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Tuesday, January 29, 2008
Ron Paul's Competing Currencies
Ron Paul's Competing Currencies
by Peter Brimelow
OK, I admit it: I tend to be early. The idea of private money – often referred to as "competing currencies" – has always fascinated me. I persuaded Jim Michaels, the late, great editor of Forbes Magazine, to let me translate the little-known academic literature into journalese in this article, which he published under the title Do You Want To Be Paid In Rockefellers? In Wristons? Or How About A Hayek? almost (ahem!) exactly twenty years ago. (May 30, 1988). The Great Inflation of the 1970s was then still a live memory. For some years, my account was regularly assigned in college courses. Now, GOP Presidential candidate Ron Paul seems to have single-handedly revived the issue with his relentless criticisms of the Federal Reserve. (Click here for Google web search). I still think it’s going to happen – just as there will eventually be an immigration cut-off.
The Federal Reserve System will be 75 years old in December. A small but growing band of academic economists proposes a special sort of birthday celebration: The Fed, they say, should be abolished.
Abolished? The sole bulwark we have against runaway inflation and fiscal irresponsibility?
Most people can't imagine life without a currency-issuing central bank, although in fact the Fed is younger than one of its most relentless critics, Nobel laureate Milton Friedman, still going strong at 76 [R. I. P. 1912–2006] and hard at work at California's Hoover Institution.
The Fed allegedly manages the country's money supply in order to prevent such economic disturbances as inflation, deflation and depression. But it is a matter of record that, since the Fed arrived, economic disturbances have been more severe than previously – notably the Great Depression of 1929 and the Great Inflation of the Seventies. In the process, the purchasing power of the dollar has almost completely eroded. Even now, inflation is still gnawing away at around 4% a year, compared with a mere 3.3% when President Richard Nixon first imposed wage and price controls in 1971.
Central banking distresses some. They argue that, far from preventing these disturbances, central banking may exacerbate them. The Fed has been accused of being too tight in the 1930s and too loose in the 1970s and of innumerable lesser errors. After bitter debate, most economists have come to accept at least a part of this critique.
For years, Milton Friedman has advocated doing away with some of the Fed's flexibility by forcing it to expand the money supply only at a fixed annual rate approximating the long-run growth of the economy. The Fed's new critics, however, go further. They think the government should be out of the money business altogether. They argue that money could and should be provided competitively by the private sector – just like baked beans, business magazines or any other goods.
What? Money is money, isn't it? How can you have different kinds of money in the same economy?
The idea of Citibank and Chase Manhattan issuing their own money may indeed seem mind-boggling. What would their currencies be called – Wristons and Rockefellers? But the truth is that there have been several episodes of private, competing monies in world economic history, including in the U.S. Recent research is suggesting they worked much better than had been thought.
Meanwhile, financial deregulations at home and floating exchanges rates abroad are creating an environmental in which elements of a competitive system are already emerging – without the permission of professors or politicians. In his forthcoming book, Free Banking and Monetary Reform, former Manhattan Institute economist David Glasner calls this phenomenon "the competitive breakthrough" that might eventually lead to the complete privatization of money.
Government money monopolies were effectively universal by the early 20th century. Even free market economists, with few exceptions, took them for granted. But these monopolies became much easier to question after Friedrich A. Hayek, who received the Nobel Prize for Economics in 1974, published his Denationalization of Money in 1976 and expanded upon it in 1978.
Hayek announced that, on reflection, he no longer thought government money monopolies were either necessary or desirable, given their record of inflation. Instead, private institutions such as banks should be allowed to issue their own monies, denominated as they wished.
Conventional wisdom had assumed that a profit-seeking bank would immediately print too much money. But Hayek pointed out that this course would be self-defeating. If a bank over-issued its currency, causing it to depreciate, people wouldn't want to accept or hold it, preferring that of more conservative banks. The offending bank's currency would go to a discount and, in short order, the bank would have to curb its enthusiasm. Competition, Hayek said, would do a better job of compelling private institutions to maintain their money's value than politics had with public institutions like the Fed.
Maybe – but let's be practical. How would I buy my groceries? Suppose the prices were marked in Rockefellers and all I had were Wristons? Suppose I'm a New Yorker in San Francisco? San Franciscans might prefer BankAmericas. What good would my Wristons be? How could a merchant function if his customers kept coming in with different kinds of currencies? How could a businessman keep his books?
The answer to these interesting questions depends partly on which of the several different proposals for privatizing money is under discussion. Hayek's version is particularly radical. In most historical episodes of private money, banks issued their own notes but denominated them in the national unit of account – the dollar, the pound. These notes usually exchanged at par and would be discounted only as a last resort in specific circumstances, such as overissue.
But more generally it is clear from the response of merchants in border zones like Tijuana or Toronto, and from inflation-racked countries like Israel or Argentina that are evolving a de facto U.S. dollar standard, the costs of handling parallel currencies can easily be exceeded by the benefits. Computers and hand-held calculators reduce the confusion, just as they have helped business to handle international floating exchange rates.
The fact is that free markets don't produce chaos. Efficiency will probably dictate that just a few kinds of monies, perhaps only one, will become universally accepted – exactly as the international computer industry has spontaneously evolved standard operating systems.
To understand Hayek's proposal and the whole competing currencies concept, you have to think about the nature of money. Most laymen, and some economists, assume that money is a collective convenience requiring government to organize, like national defense. But the historical evidence seems to be that in reality money developed all by itself. Merchants just agreed upon common stores of value and mediums of exchange because they found using them more efficient than barter – an example of what Hayek calls "spontaneous order."
Coins are traditionally supposed to have been invented in the 7th century B.C. by the Lydians, whose King Croesus became a legend for his wealth. But significantly, David Glasner reports, the earliest surviving coins appear to have been privately issued. The Lydian royal minting monopoly was only later imposed – by another king for whom the Greeks invented the word "tyrant."
Recent observations have tended to confirm the private origins of money. In one famous case, cigarettes spontaneously evolved as the medium of exchange in a World War II prisoner of war camp. In much of Europe after WWII, U.S. nylon stockings were a kind of sexual currency.
Whether or not governments were needed in the money business, however, they undeniably found getting into it an irresistible source of revenue and power, particularly in time of war or national emergency. Minting coins was easy and profitable. Most convenient of all for a spendthrift king, the coins could be debased – reissued with the same face value but a lesser amount of precious metal – or actually clipped of some of their gold and recirculated. Later, when money developed into a claim on some other asset rather than being intrinsically valuable in itself, governments discovered that they could simply overissue it.
Of course, all this would eventually result in too much money chasing too few goods and rising prices – a process still going on merrily today. But that's in the long run. And in the meantime, monkeying about with money produced interesting spasms in the economy that could be very useful politically – for example, to influence elections.
Market forces can be dammed but not destroyed. By the Middle Ages, even governments that monopolized money found themselves confronted with a burgeoning banking industry that was being summoned into existence by the growth of trade.
Banks not only accepted deposits of money from customers, on which they paid interest, but also made loans to other customers, on which they charged interest. A loan was made by a bookkeeping entry that created a deposit upon which this new debtor could draw. These new banks were able to incur multiple liabilities against the same hard cash, because bank IOUs were exchanged among the public in settlement of their own affairs and rarely presented for payment. In effect, the banks were creating money.
Governments tolerated this development largely because they needed to borrow money themselves, badly. For example, the Bank of England, the ancestor of all central banks, was first granted its charter in 1694 because it promised to buy William III's government bonds and finance his wars when Parliament would not.
Similarly in the U.S., the 1863 National Bank Act compelled qualifying banks to hold specified amounts of federal debt, helping to pay for the Civil War.
So even a government's monopoly over the issuance of currency gives it only indirect control over the entire money supply. In recent years in the U.S. this control has been exerted by a straitjacket of banking regulation – much of it dating from the New Deal and subsequently rotted away by inflation, and by the Fed's ability to alter the reserves that banks are required to maintain with it, thus affecting the size of the base upon which they can build their pyramids of credit.
But now "financial innovation" is producing a proliferation of irritatingly hard-to-categorize "near monies" – for example, traveler's checks, some of whose issuers are bound not by reserve regulations but only by their own self-interested prudence. Thus, in a sense, American Express is already issuing its own private money, although denominated in and convertible into Fed-produced dollars.
Hayek's proposal is particularly radical because it combines a number of distinct ideas that are already quite radical enough:
"Free banking" – banks ought to be able to issue currency and create deposits (conceptually the same thing), choose their own reserve ratios and generally operate entirely without regulation.
Different denominations – privately issued currencies need not be all denominated in the same unit: Citibank's Wristons and Chase Manhattan's Rockefellers would be traded against each other in a currency market just as the different national currencies are today.
Private fiat money – these private currencies need not necessarily be convertible into gold or any underlying commodity, but would trade entirely on the word of the issuing bank that it would not debauch its money.
Wouldn't this create chaos? Is Hayek serious?
Idea number one, free banking, is very serious. New York University's Lawrence H. White has recently attracted much attention with his book Free Banking in Britain, a documentation and formal analysis of the system's smooth working over a 128-year period in Scotland. Scottish free banking was suppressed in 1844, not because it didn't work, but in the course of legislation aimed at difficulties in the very different English banking system.
