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TastyWheat

03-04-2009, 02:43 AM

Any good arguments or explanations as to why the Canadian banking system isn't feeling the pinch like the rest of us?

Canada's banking system kept high and dry by strict regulation: Flaherty
Wed Oct 8, 6:03 PM
David Friend, The Canadian Press

By David Friend, The Canadian Press

TORONTO - High banking standards have kept Canada's financial institutions afloat and out of the kind of trouble that has sunk many of their international peers, Finance Minister Jim Flaherty said Wednesday.

Flaherty, who will meet Friday in Washington with finance ministers from industrial countries to co-ordinate efforts to deal with the global economic crisis, said Canadian banks have been bolstered by strict government monitoring of their capital.

"We've had a couple of financial institutions in Canada that ran the risk of falling outside the capitalization requirements," he said during a news conference on Wednesday.

"We required them... to maintain the appropriate capital requirements and raise capital as necessary, which was done months ago."

Flaherty declined to say which banks were involved in shoring up capital to meet the government's standards. However, CIBC (TSX: CM.TO), which has had to write off billions of dollars linked to the sub-prime and battered debt market in the U.S., raised $2.75 billion earlier this year by selling stock at a sharp discount.

Flaherty added that the government is prepared to do "whatever we have to do" to protect Canada's financial system - among the most robust in the world - though he declined to outline any plans.

"I'm not going to talk about what they might be," he responded when pressed for more detail.

He did, however, emphasize that the government will not run even a small deficit even as it raises planned spending to help some parts of the economy.

Over the past two years, the Conservatives have implemented a review of the Bank Act and given more power to the Bank of Canada as the global credit crisis unfolded, leading to bank failures in the United States, Europe and Asia, mainly because of bad real estate loans.

Among its many recent moves, the Bank of Canada joined other central banks Wednesday in cutting interest rates by half a percentage point in a co-ordinated effort to stimulate lending and economic growth around the world.

Some of the fundamentals credited with keeping Canada's banks in the safe zone were put in place nearly a decade ago by the former Liberal government of Jean Chretien, including a refusal to approve any merger of Canada's big banks.

About a decade ago, former finance minister Paul Martin rejected planned mergers by Royal Bank and Bank of Montreal and TD with CIBC, saying such transactions would hurt financial services choices for consumers and businesses across the country.

While Flaherty said government regulation has helped make Canada's banking industry more secure than financial sectors in the United States and many other countries, Canada has also benefited from a strong housing market and more conservative lending practices.

"We're a relative rock of stability in this situation, but of course we're vulnerable to spillovers from what's happening elsewhere," he said.

So-called subprime mortgages to risky borrowers, which were at the heart of the U.S. financial collapse, were only a tiny part of the Canadian mortgage industry and are non-existent today.

Also, Canadian borrowers must put down at least five per cent of the cost of a home and the maximum payback period on federally insured mortgages has been reduced to 35 years from 40 years, lowering the risk of defaults.

"Some Canadian banks have experienced far more stress than others, but collectively the strong banks are carrying the less strong banks through," said Brad Smith of Blackmont Capital.

But, he said, for "domestic financial institutions to continue to outperform, you have to assume the economic environment here will continue to outperform - because if it doesn't you're going to get deterioration here as well."

Economies around the world have been battered by a banking crisis, a crumbling housing market and a credit crunch that has dried up borrowing. Canada has not been hit nearly as hard as others, Flaherty said, citing an International Monetary Fund report that shows Canada will lead G-7 economies in 2009, with growth of 1.2 per cent, though overall global growth will slow down.

Meanwhile, the U.S. is forecast to grow only 0.1 per cent and Europe 0.2 per cent.

The finance minister said in order for the international crisis to subside the G-7 countries will need to work together on a solution.

"One of the key things to resolving the financial crisis is for financial institutions to have confidence in each other so they feel comfortable lending to each other," he suggested.

The minister's comments suggest he's ready to participate in any international policy changes designed to help bring the global financial community in sync, said Craig Fehr, a financial services analyst with the Edward Jones brokerage in St. Louis.

"As far as any dramatic moves, I wouldn't expect Canada to be in the forefront of having to make those dramatic policy changes," Fehr said.

Flaherty said Canada is in a strong position to deal with the global crisis, with a strong banking system, a stable housing market and a federal budget surplus.

"Other countries have been increasing their deposit standards, but they're still for the most part below the high Canadian standard," he said.

Flaherty said he doesn't have plans to boost the bank deposit insurance limit because he says the current level is among the highest in the world.

"Other countries have been increasing their deposit standards. But they are still for the most part below the high Canadian standard of $100,000," he said.

The US$700 billion bailout package approved last week in the United States included increasing deposit coverage to $250,000 from $100,000 until 2010.

The Canada Deposit Insurance Corp. echoed Flaherty's confidence, when its head Guy Saint-Pierre said earlier this week that Canada's financial system is "resilient" and has no reason to raise its deposit insurance caps in stride with the U.S.

Mini-Me

03-04-2009, 03:05 AM

Generally speaking, the only regulations that will ever do more good than harm (in the utilitarian economic sense) are the ones that counteract some other harmful government intervention (whether it be another regulation or some larger government program).

In this case: This crisis was ultimately caused by the central banking system with its easy money and artificially low interest rates, and other factors like federally-mandated fractional-reserve banking and consolidation of risk into government pets like Fannie and Freddie didn't help the matter. Could strict banking regulations have eased the blow? Yes, they could have, and this is exactly why the Democrats' rants against deregulation ensnare so many people who fail to look further. However, that doesn't reach the heart of the matter, because the whole crisis would never have happened anyway without the central banking system (and the role it plays in the Austrian business cycle)! This was fundamentally a failure of government intervention, not the free market; if not for preexisting government intervention distorting and even dominating the market's direction (such as the Federal Reserve), regulations can and will only do harm. Even in Canada, regulations (always coming at the expense of liberty) will only ease the blow that other short-sighted government policies create...they cannot eliminate it entirely. After all, even some of the Canadian banks are having some difficulties - they're only looking good in the relative sense (compared to ours).

To give an analogy and make a comparison to a similar situation: Government sometimes literally creates monopolies (cable companies, etc.). After seeing the way these corporations exploit a captive audience (thanks to the government), government then "fixes" this by regulating such companies to hell and back, resulting in a "better" situation...but really, if they just let the free market work instead of creating monopolies in the first place, they wouldn't have created any problems they'd later need to "fix" with a lackluster, barely-passable solution.

TastyWheat

03-09-2009, 01:45 AM

That doesn't really address this specific case. I'm sure the Canadian government didn't see this crisis coming, nor did they implement these regulations to avoid this specific crisis. How can you argue that abolishing the Federal Reserve is preferable (or more workable) to highly regulating industry (as in the original post)?

newbitech

03-09-2009, 02:07 AM

Canada's banking system kept high and dry by strict regulation: Flaherty
Wed Oct 8, 6:03 PM
David Friend, The Canadian Press

By David Friend, The Canadian Press

TORONTO - High banking standards have kept Canada's financial institutions afloat and out of the kind of trouble that has sunk many of their international peers, Finance Minister Jim Flaherty said Wednesday.

Flaherty, who will meet Friday in Washington with finance ministers from industrial countries to co-ordinate efforts to deal with the global economic crisis, said Canadian banks have been bolstered by strict government monitoring of their capital.

"We've had a couple of financial institutions in Canada that ran the risk of falling outside the capitalization requirements," he said during a news conference on Wednesday.

"We required them... to maintain the appropriate capital requirements and raise capital as necessary, which was done months ago."

Flaherty declined to say which banks were involved in shoring up capital to meet the government's standards. However, CIBC (TSX: CM.TO), which has had to write off billions of dollars linked to the sub-prime and battered debt market in the U.S., raised $2.75 billion earlier this year by selling stock at a sharp discount.

Flaherty added that the government is prepared to do "whatever we have to do" to protect Canada's financial system - among the most robust in the world - though he declined to outline any plans.

"I'm not going to talk about what they might be," he responded when pressed for more detail.

He did, however, emphasize that the government will not run even a small deficit even as it raises planned spending to help some parts of the economy.

Over the past two years, the Conservatives have implemented a review of the Bank Act and given more power to the Bank of Canada as the global credit crisis unfolded, leading to bank failures in the United States, Europe and Asia, mainly because of bad real estate loans.

Among its many recent moves, the Bank of Canada joined other central banks Wednesday in cutting interest rates by half a percentage point in a co-ordinated effort to stimulate lending and economic growth around the world.

Some of the fundamentals credited with keeping Canada's banks in the safe zone were put in place nearly a decade ago by the former Liberal government of Jean Chretien, including a refusal to approve any merger of Canada's big banks.

About a decade ago, former finance minister Paul Martin rejected planned mergers by Royal Bank and Bank of Montreal and TD with CIBC, saying such transactions would hurt financial services choices for consumers and businesses across the country.

While Flaherty said government regulation has helped make Canada's banking industry more secure than financial sectors in the United States and many other countries, Canada has also benefited from a strong housing market and more conservative lending practices.

"We're a relative rock of stability in this situation, but of course we're vulnerable to spillovers from what's happening elsewhere," he said.

So-called subprime mortgages to risky borrowers, which were at the heart of the U.S. financial collapse, were only a tiny part of the Canadian mortgage industry and are non-existent today.

Also, Canadian borrowers must put down at least five per cent of the cost of a home and the maximum payback period on federally insured mortgages has been reduced to 35 years from 40 years, lowering the risk of defaults.

"Some Canadian banks have experienced far more stress than others, but collectively the strong banks are carrying the less strong banks through," said Brad Smith of Blackmont Capital.

But, he said, for "domestic financial institutions to continue to outperform, you have to assume the economic environment here will continue to outperform - because if it doesn't you're going to get deterioration here as well."

Economies around the world have been battered by a banking crisis, a crumbling housing market and a credit crunch that has dried up borrowing. Canada has not been hit nearly as hard as others, Flaherty said, citing an International Monetary Fund report that shows Canada will lead G-7 economies in 2009, with growth of 1.2 per cent, though overall global growth will slow down.

Meanwhile, the U.S. is forecast to grow only 0.1 per cent and Europe 0.2 per cent.

The finance minister said in order for the international crisis to subside the G-7 countries will need to work together on a solution.

"One of the key things to resolving the financial crisis is for financial institutions to have confidence in each other so they feel comfortable lending to each other," he suggested.

The minister's comments suggest he's ready to participate in any international policy changes designed to help bring the global financial community in sync, said Craig Fehr, a financial services analyst with the Edward Jones brokerage in St. Louis.

"As far as any dramatic moves, I wouldn't expect Canada to be in the forefront of having to make those dramatic policy changes," Fehr said.

Flaherty said Canada is in a strong position to deal with the global crisis, with a strong banking system, a stable housing market and a federal budget surplus.

"Other countries have been increasing their deposit standards, but they're still for the most part below the high Canadian standard," he said.

Flaherty said he doesn't have plans to boost the bank deposit insurance limit because he says the current level is among the highest in the world.

"Other countries have been increasing their deposit standards. But they are still for the most part below the high Canadian standard of $100,000," he said.

The US$700 billion bailout package approved last week in the United States included increasing deposit coverage to $250,000 from $100,000 until 2010.

The Canada Deposit Insurance Corp. echoed Flaherty's confidence, when its head Guy Saint-Pierre said earlier this week that Canada's financial system is "resilient" and has no reason to raise its deposit insurance caps in stride with the U.S.

1.)Can Govt Runs a budget surplus -- US does not
2.)Can Govt monitors banks capital and has standards -- US allows private quasi-govt FED to "monitor" banks capital and the FED has NO standards
3.)Can Govt rejects bank monopolies -- US Govt has bank monopolies encoded in law (see FED Reserve ACT)
4.)Can Govt reviews its Banking Laws -- US Govt doesn't even know its banking laws
5.)Can Govt protects consumer and business choice -- US Govt protects shareholders
6.)Can Govt makes sure borrowers put down enough money to purchase a home -- US lets the loan officer and black box computer ran decision engines write loans to people who can't afford them, often times subsidizing the "down payment" with funds stolen from people who can afford them (FHA and VA loans)

Side note: these systems are and can be highly manipulated with the numbers to get the "automated" approval. In 2004-2007 it was highly unlikely that a live human underwriter actually looked at the loan once the system stamped it with approval. Loan officers knew this and gamed the system. I worked in loan origination support for JPMorgan during this time on the automated system as an analyst. It was part of my job to work in the SQL Tables of this system and test the rulesets for all these different products. I interfaced with Freddie and Fannie System admins to make sure the loans chase was origination and selling to these quasi-govt companies would send the correct data over on upload for approvals. I realized towards the end that by doing my job, I was helping to screw my country and now the world. I raised the flags early in 07 and fought for the entire year for reviews of the viability of these products. I eventually got fired in Nov. 07 for being as my senior management described, "too vocal".

