Ok, so the Central Bank is abolished and we have a completely free market with sound money. What happens to interest rates? who sets them? etc
Thanks
Interest rates are simply the price of money. Currently, these rates are set by the Fed. Without the Fed, they would be set by the market. They already are, to some degree. If you have a bad credit rating, you will have to pay a higher rate, because you are more of a risk. The main problem is that the Fed makes to much or too little credit available at any given time, so the market doesn't know how to properly respond, and wealth gets wasted.
Banks would still be banks in a post-Fed world. My layman understanding is that banks would individually compete for loan customers. Myself, I would choose a bank that kept all normal deposits (of sound money) in 100% reserve, and it would only loan out money that was meant to be loaned out (say a 3-month CD).
A post-FED system wouldn't be without risk, but it would be without 'systemic' risk, because there wouldn't be a pyramid of reserve rates and interest rates manipulated by a central bank. Credit wouldn't cease to exist as many pro-Fed economists profess, but there would be less credit, but that isn't necessarily a bad thing (read: current crisis) it would just mean that credit would emanate from real wealth (savers and holders of capital) and not from the Fed.
In the Fed system, wealth follows credit, in a post-Fed system credit would follow wealth.
Maybe oversimplified, but that my understanding.
When a trumpet sounds in a city, do not the people tremble?
When disaster comes to a city, has not the Lord caused it? Amos 3:6
no system is perfect, but a decentralized system with sound money is the best. It has competition and no confiscation through funny money printing. We are truly in a paradox in world history where the central banks around the world don't even compete with each other. They all work in unison. It's not working out anymore though.Originally Posted by wizardwatson
Here's some info on Austrian economics from Mises: http://mises.org/etexts/austrian.asp
Diversity finds unity in the message of freedom.
Dilige et quod vis fac. ~ Saint Augustine
"I'll believe in good cops when they start turning bad cops in."
How would you argue the above quote?The market is setting interest rates so i think that argument falls down . The central bank rate bears no relation on where people can borrow money as there is a credit spread which the lending institution add on to the central bank rate which is its insurance against bad debt. The free market sets this rate or if you will "the invisiable hand", it has shown itself to be incapable of doing this in an efficient way. Hence the death of capitalism in the form we knew it in the 80s and 90s. The central banks are pumping cash into the system at present to try and restore the link but to no avail at present as the credit market remains locked.
As an example of the inefficiency of free markets, in the year prior to the credit crisis around 4 pct of mortgages in the US were made with the lenders fully knowing that the borrower would not even make the first payment. They dont care though because they take that loan and wrap it up in a package and sell it to someone else.
The central banks cant really be blamed for doing what they were asked to do which was meet inflation targets. I think the problem was that they should have been instructed to monitor a wider range of variables. Besides that there has been a lack of transparency in financial markets which must be addressed along with better regulation.
The Fed strongly influences interest rates in a couple different ways. It sets the discount rate, it sets the reserve rate, and it participates in the market for government securities. Fed experts and banking experts can better explain what that all means. But there is really no debate that the Fed controls interest rates. It is true that any bank could charge a higher rate than the rate the Fed is pushing but they would be out of business.
Rates would be set by supply and demand of a banks money. The more money it has, the lower its interest rates would be. The more people seeking a loan from them, the higher it would be. Interest rates set an important signal to businesses. Low interest rates means savings are high and people are geared for future consumption.
So, with low interest rates, you can borrow and since you know savings are high, you invest in developing to produce better goods for less in the future when people will want to be buying.
When interest rates are high, you know savings are low and people are not set to consume in the future so you hold steady with what you are doing now and increase production now since people are consuming now.
The interest rates tell you when people are wanting stuff. High rates means they want it now, low rates means they want it later. This interest rate would also apply to other banks borrowing from other banks as well. Right now they can borrow from the fed at 2% or whatever, and then loan that out at 11% or something. Interest rates right now should be something like 20%.
The fed sets overnight rights, which is the rate other banks charge other banks for loans to cover reserves. The lower this is, the lower the banks can charge for loans and still make a profit.
It sets the reserve amount which is the percentage of deposits that must be kept on hand. The lower this is, the more money they can lend out which allows them to charge a lower interest rate.
And it has infinite supply of money, so to the fed, it has no value. It's this easy credit that causes the business cycle because it distorts the important signals interest rates provide to businesses.