But didn't this cause chaos in the U.S.? What about the wildcat banks?
That bit of history is far from settled. Free banking briefly flourished under state charters in the U.S. from 1837 to the Civil War. "Wildcat banks" were accused of locating out in the frontier forests, with the wildcats, so that their notes could not easily be presented for redemption. But recent studies suggest that these problems have been much exaggerated. And most of them, it is argued, were caused by interfering state governments and inadequate enforcement of laws against fraud.
In both Scotland and the U.S. the private money thus issued was denominated in the national monetary unit and was theoretically interchangeable and redeemable into gold. In the U.S., unlike in Scotland, national branch banking was not allowed, so notes issued by unknown faraway banks, as well as those that were suspect for other reasons, sometimes traded at a discount. This was not, however, an impossible inconvenience: Bill brokers sprang up to act as middlemen. It would be even less of a problem in these days of instant communications – and, above all, if nationwide branch banking were allowed.
Still, the wildcat banks left their clawmarks on the U.S. economics profession. Many economists concluded that private banks had a theoretical incentive to behave badly: They would produce money until its value had been driven down to its cost of production, which is essentially zero. This would cause a price explosion – severe inflation.
David Glasner, however, rebuts this argument by pointing out that a bank can make profits only to the extent that the public will hold its money. Otherwise it will be driven into insolvency by adverse clearings with its competitors as the public converts out of its money and into their money. If people trust Wristons more than Rockefellers, Chase would have to either mend its ways or be driven out of business, and vice versa. Thus, for a bank like Chase Manhattan, the key question would be not the cost of physically creating Rockefellers but of keeping them in circulation. Chase's "cost of production" would be the resources it expended in maintaining sufficient balances of whatever was necessary in order to convince its customers that their Rockefellers could be redeemed whenever they wanted.
But doesn't bad money drive out good?
Everyone has heard of Gresham's law, but practically no one understands it. Queen Elizabeth I's financial adviser was talking about a situation where two monies exchange at a rate fixed by law – for example, if both are legal tender and must be accepted in discharge of debt. Under these circumstances, people will try to pass on the "bad" money – the money whose value is suspect, either because of debasement or overissue – and hoard the money that's "good." But if the rate of exchange between the monies is free to fluctuate, it is the debauched currency that will depreciate and be driven out.
Well, who would be the lender of last resort – as the Fed can be after disasters such as Oct. 19 last year or the 1970 Penn Central bankruptcy?
Nobody. A free banking system, its advocates insist, pointing to Scotland, is not inherently unstable. The celebrated 19th-century banking "panics" were relatively brief and self-correcting compared with the Great Depression, with the sound banks leading reserves to rescue unsound ones out of their own interest in preventing general collapse, as J.P. Morgan did in the panic of 1907. In Scotland, banks competed for the customers of failed banks by accepting their notes at par.
In fact, private money proponents think the Fed's activities as a lender of last resort, and the New Deal's deposit insurance programs, have actually made the U.S. banking system's problems worse. They have encouraged bankers to take risks, knowing that the feds would bail them out, and thus in effect subsidized imprudent banking. Ask anyone in Texas.
The advocates of private monies are still arguing among themselves about other aspects of the scheme, including Hayek's idea number two (different denominations) and idea number three (private fiat money). Lawrence H. White, for example, thinks that, as in Scotland, all monies should be denominated in the same unit, albeit visually distinguishable so that they could trade at a discount if necessary. And he predicts that the emerging successful money would probably turn out to be one offering convertibility into gold or silver.
But these disputes are not conducted with the usual academic acerbity. This is because all private-money advocates agree that such questions can really be settled only by allowing competition to begin. Then the free market, to employ a key Hayekian concept, will search out the best solution.
The privatization of money has important macroeconomic implications. It offers, according to its advocates, a way out of the current grand impasse of monetary policy.
For most of its existence, the Fed has focused on interest rates, the price of credit, assuming that the amount of money it was supplying to the economy was less important. But interest rates are affected by many factors, and the Fed often ended up supplying so much money that the resulting inflation could not be ignored.
But by the time the Fed finally admitted to the importance of the money supply, in the early 1980s, it turned out that the demand for money – its "velocity of circulation" – was jumping about unpredictably, too. Thus, judged by the usual measures, the Fed supplied massive quantities of money to the economy after 1982. But, contrary to what Friedman and like-minded monetarists predicted, it did not boil off into inflation. The velocity simply slowed.
So now the Fed appears to be flying blind, following neither a price rule nor a quantity rule, responding to ad hoc considerations such as the beliefs of the Fed chairman or whatever exchange rate influential politicians happen to feel would be convenient for the dollar.
Monetary policy would not be a problem if banks issued their own monies; it would cease to exist. Banks would automatically extend credit to the extent that they and their customers agree it is economically productive. If business conditions deteriorated, loans would be liquidated, liabilities written down to match, and the banks' balance sheets would shrink. Thus the quantity of money demanded by the economy would be automatically supplied by the market, just as it now supplies the appropriate number of automobiles. (Imagine the mess if an outfit like the Fed were to control auto production, based on its best guesses of what demand ought to be.)
Occasionally, of course, banks and customers would make mistakes. But this should be no more disruptive than a mistake in any other business. Auto factories do overproduce. So do builders of office buildings. But the economy adjusts.
A much-loved answer to the mystery of monetary policy is to link the dollar in some way to gold. But gold standard advocates have always had a problem with gold's moderate but real fluctuations in price, which would inflict involuntary deflations and inflations upon the economy. Competing currencies would tend to solve this problem. Joe Cobb, senior economist for the U.S. Congress' Joint Economic committee, believes that a private money convertible into gold would eventually become dominant. "But with free banking, other types of money would come in at the margin if there were too little or too much gold-backed money," Cobb says. Silver-backed, maybe, or oil-backed. These monies would either supplement the gold-backed currency (if the gold price had risen, causing deflation) or displace it (if the gold price had fallen, causing inflation).
Recently, the young economists in the private-money subculture have been electrified by hints that the leader of the monetarist school, Milton Friedman himself, is being converted. In 1986 Friedman coauthored a paper significantly softening his view that governments necessarily have a role in money. Even more significantly, he has abandoned his long-held position that the Fed should aim for a fixed rate of growth in the monetary aggregates. Now he argues that the monetary base – Fed deposits plus currency – should be frozen and complete free banking be allowed to pyramid upon this reserve base.
This looks like a revised monetary rule, but in fact it isn't. Under Friedman's new proposal the free market, rather than the Fed, would dictate the size of the money supply-based on the banks' feel for the legitimate demand for money.
Friedman stoutly denies that his new proposal has anything to do with the volatile velocities of the 1980s, which he blames on Fed policy. Instead, he says he is now convinced that central bankers will never accept moderate restraint, so he proposes to eliminate their power. However, he agrees that under free banking the troublesome issue of velocity would be neatly bypassed.
The proponents of private money take Friedman's shift as confirmation that their position is just the logical extension of market principles. "Once the question is put, there's only one answer," says the University of Sheffield's Kevin Dowd, whose book The State and the Monetary System is being published by the Vancouver-based Fraser Institute.
Milton Friedman has an estimate of the chances of money being denationalized: "Zero." But then, he recalls, for years economists were derided for arguing about the feasibility of floating exchange rates. Then suddenly the idea became reality. So, maybe the chances are better than zero.
The first victory of the competing currency school may well be negative. By stressing the fundamental flaws of central banking, they may help derail the diametrically opposed proposal: to develop one world currency centrally managed by the International Monetary Fund. This idea was the subject of a recent cover story in the Economist magazine, and a version of it has recently been advocated by Harvard economist and former Carter Administration official Richard Cooper. The single-currency proposal appalls the private-money people, since it would mean an immensely powerful world central bank, able to manipulate its money without the minimal discipline existing now because investors can flee into other currencies. The single-currency proposal, says Lawrence H. White, would be "suicide after prolonged self-torture."
It's even possible that competing currencies may come into existence on their own. Richard W. Rahn, chief economist of the U.S. Chamber of Commerce, has actually sketched out a proposal to launch a private currency convertible into commodities or government currencies under prevailing laws. He suggests using commodity futures markets to lower operating costs, and overseas tax havens to avoid the tax problems preventing wider use of the 1977 "gold clause" legislation that made contracts based on gold legally enforceable. "Private money is not just an abstract idea, but an idea whose time has come," Rahn says. "It's technologically and legally feasible."
Meanwhile, a small network of economists attracted by competing currencies is quietly establishing itself. Books and articles are being published, sympathizers located (including outposts in Britain, France and Germany) and eminent authorities intrigued. "It's an intellectually very respectable idea," says Sir Alan Walters of Johns Hopkins University, a leading monetarist and formerly economic adviser to Prime Minister Margaret Thatcher. "I think free banking could work quite well."
But seriously: Can a handful of thinkers change the world?
Strange things happen in the idea business. When Adam Smith (who did not regard money as necessarily a government function) wrote The Wealth of Nations in 1776, he commented that to expect free trade to be established in Britain was "as absurd as to expect that an Oceana or Utopia should be established in it." But his ideas prevailed in spite of the odds against them, and some 90 years later not one British tariff was left.