I have highlighted in green the areas where I see areas the US Govt has failed. People are so locked into the black/white, red/blue, democrat/republican, regulate/deregulate paradigm. It's all part of the conditioning and dumbing down of Americans. Unless and until this paradigm of polarity and duplicity is shattered in this country, the average American sheeple will continue to be misled into the belief that what is right for our country is what has hurt our country.

I like what Ron Paul says. If we are going to call for more regulation, lets regulate the Federal Reserve.

Nanerbeet

03-09-2009, 02:24 AM

TastyWheat, I just wanted to share with you my views on why banking regulation is necessary. Let me know what you think.

In principle, banking is a scheme which takes ownership of wealth and property. To put it bluntly, banking would fail in a free market because its fraud. Government regulations simply legalize the fraud and then perpetuate it by keeping the thievery below an "acceptable" threshold. Once the thivery gets out of control or the financial engineers find a way around regulations (think derivatives, credit default swaps), it is inevitable that the system will implode on itself as it accumulates all the wealth to the point where there is none left to service the system (this is where we are-- credit is not "flowing" anymore).

I mean, think of it this way-- you wouldn't deposit money in my bank if I didn't have a bank charter, would you? If I didn't have 10 to 1 reserve ratios, etc... Heck no. You'd keep that shit under your matress where it belongs. So the effect that the Federal Reserve has is confidence-- that you can save your money in a bank without losing it. Why do you think banks have works like Trust, Assurity, 1st and so forth? Its a confidence game! Its like a multi-level marketing scheme where as long as everyone believes its legit, it actually works!! But it always comes crash down-- the music has to stop sometime.

Simply put, if we didn't have regulations, we wouldn't have banking. Period. So if we're gonna have it, we've got to have very close ability to monitor it.

hugolp

03-09-2009, 02:49 AM

TastyWheat its easy. First of all, the canadian banking system is going to suffer. But it hasnt suffered much until now not because of heavy regulations, but because it could not laverage itself so much. We have denounced fractional reserve banking here a lot of times. Canada banks did it less than the US banks. They had a bigger cuixon. Thats it.

Hugo

tmosley

03-09-2009, 08:30 AM

The ideal planned economy approaches the results of a free market economy with the added cost of a bureaucracy. All planned economies are bad compared to a free market, but some planned economies are better than others. They will collapse eventually as well. Or fall behind should real free market economies emerge.

acptulsa

03-09-2009, 08:37 AM

Because the Canadian Parliament didn't spend the nineties trying to force Canadian banks to loan money for homes to people who can't afford them?

eric_cartman

03-09-2009, 08:43 AM

i think the Canadian banking system is in a lot more trouble than everyone is saying that it is.

our housing bubble has only just started to deflate... but once we start getting all the defaults and foreclosures... our banks will be in a lot of trouble.

if i had money to play in the stock market, i would be shorting the Canadian banks (like CIBC, CM.TO)

Canada is just a year or two behind the US. The banks in the US appeared fine in 2006 and 2007... but by 2008, it was obvious they were in trouble. I think later this year and next year, the Canadian banks will be in a lot of trouble also.

(btw, i'm Canadian)

also, interest rates have been lowered to 0.5%.... how much trouble would the banks be in right now if interest rates weren't this low?

weslinder

03-09-2009, 08:45 AM

I think the real lesson from Canada is how little bank failures really matter. Canada has had no bank failures so far, and are already worse off overall than the US. During the 30's the Canadian banking system was also the strongest outside of possibly the Swiss, and they still had the longest Depression and one of the deepest. They were still in Depression in the mid-40's.

You can regulate bank failures away, and if you are going to insure banks with the "full faith and credit" of the taxpayer, you probably should, but it won't buy you a stronger overall economy.

dannno

03-09-2009, 08:51 AM

Because the Canadian Parliament didn't spend the nineties trying to force Canadian banks to loan money for homes to people who can't afford them?

Between this post and Mini-me's, I think they pretty much cover it.. though you should add that Bush put a lot of effort into the above plan as well during the early part of this century.

Brian4Liberty

03-09-2009, 01:08 PM

Some of the fundamentals credited with keeping Canada's banks in the safe zone were put in place nearly a decade ago by the former Liberal government of Jean Chretien, including a refusal to approve any merger of Canada's big banks.

About a decade ago, former finance minister Paul Martin rejected planned mergers by Royal Bank and Bank of Montreal and TD with CIBC, saying such transactions would hurt financial services choices for consumers and businesses across the country.

Preventing big mergers has to be one of the simplest and least intrusive methods of avoiding the "too big to fail" trap.

Epic

03-09-2009, 01:33 PM

krazy kaju

03-09-2009, 03:20 PM

They didn't seem to have a Fannie Mae, Freddie Mac, Ginnie Mae, Sallie Mae, Community Reinvestment Act, or a central bank that kept interest rates at 1% for as long as the Federal Reserve either.

Furthermore, according to the Heritage Index of Economic Freedom (http://www.heritage.org/index/Country/Canada), Canada has the same financial freedom as the United States.

Chabsfromcanada

03-09-2009, 08:54 PM

torchbearer

03-09-2009, 09:00 PM

Our banks actually require proof of income, and there is a ratio of income to total debt load that you can not pass. That is income before overtime, base salary. The rules are very tight in comparison to the USA.

People here are going to feel the heat trying to pay for their mortgages though. Not because it was a bad mortgage, but because a lot of our industry exports to the USA. Also, low oil and natural gas prices are causing a lull in that sector. Our lumber industry is toast, being so closely tied to your housing bubble.

I know a total of zero people who have shady, high risk mortgages. The real problem is that we are so tied to your economy.

Actually, the people in the US who are now experience foreclosure were not the risky borrowers.. but the prudent ones who are now suffering economic hardship.
The first dominos to fall were the risky loans... the next domino to fall is the middle class who live pay check to pay check... and then the next will be the upper middle class as their savings is eaten up through underemployment...
etc.

I think it is a mistake for our movement to categorize all the foreclosures that are happening in the US as a consequence of poor people buying too much home.
This isn't the case in all foreclosures and will drive away the very people who are now open to our message.

FreeMama

03-09-2009, 11:03 PM

After reading Jekyll, it is quite clear that without capitalism, no socialist economy will stay afloat. NONE. Their system is not sustainable. . .

Danke

03-09-2009, 11:18 PM

After reading Jekyll, it is quite clear that without capitalism, no socialist economy will stay afloat. NONE. Their system is not sustainable. . .

Tom Woods gave a good speech about how socialist county wouldn't work without a capitalist country to set prices. If the whole world embraced socialism, it would self destruct, for the reason that government would have no rational way to set prices.

I hope that speech makes it to youtube, he explains it very well.

Zippyjuan

03-09-2009, 11:55 PM

Canada's interest rates were pretty much the same as ours were on mortgages. They have a central bank and fractional reserve lending. Just like us.
http://www.mississauga4sale.com/rates.jpg
http://www.mississauga4sale.com/rates.htm
Maybe it was the restrictions on their banking industry which protected them.

Does this sound familiar:
http://economictimes.indiatimes.com/International-Business/Canada-cuts-rate-to-historic-low/articleshow/4222303.cms

Canada cuts interest rate to historic low, but markets slip

4 Mar 2009, 1158 hrs IST, AGENCIES

TORONTO: Canada markets, which hit the lowest levels since 2003 Monday, suffered more losses Tuesday as the nation's central bank cut down interest
rates to a historic low of 0.5 per cent.

On the news of lower-than-expected profits from the country's top banks, the Toronto Stock Exchange (TSX) slipped further by 55.89 points Tuesday to close at 7,631.62.

The TSX composite index had fallen more than five per cent Monday to reach low levels not seen since the autumn of 2003.

The market's further slide was caused by financial shares which fell a further three per cent Tuesday after slipping 4.5 per cent Monday.

Scotiabank shares fell marginally as the nation's second largest bank posted a less-than-expected net quarterly profit of $842 million till Jan 31, up 1 per cent from $835 million during the same period a year before.

Shares of the leader Royal Bank of Canada also slipped 31 cents to $29.66.

With the US economic crisis taking an unprecedented toll on its auto and housing sectors, the Canadian economy is in its worst downturn since 1991.

As Statistics Canada reported Monday, the economy shrank 3.4 per cent in the last quarter of 2008 - the biggest drop since the last recession of 1991.

But with its economy still faring better than the US economy which shrank 6.2 per cent and the EU economy which shrank 5.9 per cent in the third quarter of 2008, the Bank of Canada Tuesday cut interest rates to the historic low of 0.5 per cent to ease credit squeeze.

FreeMama

03-10-2009, 01:32 AM

Yes Danke and that is the beautiful thing!! They can surely TRY a one world socialist government. . . but it will fail!! It is simply impossible. :)

acptulsa

03-10-2009, 06:10 AM

Yes Danke and that is the beautiful thing!! They can surely TRY a one world socialist government. . . but it will fail!! It is simply impossible. :)

I agree. But on the other hand, if we let the bastards try people will suffer.

No, that doesn't quite capture it. A whole lot of people will suffer a whole lot. Still understating it, but closer...

slamminshaun

03-10-2009, 08:53 AM

I actually work for RBC Bank, an American subsidiary for Royal Bank of Canada. We are the largest bank in Canada and one of the largest in the US. We did not receive TARP money.

One of things you have to understand about the Canadian banking system (which is the most sound banking system in the world) is that the financial habits of Canadians is MUCH different that in the U.S. You do not typically see 30 year fixed rate mortgages and the peddling of debt the same way you do south of the border. Canadians save their money, Americans spend their money. Canadians have an aversion to debt, Americans love debt.

The bottom line is, the banking system of Canada is reflective of the financial habits of its people and has very little to do with government regulation.

acptulsa

03-10-2009, 09:08 AM

The bottom line is, the banking system of Canada is reflective of the financial habits of its people and has very little to do with government regulation.

Thank you.

jon_perez

03-10-2009, 09:17 AM

Any good arguments or explanations as to why the Canadian banking system isn't feeling the pinch like the rest of us?It is as simple as the fact that Canadian banks were not allowed to leverage irresponsibly.

I don't know why so many people here on RPF keep insisting that it was "low interest rates" that caused the crisis when it was more the fact that Citibank, BoA, AIG, etc... were allowed to engage in speculation which they were previously not allowed to by deregulation.

There may be good reasons for not allowing a central bank to manipulate interest rates, but this is NOT the *main* reason for the financial crisis that occurred (although it was most probably one of the many accomplices, it was certainly not the *principal* one). Pushing your ideological agenda using faulty reasoning only turns people off and lowers your credibility.

It is kind of like how Krugman endlessly yaks on about how printing money is the solution to everything... except for the RPF side the mantra ad nauseam is abolishing the Fed (and the price of PMs rising) and every small piece of news no matter how ridiculously tangential is taken as evidence for such.

You wan to talk about unthinking sheeple? Well, RPF sure has plenty of such.

krazy kaju

03-10-2009, 10:24 AM

Deregulation and leverage are very good in a normally functioning economy. By leveraging up, you are able to multiply your profits by very large amounts.

The reason this crisis happened isn't deregulation, it's overregulation: Sarbanes-Oxley promoted the bubble by forcing mark-to-market accounting which overvalued firms at the peak and now is undervaluing them; the Federal Reserve kept interest rates for too low for too long; the SEC, like all government agencies, failed miserably at its job; the government-created credit rating oligopoly failed miserably to measure risk (no surprise there); Fannie Mae, Freddie Mac, Sallie Mae, and Ginnie Mae promoted irresponsible lending by purchasing subprime mortgages; the Community Reinvestment Act of 1977 and its multiple revisions (including one in 2005) forced banks to make unwise loans; regulators in the Fed forced all banks to lower lending standards; the FDIC providing incentives to people to put their money in financially unsound banks.

Deregulation, in fact, has helped ease this crisis, as it allows a much more flexible financial system to respond to price changes. Deregulation has allowed more banks and other financial institutions to merge than otherwise, reducing the impact on the real economy that bank failures have.

slamminshaun

03-10-2009, 10:51 AM

It is as simple as the fact that Canadian banks were not allowed to leverage irresponsibly.

I don't know why so many people here on RPF keep insisting that it was "low interest rates" that caused the crisis when it was more the fact that Citibank, BoA, AIG, etc... were allowed to engage in speculation which they were previously not allowed to by deregulation.

There may be good reasons for not allowing a central bank to manipulate interest rates, but this is NOT the *main* reason for the financial crisis that occurred (although it was most probably one of the many accomplices, it was certainly not the *principal* one). Pushing your ideological agenda using faulty reasoning only turns people off and lowers your credibility.

It is kind of like how Krugman endlessly yaks on about how printing money is the solution to everything... except for the RPF side the mantra ad nauseam is abolishing the Fed (and the price of PMs rising) and every small piece of news no matter how ridiculously tangential is taken as evidence for such.

You wan to talk about unthinking sheeple? Well, RPF sure has plenty of such.

