... then won't a recession result when private agents increase the money supply, too?
Say there's a gold standard in place; gold is money, and the supply of gold is the money supply. If there's random year to year fluctuations in gold production, or superior capitalist production allows an ever increasing production of gold, then won't the money supply expand eventually, lowering interest rates and so forth?
But it won't cause a recession, right, because it's "good money" when private banks issue it and "bad money" when the federal reserve issues it?
asdflasdflasdlfasdf....
It is against the principles of the free market to force a currency upon a group of citizens- whether it fluctuates or not.
Gold is the better money. People widely think that it is valuable. there is alot of use for it. easily divisible.
Why would any mining company want to inflate gold? Doesnt it have to pay its workers with gold to produce gold? Only at a profit they can do this. When there is no profit to be made, thats when the production stops.
Putting resources and time to produce gold is harder than to simply press a few clicks to create electronic cash.
“Since people are concerned that ‘X’ will not be provided, ‘X’ will naturally be provided by those who are concerned by its absence.""The sweetest of minds can harbor the harshest of men.”
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Jumping the mexican jumping bean there. Under market equilibrium firms will have to produce to the point where marginal cost equals marginal revenue.
It's not enough for a mine to sell just enough to pay its workers. It has to continually increase its fixed capital investment to keep up with the output of the other mines, otherwise it's not going to have enough revenue to pay fixed costs plus wage growth.
As a matter of fact, in the real bills example I gave a page or so back, this could happen with any issuing institution.
It could.. but not for any extended period of time.
But if the central bank has the power to create its own demand, can't it reduce it, too?
It could, but where's the incentive to do it? There are certain public choice issues associated with the central bank pursuing a contractionary or stationary policy.
Why risk it by allowing private banks or anyone else to print additional money?
The central bank can only freeze the supply of base-money, it cannot prevent private banks from creating bank money (deposits and notes) unless a 100% RR is forcefully implemented.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
Well, if markets worked, the unregulated banking sector wouldn't be allowed to exist for any extended period of time.
Like crashing the economy and putting everyone out of work? That's definetly a major public choice issue you're going to have to circumvent. I always thought it would be best to have a natural law vanguard party seize the means of legislation.
Why not?
The world's population is increasing by 1.1% yearly. Gold production increases at this point at 1%.Without fractional reserve banking it's hard to imagine any significant increase in the money supply under a gold standard. Actually a gold standard would be deflationary. More participants in the market with less money means lower prices
eealsdjfalsdjfos...
The gold supply is constantly increasing. It has been for well before the US government existed. If that isn't long term inflation I don't know what is.
Price inflation and gold (or money) supply are two different things, and have two different meanings. Read the pages indicated above before ridiculing yourself.
Further reading : Selgin Lastrapes & White (2010, p 41-42), Selgin (1988, p 108-111)
No they haven't.
The Selgin paper doesn't address the fact that the business cycle moderated after the introduction of the Fed and countercyclical policy.
It's likely that many deposit insurance schemes are overfunded, but lowering DI isn't the same as getting rid of it entirely. Looking at introduction of new schemes is a different story.
(double post : Can a moderator erase this post please ?)
The financial sector is the second most regulated industry in the economy right behind energy.
Most of the regulations have proven to be destablizers; they have created unintended consequences which contributed to the 2008 financial crises and have in fact prolonged it (Basel 1 and 2 come to mind immediately). The regulations proposed today, namely Dodd-Frank, are equally disastrous and will undoubtedly yield the same sort of result. This is due to the fact that arbitrary, ad-hoc political decrees can never match the efficiency of natural market mechanisms that directly tie individual interests to performance, i.e., create actual accountability.
Like crashing the economy and putting everyone out of work? That's definetly a major public choice issue you're going to have to circumvent.
It appears that you're unfamiliar with Public Choice theory. It's becoming more and more obvious that you really don't know what you're talking about (though it was fairly obvious right at the start when you conflated AE with libertariansism),
Read the entire paper before making such unfounded conclusions.
You're not presenting an argument. Nothing in those papers denies the fact that the two somewhat industrialized countries that tried free banking (Sweden and Australia) didn't magically stop having a business cycle, or even suggests that introduction of countercyclical policy didn't stabilize them.
That is what you're trying to say, though. Isn't it?
Most of the regulations have proven to be destablizers; they have created unintended consequences which contributed to the 2008 financial crises and have in fact prolonged it (Basel 1 and 2 come to mind immediately).
Maybe, but I generally disagree. Basel has been accused of being procyclical (which would counteract central bank countercyclicality and is something you should be supporting), and it probably fucked up, but it's not the only financial regulation out there. Overall more regulated banking systems fared better during the crisis.
edit: link not posting
http://www.imf.org/external/pubs/ft/wp/2010/wp10265.pdf
The strongest evidence emerges in favor of the hypothesis that strong powers on the part of the supervisors to intervene in problem banks and to resolve failing financial institutions may have reduced the build-up of banking sector leverage ahead of the crisis. This evidence is consistent with the idea that strong powers in supervision and resolution can reduce moral hazard and correct risk-taking incentives that otherwise lead banks to become overexposed to aggregate credit and liquidity risks. This evidence is statistically highly significant and robust across specifications. It is also economically relevant: a decrease in supervisory power from the highest reading of the index to its lowest reading is associated with an increase in banking sector leverage of 0.9, a variation equal to about 1.5 standard deviations about its mean. There is also some, though weaker evidence that institutional structure matters. In countries where the central bank was in charge of supervision and regulation, the balance sheet expansion sourced in wholesale funding markets appears to have been less pronounced than in countries where the central bank played no role in supervision and regulation. This is consistent with the conjecture that central banks are tougher supervisors of banks’ liquidity risks, since they act as the lender of last resort to the banking system. The evidence is economically significant: moving from a framework where the central bank has no role in supervision to a framework where it has sole responsibility reduces the ratio of credit to deposits by 0.195 about its mean of 1.4. Evidence also emerges in favor of the hypothesis that barriers to entry reduce the ratio of credit to deposits. This finding confirms bank-level evidence that entry restrictions are associated with reduced leverage.37 It is consistent with the theory outlined by Keeley (1990), according to which entry restrictions reduce competition, increase franchise values and thus reduce the incentive to take risks. In particular, entry restrictions reduce competition for deposits and hence the need for banks to seek funding in wholesale markets. This finding is again sizable economically: an increase in the tightness of entry barriers from its lowest to its highest reading reduces the ratio of credit to deposits by about one standard deviation (0.5).