January 29, 2008
Peter Brimelow [send him mail] is editor of VDARE.com, columist with MarketWatch, and author of Alien Nation and Worm In The Apple.
Copyright © 2008 LewRockwell.com
by Peter Brimelow
OK, I admit it: I tend to be early. The idea of private money – often referred to as "competing currencies" – has always fascinated me. I persuaded Jim Michaels, the late, great editor of Forbes Magazine, to let me translate the little-known academic literature into journalese in this article, which he published under the title Do You Want To Be Paid In Rockefellers? In Wristons? Or How About A Hayek? almost (ahem!) exactly twenty years ago. (May 30, 1988). The Great Inflation of the 1970s was then still a live memory. For some years, my account was regularly assigned in college courses. Now, GOP Presidential candidate Ron Paul seems to have single-handedly revived the issue with his relentless criticisms of the Federal Reserve. (Click here for Google web search). I still think it’s going to happen – just as there will eventually be an immigration cut-off.
The Federal Reserve System will be 75 years old in December. A small but growing band of academic economists proposes a special sort of birthday celebration: The Fed, they say, should be abolished.
Abolished? The sole bulwark we have against runaway inflation and fiscal irresponsibility?
Most people can't imagine life without a currency-issuing central bank, although in fact the Fed is younger than one of its most relentless critics, Nobel laureate Milton Friedman, still going strong at 76 [R. I. P. 1912–2006] and hard at work at California's Hoover Institution.
The Fed allegedly manages the country's money supply in order to prevent such economic disturbances as inflation, deflation and depression. But it is a matter of record that, since the Fed arrived, economic disturbances have been more severe than previously – notably the Great Depression of 1929 and the Great Inflation of the Seventies. In the process, the purchasing power of the dollar has almost completely eroded. Even now, inflation is still gnawing away at around 4% a year, compared with a mere 3.3% when President Richard Nixon first imposed wage and price controls in 1971.
Central banking distresses some. They argue that, far from preventing these disturbances, central banking may exacerbate them. The Fed has been accused of being too tight in the 1930s and too loose in the 1970s and of innumerable lesser errors. After bitter debate, most economists have come to accept at least a part of this critique.
For years, Milton Friedman has advocated doing away with some of the Fed's flexibility by forcing it to expand the money supply only at a fixed annual rate approximating the long-run growth of the economy. The Fed's new critics, however, go further. They think the government should be out of the money business altogether. They argue that money could and should be provided competitively by the private sector – just like baked beans, business magazines or any other goods.
What? Money is money, isn't it? How can you have different kinds of money in the same economy?
The idea of Citibank and Chase Manhattan issuing their own money may indeed seem mind-boggling. What would their currencies be called – Wristons and Rockefellers? But the truth is that there have been several episodes of private, competing monies in world economic history, including in the U.S. Recent research is suggesting they worked much better than had been thought.
Meanwhile, financial deregulations at home and floating exchanges rates abroad are creating an environmental in which elements of a competitive system are already emerging – without the permission of professors or politicians. In his forthcoming book, Free Banking and Monetary Reform, former Manhattan Institute economist David Glasner calls this phenomenon "the competitive breakthrough" that might eventually lead to the complete privatization of money.
Government money monopolies were effectively universal by the early 20th century. Even free market economists, with few exceptions, took them for granted. But these monopolies became much easier to question after Friedrich A. Hayek, who received the Nobel Prize for Economics in 1974, published his Denationalization of Money in 1976 and expanded upon it in 1978.
Hayek announced that, on reflection, he no longer thought government money monopolies were either necessary or desirable, given their record of inflation. Instead, private institutions such as banks should be allowed to issue their own monies, denominated as they wished.
Conventional wisdom had assumed that a profit-seeking bank would immediately print too much money. But Hayek pointed out that this course would be self-defeating. If a bank over-issued its currency, causing it to depreciate, people wouldn't want to accept or hold it, preferring that of more conservative banks. The offending bank's currency would go to a discount and, in short order, the bank would have to curb its enthusiasm. Competition, Hayek said, would do a better job of compelling private institutions to maintain their money's value than politics had with public institutions like the Fed.
Maybe – but let's be practical. How would I buy my groceries? Suppose the prices were marked in Rockefellers and all I had were Wristons? Suppose I'm a New Yorker in San Francisco? San Franciscans might prefer BankAmericas. What good would my Wristons be? How could a merchant function if his customers kept coming in with different kinds of currencies? How could a businessman keep his books?
The answer to these interesting questions depends partly on which of the several different proposals for privatizing money is under discussion. Hayek's version is particularly radical. In most historical episodes of private money, banks issued their own notes but denominated them in the national unit of account – the dollar, the pound. These notes usually exchanged at par and would be discounted only as a last resort in specific circumstances, such as overissue.
But more generally it is clear from the response of merchants in border zones like Tijuana or Toronto, and from inflation-racked countries like Israel or Argentina that are evolving a de facto U.S. dollar standard, the costs of handling parallel currencies can easily be exceeded by the benefits. Computers and hand-held calculators reduce the confusion, just as they have helped business to handle international floating exchange rates.
The fact is that free markets don't produce chaos. Efficiency will probably dictate that just a few kinds of monies, perhaps only one, will become universally accepted – exactly as the international computer industry has spontaneously evolved standard operating systems.
To understand Hayek's proposal and the whole competing currencies concept, you have to think about the nature of money. Most laymen, and some economists, assume that money is a collective convenience requiring government to organize, like national defense. But the historical evidence seems to be that in reality money developed all by itself. Merchants just agreed upon common stores of value and mediums of exchange because they found using them more efficient than barter – an example of what Hayek calls "spontaneous order."
Coins are traditionally supposed to have been invented in the 7th century B.C. by the Lydians, whose King Croesus became a legend for his wealth. But significantly, David Glasner reports, the earliest surviving coins appear to have been privately issued. The Lydian royal minting monopoly was only later imposed – by another king for whom the Greeks invented the word "tyrant."
Recent observations have tended to confirm the private origins of money. In one famous case, cigarettes spontaneously evolved as the medium of exchange in a World War II prisoner of war camp. In much of Europe after WWII, U.S. nylon stockings were a kind of sexual currency.
Whether or not governments were needed in the money business, however, they undeniably found getting into it an irresistible source of revenue and power, particularly in time of war or national emergency. Minting coins was easy and profitable. Most convenient of all for a spendthrift king, the coins could be debased – reissued with the same face value but a lesser amount of precious metal – or actually clipped of some of their gold and recirculated. Later, when money developed into a claim on some other asset rather than being intrinsically valuable in itself, governments discovered that they could simply overissue it.
Of course, all this would eventually result in too much money chasing too few goods and rising prices – a process still going on merrily today. But that's in the long run. And in the meantime, monkeying about with money produced interesting spasms in the economy that could be very useful politically – for example, to influence elections.
Market forces can be dammed but not destroyed. By the Middle Ages, even governments that monopolized money found themselves confronted with a burgeoning banking industry that was being summoned into existence by the growth of trade.
Banks not only accepted deposits of money from customers, on which they paid interest, but also made loans to other customers, on which they charged interest. A loan was made by a bookkeeping entry that created a deposit upon which this new debtor could draw. These new banks were able to incur multiple liabilities against the same hard cash, because bank IOUs were exchanged among the public in settlement of their own affairs and rarely presented for payment. In effect, the banks were creating money.
Governments tolerated this development largely because they needed to borrow money themselves, badly. For example, the Bank of England, the ancestor of all central banks, was first granted its charter in 1694 because it promised to buy William III's government bonds and finance his wars when Parliament would not.
Similarly in the U.S., the 1863 National Bank Act compelled qualifying banks to hold specified amounts of federal debt, helping to pay for the Civil War.
So even a government's monopoly over the issuance of currency gives it only indirect control over the entire money supply. In recent years in the U.S. this control has been exerted by a straitjacket of banking regulation – much of it dating from the New Deal and subsequently rotted away by inflation, and by the Fed's ability to alter the reserves that banks are required to maintain with it, thus affecting the size of the base upon which they can build their pyramids of credit.
But now "financial innovation" is producing a proliferation of irritatingly hard-to-categorize "near monies" – for example, traveler's checks, some of whose issuers are bound not by reserve regulations but only by their own self-interested prudence. Thus, in a sense, American Express is already issuing its own private money, although denominated in and convertible into Fed-produced dollars.
Hayek's proposal is particularly radical because it combines a number of distinct ideas that are already quite radical enough:
"Free banking" – banks ought to be able to issue currency and create deposits (conceptually the same thing), choose their own reserve ratios and generally operate entirely without regulation.
Different denominations – privately issued currencies need not be all denominated in the same unit: Citibank's Wristons and Chase Manhattan's Rockefellers would be traded against each other in a currency market just as the different national currencies are today.
Private fiat money – these private currencies need not necessarily be convertible into gold or any underlying commodity, but would trade entirely on the word of the issuing bank that it would not debauch its money.
Wouldn't this create chaos? Is Hayek serious?