The Canadian people have very little interest in undertaking massive amounts of debt, therefore, the need to leverage the bank up to the numbers seen here in the U.S. is unnecessary. They could have zero regulation and it wouldn't change the financial habits of their people. They don't like debt up there, and there's nothing you can do to change that.

On the other hand, we have a very heavily regulated banking system...but that didn't stop people from demanding credit. You can pass all the regulations you want, but you can't regulate people into being frugal. Banking systems reflect the financial habits of the people. The US is debt heavy, Canada's is not. My customers (Canadians) think Americans are certifiably insane....they understand that borrow/spend is the problem, not the solution as our leaders seem to think.

Unlike most people, I don't point to one thing as the problem....indeed, low interest rates provided the gasoline, but gov't intervention and politically-correct lending practices provided the engine and the cause of much of the speculation you're referring to. If banks had been allowed to make money the old-fashioned way, derivatives would not have been necessary. Since the gov't said banks need to figure out how to put minorities and low-income people into houses and it was up to the banks to figure out how, derivatives were the result because banks didn't want to hold that paper themselves. Why should they? They had a mandate to do it, so they did it. That's why the smart guys came up with the idea for derivatives, so banks wouldn't have to take the risk of these loans (or so they thought). Compound that with a subprime culture of no money down, no payments for 3 years....and the entire recipe was a recipe for disaster.

krazy kaju

03-10-2009, 10:57 AM

slamminshaun

03-10-2009, 11:01 AM

Canada has the same financial freedom as the United States (http://www.heritage.org/index/topten.aspx).

In addition, the Bank of Canada hasn't been following the same insane credit policies as the Federal Reserve System. That's the main reason why the U.S. has had such a low savings rate compared to Canada. Once upon a time, the U.S. actually had a high savings rate. Then it slowly declined to under 5% and eventually even touched the negative zone in the mid to late 2000s because of Fed actions.

Exactly. What incentive do you have to save money in the US? You're taxed on the interest and the interest rate you earn is so low, you might as well do something else with the money.....and that's EXACTLY what the government wants you to think.

No sense in saving it, so we might as well spend it. Oh...rates are low, we can spend it, then borrow once we run out. It's "free" money at those rates....oh, and we get a tax write-off for borrowing too??? Sign me up!

acptulsa

03-10-2009, 11:03 AM

Once upon a time, the U.S. actually had a high savings rate. Then it slowly declined to under 5% and eventually even touched the negative zone in the mid to late 2000s because of Fed actions.

I remember when it disappeared. That inflation was horrible. My entire generation watched our parents doing what was traditional and wise and getting eaten alive by the Fed. It's no accident that Americans for thirty-five years have seen saving as a fools' game. Fortunately, many do save, but they do it by investing--which is another interesting aspect of all this. Why do they point to the lack of bank accounts, ignore the portfolios, and say 'Americans don't save'? Are they trying to talk everyone out of it?

Americans stopped saving and started investing, even as they were repeatedly told they don't save. Now they're trying to convince us that investing is as much a fools' game as trying to save...

slamminshaun

03-10-2009, 11:09 AM

Americans stopped saving and started investing, even as they were repeatedly told they don't save. Now they're trying to convince us that investing is as much a fools' game as trying to save...

You say investing, I say speculating. How many people do you know that invest in the stock market to earn a dividend yield? Now, how many people do you know who invest in the stock market hoping the stock price goes up? One is considered investing, the other is considered speculating. It amazes me how many people purchase stocks that pay ZERO dividend. That's like buying an investment house and not putting a tenant in there....you're just banking on the price going up.

acptulsa

03-10-2009, 11:15 AM

You say investing, I say speculating. How many people do you know that invest in the stock market to earn a dividend yield?

The vast majority of them, as a matter of fact. But that's an interesting observation. Even though they're investing, the price news brings the speculator out in them. And that's how a great many of them are getting fleeced right now.

The way I usually try to explain it to them is, well you didn't get as good a deal as the person who's buying it today, but that doesn't affect the dividend. Of course, this was more reassuring to them back when they actually were paying dividends.

krazy kaju

03-10-2009, 11:32 AM

For anyone interested, here (http://www.bankofcanada.ca/cgi-bin/famecgi_fdps) are BOC rates. Here are images of the BOC rates:
http://www.journalofcommerce.com/images/archivesid/26841/1000.jpg

http://www.canadianmortgagetrends.com/canadian_mortgage_trends/WindowsLiveWriter/Bank-of-Canada-Overnight-Rate.jpg

Here is the Fed Funds rate:
http://static.seekingalpha.com/uploads/2008/2/25/fed_funds_and_greenpan.png

See the difference?

Zippyjuan

03-10-2009, 12:10 PM

Thank you Kaju. More evidence that Canada had similar monetary policies and interest rates to those in the US.

Both savings rates and interest rates in the US came down as future inflationary expectations also came down. I guess people saw fewer reasons to save for the future if prices were not expected to go up by as much. It seems that the people in the US decided to spend more now while the Canadians kept their older pattern of saving for the future.

So why did the banks not do as poorly? In both countries, the issuer of a mortgage used to keep the mortgage until it was paid off or refinanced. That changed in the US about ten years ago. That meant that the sell of the mortgage no longer had to worry about whether the loan would be paid off. The person writing the mortgage got their commission and moved on to the next customer. They had no incentive to check into the ability of the person to pay. That was someone else's' problem. This is how the lending standards got to rediculous proportions. Owners of mortgage companies wanted to issue as many mortgages as they could to maximise their profits.

The people who bought these mortgages from the issuers looked at past performance and saw little risk in not getting paid- default rates were low historically. These were repackaged and sold to other investors. Nobody recognized the increased risk. These were leveraged into more instruments to multiply the potential profits- but if things went bad, they would also multiply the losses which is what finally happened. Canada had neither the issuance of these riskier loans nor the leverage which magnified the problem at banks and financial institutions here.

That, and not their interest rates or monetary policy or fractional lending or fiat currency is why they were not hurt nearly as badly as the banks in the US. On these issues, they were basically the same as us.

krazy kaju

03-10-2009, 02:55 PM

More evidence that Canada had similar monetary policies and interest rates to those in the US.

Actually, it shows that the Fed kept lower interest rates for longer.

So why did the banks not do as poorly? In both countries, the issuer of a mortgage used to keep the mortgage until it was paid off or refinanced. That changed in the US about ten years ago. That meant that the sell of the mortgage no longer had to worry about whether the loan would be paid off. The person writing the mortgage got their commission and moved on to the next customer. They had no incentive to check into the ability of the person to pay. That was someone else's' problem. This is how the lending standards got to rediculous proportions. Owners of mortgage companies wanted to issue as many mortgages as they could to maximise their profits.

The people who bought these mortgages from the issuers looked at past performance and saw little risk in not getting paid- default rates were low historically. These were repackaged and sold to other investors. Nobody recognized the increased risk. These were leveraged into more instruments to multiply the potential profits- but if things went bad, they would also multiply the losses which is what finally happened. Canada had neither the issuance of these riskier loans nor the leverage which magnified the problem at banks and financial institutions here.

That, and not their interest rates or monetary policy or fractional lending or fiat currency is why they were not hurt nearly as badly as the banks in the US. On these issues, they were basically the same as us.

Your half baked theory sounds good until it runs into one massive problem: such loose buying and selling of bad securities could not have occurred had housing prices not been rising consistently, making subprime borrowers able to pay back their mortgage by refinancing. The only way this was made possible was by low interest rates by the Fed.

The boom ended when people in higher order industries were getting laid off. Investment decreased due to overconsumption, the higher unemployment then spurred lower order industries to cut jobs and wages, leading directly to this recession.

Zippyjuan

03-10-2009, 06:57 PM

Canadian mortgage rates were similiarly historically low as were the US rates. The bubble burst when prices finally got higher than the amount of money people could borrow.

jon_perez

03-11-2009, 04:39 AM

Deregulation and leverage are very good in a normally functioning economy. By leveraging up, you are able to multiply your profits by very large amounts.You ignore the fact that even in the commodities markets, leveraging many times over may be permitted, but regulations require that margin calls be immediately met when the entity leveraging is going to suffer a loss. This is NOT what happened with the securitization wave.

Actually one could argue that one piece of regulation worked effectively, mark-to-market forced the demise of these overleveraged paper tigers who really had no rational reason to be doing such "good business". Sure, their demise was extremely painful, but it's not something that can't be fixed with wiser (not necessarily more) regulation.

jon_perez

03-11-2009, 04:40 AM

Deregulation and leverage are very good in a normally functioning economy. By leveraging up, you are able to multiply your profits by very large amounts.

The reason this crisis happened isn't deregulation, it's overregulation: Sarbanes-Oxley promoted the bubble by forcing mark-to-market accounting which overvalued firms at the peak and now is undervaluing them; the Federal Reserve kept interest rates for too low for too long; the SEC, like all government agencies, failed miserably at its job; the government-created credit rating oligopoly failed miserably to measure risk (no surprise there); Fannie Mae, Freddie Mac, Sallie Mae, and Ginnie Mae promoted irresponsible lending by purchasing subprime mortgages; the Community Reinvestment Act of 1977 and its multiple revisions (including one in 2005) forced banks to make unwise loans; regulators in the Fed forced all banks to lower lending standards; the FDIC providing incentives to people to put their money in financially unsound banks.
I think the mainstream reasoning is the correct one and there is no need to overanalyze just to provide flimsy support for a deregulation ideology.

The repeal of Glass-Steagall allowed banks like Citi and BoA (who had no business doing such) to leverage up to far beyond 15x, and it is painfully obvious that such excesses were what directly led to the crisis. OVERLEVERAGING was clearly the problem here, and deregulation (specifically, repeal of Glass-Steagall) is what allowed the overleveraging.

You could find many other arguments in favor of deregulation (for example, I agree with you that SarbOx is ridiculously reactionary and definitely hurts US competitiveness), but the current crisis is NOT a good example for such, in fact it is a very good COUNTERexample for deregulation.

krazy kaju

03-11-2009, 12:25 PM

Canadian mortgage rates were similiarly historically low as were the US rates. The bubble burst when prices finally got higher than the amount of money people could borrow.

Their lowest interest rates were still two times higher in nominal terms than the Fed's lowest interest rates.

In real terms, BOC interest rates were never negative, unlike the Fed's interest rates:

http://www.bankofcanada.ca/en/ragan_paper/chart2.gif

http://www.mississauga4sale.com/images/Bank-Canada-Rates.gif

http://www.marketoracle.co.uk/images/2008/Interest_rates_US_UK_Europe_Jan08.gif

http://www.debtdeflation.com/blogs/wp-content/uploads/2008/02/IMG0024_89430984.PNG

You ignore the fact that even in the commodities markets, leveraging many times over may be permitted, but regulations require that margin calls be immediately met when the entity leveraging is going to suffer a loss. This is NOT what happened with the securitization wave.

Unfortunately, this rule hurts financial institutions. Temporary market downturns can lead towards massive deleveraging and financial collapse. The forex market, on the other hand, is almost completely deregulated and thus is so successful. Individual investors as well as financial institutions regularly leverage up to 400:1, making large profits possible.

It is up to the brokers and banks that provide leverage to decide when to make margin calls. The ones that are most successful are the ones that can then expand market share. This is how the market is self regulating.

Actually one could argue that one piece of regulation worked effectively, mark-to-market forced the demise of these overleveraged paper tigers who really had no rational reason to be doing such "good business". Sure, their demise was extremely painful, but it's not something that can't be fixed with wiser (not necessarily more) regulation.

I'm sure writing words in bold makes you feel intelligent, but mark-to-market is one of the many reasons why the bubble was so bad. Because securities like mortgage backed securities were based on current market conditions and not historical prices, financial asset sheets were overvalued, which help heighten the bubble.

I think the mainstream reasoning is the correct one and there is no need to overanalyze just to provide flimsy support for a deregulation ideology.

The "mainstream reasoning" (if you can even call it reasoning) is a complete logical contradiction. Bubbles just don't form out of thin air. They require low interest rates and high consumption, something that simply cannot exist at the same time in a free market.

The repeal of Glass-Steagall allowed banks like Citi and BoA (who had no business doing such) to leverage up to far beyond 15x, and it is painfully obvious that such excesses were what directly led to the crisis. OVERLEVERAGING was clearly the problem here, and deregulation (specifically, repeal of Glass-Steagall) is what allowed the overleveraging.

Then how do you explain the spectacular success that businesses experience in the completely deregulated forex market? Personally, I'm leveraged 200:1. Throw me in jail!

You could find many other arguments in favor of deregulation (for example, I agree with you that SarbOx is ridiculously reactionary and definitely hurts US competitiveness), but the current crisis is NOT a good example for such, in fact it is a very good COUNTERexample for deregulation.

