual fund made up of gold, pork futures, and Pets.com stock.

I don't understand people's wish to revert to primitive forms of banking/currency. It makes about as much sense to me to tie our currency to gold / hens / corn yields as it does to go back to pulling plows with donkeys instead of tractors.

If our currency were backed by gold and we discovered a huge amount of gold, that would inflate the currency if you kept the amount the same. If you changed the amount to keep the amount of bills in service in place you'd deflate the currency.

Either way you'd have inflation or deflation. How is this better than the current system?

Skooma Addict

24th July 2010, 06:30

I'd definitely know my money was secure if it was backed by a mutual fund made up of gold, pork futures, and Pets.com stock.

I don't understand people's wish to revert to primitive forms of banking/currency. It makes about as much sense to me to tie our currency to gold / hens / corn yields as it does to go back to pulling plows with donkeys instead of tractors.

If our currency were backed by gold and we discovered a huge amount of gold, that would inflate the currency if you kept the amount the same. If you changed the amount to keep the amount of bills in service in place you'd deflate the currency.

Either way you'd have inflation or deflation. How is this better than the current system? Historically free banking has proved to be more stable than banking today. As for your gold example, that is assuming one commodity is backing the currency. People who preferred stable currencies could use monies with a basket of commodities to back them, thus shielding themselves from such spikes in the value of their currency.

A currency fully backed by stock would be very interesting, since it could theoretically be extremely stable if it were backed by the stock of many many of firms.

Even your gold example is much better than what we have today. At least in your example a sudden discovery is required to inflate the currency. Currently there are no real checks.

And last but not least the govt does not control the money supply, which means a smaller government and fewer wars.

turquino

24th July 2010, 10:26

RGacky3

24th July 2010, 12:12

And last but not least the govt does not control the money supply, which means a smaller government and fewer wars.

HAHAHAH, are you joking? ok, so federal reserve (which is'nt really the government) going away = smaller government = less wars?

You do realize there were wars before federal banking right? Dumbass, theres no connection.

Historically free banking has proved to be more stable than banking today. As for your gold example, that is assuming one commodity is backing the currency. People who preferred stable currencies could use monies with a basket of commodities to back them, thus shielding themselves from such spikes in the value of their currency.

A currency fully backed by stock would be very interesting, since it could theoretically be extremely stable if it were backed by the stock of many many of firms.

Even your gold example is much better than what we have today. At least in your example a sudden discovery is required to inflate the currency. Currently there are no real checks.

It does'nt make a difference what backs the money in the long run, as long as the wealth is centralized (which its bound to be), the ruling class is going to determine things in their favor.

Publius

24th July 2010, 15:33

Historically free banking has proved to be more stable than banking today. As for your gold example, that is assuming one commodity is backing the currency. People who preferred stable currencies could use monies with a basket of commodities to back them, thus shielding themselves from such spikes in the value of their currency.

They could try, but as the last economic disaster showed us diversification doesn't do you any good when the entire economy takes a dive.

A currency fully backed by stock would be very interesting, since it could theoretically be extremely stable if it were backed by the stock of many many of firms.

:rolleyes:

1929. 2008.

Recipe for disaster.

Even your gold example is much better than what we have today.

Exactly what I mean by ignoring the reasons why we left the gold standard in the first place.

If the gold standard were such a good idea, we never would have abandoned it and achieved our greatest periods of economic success while doing so.

At least in your example a sudden discovery is required to inflate the currency. Currently there are no real checks.

Some inflation is good for the economy. Of course it wouldn't be good in an economy with competing currencies, because you'd prefer a currency that deflated in value because you would make money by doing nothing if you owned such currency. Of course deflation is lethal to the economy because it destroys the incentive to invest. If you can make money by just hoarding money, why lend that money out and take a risk?

So you'd really want the money supply to say exactly even, which is impossible because the population fluctuates. Same amount of money but more people equals less money per person equals deflation. Same thing with population decrease. A few million people die off and suddenly everyone else is richer -- inflation.

Not to mention the fact that government control of the money supply has numerous advantages. Deficit spending, for example, effectively increases the amount of money the government can spend, but it's only practical with an inflationary currency.