Idea number one, free banking, is very serious. New York University's Lawrence H. White has recently attracted much attention with his book Free Banking in Britain, a documentation and formal analysis of the system's smooth working over a 128-year period in Scotland. Scottish free banking was suppressed in 1844, not because it didn't work, but in the course of legislation aimed at difficulties in the very different English banking system.
But didn't this cause chaos in the U.S.? What about the wildcat banks?
That bit of history is far from settled. Free banking briefly flourished under state charters in the U.S. from 1837 to the Civil War. "Wildcat banks" were accused of locating out in the frontier forests, with the wildcats, so that their notes could not easily be presented for redemption. But recent studies suggest that these problems have been much exaggerated. And most of them, it is argued, were caused by interfering state governments and inadequate enforcement of laws against fraud.
In both Scotland and the U.S. the private money thus issued was denominated in the national monetary unit and was theoretically interchangeable and redeemable into gold. In the U.S., unlike in Scotland, national branch banking was not allowed, so notes issued by unknown faraway banks, as well as those that were suspect for other reasons, sometimes traded at a discount. This was not, however, an impossible inconvenience: Bill brokers sprang up to act as middlemen. It would be even less of a problem in these days of instant communications – and, above all, if nationwide branch banking were allowed.
Still, the wildcat banks left their clawmarks on the U.S. economics profession. Many economists concluded that private banks had a theoretical incentive to behave badly: They would produce money until its value had been driven down to its cost of production, which is essentially zero. This would cause a price explosion – severe inflation.
David Glasner, however, rebuts this argument by pointing out that a bank can make profits only to the extent that the public will hold its money. Otherwise it will be driven into insolvency by adverse clearings with its competitors as the public converts out of its money and into their money. If people trust Wristons more than Rockefellers, Chase would have to either mend its ways or be driven out of business, and vice versa. Thus, for a bank like Chase Manhattan, the key question would be not the cost of physically creating Rockefellers but of keeping them in circulation. Chase's "cost of production" would be the resources it expended in maintaining sufficient balances of whatever was necessary in order to convince its customers that their Rockefellers could be redeemed whenever they wanted.
But doesn't bad money drive out good?
Everyone has heard of Gresham's law, but practically no one understands it. Queen Elizabeth I's financial adviser was talking about a situation where two monies exchange at a rate fixed by law – for example, if both are legal tender and must be accepted in discharge of debt. Under these circumstances, people will try to pass on the "bad" money – the money whose value is suspect, either because of debasement or overissue – and hoard the money that's "good." But if the rate of exchange between the monies is free to fluctuate, it is the debauched currency that will depreciate and be driven out.
Well, who would be the lender of last resort – as the Fed can be after disasters such as Oct. 19 last year or the 1970 Penn Central bankruptcy?
Nobody. A free banking system, its advocates insist, pointing to Scotland, is not inherently unstable. The celebrated 19th-century banking "panics" were relatively brief and self-correcting compared with the Great Depression, with the sound banks leading reserves to rescue unsound ones out of their own interest in preventing general collapse, as J.P. Morgan did in the panic of 1907. In Scotland, banks competed for the customers of failed banks by accepting their notes at par.
In fact, private money proponents think the Fed's activities as a lender of last resort, and the New Deal's deposit insurance programs, have actually made the U.S. banking system's problems worse. They have encouraged bankers to take risks, knowing that the feds would bail them out, and thus in effect subsidized imprudent banking. Ask anyone in Texas.
The advocates of private monies are still arguing among themselves about other aspects of the scheme, including Hayek's idea number two (different denominations) and idea number three (private fiat money). Lawrence H. White, for example, thinks that, as in Scotland, all monies should be denominated in the same unit, albeit visually distinguishable so that they could trade at a discount if necessary. And he predicts that the emerging successful money would probably turn out to be one offering convertibility into gold or silver.
But these disputes are not conducted with the usual academic acerbity. This is because all private-money advocates agree that such questions can really be settled only by allowing competition to begin. Then the free market, to employ a key Hayekian concept, will search out the best solution.
The privatization of money has important macroeconomic implications. It offers, according to its advocates, a way out of the current grand impasse of monetary policy.
For most of its existence, the Fed has focused on interest rates, the price of credit, assuming that the amount of money it was supplying to the economy was less important. But interest rates are affected by many factors, and the Fed often ended up supplying so much money that the resulting inflation could not be ignored.
But by the time the Fed finally admitted to the importance of the money supply, in the early 1980s, it turned out that the demand for money – its "velocity of circulation" – was jumping about unpredictably, too. Thus, judged by the usual measures, the Fed supplied massive quantities of money to the economy after 1982. But, contrary to what Friedman and like-minded monetarists predicted, it did not boil off into inflation. The velocity simply slowed.
So now the Fed appears to be flying blind, following neither a price rule nor a quantity rule, responding to ad hoc considerations such as the beliefs of the Fed chairman or whatever exchange rate influential politicians happen to feel would be convenient for the dollar.
Monetary policy would not be a problem if banks issued their own monies; it would cease to exist. Banks would automatically extend credit to the extent that they and their customers agree it is economically productive. If business conditions deteriorated, loans would be liquidated, liabilities written down to match, and the banks' balance sheets would shrink. Thus the quantity of money demanded by the economy would be automatically supplied by the market, just as it now supplies the appropriate number of automobiles. (Imagine the mess if an outfit like the Fed were to control auto production, based on its best guesses of what demand ought to be.)
Occasionally, of course, banks and customers would make mistakes. But this should be no more disruptive than a mistake in any other business. Auto factories do overproduce. So do builders of office buildings. But the economy adjusts.
A much-loved answer to the mystery of monetary policy is to link the dollar in some way to gold. But gold standard advocates have always had a problem with gold's moderate but real fluctuations in price, which would inflict involuntary deflations and inflations upon the economy. Competing currencies would tend to solve this problem. Joe Cobb, senior economist for the U.S. Congress' Joint Economic committee, believes that a private money convertible into gold would eventually become dominant. "But with free banking, other types of money would come in at the margin if there were too little or too much gold-backed money," Cobb says. Silver-backed, maybe, or oil-backed. These monies would either supplement the gold-backed currency (if the gold price had risen, causing deflation) or displace it (if the gold price had fallen, causing inflation).
Recently, the young economists in the private-money subculture have been electrified by hints that the leader of the monetarist school, Milton Friedman himself, is being converted. In 1986 Friedman coauthored a paper significantly softening his view that governments necessarily have a role in money. Even more significantly, he has abandoned his long-held position that the Fed should aim for a fixed rate of growth in the monetary aggregates. Now he argues that the monetary base – Fed deposits plus currency – should be frozen and complete free banking be allowed to pyramid upon this reserve base.
This looks like a revised monetary rule, but in fact it isn't. Under Friedman's new proposal the free market, rather than the Fed, would dictate the size of the money supply-based on the banks' feel for the legitimate demand for money.
Friedman stoutly denies that his new proposal has anything to do with the volatile velocities of the 1980s, which he blames on Fed policy. Instead, he says he is now convinced that central bankers will never accept moderate restraint, so he proposes to eliminate their power. However, he agrees that under free banking the troublesome issue of velocity would be neatly bypassed.
The proponents of private money take Friedman's shift as confirmation that their position is just the logical extension of market principles. "Once the question is put, there's only one answer," says the University of Sheffield's Kevin Dowd, whose book The State and the Monetary System is being published by the Vancouver-based Fraser Institute.
Milton Friedman has an estimate of the chances of money being denationalized: "Zero." But then, he recalls, for years economists were derided for arguing about the feasibility of floating exchange rates. Then suddenly the idea became reality. So, maybe the chances are better than zero.
The first victory of the competing currency school may well be negative. By stressing the fundamental flaws of central banking, they may help derail the diametrically opposed proposal: to develop one world currency centrally managed by the International Monetary Fund. This idea was the subject of a recent cover story in the Economist magazine, and a version of it has recently been advocated by Harvard economist and former Carter Administration official Richard Cooper. The single-currency proposal appalls the private-money people, since it would mean an immensely powerful world central bank, able to manipulate its money without the minimal discipline existing now because investors can flee into other currencies. The single-currency proposal, says Lawrence H. White, would be "suicide after prolonged self-torture."
It's even possible that competing currencies may come into existence on their own. Richard W. Rahn, chief economist of the U.S. Chamber of Commerce, has actually sketched out a proposal to launch a private currency convertible into commodities or government currencies under prevailing laws. He suggests using commodity futures markets to lower operating costs, and overseas tax havens to avoid the tax problems preventing wider use of the 1977 "gold clause" legislation that made contracts based on gold legally enforceable. "Private money is not just an abstract idea, but an idea whose time has come," Rahn says. "It's technologically and legally feasible."
Meanwhile, a small network of economists attracted by competing currencies is quietly establishing itself. Books and articles are being published, sympathizers located (including outposts in Britain, France and Germany) and eminent authorities intrigued. "It's an intellectually very respectable idea," says Sir Alan Walters of Johns Hopkins University, a leading monetarist and formerly economic adviser to Prime Minister Margaret Thatcher. "I think free banking could work quite well."
But seriously: Can a handful of thinkers change the world?