You have failed to make a case that it is a counterexample for deregulation. No such bubble could have formed had it not been for unnaturally low interest rates which drove savings rates to negative rates in the late 2000s and which made rising asset prices the rule. No free market can create a situation in which trade deficits and capital account surpluses coexist for many years.

danberkeley

03-11-2009, 12:36 PM

The repeal of Glass-Steagall allowed banks like Citi and BoA (who had no business doing such) to leverage up to far beyond 15x, and it is painfully obvious that such excesses were what directly led to the crisis. OVERLEVERAGING was clearly the problem here, and deregulation (specifically, repeal of Glass-Steagall) is what allowed the overleveraging.

Yes. They were overleveraged. They collapsed and went bankrupt because of it (or at least they would have if the government didnt bail them out). This is the market at work. You complain about them leveraging up and then failing, but I say this is a good thing as it teaches the market a lesson to not do stupid shit. The only problem is that they are being bailout out, which itself is government intervention.

krazy kaju

03-11-2009, 12:44 PM

Exactly. The market self-regulates in that fashion. Unfortunately, the government has repeatedly bailed out banks and other financial institutions in every single economic downturn. It's well known that the Fed has been using its discount window to bail out financial institutions with loans. Other federal actions that have led to worsening bubbles have been the FDIC, which incentivizes individuals to put their money into risky banks, and the government-enforced credit rating oligopoly which has consistently miscalculated risk.

jon_perez

03-12-2009, 10:53 AM

Then how do you explain the spectacular success that businesses experience in the completely deregulated forex market? Personally, I'm leveraged 200:1. Throw me in jail!You're not a bank, you're subject to margin calls. People expect something very different from banks. That is the entire problem. Everyday people were NOT aware that with the repeal of Glass-Steagall, suddenly the banking institutions that they had faith in were allowed to operate like casino gamblers. If the "free market" were truly self-regulating, people would have known to take their money out of Citibank, BoA, et al, a long long time ago. Unfortunately, the knowledge needed to be aware of the sea change that occurred is very esoteric and that is what these irresponsible banks counted on. Without good knowledge in the hands of the majority of participants, markets will not necessarily self-regulate, and that is the problem with the purist, axiomatic "free market" assumptions. Reality is far messier than what grand-sounding philosophies can assume.

Another logical contradiction to realize here is how self-professed Austrians or Libertarians rant on against "fractional reserve" on the one hand and then on the other, go on and say that it is ok for banks to overleverage themselves.

Fractional reserve IS a form of leverage and if you say it is ok for banks to leverage as much as they want, then you should have no problems with fractional reserve.

Rothbard said it was ok for banks to be completely unregulated wrt fractional reserve because they would police themselves and effectively put the non-100% reserve ones out of business eventually. This is your so-called Austrian axiomatic thinking at work.

Now compare with the empirical evidence: What we had before when Glass-Steagall was in force was a highly regulated banking system which did not allow leveragin beyond 15x (or something like that). The moment they were let loose, just how much self-regulation did we see?? Granted, this was not exactly the scenario Rothbard wanted to see, and there is a Fed lender-of-last-resort dynamic at work, but it would be sheer disingenuity to argue that this was tantamount to a guarantee that losers would be bailed out.

So, in this particular scenario, did the Austrian/Libertarian style predictions of self-regulating markets pan out?

Sorry to be playing devil's advocate here, but most of what I encounter here on RPF is herdthink and very little critical thinking.

gilliganscorner

03-12-2009, 11:43 AM

You're not a bank, you're subject to margin calls. People expect something very different from banks. That is the entire problem. Everyday people were NOT aware that with the repeal of Glass-Steagall, suddenly the banking institutions that they had faith in were allowed to operate like casino gamblers. If the "free market" were truly self-regulating, people would have known to take their money out of Citibank, BoA, et al, a long long time ago.

We are not operating in a true free market. For example, a true free market would never ascribe value to Federal Reserve Loyalty or Federal Reserve Permission to Live Points (we call them dollars)

The only thing that gives a Federal Reserve Loyalty Point (sometimes referred to as a "dollar") any value at all is the fact that government demands it from you in the form of taxation - i.e. threat or actual use of violence.

A true free market would never ascribe value to a paper ticket the government prints. It is analogous to me setting up "Gilligan's Monetary Printing House" and using a really funky printer to make pretty pieces of paper with different markings on it representing different denominations. If I tried to impose that on a free market - without the backing of State violence - I would be laughed out of town. However, if I secured an army of people to go around showing up at your door demanding you pay tribute to me in the form of money I issued, and I had bigger guns than you, and threatened you and your family with violence, you probably would comply.

If you are familiar with Gresham's Law, it only works because of State violence. Repudiate the State, and Gresham's Law would be reversed.

The second point I want to make is the regulation problem. Government regulators distort peoples perceptions of businesses they regulate as they lull people into thinking they are safe. For example, the FAA regulates the airlines and sends in safety inspectors to examine aircraft. If that aircraft goes down and kills people, the airline can say, "We complied with FAA regulations! They said that airplane was safe!", effectively granting the airline sovereign immunity. A free market solution would have the airline purchase insurance and be subject to the insurance providers inspection team, who would more aggressively inspect aircraft, as they do not want to pay out a premium.

Unfortunately, the knowledge needed to be aware of the sea change that occurred is very esoteric and that is what these irresponsible banks counted on. Without good knowledge in the hands of the majority of participants, markets will not necessarily self-regulate, and that is the problem with the purist, axiomatic "free market" assumptions. Reality is far messier than what grand-sounding philosophies can assume.

That knowledge might present itself to the public at large by way of companies springing into existence competing with each other to ensure people do know. It might sell subscriptions, rank companies or whatever. The trouble I have is citing an example of a true free market where that model might be looked to for analysis; all have been usurped by the State.

In addition, in the event of the abolition of government indoctrination wage slave camps we call "public education", there would be a wide variety of schools with competing curricula driving up the quality of education instead of lobotomizing critical thinking skills or thwarting the development of the mind in its most arguably receptive state. Again, the weak point in my argument is that I cannot cite an example of a working model that most people want; public education has been usurped by the State, with the exception of private schools where parents more or less demand a higher quality of education with goal of ensuring Junior has a higher wage-slave job than his peers. What teacher would teach fractional reserve banking, monetary theory, critical anti-State curricula, or ask the class to debate, "Is Taxation Theft?".

It will take years to break 100+ years of government enforced social engineering. The Socrates quote in my sig sums it up nicely.

Another logical contradiction to realize here is how self-professed Austrians or Libertarians rant on against "fractional reserve" on the one hand and then on the other, go on and say that it is ok for banks to overleverage themselves.

Fractional reserve IS a form of leverage and if you say it is ok for banks to leverage as much as they want, then you should have no problems with fractional reserve.

I have no idea who is saying that. I am not saying you are wrong....

Rothbard said it was ok for banks to be completely unregulated wrt fractional reserve because they would police themselves and effectively put the non-100% reserve ones out of business eventually. This is your so-called Austrian axiomatic thinking at work.

I don't recall him saying that in the Case against the Fed or "What has government done to our Money". He argued fractional reserve banking was equivalent to property theft. He also argued the case for a 100% gold dollar. In a true free market, there might be a wide variety of banking models to choose from. On one end of the spectrum there would be warehouse type banking where people pay service fees to store their money. On the other end there might be banks that practise some form of fractional reserve system, with full disclosure to their clientele, that pay them interest on their deposits, with the understanding that the bank might loan out their money to others. I am not sure. With no State imposing fiat money, taxation, regulation, confiscation, or other nefarious goodies, no limited liability laws protecting the owners of a bank, chances are the actors would act accordingly to risk, capital restraints, and information wired to them in a heartbeat, given our communication technology today.

Now compare with the empirical evidence: What we had before when Glass-Steagall was in force was a highly regulated banking system which did not allow leveragin beyond 15x (or something like that). The moment they were let loose, just how much self-regulation did we see?? Granted, this was not exactly the scenario Rothbard wanted to see, and there is a Fed lender-of-last-resort dynamic at work, but it would be sheer disingenuity to argue that this was tantamount to a guarantee that losers would be bailed out.

So, in this particular scenario, did the Austrian/Libertarian style predictions of self-regulating markets pan out?

We are not operating in a true free market as per my points above.

Sorry to be playing devil's advocate here, but most of what I encounter here on RPF is herdthink and very little critical thinking.

The shortcoming that a number of posters have here is to think that they can reform the State. Their are too many connected insiders, politicians and their ilk that loot and pillage the citizens through this instrument. Collapse is more likely than reform. The correct solution is agorism (http://www.ronpaulforums.com/showthread.php?t=153542).

gilliganscorner

03-12-2009, 11:49 AM

I am Canadian as well, but don't hold that against me. :p

1) Our population is 10 times smaller than yours. 90% of us live within 200 miles of the border. Our banks received a $75B bailout (http://www.globalresearch.ca/PrintArticle.php?articleId=12007), although that point is hotly contended up here. Multiplying that number by 10 is equivalent to $750B - the same size as yours.

2) Ownership of the Bank of Canada is solely possessed by our Federal Government. It isn't important as much as to who owns it as opposed to what it does. Our BoC is taking is diversifying into "other" debt as opposed to government security instruments as well.

http://www.greaterfool.ca/wp-content/uploads/2008/12/bank-of-canada.jpg

krazy kaju

03-12-2009, 01:59 PM

Good job ignoring 99% of my arguments, jon.

You're not a bank, you're subject to margin calls.

Maybe you need to call every single forex broker then for using margin calls on individual investors.

People expect something very different from banks. That is the entire problem. Everyday people were NOT aware that with the repeal of Glass-Steagall, suddenly the banking institutions that they had faith in were allowed to operate like casino gamblers. If the "free market" were truly self-regulating, people would have known to take their money out of Citibank, BoA, et al, a long long time ago.

We didn't have a free market. The FDIC provided incentives to put their money into highly overleveraged and dangerously invested banks. Mark-to-market overvalued bank assets. Low Fed interest rates led towards constantly rising asset prices. All of these created incentives for people to put their money into banks like Citi and BOC.

Unfortunately, the knowledge needed to be aware of the sea change that occurred is very esoteric and that is what these irresponsible banks counted on.

That doesn't sound like a very logical explanation. See my above answer.

Without good knowledge in the hands of the majority of participants, markets will not necessarily self-regulate,

Except, you know, via failures, bankruptcies, asset revaluation, etc.

and that is the problem with the purist, axiomatic "free market" assumptions.

You still have failed to provide one coherent critique of free markets.

Reality is far messier than what grand-sounding philosophies can assume.

It's even far more messier than what half-baked idiotic hypothesis like yours assume.

Another logical contradiction to realize here is how self-professed Austrians or Libertarians rant on against "fractional reserve" on the one hand and then on the other, go on and say that it is ok for banks to overleverage themselves.

Fractional reserve IS a form of leverage and if you say it is ok for banks to leverage as much as they want, then you should have no problems with fractional reserve.

All squares are rectangles. Are all rectangles squares? No.

Fractional reserve banking is leverage. Is all leverage fractional reserve banking? No.

You lose.

Rothbard said it was ok for banks to be completely unregulated wrt fractional reserve because they would police themselves and effectively put the non-100% reserve ones out of business eventually. This is your so-called Austrian axiomatic thinking at work.

You, sir, are clearly an idiot. Banks have been known to self regulate before the rise of pro-FRB government intervention. For example, America's first bailout in 1792 happened when NYC banks brought one bank to its knees for practicing fractional reserve banking. The Treasury bailed that bank out, setting a precedent promoting FRB.

Now compare with the empirical evidence: What we had before when Glass-Steagall was in force was a highly regulated banking system which did not allow leveragin beyond 15x (or something like that).[quote]

A highly regulated banking system that failed in the late 30s, late 40s, mid 50s, late 50s, early 60s, early 70s, mid 70s, early 80s, late 80s, and early 90s. It sure worked great!

[quote] The moment they were let loose, just how much self-regulation did we see??

THEY WERE NEVER LET LOOSE

Please explain:

The FDIC
The SEC
The government-enforced credit rating oligopoly
The Federal Reserve System
Fair Credit Reporting Act
Pass Through Insurance
Sarbanes-Oxley Act
Regulation A
Regulation B - Equal Credit Opportunity Act
Regulation C - Home Mortgage Disclosure Act
Regulation D
Regulation E
Regulation F - Limitations on Interbank Liabilities
Regulation O
Regulation P
Regulation Q
Regulation W
Regulation Z
Regulation AA
Regulation BB - Community Reinvestment Act
Regulation CC
Regulation DD

Granted, this was not exactly the scenario Rothbard wanted to see, and there is a Fed lender-of-last-resort dynamic at work, but it would be sheer disingenuity to argue that this was tantamount to a guarantee that losers would be bailed out.

Only if you ignored the dozens of financial institutions and even entire countries that the Fed has bailed out in the past 50 years.

So, in this particular scenario, did the Austrian/Libertarian style predictions of self-regulating markets pan out?