Last edited by noxagol; 09-24-2008 at 06:32 AM.
"Anarchists oppose the State because it has its very being in such aggression, namely, the expropriation of private property through taxation, the coercive exclusion of other providers of defense service from its territory, and all of the other depredations and coercions that are built upon these twin foci of invasions of individual rights." -Murray Rothbard
That's a fallacy. The market isn't setting interest rates. Bernacke (and Greenspan before him...etc) manipulate the interest rates in an attempt to control the economy.The market is setting interest rates so i think that argument falls down .
What free market is he referring to?As an example of the inefficiency of free markets, in the year prior to the credit crisis around 4 pct of mortgages in the US were made with the lenders fully knowing that the borrower would not even make the first payment. They dont care though because they take that loan and wrap it up in a package and sell it to someone else.
# 3 Federal Laws and Regulations
* 3.1 Bank Secrecy Act
* 3.2 Fair Credit Reporting Act (FCRA)
* 3.3 Lending Limits
* 3.4 Pass Through Insurance (PTI)
* 3.5 Right to Financial Privacy Act
* 3.6 Sarbanes-Oxley Act of 2002
* 3.7 USA PATRIOT Act
* 3.8 Federal Reserve regulations
o 3.8.1 Regulation A - Extensions of Credit by Federal Reserve Banks
o 3.8.2 Regulation B - Equal Credit Opportunity
o 3.8.3 Regulation C - Home Mortgage Disclosure Act (HMDA)
o 3.8.4 Regulation D - Reserve Requirements for Depository Institutions
o 3.8.5 Regulation E - Electronic Funds Transfer Act
o 3.8.6 Regulation F - Limitations on Interbank Liabilities
o 3.8.7 Regulation O - Loans to Insiders
o 3.8.8 Regulation P - Privacy of Consumer Financial Information
o 3.8.9 Regulation Q - Prohibition Against Payment of Interest on Certain Deposit Account Types
o 3.8.10 Regulation W - Transactions Between Member Banks and Their Affiliates
o 3.8.11 Regulation AA - Unfair or Deceptive Acts or Practices
o 3.8.12 Regulation BB - Community Reinvestment Act (CRA)
o 3.8.13 Regulation CC - Expedited Funds Availability Act
o 3.8.14 Regulation DD - Truth in Savings Act
Yes, just look at all that freedom.
The banks print the money, and they control the interest rates. The government subsidizes and insures loans at the behest of the lobbyists, and over the past 15 years aggressively pursued less-than-desirable creditors to the point of using strong arm tactics to force loans the banks didn't want to write.
The Feds even took away a lot of the state-by-state divisions that kept the banks from growing so large. If they had stayed out of it as per the Constitution, some states right now might be talking about bailing another state out. Or not. But the entire world wouldn't be teetering on the brink.
What's free about that, exactly?
At the behest of the Bush admininstration, interest rates were kept artificially low to drive up housing demand to all time highs. That was coupled with turning a blind eye to the mass influx of cheap labor, which served to keep labor costs down. This meant that while housing prices skyrocketed, wages stayed stagnant and soon we ended up with an outgageous percentage of the population making less money and trying to buy more house.The central banks cant really be blamed for doing what they were asked to do which was meet inflation targets. I think the problem was that they should have been instructed to monitor a wider range of variables. Besides that there has been a lack of transparency in financial markets which must be addressed along with better regulation.
The banks can't be blamed? Nonsense. It is the responsibility of business to walk away from bad deals. Happens every day.
More regulation? Who does your friend trust to regulate it, exactly? Return that right to the states. That will keep the system in check, and prevent the power brokers from easily seizing control of the entire country.
Another point - it is entirely possible that conventional banking is outliving it's usefulness. In the past, they served to hook up buyers with lenders. A lot of the depression was caused by the inability of the borrowers to find money to borrow. The internet, and modern communications, can solve that problem. BUt do you think the banking industry will let it? Most of the regulations serve as protectionism in the industry.
Free market? My butt.
That's how I'd respond.
Last edited by angelatc; 09-24-2008 at 06:54 AM.
The private banks set the rates, but they do it with their own money or borrowed money from other private banks. In free market they would be a lot more careful with their own money than with Fed. supplied ultra CHEAP credit. They would also know there would be no one bailing them out.
Cheers,
mark...
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