Strange things happen in the idea business. When Adam Smith (who did not regard money as necessarily a government function) wrote The Wealth of Nations in 1776, he commented that to expect free trade to be established in Britain was "as absurd as to expect that an Oceana or Utopia should be established in it." But his ideas prevailed in spite of the odds against them, and some 90 years later not one British tariff was left.
January 29, 2008
Peter Brimelow [send him mail] is editor of VDARE.com, columist with MarketWatch, and author of Alien Nation and Worm In The Apple.
Copyright © 2008 LewRockwell.com
The Great Credit Unwind of '08
The Great Credit Unwind of '08
by Mike Whitney
"The current crisis is not only the bust that follows the housing boom, it's basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency. Now the rest of the world is increasingly unwilling to accumulate dollars.''
~ George Soros, World Economic Forum, Davos, Switzerland
Global market turmoil continued into a second week as stock markets in Asia and Europe took another tumble on Monday on growing fears of a recession in the United States. China's benchmark index plummeted 7.2% to its lowest point in six months, while Japan's Nikkei index slipped another 4.3%. Equities markets across Asia recorded similar results and, by midmorning in Europe, all three major indexes – the UK FTSE "Footsie," France's CAC 40, and the German DAX – were recording heavy losses. It's now clear that Fed Chairman Bernanke's "surprise" announcement of a 75 basis points cut to the Fed Funds rate last Tuesday has neither stabilized the markets nor restored confidence among jittery investors.
At the time of this writing, the storm clouds are swiftly moving towards Wall Street where markets are likely to be roiled on the very day that President Bush will give his farewell State of the Union speech.
In Monday's Financial Times, Harvard economics professor, Lawrence Summers, made an impassioned plea for further government action in addition to the Fed's rate cuts and Bush's $150 billion "stimulus plan." Summers believes that steps must be taken immediately to mitigate the damage from the sharp downturn in housing and persistent troubles in the credit markets. He suggests a "global coordination of policy" with the other foreign central banks. It is a tacit admission that the Fed has lost control of the system and cannot solve the problem by itself.
Summers is right; although it's easy to wonder why he remained silent for so long while the markets were soaring and the investment banks were reaping trillions of dollars in profits on a "structured investment" swindle which has left the global financial system teetering on the brink of catastrophe. Now that the US economy is sliding towards recession; Summers has suddenly found his voice and is calling for "transparency." How convenient.
"Financial institutions are holding all sorts of credit instruments that are impaired but are difficult to value, creating uncertainty and freezing new lending. Without more visibility, the economy and financial system risk freezing up as Japan’s did in the 1990s."
Right again. The banks are "capital impaired" because they are holding nearly $600 billion in mortgage-backed assets which are declining in value every month. This is forcing many banks to conceal their real condition from investors while they scour the planet for the extra capital they need to continue operations. As long as the banks are in distress, consumer and business lending will dwindle and the economy will continue to shrink. The main gear in the credit-generating mechanism is now broken. The rate cuts can provide liquidity, but they cannot bring insolvent banks back from the dead. Summers is expecting too much.
The United States has led the world into the greatest credit bust in history, and yet, few people have any idea of what has transpired. The US current account deficit – nearly $800 billion – has been recycling into US Treasuries and securities from foreign investors. Up to this point, American markets were an attractive place to put one's savings. The dollar was strong, and the stock market had a proven record of profitability and transparency. But since President Bill Clinton repealed Glass-Steagall in 1999, the markets have been reconfigured according to an entirely new model, "structured finance." Glass-Steagall was the last of the Depression-era bulwarks against the merging of commercial and investment banks. As a result banking has changed from a culture of "protection" (of deposits) to "risk taking," which is the securities business. Through "financial innovation" the investment banks created myriad structured debt instruments which they sold through their Enron-like "off balance" sheets operations (SIVs and Conduits) to credulous investors. Now, trillions of dollars of these subprime and mortgage-backed bonds – many of which were rated triple A – are held by foreign banks, retirement funds, insurance companies, and hedge funds. They are steadily losing value with every rating's downgrade. Here is a graph which illustrates how the scam works.
Summers, of course, understands the enormity of the swindle that has taken place beneath the noses of US regulators, but chooses not to hold any of the main actors accountable. Instead, he draws our attention to a little-known part of the market which will probably lead the way to a stock market crash and a system-wide meltdown.
Here's Summers:
"It is critical that sufficient capital is infused into the bond insurance industry as soon as possible. Their failure or loss of a AAA rating is a potential source of systemic risk. Probably it will be necessary to turn in part to those companies that have a stake in guarantees remaining credible because they have large holdings of guaranteed paper. It appears unlikely that repair will take place without some encouragement and involvement by financial authorities. Though there are many differences and the current problem is more complex, the Long-Term Capital Management work-out is an example of successful public sector involvement."
Some of the largest bond insurers are currently unable to cover the losses that are piling up from the meltdown in mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs). Their business model is hopelessly broken and they will require an immediate $143 billion bailout to maintain operations. The largest of the bond insurers is MBIA.
"MBIA's total exposure to bonds backed by mortgages and CDOs was disclosed to be $30.6 billion, including $8.14 billion of holdings of CDO-squareds (eds. note; pure garbage). MBIA was being priced as a weak CCC-rated credit when it issued its bonds last week; it is now being priced for a bankruptcy. MBIA's stock, which traded just under $68 per share last October, dropped another $3.50 this morning to under $10.00 per share." (Stock analyst Michael Lewitt, quoted in Bloomberg)
Barclay's estimates that the investment banks alone are holding as much as $615 billion of structured securities guaranteed by bond insurers. If the insurers default, hundreds of billions will be lost via downgrades.
So, in practical terms, what does it mean if the bond insurers go under?
It means that the system will freeze and the stock market will crash. Here's how TV stock guru Jim Cramer summed it up last week in an interview with MSNBC's Chris Matthews:
But, Chris, there is something I would urge all the candidates to think about and our Treasury Secretary, which is that there are a group of insurance companies which insure all these bad mortgages and, Cris, I think they are all about to go belly-up, and that will cause the Dow Jones to decline 2,000 points. They've got to be shut down and the insurance given to a New Resolution Trust. This is going to happen in maybe two or three weeks, Chris, it going to on the front of every newspaper and no one in Washington is even willing to admit it.
Chris Matthews: "So who are you including in these mortgage companies that are going to go belly-up; give me a description?"
These are MBIA and Ambac remember the companies that Merrill Lynch and Citigroup wrote down a lot of stuff the other day? All these companies are relying on insurance to save them. The insurers don't have the money. There's also personal mortgage insurance; that's PMI, is one company; MGIC is another. Chris, I am telling you that these companies do not have the capital to "make good." And when they do fall, and I believe it is when – if the government does not have a plan in action; you will not be able to open the stock market when they collapse. No one is even talking about the fact that these major insurers, who insure $450 billion of mortgages are all about to go under. (See the whole video.)
Cramer is correct in assuming that the market won't open. And yet, so far, nothing has been done to avert the disaster which lies just ahead. Maybe nothing can be done?
So, how did things get so bad, so fast? How could the world's most resilient and profitable markets be transformed into a carnival sideshow peddling poisonous "mortgage-backed" snake-oil to every gullible investor?
Author and stock market soothsayer Pam Martens puts it like this:
How could a layered concoction of questionable debt pools, many of dubious origin, achieve the equivalent AAA rating as U.S. Treasury securities, backed by the full faith and credit of the U.S. government, and time-tested over a century of panics, crashes and the Great Depression?
How did a 200-year-old "efficient" market model that priced its securities based on regular price discovery through transparent trading morph into an opaque manufacturing and warehousing complex of products that didn't trade or rarely traded, necessitating pricing based on statistical models? (The Free Market Myth Dissolves into Chaos, Pam Martens, CounterPunch.)
How, indeed?
The answer to all these questions is "deregulation." The financial system has been handed over to scam-artists and fraudsters who've created a multi-trillion dollar inverted pyramid of shaky, hyper-inflated, subprime slop that they've sold around the world with the tacit support of the ratings agencies and the US political establishment. (wink, wink) Now that system is about to collapse and there's nothing that the Federal Reserve can do to stop the Great Credit Unwind of '08. As economist Ludwig von Mises said:
"There is no means of avoiding the final collapse of a boom brought on by credit expansion. The question is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
January 29, 2008
Mike Whitney's [send him mail] lives in Washington state.
Copyright © 2008 LewRockwell.com
by Mike Whitney
"The current crisis is not only the bust that follows the housing boom, it's basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency. Now the rest of the world is increasingly unwilling to accumulate dollars.''
~ George Soros, World Economic Forum, Davos, Switzerland
Global market turmoil continued into a second week as stock markets in Asia and Europe took another tumble on Monday on growing fears of a recession in the United States. China's benchmark index plummeted 7.2% to its lowest point in six months, while Japan's Nikkei index slipped another 4.3%. Equities markets across Asia recorded similar results and, by midmorning in Europe, all three major indexes – the UK FTSE "Footsie," France's CAC 40, and the German DAX – were recording heavy losses. It's now clear that Fed Chairman Bernanke's "surprise" announcement of a 75 basis points cut to the Fed Funds rate last Tuesday has neither stabilized the markets nor restored confidence among jittery investors.
At the time of this writing, the storm clouds are swiftly moving towards Wall Street where markets are likely to be roiled on the very day that President Bush will give his farewell State of the Union speech.