There weren't any free markets, so the Austrian predictions of financial calamity caused by regulations did pan out.

Sorry to be playing devil's advocate here, but most of what I encounter here on RPF is herdthink and very little critical thinking.

You're using herdthink and very little critical thinking. Shouldn't you be at the Obama forums praising hyperinflation and the USSR?

jon_perez

03-13-2009, 09:24 AM

We are not operating in a true free market. For example, a true free market would never ascribe value to Federal Reserve Loyalty or Federal Reserve Permission to Live Points (we call them dollars)

The only thing that gives a Federal Reserve Loyalty Point (sometimes referred to as a "dollar") any value at all is the fact that government demands it from you in the form of taxation - i.e. threat or actual use of violence.

A true free market would never ascribe value to a paper ticket the government prints. It is analogous to me setting up "Gilligan's Monetary Printing House" and using a really funky printer to make pretty pieces of paper with different markings on it representing different denominations. If I tried to impose that on a free market - without the backing of State violence - I would be laughed out of town. However, if I secured an army of people to go around showing up at your door demanding you pay tribute to me in the form of money I issued, and I had bigger guns than you, and threatened you and your family with violence, you probably would comply.That is, of course, the Bastiatardized version of the story.

The more accurate truth is that government did not "coerce" the people to accept this fiat money through implied violence. If that was what had happened, revolution would have occurred a long long time ago. Rather, it got people to accept fiat money via a lot of sneaky means:

1) appeal to patriotism
2) sheer ignorance of the monetary system
3) slow and subtle shifts in national policies

Unless you acknowledge the slow, insidious means via which a society is navigated towards becoming more Statist, you will not be able to combat such trends effectively nor will reactionary methods succeed in convincing the masses to appreciate your POV.

jon_perez

03-13-2009, 09:28 AM

I don't recall him saying that in the Case against the Fed or "What has government done to our Money". He argued fractional reserve banking was equivalent to property theft. He also argued the case for a 100% gold dollar. In a true free market, there might be a wide variety of banking models to choose from. On one end of the spectrum there would be warehouse type banking where people pay service fees to store their money. On the other end there might be banks that practise some form of fractional reserve system, with full disclosure to their clientele, that pay them interest on their deposits, with the understanding that the bank might loan out their money to others. I am not sure. With no State imposing fiat money, taxation, regulation, confiscation, or other nefarious goodies, no limited liability laws protecting the owners of a bank, chances are the actors would act accordingly to risk, capital restraints, and information wired to them in a heartbeat, given our communication technology today."Mystery of Banking" is where I believe Rothbard sets out to logically argue that a completely unregulated banking system would necessarily cause banks which practice fractional reserve to go out of business (pretty quickly). The argument is actually rather brilliant and a tour de force of reasoning, but I don't think it holds out well empirically, unfortunately...

gilliganscorner

03-13-2009, 09:45 AM

The argument is actually rather brilliant and a tour de force of reasoning, but I don't think it holds out well empirically, unfortunately...

It can't be empirical; there isn't a true free market that exists putting it to the test - all have been usurped by the State. Neither you nor I know empirically if it would. The only way to know is to conduct an experiment....where?

gilliganscorner

03-13-2009, 09:49 AM

Unless you acknowledge the slow, insidious means via which a society is navigated towards becoming more Statist, you will not be able to combat such trends effectively nor will reactionary methods succeed in convincing the masses to appreciate your POV.

I do acknowledge the tremendous success the Fabians have achieved via the slow insidious methods. It is unbelievable once you break the matrix.

Sometimes I wonder how I can compete for the minds of people so thoroughly lobotomized by public education and the media cartel.

jon_perez

03-13-2009, 09:53 AM

Granted, this was not exactly the scenario Rothbard wanted to see, and there is a Fed lender-of-last-resort dynamic at work, but it would be sheer disingenuity to argue that this was tantamount to a guarantee that losers would be bailed out.
Only if you ignored the dozens of financial institutions and even entire countries that the Fed has bailed out in the past 50 years.When shareholders are wiped out, that is not exactly a bailout. Do you think Prince Alwaleed is happy that Citi shares fell to a dollar? I'm not trying to defend or say that these Fed actions of [ostensibly] trying to prevent systemic risk you mention are necessarily correct or will work, but to characterize them as bailouts per se is being very disingenuous and ignoring the subtleties. People behind these failed institutions STILL lost money and a hell of a lot of it (although almost surely not as much compared to if taxpayers were not called in to help). So this willful characterization of the Fed as outright guarantor of risky ventures is extremely misleading and will not get you anywhere in debates with anyone other than those of the same herd as you.

In the case of LTCM for example, the Fed did not use any taxpayer money, rather it used a lot of jawboning. And yet, I believe many anti-Fed advocates call it a "bailout". (I respect Jim Rogers' opinions a lot, and if I'm not mistaken he virtually called LTCM a bailout, although I believe this is due to his Jim's penchant for exaggeration. The Fed would not let LTCM fail, as Jim correctly mentions, but they did try very hard to avoid moral hazard.)

So to the extent that the Fed is still very far from acting as a pure bailer-outer, the market is "free" and "unregulated". If you possess enough common sense to realize that there is really no such a thing as either a "purely free" nor "purely regulated" market (even Hongkong, which iirc Ron Paul characterizes as the most laissez-faire economy out there, has financial regulations), you'd realize that we are essentially arguing shades of gray here.

I tend to be in favor of freer markets (than the status quo) just like you (but not sure if it is to the same extent), but unlike you, I think the way to success is to acknowledge and address the concerns of the opposing camp, rather than trying to righteously brandish or stamp an ideology onto other people's minds or resort to sometimes flimsy or misleading (of course these are matters of opinion) arguments. That only invites more opposition.

heavenlyboy34

03-13-2009, 09:58 AM

gilliganscorner

03-13-2009, 10:08 AM

Perhaps China? They seem to have the free market thing going for them over there. ;)

Do they have a central bank and fiat ? ;) If so, they do not have a true free market. A central bank and a free market are opposite ideas. :p However, I bet you there is a large contingency of agorists over there.

jon_perez

03-13-2009, 10:17 AM

It can't be empirical; there isn't a true free market that exists putting it to the test - all have been usurped by the State. Neither you nor I know empirically if it would. The only way to know is to conduct an experiment....where?As I have tried to argue in my reply to krazy kaju, a true free market is an idealization. What you have in reality are relatively freer or relatively more regulated markets and economies.

I am frankly thoroughly impressed with Jon Stewart essentially understanding / getting Greenspan to acknowledge that we have a controlled market in [short-term] money itself. But I consider that more as a piece of enlightening clarification rather than as a debate between Jon and Alan. Greenspan, as Ron Paul correctly observed, remembers earlier monetary regimes, which is exactly why he was able to honestly acknowledge Jon Stewart's observation, which would probably confuse those who have only ever known a regime of central banking (we do have Keynes to thank/blame for this...).

But remember, that the flip side of this admission is that while we have a relatively high degree of interference in the market for [short-term] money, most everything else is unregulated to a greater or lesser degree (certainly, production of goods and services is NOT centrally planned...). This is why, when posters like hugolp keep resorting to cliched propaganda about how we are all thoroughly doomed because "we have become communist", they just highlight their own propensity to exaggerate (in the name of ideology) and do their own cause no good. They think such exaggerations help their arguments when in reality their work is cut out for them to explain with better arguments just why central banking is bad. While I am extremely dubious about efforts towards more centralization, I am STILL far from entirely convinced that central banking per se is to blame for the present blow-up.

I can appreciate the cons of having a central bank artificially set interest rates (and even then, you have to admit it only controls rates for short term money) and its attendant ills, but when it comes to the current mess, the mainstream explanation of overleveraging due to deregulation makes far more sense to me as a primary cause.

Yes, the Fed shares some blame for the mess (but in fact, not for setting the price of money, but rather for allowing deregulation to push through), but the Austrian case of laying out the existence of central banking as being the root cause of all evil we see today is I think going out on a limb.

It's great that the current crisis has gotten more mainstream attention for Austrian economics because, if not for anything else, it offers great counter-ideas against the hokier aspects of Keynesianism. But I'd rather not see such attention squandered by people who are too eager to push their ideology to the extent of resorting to less-than-solid reasoning. It just destroys the cause.

jon_perez

03-13-2009, 10:24 AM

The only way to know is to conduct an experiment....where?Online, via massively multiplayer simulations.

Kraig

03-13-2009, 10:31 AM

Any good arguments or explanations as to why the Canadian banking system isn't feeling the pinch like the rest of us?

Any good arguments as to why a banking system should be saved to begin with?

Zippyjuan

03-13-2009, 11:58 AM

Mini-Me

03-13-2009, 12:07 PM

As I have tried to argue in my reply to krazy kaju, a true free market is an idealization. What you have in reality are relatively freer or relatively more regulated markets and economies.

I am frankly thoroughly impressed with Jon Stewart essentially understanding / getting Greenspan to acknowledge that we have a controlled market in [short-term] money itself. But I consider that more as a piece of enlightening clarification rather than as a debate between Jon and Alan. Greenspan, as Ron Paul correctly observed, remembers earlier monetary regimes, which is exactly why he was able to honestly acknowledge Jon Stewart's observation, which would probably confuse those who have only ever known a regime of central banking (we do have Keynes to thank/blame for this...).

But remember, that the flip side of this admission is that while we have a relatively high degree of interference in the market for [short-term] money, most everything else is unregulated to a greater or lesser degree (certainly, production of goods and services is NOT centrally planned...). This is why, when posters like hugolp keep resorting to cliched propaganda about how we are all thoroughly doomed because "we have become communist", they just highlight their own propensity to exaggerate (in the name of ideology) and do their own cause no good. They think such exaggerations help their arguments when in reality their work is cut out for them to explain with better arguments just why central banking is bad. While I am extremely dubious about efforts towards more centralization, I am STILL far from entirely convinced that central banking per se is to blame for the present blow-up.

I can appreciate the cons of having a central bank artificially set interest rates (and even then, you have to admit it only controls rates for short term money) and its attendant ills, but when it comes to the current mess, the mainstream explanation of overleveraging due to deregulation makes far more sense to me as a primary cause.

Yes, the Fed shares some blame for the mess (but in fact, not for setting the price of money, but rather for allowing deregulation to push through), but the Austrian case of laying out the existence of central banking as being the root cause of all evil we see today is I think going out on a limb.

It's great that the current crisis has gotten more mainstream attention for Austrian economics because, if not for anything else, it offers great counter-ideas against the hokier aspects of Keynesianism. But I'd rather not see such attention squandered by people who are too eager to push their ideology to the extent of resorting to less-than-solid reasoning. It just destroys the cause.

I think you may be confusing the financial crisis with the wider recession that started it. Were banks overleveraged? Yes, of course they were. Within the current system, Federal Reserve and all, could regulation [from some arrogant central manipulators who think they know what's best for everyone] have prevented the financial crisis in particular from reaching the heights it did, as it did in Canada? Yes, it could have...if the right regulations were in place...but that still misses the point that the financial crisis is only a symptom of the larger problem, and that problem is a major recession caused by the business cycle. Plus, you may be forgetting that we DO already have a lot of regulation...and in fact, these regulations made the crisis worse. When fractional reserve banking and overleveraging are not merely allowed but practically mandated by the government itself, that doesn't exactly provide consumers with a whole lot of choice between irresponsible banks and responsible banks, does it? When so much risk is consolidated - not by the market, but by government - into unnaturally large institutions like Fannie and Freddie, don't you think that's just asking for trouble (just like all centralization of power...)? They were created in order to "prevent" crises, yet their very existence catalyzed and exacerbated this one. When consumers are constantly reassured by government propaganda that nothing could ever happen to their bank deposits because they're all FDIC-insured by a supposedly bottomless well of money, that doesn't exactly encourage careful scrutiny of interest rates and banking practices by consumers, does it? Hell, most consumers don't even REALIZE that their bank deposits are a loan to the bank, as if their deposits go into some kind of safety deposit box that magically returns interest. This kind of complacency stems from a long history of government interference and empty promises.

I mentioned above that the financial crisis is just a symptom of the larger problem, and that problem is the business cycle. What do you think started the financial crisis? Did the system just spontaneously combust one day, while the rest of the economy was doing just fine? Of course it didn't! The real economy was already suffering, because it had already entered the nasty end of the business cycle, and that's what started the massive wave of loan defaults and foreclosures. Ignoring this and citing "deregulation" alone is the epitome of the less-than-solid reasoning you're accusing others of, because you're looking at the middle of the problem for the root cause instead of the beginning.