And last but not least the govt does not control the money supply, which means a smaller government and fewer wars.

It means a completely ineffective government since it would have to rely on private banks whenever it needed money beyond its current tax revenues.

Devrim

24th July 2010, 16:38

This is rediculous, the problem is not pumping money into the economy, nor is it a large public sector, the problem is unaccountability of the major institutions. Obviously pumping money into the system without regulating it and public control is not going to work, but the solution is'nt just cut the public sector, its having the control over it.

You know what you do in these instances? Nationalize the major banks, and put them under public accountability, the banks major profits become public profits and not cuts have to be made.

For communists the view point is different. For us the question is not what methods the bourgeoisie can use to salvage more profits from the crisis, but how the working class can defend its wages, working conditions, and living standards.

It is not a question of arguing for this policy or that to 'avert' the deepening of the crisis, but of starting from the perspective of the working class, and how it can defend itself, not from how capital could manage itself.

Devrim

Skooma Addict

24th July 2010, 19:36

They could try, but as the last economic disaster showed us diversification doesn't do you any good when the entire economy takes a dive.Except if you refer to times where the economy takes a dive due to our monetary policies (which emerge through central banking), such as 2008 or 1929. The market rate of interest would be more aligned with the natural rate, and thus reduce the degree of the business cycle. There would still be business cycles and nobody is claiming that there would be some Jesus currency.

:rolleyes:

1929. 2008.

Recipe for disaster.Generally, stock is very stable. Were there free banking, the 1929 crash wouldn't have happened.

Exactly what I mean by ignoring the reasons why we left the gold standard in the first place.

If the gold standard were such a good idea, we never would have abandoned it and achieved our greatest periods of economic success while doing so.Your gold example is different than what we had prior to when we left the gold standard. In your example, there is private competitive note insurance.

The U.S. "free banking" period was far removed from true laissez faire banking. A far better example was Scottish free banking. However, only after central banking in America have we experienced such brutal business cycles.

Some inflation is good for the economy. Of course it wouldn't be good in an economy with competing currencies, because you'd prefer a currency that deflated in value because you would make money by doing nothing if you owned such currency. Of course deflation is lethal to the economy because it destroys the incentive to invest. If you can make money by just hoarding money, why lend that money out and take a risk?Banks will inflate based on the demand for money. FRB allows banks to invest some of their deposits since they must only keep a fractional reserve. Whether or not you would prefer to invest depends on what you believe the return on your investment would be.

So you'd really want the money supply to say exactly even, which is impossible because the population fluctuates. Same amount of money but more people equals less money per person equals deflation. Same thing with population decrease. A few million people die off and suddenly everyone else is richer -- inflation. The money supply would not stay even. It would be constantly changing.

Not to mention the fact that government control of the money supply has numerous advantages. Deficit spending, for example, effectively increases the amount of money the government can spend, but it's only practical with an inflationary currency.I want to decrease the amount of money the government can spend.

It means a completely ineffective government since it would have to rely on private banks whenever it needed money beyond its current tax revenues. I fail to see how a government that must rely on tax revenues becomes ineffective.

Skooma Addict

24th July 2010, 21:28

HAHAHAH, are you joking? ok, so federal reserve (which is'nt really the government) going away = smaller government = less wars? Warfare becomes far more difficult to fund, along with many other government programs.

You do realize there were wars before federal banking right? Dumbass, theres no connection.Did I ever claim otherwise?

It does'nt make a difference what backs the money in the long run, as long as the wealth is centralized (which its bound to be), the ruling class is going to determine things in their favor. It does matter what backs the money since a currency which people lose faith in ceases to be a medium of exchange.

RGacky3

25th July 2010, 00:04

Warfare becomes far more difficult to fund, along with many other government programs.

Then we'll see something even better (which has kind of started already), the privatization of war, war is waged for the interest of the capitalist class, its not like an underfunded state will stop that, what will stop is the stuff they don't care about, but the poor do care about.

Did I ever claim otherwise?

By making the connetion to the federal reserve and wars you did.

It does matter what backs the money since a currency which people lose faith in ceases to be a medium of exchange.