In Monday's Financial Times, Harvard economics professor, Lawrence Summers, made an impassioned plea for further government action in addition to the Fed's rate cuts and Bush's $150 billion "stimulus plan." Summers believes that steps must be taken immediately to mitigate the damage from the sharp downturn in housing and persistent troubles in the credit markets. He suggests a "global coordination of policy" with the other foreign central banks. It is a tacit admission that the Fed has lost control of the system and cannot solve the problem by itself.
Summers is right; although it's easy to wonder why he remained silent for so long while the markets were soaring and the investment banks were reaping trillions of dollars in profits on a "structured investment" swindle which has left the global financial system teetering on the brink of catastrophe. Now that the US economy is sliding towards recession; Summers has suddenly found his voice and is calling for "transparency." How convenient.
"Financial institutions are holding all sorts of credit instruments that are impaired but are difficult to value, creating uncertainty and freezing new lending. Without more visibility, the economy and financial system risk freezing up as Japan’s did in the 1990s."
Right again. The banks are "capital impaired" because they are holding nearly $600 billion in mortgage-backed assets which are declining in value every month. This is forcing many banks to conceal their real condition from investors while they scour the planet for the extra capital they need to continue operations. As long as the banks are in distress, consumer and business lending will dwindle and the economy will continue to shrink. The main gear in the credit-generating mechanism is now broken. The rate cuts can provide liquidity, but they cannot bring insolvent banks back from the dead. Summers is expecting too much.
The United States has led the world into the greatest credit bust in history, and yet, few people have any idea of what has transpired. The US current account deficit – nearly $800 billion – has been recycling into US Treasuries and securities from foreign investors. Up to this point, American markets were an attractive place to put one's savings. The dollar was strong, and the stock market had a proven record of profitability and transparency. But since President Bill Clinton repealed Glass-Steagall in 1999, the markets have been reconfigured according to an entirely new model, "structured finance." Glass-Steagall was the last of the Depression-era bulwarks against the merging of commercial and investment banks. As a result banking has changed from a culture of "protection" (of deposits) to "risk taking," which is the securities business. Through "financial innovation" the investment banks created myriad structured debt instruments which they sold through their Enron-like "off balance" sheets operations (SIVs and Conduits) to credulous investors. Now, trillions of dollars of these subprime and mortgage-backed bonds – many of which were rated triple A – are held by foreign banks, retirement funds, insurance companies, and hedge funds. They are steadily losing value with every rating's downgrade. Here is a graph which illustrates how the scam works.
Summers, of course, understands the enormity of the swindle that has taken place beneath the noses of US regulators, but chooses not to hold any of the main actors accountable. Instead, he draws our attention to a little-known part of the market which will probably lead the way to a stock market crash and a system-wide meltdown.
Here's Summers:
"It is critical that sufficient capital is infused into the bond insurance industry as soon as possible. Their failure or loss of a AAA rating is a potential source of systemic risk. Probably it will be necessary to turn in part to those companies that have a stake in guarantees remaining credible because they have large holdings of guaranteed paper. It appears unlikely that repair will take place without some encouragement and involvement by financial authorities. Though there are many differences and the current problem is more complex, the Long-Term Capital Management work-out is an example of successful public sector involvement."
Some of the largest bond insurers are currently unable to cover the losses that are piling up from the meltdown in mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs). Their business model is hopelessly broken and they will require an immediate $143 billion bailout to maintain operations. The largest of the bond insurers is MBIA.
"MBIA's total exposure to bonds backed by mortgages and CDOs was disclosed to be $30.6 billion, including $8.14 billion of holdings of CDO-squareds (eds. note; pure garbage). MBIA was being priced as a weak CCC-rated credit when it issued its bonds last week; it is now being priced for a bankruptcy. MBIA's stock, which traded just under $68 per share last October, dropped another $3.50 this morning to under $10.00 per share." (Stock analyst Michael Lewitt, quoted in Bloomberg)
Barclay's estimates that the investment banks alone are holding as much as $615 billion of structured securities guaranteed by bond insurers. If the insurers default, hundreds of billions will be lost via downgrades.
So, in practical terms, what does it mean if the bond insurers go under?
It means that the system will freeze and the stock market will crash. Here's how TV stock guru Jim Cramer summed it up last week in an interview with MSNBC's Chris Matthews:
But, Chris, there is something I would urge all the candidates to think about and our Treasury Secretary, which is that there are a group of insurance companies which insure all these bad mortgages and, Cris, I think they are all about to go belly-up, and that will cause the Dow Jones to decline 2,000 points. They've got to be shut down and the insurance given to a New Resolution Trust. This is going to happen in maybe two or three weeks, Chris, it going to on the front of every newspaper and no one in Washington is even willing to admit it.
Chris Matthews: "So who are you including in these mortgage companies that are going to go belly-up; give me a description?"
These are MBIA and Ambac remember the companies that Merrill Lynch and Citigroup wrote down a lot of stuff the other day? All these companies are relying on insurance to save them. The insurers don't have the money. There's also personal mortgage insurance; that's PMI, is one company; MGIC is another. Chris, I am telling you that these companies do not have the capital to "make good." And when they do fall, and I believe it is when – if the government does not have a plan in action; you will not be able to open the stock market when they collapse. No one is even talking about the fact that these major insurers, who insure $450 billion of mortgages are all about to go under. (See the whole video.)
Cramer is correct in assuming that the market won't open. And yet, so far, nothing has been done to avert the disaster which lies just ahead. Maybe nothing can be done?
So, how did things get so bad, so fast? How could the world's most resilient and profitable markets be transformed into a carnival sideshow peddling poisonous "mortgage-backed" snake-oil to every gullible investor?
Author and stock market soothsayer Pam Martens puts it like this:
How could a layered concoction of questionable debt pools, many of dubious origin, achieve the equivalent AAA rating as U.S. Treasury securities, backed by the full faith and credit of the U.S. government, and time-tested over a century of panics, crashes and the Great Depression?
How did a 200-year-old "efficient" market model that priced its securities based on regular price discovery through transparent trading morph into an opaque manufacturing and warehousing complex of products that didn't trade or rarely traded, necessitating pricing based on statistical models? (The Free Market Myth Dissolves into Chaos, Pam Martens, CounterPunch.)
How, indeed?
The answer to all these questions is "deregulation." The financial system has been handed over to scam-artists and fraudsters who've created a multi-trillion dollar inverted pyramid of shaky, hyper-inflated, subprime slop that they've sold around the world with the tacit support of the ratings agencies and the US political establishment. (wink, wink) Now that system is about to collapse and there's nothing that the Federal Reserve can do to stop the Great Credit Unwind of '08. As economist Ludwig von Mises said:
"There is no means of avoiding the final collapse of a boom brought on by credit expansion. The question is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
January 29, 2008
Mike Whitney's [send him mail] lives in Washington state.
Copyright © 2008 LewRockwell.com
Sunday, January 27, 2008
Republicans have no respect for the 2nd Amendment either.
Public 'threatened' by private-firearms ownership.
Government argues gun restrictions 'permitted by the 2nd Amendment.'
by Stewart Rhodes
A faithful apprentice strikes again. Yet another fake conservative legal tool gleefully guts the Constitution for his Master - this time coldly disemboweling the Second Amendment.
Here is an excerpt of the Worldnetdaily.com article:
Since "unrestricted" private ownership of guns clearly threatens the public safety, the 2nd Amendment can be interpreted to allow a variety of gun restrictions, according to the Bush administration.
The argument was delivered by U.S. Solicitor General Paul D. Clement in a brief filed with the U.S. Supreme Court in the ongoing arguments over the legality of a District of Columbia ban on handguns in homes, according to a report from the Los Angeles Times.
Clement suggested that gun rights are limited and subject to "reasonable regulation" and said all federal limits on guns should be upheld.
"Given the unquestionable threat to public safety that unrestricted private firearm possession would entail, various categories of firearm-related regulation are permitted by the 2nd Amendment," he wrote in the brief, the Times reported.
He noted especially the federal ban on machine guns and those many other "particularly dangerous types of firearms," and endorsed restrictions on gun ownership by felons, those subject to restraining orders, drug users and "mental defectives."
His arguments came in the closely watched Washington, D.C., ban that would prevent residents from keeping handguns in their homes for self-defense.
Paul Helmke, of the pro-gun control Brady Campaign to Prevent Handgun Violence, told the Times he salutes the administration for its position.
Read the rest here.
My Comments:
There you go! Bush lawyers have sided with the District of Columbia against gun owners, not only arguing that D.C.'s total ban on handguns is constitutional but that all current federal gun laws should be upheld, winning praise (a salute no less!) from the gun grabbing victim disarmament crowd over at the Brady Campaign. So nice to see yet another "bipartisan" assault on the American people.
So much for the old saw that Republican politicians, if only they could, would get rid of all of those unconstitutional federal gun laws, but we just need to be patient until they are in a position to do so. Now, when a case is before the Supreme Court, and they actually have a chance (however remote) of striking down those federal gun laws by convincing the Supreme Court to rule those laws unconstitutional, we have the US government, in the form of the Bush Administration controlled Justice Department, chock full of Republican lawyers, arguing to the Court that all of those federal gun laws are perfectly constitutional and nothing in the Second Amendment can be used to strike them down. To the contrary, doing so would be "dangerous"!