When it comes to the business cycle, you can look at a business cycle in a few ways:
On one hand, you can argue - as Keynesians do - that the business cycle is caused by "animal spirits" like sunspots or whatever the hell kind of voodoo reasons you want to make up. These "animal spirits" supposedly cause unforeseen and unpredictable shifts in psychological attitudes among market actors from optimism to pessimism, and these completely unpredictable mood swings cause feedback loops that spontaneously wreck an otherwise perfectly healthy economy. :rolleyes: By pretending like the business cycle is caused by spontaneous irrationality (and/or "not enough" regulation to counteract that irrationality), Keynesians conveniently claim that arbitrary government intervention can smooth out these cycles and "fix" these problems. Of course, the fact that Keynesian theory gives a convenient excuse for arrogant central planning/manipulation is exactly why bureaucrats, regulators, and academics decided to adopt that school of thought in the first place! Instead of coming up with logical reasons for the business cycle, Keynesians seem to just write it off as a foregone conclusion that animal spirits are to blame, focusing their efforts on coming up with elaborate schemes to alleviate the cycle with central planning...as if everyone in the world is simply a lab rat for their social experiments. This also explains why the Keynesians were entirely unable to predict the Great Depression or the current crisis, and they were entirely dumbfounded by them until they got their PR machines going and ranting about "deregulation" (i.e. "We didn't have enough central control to prevent all this irrationality! We need more power!" :rolleyes: ). Similarly, Keynesians frequently whine about how markets need benevolent central planning and intervention because individual market actors have "imperfect information" and need someone "smarter" than them to fix things...for their own good. Of course, they're completely correct that market actors operate on imperfect information, but it's unbelievably naive to accept that as a justification for central manipulation: After all, every single central planner on earth is plagued by the same exact problem of imperfect information...on top of additional problems like moral hazard and the stark possibility of corruption/ulterior motives/outright malevolence (especially considering the kind of personalities that are drawn to power)...and their decisions affect not only themselves, but everyone else as well, who is forced to abide by them.
On the other hand, you can realize - as the Austrians do - that recessions and crises are the entirely predictable (and yes, predicted) logical conclusion of central intervention. Why do you think Mises was able to predict the Great Depression when it took mainstream economists by complete surprise? Why do you think Ron Paul and the Austrians have been warning about this crisis for years, when it took mainstream economists by complete surprise? Do you really think it was dumb luck and coincidence, or is it possible that maybe, just maybe, their theory is actually correct that these crises are caused by a central banking system (and thus avoidable not through central control but by abolishing central control)? Do you really think it's wise to get your explanations for this crisis from the same idiots who never saw it coming in the first place? The people who actually predicted this did not do so on a lark; they predicted it based on sound economic reasoning from the Austrian standpoint, and guess what? They were right! Either their theory is correct (or at the very least, way closer to the mark than any other opposing explanations), or this extremely small group of economists has just been extremely lucky in their guesses, regardless of theory. :rolleyes:
...other. If so, explain.

I don't think you need me to actually explain the Austrian business cycle for you, because I'm sure you've been exposed to it, so I'll leave that part out. Anyway:

On the one hand, if the Austrians are correct or mostly correct, the business cycle is a natural consequence of the central banking system. If so, "deregulation" cannot really be blamed as anything more than an exacerbating factor of a problem that never would have occurred, had we listened to the Austrians in the first place.

On the other hand, if the Keynesians are correct, then the business cycle is a natural consequence of market irrationality, and it can only be avoided by central regulation and manipulation. IF they are correct about the business cycle, THEN you can blame "deregulation" for the banking failures in particular (even though, as I mentioned, existing regulation played a large detrimental role as well)...but you still can't blame it for the wider recession.

However, considering the Austrians were able to predict the Great Depression AND this crisis and explain it inside and out with coherent logic, I think the burden of proof is now on you to explain why you think they're wrong. The Austrian business cycle makes perfect logical sense, it explains everything that has happened with simple cause and effect, and using the same logic, the Austrians were able to predict the two biggest economic crises of the century before they happened...unlike anyone else. This isn't a rhetorical question, and I really want to know: Honestly, what more would it actually take for their arguments to convince you?

Personally, I see absolutely no credibility in the Keynesian standpoint, and I think the "animal spirits" explanation for the business cycle is a total copout, reminiscent of ancient "magical" explanations for the sun rising and setting every day (the gods were moving the sun! :rolleyes: ). In other words, they simply pulled their argument out of their asses by default, for lack of any better explanation. Do waves of optimism and pessimism affect the market? Of course they do, and only a fool would completely discount the notion, but these waves are hardly spontaneous, nor are they the root cause of market movements or the business cycle. All they do is exacerbate preexisting trends...which are dependent upon fundamentals. To give an example, waves of optimism and pessimism are the reason why market prices of assets seem to overshoot the "real" value (based on fundamentals) on both major upswings and downswings, before they finally settle and correct themselves. Yes, they do play a role in increasing the magnitude of existing movements, but when better, more logical explanations exist (which fit empirical evidence), it's foolish to continue blindly assuming that these mood swings actually cause trends all by themselves. As it stands, the Austrians have a pretty coherent explanation for fundamentals, and what do you know, it's actually backed by real-world empirical examples. You can ignore the evidence and blindly accept the "animal spirits" explanation for the business cycle and recession (and the idea that centralized regulation is the only cure), or you can accept the idea that there's actually a logical, concrete reason for it...and currently, the Austrians are the only economists I know about who are offering any kind of logical, concrete explanation whatsoever.

In any case, even if you're not personally convinced, that hardly means the Austrian perspective isn't convincing, and it certainly doesn't mean that anyone who IS convinced by it is some kind of mindless sheep, as you've been implying in some of your posts. Unlike what you're suggesting, I'm not using the economic situation today as an excuse to peddle otherwise untenable Austrian dogma; on the contrary, the economic situation is doing a whole hell of a lot to convince me that their arguments are indeed grounded firmly in reality. I agree that people shouldn't come up with absurd exaggerations (such as saying we're already Communist, which is far from reality...though we're certainly becoming more and more socialist) or wildly overstate their case, but I do not believe supporters of Austrian theory in general are doing either of those two things.

Mini-Me

03-13-2009, 12:15 PM

Maybe we should get rid of all banks and money and go back to barter. If you get rid of the central bank, then the banksters are in charge. How would this crisis go if Citibank and Wells Fargo were in control?

Errrm...when you're asking your question to people who subscribe to the Austrian theory of the business cycle, you should realize that from their standpoint, you're basing your question off of an entirely faulty premise. After all, from that perspective, this crisis never would have even happened at all without the central banking system causing the business cycle.

In any case, what do you mean by "if Citibank and Wells Fargo were in control?" How would they be "in control" when consumers and businesses have tons of other banks to use? The whole point of a free market is to decentralize control, and supply and demand naturally bring a lot of control into the hands of consumers. Personally, I'd let Citibank and Wells Fargo marinate in their own sick.

Zippyjuan

03-13-2009, 03:11 PM

Errrm...when you're asking your question to people who subscribe to the Austrian theory of the business cycle, you should realize that from their standpoint, you're basing your question off of an entirely faulty premise. After all, from that perspective, this crisis never would have even happened at all without the central banking system causing the business cycle.

You are assuming that Austrian economics prevents booms and busts. That there would be no business cycle.

Before we had a central bank the economy would lurch from boom to bust every few years. And that was also with money backed by gold.

I don't pretend that Keynsians can control the market to the nth degree and eliminate the business cycle either.

Brassmouth

03-13-2009, 05:43 PM

I'm sure the Soviet banking system would have been just dandy too. Oh wait...

jon_perez

03-13-2009, 06:30 PM

You are assuming that Austrian economics prevents booms and busts. That there would be no business cycle.

Before we had a central bank the economy would lurch from boom to bust every few years. And that was also with money backed by gold.

I don't pretend that Keynesians can control the market to the nth degree and eliminate the business cycle either.People who listened carefully to the Jon Stewart interview of Greenspan would have realized that one reason Greenspan the libertarian became a central banker was because, with all good intentions, he believed that a Fed *could* smoothen out such booms and busts. Near the end of the interview, he stated that in light of what has happened central banks apparently COULDN'T prevent the propensity of human psychology to habitually overshoot both in terms of overconfidence and unwarranted fear. It's not "animal spirits" responsible for booms and busts, rather it is plain ol' human psychology, and manipulated interest rates or natural interest rates, the same thing will keep on happening. My hypothesis is that this is because human psychology always discounts the current state of affairs and takes it as the status quo / background noise with which to base decisions upon. Arguments about the relative character of booms and busts notwithstanding, the fact is that they DO happen with or without fiat money, with or without fractional reserve banking, and regardless of the prevailing economic doctrine. A reality which Zippyjuan reminds us of here and which Austrian advocates seem to conveniently ignore when it suits their arguments.

Anyway, the fact that Greenspan would say such a thing further reinforces for me his awareness that such booms and busts DID occur before central bankers had the wherewithal to control short term interest rates and that in fact, Greenspan was interested in seeing whether he could prevent such (remember also his comment that he wanted to see if he could prevent a Kondratieff Winter from happening). (This eye-opening article (http://econ161.berkeley.edu/movable_type/2003_archives/001711.html) even questions whether even the Fed can actually truly control short-term interest rates.)

Another thing to consider is that in his Congressional tête-à-têtes with Ron Paul - the ones documented on lewrockwell.com - Greenspan states that Austrian theory has had a great impact on mainstream economic theory and that many of its ideas have been incorporated in the theories in operation today. Purists like Mises would violently contradict him... but it all leads me to wonder if maybe we have already trodden some similar path of freer markets in the past only to have it replaced with Keynesianism when these philosophies have turned out to be not viable. Then the pendulum swung back to Monetarism, which, no matter how much the ideologues here try to mischaracterize it, was indeed a free market revolt against Keynesianism (for which the stagflation experience of the 70s had discredited).

Now, with another mess on our hands as the arguably middle-ground Monetarist orthodoxy has been found wanting, you've got both Keynesians and their ideological opposites, the Austrians, using the benefit of hindsight and capitalizing on a catastrophe to argue for their respective positions. It really seems like the same old boring reasoning, finger pointing, and ideological jockeying for position with no one truly learning at all from history and realizing how this has all already all played out in the past.

The_Orlonater

03-13-2009, 07:19 PM

Mini-Me

03-14-2009, 12:56 AM

You are assuming that Austrian economics prevents booms and busts. That there would be no business cycle.

Before we had a central bank the economy would lurch from boom to bust every few years. And that was also with money backed by gold.

I don't pretend that Keynsians can control the market to the nth degree and eliminate the business cycle either.

The 19th century booms and busts are an important empirical test case, and I actually have no concrete answer for you at the moment. I'm searching for a competent explanation addressing the various panics during this period...I can still speculate for the moment, though:
First, until someone shows me otherwise, I seriously doubt any of the busts came anywhere near the severity or length of 20th century crises, especially the Great Depression (and our emerging depression). My history is rusty, so I could be wrong, but...
Second, any boom/bust around the Civil War can probably be explained by the war itself (and its effects on the economies and banking systems of the North and South)
Third, we had a central bank during the first third of the 19th century, and The_Orlonater mentioned the National Banking Act (this actually completely slipped my mind until a moment ago)
Finally, the rest of the booms and busts - which I presume were much smaller the major crises of the 20th century, though I mentioned I'm rusty on history - may possibly be attributed to the following factors:

The global economy back then was different from the global economy now, but it was STILL a global economy. If other countries had central banks (and therefore nasty boom/bust cycles), this could have disrupted trade patterns and caused smaller but noticeable booms and busts in the US.
Speaking of trade patterns, we were still transitioning from a mercantilistic economy to a capitalistic economy throughout the 19th century. Could international trade deficits and remaining mercantilist policies have played a role in creating booms and busts?
Even then, we had a national gold standard, not freely competing commodity money: Perhaps there were some other central regulations / shenanigans that I'm not aware of which contributed to the formation of a distinct business cycle?

I know this isn't the first time you've addressed 19th century booms and busts, so this apparent counterexample is clearly a sticking point (perhaps THE sticking point) for you in seriously considering the Austrian perspective...anyway, I'll hopefully be back with a better answer on this. At first glance, it looks like there are some pretty decent Austrian explanations for most of these panics, though they're conspicuously quiet about a few. In any case, I'll partially side with you here and admit they need to spend more time figuring out a couple of the 19th century panics. On one hand, maybe they merely need to defend their theory better with respect to those panics...or on the other hand, perhaps spending more time on them will help bring to light another factor they may have missed with their current theory. I'm confident in the Austrian approach (and policy prescriptions), but if there are holes in their theory or if they're missing something, they should take that into account, face the challenge head-on, and adjust their theory if necessary.

Actually, I posted a question to the Mises forum here (http://mises.org/Community/forums/t/6829.aspx), and it turns out a student is doing a project on it, trying to defend the Austrian approach with respect to 19th century panics (and having mixed results due to the conspicuous lack of Austrian literature regarding a couple of the panics). I'll be following this.