When you say people you mean the capitalist class and the rich, becaus they are the only ones to be able to make that choice, what medium of exchange they like.

McCroskey

25th July 2010, 02:39

Going back to the austerity measures, my opinion is, in simple words, that it´s just plain blackmail. Goverment debts to the international private markets make them exposed to accept conditions. The main consition, of course, is the opening up of markets previously closed to private investments, ie the public sector. In Europe, what they want is public services to be transferred to the private sector, as these are basically safe markets with a strong and guaranteed demand (health, education, social housing, pensions, etc). These traditionally closed markets are what the international markets are demanding to be open. We are seeing it now in Europe. Think of the UK. The LibCon coalition are paving the way for a profit-orientated education, with its "free schools program", for a profit-orientated NHS, a profit-orientated everything (they want to leave social services, from libraries to street-cleaning, to decentralised citizens´associations), thus destroying unions and collective agreements and, by reducing public spending on such services, forcing them to hire private companies to cater for these services, on a profit-making basis. The opening of the public sector services for private profiteering is what they are seeking with these austerity measures. Helped with the "big society" and the "freedom of choice" propaganda, they want the basic services to be accesible to private profit, and that is the main issue on the fight against these austerity plans.

Sir Comradical

25th July 2010, 03:17

The rational thing to do, even from the standpoint of saving capitalism from itself would be to nationalise all banks and impose a moratorium on debt. They won't do this because it would undermine the very corporations they're structurally committed to serving.

Conquer or Die

25th July 2010, 04:32

I'm interested in this free banking stuff.

1. Wouldn't the lack of a hard currency backed by gold or by monopoly of force fiat simply degenerate into one of the two in a free banking system?

2. In the meantime; wouldn't it be confusing and create massive boom and bust cycles with widespread depressions or necessitate some sort of massive expansion and warfare?

3. How would it be possible to establish free banking in any country today, especially the United States? It seems like a recipe for disaster if it were to be completely implemented in this current climate.

What about the example of George Pullman? Or is that a case where the state's involvement in a border dispute in Canada caused the Free Market justice of Pullman's utopia to be lost?

Skooma Addict

25th July 2010, 05:15

Then we'll see something even better (which has kind of started already), the privatization of war, war is waged for the interest of the capitalist class, its not like an underfunded state will stop that, what will stop is the stuff they don't care about, but the poor do care about.

I fail to see how free banking will cause war to be privatized, especially since that is not what happened historically. The police and military will not be privatized as well.

By making the connetion to the federal reserve and wars you did.

I said there would be fewer wars. I didn't say warfare wouldn't exist.

When you say people you mean the capitalist class and the rich, becaus they are the only ones to be able to make that choice, what medium of exchange they like.

No, I mean the society in general. Mises' regression theorem explains how money emerges out of a marketable commodity. The rich do not get together and choose what can and cannot be money.

1. Wouldn't the lack of a hard currency backed by gold or by monopoly of force fiat simply degenerate into one of the two in a free banking system?

I am not sure if I fully understand your question here. Currencies under free banking could be backed by gold, but they don't need to be. Currency would not degenerate into gold coinage because paper notes are far more practical. Nowadays it may even be more practical to use some kind of digital cash.

2. In the meantime; wouldn't it be confusing and create massive boom and bust cycles with widespread depressions or necessitate some sort of massive expansion and warfare?

There would still be business cycles, but they would not be as severe. The market rate of interest would be more aligned with the natural rate under free banking. You can just go back and look empirically and find out for yourself that this has historically been the case.

3. How would it be possible to establish free banking in any country today, especially the United States? It seems like a recipe for disaster if it were to be completely implemented in this current climate.

That is a point of debate. Many people think that there needs to be a transition phase. However, people disagree over what exactly the transitory phase should be.

Free banking is extremely interesting. There are so many great studies which show the true merit of free banking. I know Selgin has a piece on free banking in China, and it looks very interesting. However, if you are very interested, here is where you start.

http://mars.superlink.net/~neptune/BankFAQ.html

http://www.terry.uga.edu/~selgin/freebanking.html

Conquer or Die

25th July 2010, 05:38

There would still be business cycles, but they would not be as severe. The market rate of interest would be more aligned with the natural rate under free banking. You can just go back and look empirically and find out for yourself that this has historically been the case.