We now see the final nails being hammered in the coffin of the right to bear arms in America.
First, we had the Gonzales v.Raich decision, where the Republican lawyers of the Bush Administration argued that there is no limit whatsoever to Congress's law making power since Congress can even regulate what a person does in her own back yard, growing a plant, not for sale, but for personal consumption. That decision had a direct and almost immediate impact on gun rights.
In United States v. Stewart, before the Ninth Circuit Court of Appeals, Mr. Stewart argued that his manufacture of homemade machine-guns was not for interstate commerce and was therefore beyond the power of Congress to regulate. He won! The Ninth Circuit agreed! That's right, the Ninth Circuit ruled that Congress lacked the power, under the Article I, Section 8 commerce clause, to regulate homemade machine-guns. An amazing decision, which truly surprised many a constitutionalist who thought the federal courts were beyond hope.
But then came the Supreme Court's Raich decision. In the aftermath of Raich, the U.S. government, once again with Republican Bush appointed lawyers leading the charge against the Constitution, appealed the Ninth Circuit's decision to the Supreme Court. the Supreme Court ordered the Ninth Circuit to follow Raich, and to reverse its decision in Stewart, because lo and behold, Congress could regulate even home-made machine guns (and any other home-made firearms). So now Mr. Stewart, an American gun owning patriot, is still in federal prison thanks to the Bush lawyers and thanks to the Raich decision the Bush Administration pushed for.
So now Congress can make any law it likes. There is no longer a commerce clause challenge to the power of Congress to pass any law, much less a gun law. Forget about pointing out that the federal government is only supposed to have certain, limited, enumerated powers. Your only remaining way to challenge such laws is to argue it violates your rights.
And now here comes the Bush Admin arguing that not only can Congress pass any law it pleases, but you cannot challenge the constitutionality of those laws by evoking the Second Amendment. Sure, they throw us a bone by saying that the Second Amendment somehow protects an individual right, but then they argue that your right to bear arms can be regulated by Congress, and that none of Congress's regulations violate that right. That's right. Not one of the current multitude of federal gun laws and regulations violates your rights - not even outright bans on whole classes of firearms. I'm not clear on what restriction these so-called conservative lawyers would find to ever violate the Second Amendment. Perhaps a total ban on any and all private possession of firearms? Would that do it? So, short of that, any restriction is constitutional so long as you are at least theoretically "permitted" to own some kind of firearm?
This is like saying in grand language that "the powers of Congress are few and defined, and limited to those enumerated," but then saying that among the powers enumerated is the power to regulate commerce and everything is commerce, so Congress can go ahead and regulate whatever it wants. What a farce of the concept of limited and enumerated powers. What an empty limit on the power of the federal government.
Same here: The Second Amendment protects an "individual right" but that right may be regulated in any way Congress pleases, including banning entire categories of firearms and ammunition, and may track you and your arms at will. What an empty right and a non-existent limit on power.
So now we have a "conservative" administration that argues that the federal government may pass any damn law it pleases, and any damn gun law it pleases.
Forget the illusion that the men in the Bush Administration care about the Constitution. Forget the illusion that your rights are somehow safer with Republicans in office. You have been fooled. Many of us knew that long, long ago. But now perhaps other Americans, especially those who consider themselves conservatives, will finally, after all these years, wake up to this fact.
We are seeing before us a constitutional republic in its final death throes, killed by a thousand treacherous cuts, and we are now seeing the final slashes being inflicted by cold reptilian lawyers who fancy themselves "conservatives" working for a man who truly does treat the Constitution like it is "just a goddamn piece of paper."
Stewart Rhodes
Government argues gun restrictions 'permitted by the 2nd Amendment.'
by Stewart Rhodes
A faithful apprentice strikes again. Yet another fake conservative legal tool gleefully guts the Constitution for his Master - this time coldly disemboweling the Second Amendment.
Here is an excerpt of the Worldnetdaily.com article:
Since "unrestricted" private ownership of guns clearly threatens the public safety, the 2nd Amendment can be interpreted to allow a variety of gun restrictions, according to the Bush administration.
The argument was delivered by U.S. Solicitor General Paul D. Clement in a brief filed with the U.S. Supreme Court in the ongoing arguments over the legality of a District of Columbia ban on handguns in homes, according to a report from the Los Angeles Times.
Clement suggested that gun rights are limited and subject to "reasonable regulation" and said all federal limits on guns should be upheld.
"Given the unquestionable threat to public safety that unrestricted private firearm possession would entail, various categories of firearm-related regulation are permitted by the 2nd Amendment," he wrote in the brief, the Times reported.
He noted especially the federal ban on machine guns and those many other "particularly dangerous types of firearms," and endorsed restrictions on gun ownership by felons, those subject to restraining orders, drug users and "mental defectives."
His arguments came in the closely watched Washington, D.C., ban that would prevent residents from keeping handguns in their homes for self-defense.
Paul Helmke, of the pro-gun control Brady Campaign to Prevent Handgun Violence, told the Times he salutes the administration for its position.
Read the rest here.
My Comments:
There you go! Bush lawyers have sided with the District of Columbia against gun owners, not only arguing that D.C.'s total ban on handguns is constitutional but that all current federal gun laws should be upheld, winning praise (a salute no less!) from the gun grabbing victim disarmament crowd over at the Brady Campaign. So nice to see yet another "bipartisan" assault on the American people.
So much for the old saw that Republican politicians, if only they could, would get rid of all of those unconstitutional federal gun laws, but we just need to be patient until they are in a position to do so. Now, when a case is before the Supreme Court, and they actually have a chance (however remote) of striking down those federal gun laws by convincing the Supreme Court to rule those laws unconstitutional, we have the US government, in the form of the Bush Administration controlled Justice Department, chock full of Republican lawyers, arguing to the Court that all of those federal gun laws are perfectly constitutional and nothing in the Second Amendment can be used to strike them down. To the contrary, doing so would be "dangerous"!
We now see the final nails being hammered in the coffin of the right to bear arms in America.
First, we had the Gonzales v.Raich decision, where the Republican lawyers of the Bush Administration argued that there is no limit whatsoever to Congress's law making power since Congress can even regulate what a person does in her own back yard, growing a plant, not for sale, but for personal consumption. That decision had a direct and almost immediate impact on gun rights.
In United States v. Stewart, before the Ninth Circuit Court of Appeals, Mr. Stewart argued that his manufacture of homemade machine-guns was not for interstate commerce and was therefore beyond the power of Congress to regulate. He won! The Ninth Circuit agreed! That's right, the Ninth Circuit ruled that Congress lacked the power, under the Article I, Section 8 commerce clause, to regulate homemade machine-guns. An amazing decision, which truly surprised many a constitutionalist who thought the federal courts were beyond hope.
But then came the Supreme Court's Raich decision. In the aftermath of Raich, the U.S. government, once again with Republican Bush appointed lawyers leading the charge against the Constitution, appealed the Ninth Circuit's decision to the Supreme Court. the Supreme Court ordered the Ninth Circuit to follow Raich, and to reverse its decision in Stewart, because lo and behold, Congress could regulate even home-made machine guns (and any other home-made firearms). So now Mr. Stewart, an American gun owning patriot, is still in federal prison thanks to the Bush lawyers and thanks to the Raich decision the Bush Administration pushed for.
So now Congress can make any law it likes. There is no longer a commerce clause challenge to the power of Congress to pass any law, much less a gun law. Forget about pointing out that the federal government is only supposed to have certain, limited, enumerated powers. Your only remaining way to challenge such laws is to argue it violates your rights.
And now here comes the Bush Admin arguing that not only can Congress pass any law it pleases, but you cannot challenge the constitutionality of those laws by evoking the Second Amendment. Sure, they throw us a bone by saying that the Second Amendment somehow protects an individual right, but then they argue that your right to bear arms can be regulated by Congress, and that none of Congress's regulations violate that right. That's right. Not one of the current multitude of federal gun laws and regulations violates your rights - not even outright bans on whole classes of firearms. I'm not clear on what restriction these so-called conservative lawyers would find to ever violate the Second Amendment. Perhaps a total ban on any and all private possession of firearms? Would that do it? So, short of that, any restriction is constitutional so long as you are at least theoretically "permitted" to own some kind of firearm?
This is like saying in grand language that "the powers of Congress are few and defined, and limited to those enumerated," but then saying that among the powers enumerated is the power to regulate commerce and everything is commerce, so Congress can go ahead and regulate whatever it wants. What a farce of the concept of limited and enumerated powers. What an empty limit on the power of the federal government.
Same here: The Second Amendment protects an "individual right" but that right may be regulated in any way Congress pleases, including banning entire categories of firearms and ammunition, and may track you and your arms at will. What an empty right and a non-existent limit on power.
So now we have a "conservative" administration that argues that the federal government may pass any damn law it pleases, and any damn gun law it pleases.
Forget the illusion that the men in the Bush Administration care about the Constitution. Forget the illusion that your rights are somehow safer with Republicans in office. You have been fooled. Many of us knew that long, long ago. But now perhaps other Americans, especially those who consider themselves conservatives, will finally, after all these years, wake up to this fact.