Mini-Me

03-14-2009, 12:57 AM

People who listened carefully to the Jon Stewart interview of Greenspan would have realized that one reason Greenspan the libertarian became a central banker was because, with all good intentions, he believed that a Fed *could* smoothen out such booms and busts. Near the end of the interview, he stated that in light of what has happened central banks apparently COULDN'T prevent the propensity of human psychology to habitually overshoot both in terms of overconfidence and unwarranted fear. It's not "animal spirits" responsible for booms and busts, rather it is plain ol' human psychology, and manipulated interest rates or natural interest rates, the same thing will keep on happening. My hypothesis is that this is because human psychology always discounts the current state of affairs and takes it as the status quo / background noise with which to base decisions upon. Arguments about the relative character of booms and busts notwithstanding, the fact is that they DO happen with or without fiat money, with or without fractional reserve banking, and regardless of the prevailing economic doctrine. A reality which Zippyjuan reminds us of here and which Austrian advocates seem to conveniently ignore when it suits their arguments.
First, I should mention that the term "animal spirits" wasn't some derogatory remark that Austrians came up with; on the contrary, it's a term that Keynesians themselves used to describe any kind of unknown spontaneous or unpredictable factors (pure chance, sunspots, or whatever) affecting trends and human psychology on a collective scale...though I think it works very well as a derogatory remark, too. ;) In other words, you really do seem to be arguing in favor of the "animal spirits" explanation, whether you want to call it that or not.

The problem is, insisting the business cycle can only be due to the irrationality of human psychology is a copout, especially when alternative logical cause/effect explanations regarding market fundamentals exist (even if there might be a couple panics that those explanations cannot account for). It's possible that the Austrians' explanations are partially incomplete, or even if they are complete, it's still possible that the Austrians have not yet pinpointed the precise interventionary factors behind each and every recession (although if so, I agree they should be looking into this, since most people - yourself included - tend to favor empirical evidence over a priori logic). In any case though, they do make logical sense, I believe they're the best explanations we have, and in contrast, the "human psychology" answer is really a non-answer...as I stated in my previous post, waves of collective optimism and pessimism do affect the magnitude of trends, but I think it's one hell of a stretch to claim that they happen all by themselves, spontaneously: Rather, direction shifts in human attitudes (w.r.t. the market) come about due to growing awareness that market fundamentals are out of whack. I mean, you can argue otherwise, but I find it pretty silly to act as though booms and busts are caused by spontaneous attitude shifts from the masses (as a whole - because individuals have no minds or souls, and everyone acts in unison as a hive mind ;)), when the Austrians are right there pointing out the exact fundamentals that are awry and explaining why they're awry (at least in the case of most recessions - they may be more hazy on others). When your own explanation of the business cycle is hand-wavey at best and competing logical explanations exist, do you not think the burden of proof should be on you?

Besides, your own post actually lends credence to what I'm saying: Greenspan couldn't prevent public opinion from overshooting the truth, both in terms of overconfidence and fear...but the general direction of their opinions was a response to HIS actions! The general direction of the market's mood is always a response to the fundamentals; it is NOT spontaneous or capricious. The "irrational" collective psychology of market players is not the fundamental arbiter of where the market heads or when (in terms of overall performance, that is). That is a function of market fundamentals...which are a direct result of central government policy, one way or another...at least generally speaking. Government policy sets the rules, and when those rules distort the price mechanism and supply and demand, something has to give, and the Austrians demonstrate with logic why these manipulations create the business cycle as we know it. Keynesians and other mainstream economists ignore this connection between the price mechanism and the business cycle...do you know why they feel able to do so? Whereas the Austrians have one single, consistent, unified theory that takes all aspects of the economy into account, mainstream economists separate and compartmentalize their theories on different aspects of the economy. For example, their theories on supply and demand, the price mechanism, etc. are completely separate from their theories on the business cycle...as if they're completely independent and you can really toy with one aspect of a complex interconnected system without disturbing another (and their theories are supposedly completely incompatible, though I do not know enough about Keynesian theory to point out the contradictions myself). It's kind of like quantum mechanics and general relativity in physics: Physicists know that there's SOMETHING seriously wrong with one or the other, because they're incompatible...but they're holding onto both until they can come up with something better. The difference is, the Keynesians and pals are holding onto both despite the existence of better explanations...and frankly, I think their reasons come down to pride and political reasons.

Plus, you mention that booms and busts appear to happen with or without fiat money or central banking, as ZippyJuan pointed out: However, I have a feeling that the Austrians have a very good logical explanation for why they ABCT applies to 19th century booms and busts, and I'm currently searching for it. Anyway, I think you're incorrect when you state these booms and busts have happened regardless of fractional reserve banking or prevailing economic doctrine:
Recognizable periods of booms and busts did not even occur until the 17th century. Sure, you had downturns that coincided with wars and kings raising taxes or confiscating property and such, but there weren't any boom/bust patterns. This is the whole reason why Karl Marx attributed booms and busts to some problem inherent in capitalistic market economies (which arose during that time period). Interestingly, that's the same exact explanation that Keynesians and mainstream economists use today (really, everyone EXCEPT for the Austrians essentially uses the Marxist explanation by default...did I mention it's a copout?). However, fractional reserve banking also emerged during this same time period, and it's been with us ever since. In my opinion, the Austrians have made quite a good case for explaining the role that fractional reserve banking plays in booms and busts (and in comparison, nobody has ever logically supported the "problem inherent in capitalistic market economies" hypothesis whatsoever).
In terms of prevailing economic doctrine: As The_Orlonater mentioned, and as so many others have stated so many times: We have NEVER ONCE had economic policies guided entirely by Austrian principles. Sure, we may have incorporated some of them to greater or lesser extents, but central intervention has always been there to muck it up, without exception. You're trying to base your argument off of empirical observation, but your sample pool is WAY too small to be statistically meaningful, and you're unable to isolate the variables in question.

HOWEVER, I will concede one point: It IS possible for factors other than central government intervention and manipulation to cause business cycles (in addition to government intervention and manipulation, that is). To explain:
Competition between market actors causes supply and demand to tend toward equilibrium. Ordinarily, without some kind of central intervention screwing everything up, competitive forces prevent hordes of banks from simultaneously engaging in the same kind of irresponsible behavior all at once and inexplicably failing all at the same time. Similarly, without some kind of central intervention screwing everything up, entrepreneurs ordinarily do not all inexplicably start making bad calls and failing together en masse. Ordinarily, when entrepreneuers and businesses fail, they do so intermittently, and these failures are not all clustered together (and furthermore, the failure of one company gives its competitors a stronger market position).
When failures cluster together, there's a reason for it: Whereas the Keynesians and other mainstream economists generally blame "animal spirits" and "not enough regulation," the Austrian business cycle tends to blame government intervention...and I agree with them, due to their logical cause and effect arguments regarding the havoc such intervention wreaks on the supply and demand pricing mechanism. However, I think this generalization applies only to MOST cases, because I can think of a few naturally-occurring factors that might play a similar role to central intervention in terms of causing companies all across an industry (or the economy as a whole) to act in concert and fail in concert:
Natural disasters, widespread disease, massive crop failures, etc.
Wars...then again, although wars cause reckless borrowing and lending, the discipline of specie-money can prevent unnecessary wars from occurring in the first place, due to more realistic views of the money supply and the financial cost of war (and that's another major reason why governments and banks love fiat money)
Unexpected supply shocks
Even if you have commodity-based money (like gold), an unexpected - and prolonged - influx of that commodity will kick off the Austrian business cycle with a credit bubble, for the same exact reasons that a central banking establishment can
etc.
In other words, I think the Austrians are right about the effect of government intervention on the business cycle, but I think other events can cause similar effects from time to time.

Anyway, the fact that Greenspan would say such a thing further reinforces for me his awareness that such booms and busts DID occur before central bankers had the wherewithal to control short term interest rates and that in fact, Greenspan was interested in seeing whether he could prevent such (remember also his comment that he wanted to see if he could prevent a Kondratieff Winter from happening). (This eye-opening article (http://econ161.berkeley.edu/movable_type/2003_archives/001711.html) even questions whether even the Fed can actually truly control short-term interest rates.)

Another thing to consider is that in his Congressional tête-à-têtes with Ron Paul - the ones documented on lewrockwell.com - Greenspan states that Austrian theory has had a great impact on mainstream economic theory and that many of its ideas have been incorporated in the theories in operation today. Purists like Mises would violently contradict him... but it all leads me to wonder if maybe we have already trodden some similar path of freer markets in the past only to have it replaced with Keynesianism when these philosophies have turned out to be not viable. Then the pendulum swung back to Monetarism, which, no matter how much the ideologues here try to mischaracterize it, was indeed a free market revolt against Keynesianism (for which the stagflation experience of the 70s had discredited).

You say this leads you to wonder if we have already trodden some similar path of "freer" markets in the past only to have it replaced with Keynesianism, but this is historically incorrect: Keynesian economics came as a response to the Great Depression, which was preceded not by a period of laissez-faire policies but by a period of extreme credit expansion under the Federal Reserve. According to Rothbard, Mises's arguments about the Austrian Business Cycle Theory really picked up some steam near the beginning of the Great Depression...but they were just forgotten (not rebutted or anything - simply forgotten and overshadowed) by the hip new Keynesian orthodoxy following the General Theory of Employment, Interest and Money. It's a shame, too...the whole thing is, governments NEVER seriously listen to the Austrians or follow their advice, because it would constitute relinquishing power.*

Regardless of what Greenspan says about the "influence" that Austrian ideas have had, that influence has clearly only caused mainstream economists to tweak their policy prescriptions at best...because US economic policy this entire century has run completely against the advice of Austrian economists. Sure, you can cite certain periods of relative deregulation and such, but none of these minor tweaks come anywhere near the complete paradigm shift the Austrians advocate. For one thing, we certainly haven't tried the "no central bank" thing for quite a while, and we have never in the modern history of the world tried competing free market commodity-backed money.

There's a reason the Austrians demand the end of ALL arbitrary intervention and regulation rather than just "some," and there's a reason why the elimination of only some does not always have positive effects. As I mentioned before, regulation can in fact mitigate some of the worst aspects of previous regulation/interventionist policies. In other words, when you only get rid of some interventionist policies, you could say the market has become more "laissez-faire," but this isn't necessarily true. To give an example demonstrating why it's such a fallacy to blame "laissez-faire" policies for recessions and negative economic effects after only relative deregulation: Consider the existence of cable and telecom monopolies. They are quite literally government-granted monopolies, but then the government doubles back and regulates them to keep them from practically mugging the consumer unchecked. If you removed all of the regulations on these companies but allowed them to KEEP their exclusive government-granted monopoly contracts, you could call this "deregulation," and you could technically say we're "closer" to a laissez-faire economy...but do you really think that the end result would be ANYTHING LIKE what the end result would be if the monopoly contract was also revoked and competition was allowed? You're making the same mistake as the Keynesians when you act as though the effects of certain policies are independent of all the other policies in play...and this is why you're taking the wrong stance when you say,

As I have tried to argue in my reply to krazy kaju, a true free market is an idealization. What you have in reality are relatively freer or relatively more regulated markets and economies.
If the market is not completely free, then perhaps it's close enough to free that it will have similar results...but it is fallacious to merely assume that is the case. After all, even a single interventionist policy will have a detrimental affect, and depending on what that policy is, it may possibly screw EVERYTHING up all by itself. Moreover, the complex interplay of multiple interventionist policies - especially in the absence of other counterbalancing interventionist policies - is going to take a greater and greater toll, and it also runs a greater risk of resulting in a completely catastrophic formula.
Two examples of combinations resulting in a shitstorm of trouble:
consumer_rape = monopoly_contracts - counterbalancing_regulations; // Even if no counterbalancing_regulations is normally okay
financial_maelstrom = central_bank + fiat_money + inflationary_monetary_policies_which_are_inevitabl e_in_light_of_central_banking + mandated_fractional_reserve_money + fannie_mae + freddie_mac + generations_long_empty_promises_of_bottomless_well _FDIC_insurance + bailouts_of_failed_institutions + low_reserve_requirements; // :rolleyes: Even if low reserve requirements would be perfectly okay all by themselves

Do you see my point here? Regulations and interventionary policies have complex interactions with the economy AND with each other. They cannot be treated independently. Two bad policies together might result in general malaise, whereas removing one would result in horrendous problems (cable/telecom example). That doesn't mean the removed policy is a "good" policy by itself; it just means it can make another bad policy more bearable, but the ideal situation may still be the complete absence of both.

Now, with another mess on our hands as the arguably middle-ground Monetarist orthodoxy has been found wanting, you've got both Keynesians and their ideological opposites, the Austrians, using the benefit of hindsight and capitalizing on a catastrophe to argue for their respective positions. It really seems like the [i]same old boring reasoning, finger pointing, and ideological jockeying for position with no one truly learning at all from history and realizing how this has all already all played out in the past.