Well I don't know the history of free banking so I should find out.

Thank you for response/links.

RGacky3

25th July 2010, 16:27

No, I mean the society in general. Mises' regression theorem explains how money emerges out of a marketable commodity. The rich do not get together and choose what can and cannot be money.

No, but what a rich person, or a few rich people view as acceptable means of exchange will take presidence over the poor, because they control more resources, and thus are going to be doing most of the exchanging.

I fail to see how free banking will cause war to be privatized, especially since that is not what happened historically. The police and military will not be privatized as well.

If a government cannot pay for a war the ruling class wants (for whatever reason), they will find another way to get what they want.

As for the history of free banking, whats the history? If you can enlighten me.

Publius

25th July 2010, 16:56

From the FAQ you posted:

How would customers and investors, especially small investors, be able to rate banks?

This would be no different from any other business. Again, banking presents no special problems in this area. Customers are able, e.g., to buy cars without being automobile engineers. Banks, too, would have an incentive to display important traits about themselves to customers and rating agencies. Banks that do not do so or are known to deceive the public and rating agencies would tend to lose customers and public confidence. (Rating agencies would depend on their reputation for accuracy and honesty. Thus, a rating agency that was either incompetent or dishonest would lose its credibility. After all, a rating agency's product is accurate and clear information about whatever it rates. On a free market, people would be free to patronize only those rating agencies they believed to be competent and honest.)

Investors, even small ones, would also be able to rate banks, either through third parties – rating agencies again – or just by looking at publicly available information. This would be no different than investing in any other business. Again, there is no special case against banks as businesses in comparison to other types of businesses. In fact, banks that tried to hide behind some sort of special complexity would probably be viewed by savvier investors as too risky to invest in.

I just can't take this seriously after seeing what happened in the housing bubble. Banks fabricated value out of thin air by creating CDOs that were essentially bets on the solvency of the nation's poorest mortgage holders. But these bets, essentially bets that home prices would continue to rise at an astronomical rate every year, were presented to to buyers (other banks, mutual fund and hedge fund managers, etc.) as AAA rated golden investments.

Why?

Because the rating agencies (Moodys, S&P -- mostly Moodys in this case) get paid by the banks, and because the rating agencies had no idea how to deal with the complicated derivatives the banks were producing.

The end result was that the savviest consumers of financial goods, professionals whose job it is to invest people's money, got taken to the cleaners by these CDOs. And there's really nothing they could have done or known in hindsight to prevent it from happening.

Even today, Goldman Sachs et al perpetrated these schemes on the country and they're wildly successful.

What I read up there is just free market Pollyanna bullshit. In the real world rating agencies are imperfect, and consumers are complete idiots. If we didn't have a Federal Government deeply involved in the running of the economy the last economic disaster would have, quite literally, destroyed the entire financial sector of the economy.

Every single bank would have went under due to the run on banks. There would be no liquidity for investors, and so on.

You talk about real cases. There's a real case. Moodys and S&P were rating agencies that everybody trusted. They rated these CDOs triple AAA, that is equally safe as US government treasury bonds. Investors were fooled, ratings agencies were fooled.

Read Michael Lewis' book The Big Short for the whole story (excellent book too), but the take home message is this is all a load of bullshit that none should believe.

It's all free market theorycrafting based on several dozen dubious assumptions about how hyper-rational free-market Ubermensch would behave in some idealized free market fantasies.

Here in the real world people buy unsafe cars and die in them, people put money into banks because the nearest ATM is from that bank, people's knowledge of how the financial system works should be belied by the fact that Americans are in debt an average of several thousand dollars.

In fact, banks that tried to hide behind some sort of special complexity would probably be viewed by savvier investors as too risky to invest in.

Tell that to Goldman Sachs, a bank that had its stock price RISE the day it got fined by the SEC for DEFRAUDING ITS INVESTORS THROUGH ARCANE, DESIGNED-TO-FAIL SECURITIES WHICH GOLDMAN BET AGAINST.

Goldman Sachs is going to make 40 billion dollars this year.