We are seeing before us a constitutional republic in its final death throes, killed by a thousand treacherous cuts, and we are now seeing the final slashes being inflicted by cold reptilian lawyers who fancy themselves "conservatives" working for a man who truly does treat the Constitution like it is "just a goddamn piece of paper."
Stewart Rhodes
Banning Guns in Britain has backfired
Banning Guns Has Backfired
by John R. Lott, Jr.
by John R. Lott, Jr.
Worried that even showing a starting pistol in a car ad might encourage gun crime in Britain, the British communications regulator has banned a Ford Motor Co. television spot because in it a woman is pictured holding such a "weapon." According to a report by Bloomberg News, the ad was said by regulators to "normalize" the use of guns and "must not be shown again."
What's next? Toy guns? Actually, the British government this year has been debating whether to ban toy guns. As a middle course, some unspecified number of imitation guns will be banned, and it will be illegal to take imitation guns into public places.
And in July a new debate erupted over whether those who own shotguns must now justify their continued ownership to the government before they will get a license.
The irony is that after gun laws are passed and crime rises, no one asks whether the original laws actually accomplished their purpose. Instead, it is automatically assumed that the only "problem" with past laws was they didn't go far enough. But now what is there left to do? Perhaps the country can follow Australia's recent lead and ban ceremonial swords.
Despite the attention that imitation weapons are getting, they account for a miniscule fraction of all violent crime (0.02%) and in recent years only about 6% of firearms offenses. But with crime so serious, Labor needs to be seen as doing something. The government recently reported that gun crime in England and Wales nearly doubled in the four years from 1998–99 to 2002–03.
Crime was not supposed to rise after handguns were banned in 1997. Yet, since 1996 the serious violent crime rate has soared by 69%: robbery is up by 45% and murders up by 54%. Before the law, armed robberies had fallen by 50% from 1993 to 1997, but as soon as handguns were banned the robbery rate shot back up, almost back to their 1993 levels.
The 2000 International Crime Victimization Survey, the last survey done, shows the violent-crime rate in England and Wales was twice the rate in the U.S. When the new survey for 2004 comes out, that gap will undoubtedly have widened even further as crimes reported to British police have since soared by 35%, while declining 6% in the U.S.
The high crime rates have so strained resources that 29% of the time in London it takes police longer than 12 minutes to arrive at the scene. No wonder police nearly always arrive on the crime scene after the crime has been committed.
As understandable as the desire to "do something" is, Britain seems to have already banned most weapons that can help commit a crime. Yet, it is hard to see how the latest proposals will accomplish anything.
Banning guns that fire blanks and some imitation guns. Even if guns that fire blanks are converted to fire bullets, they would be lucky to fire one or two bullets and most likely pose more danger to the shooter than the victim. Rather than replace the barrel and the breach, it probably makes more sense to simply build a new gun.
Making it very difficult to get a license for a shotgun and banning those under 18 from using shotguns also adds little. Ignoring the fact that shotguns make excellent self-defense weapons, they are so rarely used in crime, that the Home Office's report doesn't even provide a breakdown of crimes committed with shotguns.
Britain is not alone in its experience with banning guns. Australia has also seen its violent crime rates soar to rates similar to Britain's after its 1996 Port Arthur gun control measures. Violent crime rates averaged 32% higher in the six years after the law was passed (from 1997 to 2002) than they did the year before the law in 1995. The same comparisons for armed robbery rates showed increases of 74%.
During the 1990s, just as Britain and Australia were more severely regulating guns, the U.S. was greatly liberalizing individuals' abilities to carry guns. Thirty-seven of the 50 states now have so-called right-to-carry laws that let law-abiding adults carry concealed handguns once they pass a criminal background check and pay a fee. Only half the states require some training, usually around three to five hours' worth. Yet crime has fallen even faster in these states than the national average. Overall, the states in the U.S. that have experienced the fastest growth rates in gun ownership during the 1990s have experienced the biggest drops in murder rates and other violent crimes.
Many things affect crime; the rise of drug-gang violence in Britain is an important part of the story, just as it has long been important in explaining the U.S.'s rates. Drug gangs also help explain one of the many reasons it is so difficult to stop the flow of guns into a country. Drug gangs can't simply call up the police when another gang encroaches on their turf, so they end up essentially setting up their own armies. And just as they can smuggle drugs into the country, they can smuggle in weapons to defend their turf.
Everyone wants to take guns away from criminals. The problem is that if the law-abiding citizens obey the law and the criminals don't, the rules create sitting ducks who cannot defend themselves. This is especially true for those who are physically weaker, women and the elderly.
September 6, 2004
John Lott [send him mail], a resident scholar at the American Enterprise Institute, is the author of The Bias Against Guns (Regnery 2003).
Copyright © 2004 John Lott
by John R. Lott, Jr.
by John R. Lott, Jr.
Worried that even showing a starting pistol in a car ad might encourage gun crime in Britain, the British communications regulator has banned a Ford Motor Co. television spot because in it a woman is pictured holding such a "weapon." According to a report by Bloomberg News, the ad was said by regulators to "normalize" the use of guns and "must not be shown again."
What's next? Toy guns? Actually, the British government this year has been debating whether to ban toy guns. As a middle course, some unspecified number of imitation guns will be banned, and it will be illegal to take imitation guns into public places.
And in July a new debate erupted over whether those who own shotguns must now justify their continued ownership to the government before they will get a license.
The irony is that after gun laws are passed and crime rises, no one asks whether the original laws actually accomplished their purpose. Instead, it is automatically assumed that the only "problem" with past laws was they didn't go far enough. But now what is there left to do? Perhaps the country can follow Australia's recent lead and ban ceremonial swords.
Despite the attention that imitation weapons are getting, they account for a miniscule fraction of all violent crime (0.02%) and in recent years only about 6% of firearms offenses. But with crime so serious, Labor needs to be seen as doing something. The government recently reported that gun crime in England and Wales nearly doubled in the four years from 1998–99 to 2002–03.
Crime was not supposed to rise after handguns were banned in 1997. Yet, since 1996 the serious violent crime rate has soared by 69%: robbery is up by 45% and murders up by 54%. Before the law, armed robberies had fallen by 50% from 1993 to 1997, but as soon as handguns were banned the robbery rate shot back up, almost back to their 1993 levels.
The 2000 International Crime Victimization Survey, the last survey done, shows the violent-crime rate in England and Wales was twice the rate in the U.S. When the new survey for 2004 comes out, that gap will undoubtedly have widened even further as crimes reported to British police have since soared by 35%, while declining 6% in the U.S.
The high crime rates have so strained resources that 29% of the time in London it takes police longer than 12 minutes to arrive at the scene. No wonder police nearly always arrive on the crime scene after the crime has been committed.
As understandable as the desire to "do something" is, Britain seems to have already banned most weapons that can help commit a crime. Yet, it is hard to see how the latest proposals will accomplish anything.
Banning guns that fire blanks and some imitation guns. Even if guns that fire blanks are converted to fire bullets, they would be lucky to fire one or two bullets and most likely pose more danger to the shooter than the victim. Rather than replace the barrel and the breach, it probably makes more sense to simply build a new gun.
Making it very difficult to get a license for a shotgun and banning those under 18 from using shotguns also adds little. Ignoring the fact that shotguns make excellent self-defense weapons, they are so rarely used in crime, that the Home Office's report doesn't even provide a breakdown of crimes committed with shotguns.
Britain is not alone in its experience with banning guns. Australia has also seen its violent crime rates soar to rates similar to Britain's after its 1996 Port Arthur gun control measures. Violent crime rates averaged 32% higher in the six years after the law was passed (from 1997 to 2002) than they did the year before the law in 1995. The same comparisons for armed robbery rates showed increases of 74%.
During the 1990s, just as Britain and Australia were more severely regulating guns, the U.S. was greatly liberalizing individuals' abilities to carry guns. Thirty-seven of the 50 states now have so-called right-to-carry laws that let law-abiding adults carry concealed handguns once they pass a criminal background check and pay a fee. Only half the states require some training, usually around three to five hours' worth. Yet crime has fallen even faster in these states than the national average. Overall, the states in the U.S. that have experienced the fastest growth rates in gun ownership during the 1990s have experienced the biggest drops in murder rates and other violent crimes.
Many things affect crime; the rise of drug-gang violence in Britain is an important part of the story, just as it has long been important in explaining the U.S.'s rates. Drug gangs also help explain one of the many reasons it is so difficult to stop the flow of guns into a country. Drug gangs can't simply call up the police when another gang encroaches on their turf, so they end up essentially setting up their own armies. And just as they can smuggle drugs into the country, they can smuggle in weapons to defend their turf.
Everyone wants to take guns away from criminals. The problem is that if the law-abiding citizens obey the law and the criminals don't, the rules create sitting ducks who cannot defend themselves. This is especially true for those who are physically weaker, women and the elderly.
September 6, 2004
John Lott [send him mail], a resident scholar at the American Enterprise Institute, is the author of The Bias Against Guns (Regnery 2003).
Copyright © 2004 John Lott
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