To be fair to the Monetarists and Keynesians: Their theories have never even been really tried with any level of discipline, either...and this goes back to what I was saying about how policies have complex interactions, and you can't just make judgments based on empirical comparisons between supposedly "more free" and supposedly "less free" economies. That said, the very nature of centralized power makes it completely impossible for Keynesian and neo-Keynesian policies to be implemented with discipline anyway. :rolleyes:

Anyway, I don't think the Austrians are simply being stubborn and clinging to their ideology for the hell of it. I don't think they're just cynically jockeying for position, either. Frankly, I think it can get no more simple than this: I think they're right...or at least I think they're way closer than anyone else. For the most part, I think they understand the history of the past century and the past several thousand years very well (with the possible exception of 19th century panics, which I agree they need to spend some more time learning and teaching about). However, you're totally right that people in general have not learned one bit from history:
Let me give you an example. There's a thread around here talking about how price controls cause shortages. The thing is, we've known that price controls cause shortages SINCE BABYLONIAN TIMES. We have known this since the days the first written legal code - by Hammurabi - caused shortages due to its prescribed price and wage controls. Actually, I bet we've known for even longer...we've probably known this since BEFORE anyone knew how to write, back when all knowledge was passed down orally. Throughout the past several thousand years, human beings have learned this hard economic lesson - and forgotten it - again and again and again...and again, and again...etc. Here's a pretty funny (but sad) article about it from Capitalist Magazine: http://www.capitalismmagazine.com/article.asp?ID=1164. I found that article by pure chance some time back, and I have no idea if I'd endorse anything else Capitalism Magazine says, but anyway...a few years ago in California, people seriously had the audacity to claim that nobody could no for sure that price controls on energy rates would cause shortages. THAT is the kind of abject stupidity that logical positivism fosters...no matter how much basic logic (based on supply and demand) tells us that price controls cause shortages, and no matter how many times they have been tried in the past to that exact effect, people continually seem to think that their slightly modified version of price controls (based on the same exact premise though) will have different results. :rolleyes:

I think this is important to think about: How can it be that we have learned all of these lessons over and over, yet they never seem to sink in? We still have price controls in America, in the form of minimum wage and other policies, and practically everyone supports them! How can this be? After all, we sure as hell learn and grow in other subjects. In physics for example, we've been progressing at a steady pace for centuries. In mathematics, we've been building upon past knowledge for thousands of years. When's the last time you heard of a mathematician arguing against the basic tenets of arithmetic or algebra?

*I think the reason for this tendency to forget history is simple: Unlike mathematics and many other fields, people disagree on the very basics of economics because economic theory plays a huge role in economic policy, and because of this, emotions, politics, and agendas corrupt honest study in the field. Most importantly, it's people in power who have the greatest ability to corrupt the honest study of economics, and they will naturally - and inevitably - always seek out economic theories that conveniently justify their power (and/or increases in their power). That's why we're still arguing over price controls thousands of years after we should have realized they cause shortages (and nothing good). That's why we're still dealing with one set of failed economic policies [different only in the details] after another. That's why, after a short and promising period of exposure at the beginning of the Great Depression, the mainstream forgot all about Mises's explanation of the business cycle in favor of Keynes's new theory. Does anyone really think many tenured professors at public universities are going to pay much attention to any theory that warns against taxpayers paying their salaries? Of course they won't! The vast majority will discount it do to personal bias, and they'll fight the idea to the death, because they're too afraid of the implications to give it a fair hearing. Similarly, politicians - who constantly want to promise their constituents that they can live at everyone else's expense (but nobody will live at theirs) - cannot stomach the idea of a theory whose economic prescriptions prevent them from promising the world plus one to the voters. Finally, bankers and bureaucrats with central planning or regulatory authority simply don't care about which theories have solid foundations; all they care about is encouraging the adoption of any theory that justifies their own positions of prestige and influence. If one finally becomes so untenable that the masses [and even people whose livelihoods depend on its propagation] reject it, they can move to another...but you have to drag these people kicking and screaming to the Austrians' door, because the strict, unflinching discipline they demand from government is too much for people with "authority" to handle. Unfortunately, mass marketing of an idea followed by long-standing mass acceptance of that idea kind of makes it difficult to convince people to question their premises. The corrupting influence of centralized power has put pure free market views at a marked disadvantage from the very beginning of civilization, because proponents of a true free market and opponents of state authority have long been in short supply...and this is why we never learn from history, and this is why we keep fighting the same battles over and over and over, ad infinitum. So...anybody up for some price controls today?

jon_perez

03-14-2009, 07:30 AM

First all, Mini-Me, thank you for that amazing reply, these are exactly the types of erudite clarifications I'm trolling for when I make my somtimes objectionable-sounding posts... ;-)

In any case though, they do make logical sense, I believe they're the best explanations we have, and in contrast, the "human psychology" answer is really a non-answer...as I stated in my previous post, waves of collective optimism and pessimism do affect the magnitude of trends, but I think it's one hell of a stretch to claim that they happen all by themselves, spontaneously: Rather, direction shifts in human attitudes (w.r.t. the market) come about due to growing awareness that market fundamentals are out of whack.Here is a big question that I believe is unanswered however. krazy kaju mentioned earlier that Austrian theory is predicated on so-called "rational human action", but the more you think about it, the more you realize that human actions are nowhere near rational most of the time and even if they were, the level of information incompleteness can sometimes be desperately high.

Now, I can appreciate the doctrine that price transmission/price discovery can work optimally only in a free market absent artificial price controls, but isn't that because price relative to goods and services is a rather straightforward pairing that participants can easily calculate?

When it comes to interest rates however, participants have a harder time reasoning about what the proper interest rate should be because hidden behind those numbers can be volumes of legalese and conditions that can greatly alter the risk of default. Madoff and countless other ponzi schemes prove that people are much more easily fooled wrt rates of return on money. So in the total or near total absence of regulation, could you expect your everyday man-on-the-street (or heck,even most businessmen) to properly differentiate between a bank offering 10% returns on deposits them pyramiding then via unreasonably high leverage versus another one offering 1% return invested in relatively much safer fixed income assets. Isn't this exactly what went wrong with Citi, BoA, IndyMac et al? That deregulation let them get away with such mischief?

Doesn't the wild west of American banking history have plenty of examples of when unregulated banks fractionally backed their gold notes with unreasonably high ratios and already proves that such abuses are virtually GUARANTEED to happen in the absence of at least some regulation? The present regulatory framework may certainly be full of loopholes that are being exploited, but that does not necessarily mean absence of regulation is the answer either. Furthermore, doesn't it stand to reason that when it comes to such "loopholes", isn't it quite likely the case that most participants have equal access to exploit such and thus the (purportedly virtuous) dynamics of free market competition still come into play?

Paulitician

03-14-2009, 09:50 AM

The only way to know is to conduct an experiment....where?
Online, via massively multiplayer simulations.
You're not serious are you?

My two cents on the issue: I'll have to admit that the deregulation of leverage was, within the current regulatory system, a bad idea. The way I see it is that, the reason Canada didn't have quite the credit boom and therefore quite the housing bubble probably was because they had a cap on leverage. Why would that be? Leverage is debt to equity: the more debt you have compared to equity, the more your are leveraged; the less debt you have compared to equity/capital, the less you are leveraged. In order to have high magnitudes of leverage (as in the US), there must have been readily available credit. Why was their readily available credit? I know most here would respond with "the Fed!" but I personally don't agree with that. I think it was from the banks themselves--they're more efficient at creating credit out of nothing than a central bank can be. IOW, the banks created the credit/debt they needed for the leverage they wanted, which is why there was such a speculative boom, it was possible to bid up prices with all the credit created. Canadian banks were restricted in this area, they couldn't have the leverage at the highest level possible, which would mean that as much debt creation wasn't needed, which would mean that there was less inflation in the system to bid up prices. Coming back to the US, since there is heavy deleveraging going on right now, there is less need for debt, and debt is being paid back, which is sort of why we've had the dollar stregthen and we've had deflationary forces pushing down on the economy.

I mean, it makes perfect sense to me, does anyone take issue with this?

Of course, I said deregulation within the current regulatory enviroment was a bad idea. One has to remember that the US does have mountains of regulations, is a highly mixed economy, and there's a lot of oversight. IOW, far from a free market, which is what I support.

I'm going to reference two things from mises.org. First a post (http://mises.org/Community/forums/p/6577/93879.aspx#93879) about why deregulation does not equal free market (only thorough deregulation would):

http://mises.org/Community/resized-image.ashx/__size/550x0/__key/CommunityServer.Discussions.Components.Files/8/3704.deregulation.gif

I have noticed that both the Democrats and the Republicans benefit from a general ignorance of free markets, and they are quite content doing so. One such point of ignorance is deregulation. Deregulation in practice has little to do with free markets. Further, “Freer” markets do not necessarily, in application, lead to a state of affairs similar to that under Free Markets. Consider the classic issue of price controls and prejudice. Government regulation shoves a wedge under the table leading people to be able to afford to indulge their prejudices. Consequently, another wedge is shoved in from the otherside in an attempt to level the table, that is, laws against discrimination. At this point, removing one or the other wedge would make the table inspire a horrific disgust in especially those who are forced to eat at it. As one can imagine, this constant shimming of the table makes it unstable and top heavy and only the tallest can reach the table to eat comfortably at it. The metaphor could be expanded further, but this is not my main point.

Along this model, suppose that the structure of regulations is illustrated as above.

Removing the blue regulation leads to a different set of affairs, but comparison to the free market has no validity. I need not necessarily assume that the free market is flat to make this argument, for if the free market is not the definition of flat (it is), then flat is unknowable precisely because of the stack of regulations and resultant distortions continues innumerably below – Hazlitt’s one lesson.

Second, yesterday's speech by Peter Schiff @ the Austrians scholars conference, on why certain regulations, while maybe not the main cause of the problem, let the situation get out of hand (IOW, government deregulated some of the self-regulating features of a true free market, and failed to regulate themselves):

http://mises.org/multimedia/mp3/ASC2009/ASC09_Schiff.mp3

I also wanted to mention, it's taken for granted the the government has to be involved in the banking system, they have to rescue it. (Actually, they need to get their greedy little hands out of this area, but of course if they did that, there'd be no way they could exist.) And of course, we're only focusing on the troubled banks in this area. There are many banks that didn't do quite stupid things and are still solvent. Oh well, such is the political nature. What a sad state of affairs.

Zippyjuan

03-14-2009, 07:30 PM

MiniMe- thank you for taking the time to write up your lengthy and thoughtful posts. You obviously have much more knowledge on the subject that some people who only repeat quotes they heard (and I can be guilty of that at times as well). My own background is from a degree in Economics and yes that was predominantly Kenynsian. My exposure to Austrian economics is from fragments I have read on this forum and obviously I do not yet have an apreciation for all that it does cover. Sometimes I ask questions or say things to try to find out more. To raise a counter arguement to see if a theory or proposed idea holds true.

I tend to blame "herd mentality" for most booms and busts. Somebody sees what they think is a good thing. A few other people hear about it and get in on it. This increases the value or desirability of that thing and makes it more attractive and even more people pile on until you get to the point where you cannot get any new people (or at least enough new people) to sustain the growth in popularity so eveybody moves on to the next "hot thing". It all collapses- often to a lower point than where it started. Basically a pyramid scheme where you need new people to keep it going.

When Paul Volker was chairman of the Fed he realized he had fairly limited power to control the economy at large so he made as his goal as chairman trying to target inflation through stable money supply growth (he first had to greatly cut back on the money supply to try to break the high inflation he inherited and he did that by raising interest rates to as much as 20%) and let business sort out what they thought was best to do with that money. Under Paulson and Bernanke we have a much more interventionist Fed and Treasury which I think will turn out to make more of a mess of things than actually help the situation.

Money is both emotional and rational. Often the emotional takes precidence over the rational and people do what logically is not in their best interests. Whether that is buying a stock you know is probably over valued but it is still going up so you don't want to miss out on it to buying house you hope you will still be able to afford once the grace period is over and your payments suddenly jump or simply deciding between spending money now or saving it for the future.

Electric Church

03-14-2009, 07:53 PM

I actually work for RBC Bank, an American subsidiary for Royal Bank of Canada. We are the largest bank in Canada and one of the largest in the US. We did not receive TARP money.

Canada's 75 Billion Dollar Bank Bailout
The $64 Billion Federal Budget Deficit is intended to Finance Canada's Chartered Banks

by Michel Chossudovsky
Global Research, January 25, 2009

http://www.globalresearch.ca/index.php?context=va&aid=12007

jon_perez

03-15-2009, 06:52 AM

When Paul Volker was chairman of the Fed he realized he had fairly limited power to control the economy at large so he made as his goal as chairman trying to target inflation through stable money supply growth (he first had to greatly cut back on the money supply to try to break the high inflation he inherited and he did that by raising interest rates to as much as 20%)Just as clarification, ZippyJuan, Volcker did not per se raise the short term interest rates that the Fed directly targets to 20% right? He just basically let the market bid up (long term rates?) to 20% without intervening to prevent that, is this correct?