In countries where the central bank was in charge of supervision and regulation, the balance sheet expansion sourced in wholesale funding markets appears to have been less pronounced than in countries where the central bank played no role in supervision and regulation. This is consistent with the conjecture that central banks are tougher supervisors of banks’ liquidity risks, since they act as the lender of last resort to the banking system. The evidence is economically significant: moving from a framework where the central bank has no role in supervision to a framework where it has sole responsibility reduces the ratio of credit to deposits by 0.195 about its mean of 1.4.
Evidence also emerges in favor of the hypothesis that barriers to entry reduce the ratio of credit to deposits. This finding confirms bank-level evidence that entry restrictions are associated with reduced leverage.37 It is consistent with the theory outlined by Keeley (1990), according to which entry restrictions reduce competition, increase franchise values and thus reduce the incentive to take risks. In particular, entry restrictions reduce competition for deposits and hence the need for banks to seek funding in wholesale markets. This finding is again sizable economically: an increase in the tightness of entry barriers from its lowest to its highest reading reduces the ratio of credit to deposits by about one standard deviation (0.5).
Monetary factors mattered too, everyone agrees on that. It's just a matter of how much. Was the global financial crisis due to a few regulations and the FMs destroying the world economy? It actually looks like central bank interest rates don't do a very good job of explaining yield curve inversion.
Moreover, theory suggests that—at the country level—capital inflows (current account deficits) would drive down the local long-term short-term spread, as capital inflows would affect the long end of the yield curve. Panel regression analysis confirms empirically that the current account position is a key driver of the spread between long and short rates at the country level, significant at the one per cent level, Appendix I.25 Our panel regressions document in addition that differences across countries in the monetary policy stance do not explain differences in the spread between long and short rates. We treat the current account and the long-term short-term spread as alternative measures of the global imbalances hypothesis and avoid including both measures at the same time.
"the fact that the two somewhat industrialized countries that tried free banking (Sweden and Australia) didn't magically stop having a business cycle"
"Overall more regulated banking systems fared better during the crisis."
"Evidence also emerges in favor of the hypothesis that barriers to entry reduce the ratio of credit to deposits."
"It actually looks like central bank interest rates don't do a very good job of explaining yield curve inversion."
You could also look at this : Austrian Business Cycle Theory : Evidence from Scandinavia Stop just posting these things out of the blue without offering any supporting explanation. The analysis does find some relation between monetary phenomena and business cycles, which I didn't dispute, but the magnitude of the effect is incredibly small. Their model R squared is about 15% and not only do the variables they're looking at (like DEP, the investment rate) have R values of less than 0.03, they're affected by many, many factors besides government policy anyway. If that analysis was performed for publication in an economics journal it would probably conclude that the tangential evidence for the Austrian business cycle theory arrived at through the regression was weak if not tenuous. | Post Points: 5
Stop just posting these things out of the blue without offering any supporting explanation. The analysis does find some relation between monetary phenomena and business cycles, which I didn't dispute, but the magnitude of the effect is incredibly small. Their model R squared is about 15% and not only do the variables they're looking at (like DEP, the investment rate) have R values of less than 0.03, they're affected by many, many factors besides government policy anyway.
If that analysis was performed for publication in an economics journal it would probably conclude that the tangential evidence for the Austrian business cycle theory arrived at through the regression was weak if not tenuous.
The evidence that you cite does not in fact make the case that more regulation yields a sounder financial system. Again, the American financial system is highly regulated. The conclusion drawn is that certain regulators and certain types of regulation yield financial stability, i.e., one where the regulators are consolidated into a uniform body as opposed to the American system, where there are multiple agencies responsible for bank regulation both at the federal and state level.
But either way, the performance of today's 'sound financial systems' (such as Canada, for example) pale in comparison to the financial stability that existed during the 19th century in nations that had a free banking system. I suggest George Selgin's work on this matter. He cites a torrential amount of empirical evidence.
I don't think you understand what this is saying at all, and I would really prefer you stop bull-shitting. I already called you out on your nonsense before with respect to CDO's and MBS's acting as money. But very quickly, our current account deficit is, in part, a result of monetary policy and the international monetary system.
But very quickly, our current account deficit is, in part, a result of monetary policy and the international monetary system.
True. But it's also possible raising interest rates could create more problems. Higher interest rates raise the return to foreign investment capital inflows, and the current account moves inversely to capital inflows. I don't know. There are probably more direct solutions.
I don't think you understand what this at all, and I would really prefer if you stopped bull-shitting. I already called you out on your nonsense before with respect to CDO's and MBS's acting as money.
Anyway, the important part of the paragraph was the part about the monetary policy stance.
But either way, the performance of today's 'sound financial systems' (such as Canada, for example) pale in comparison to the financial stability that existed during the 19th century in nations that had a free banking system.
I don't know about that. No doubt there are always various government policies that work against stability, but those have always existed, and countries like Chile, Sweden, Canada, and Australia each suffered through business cycles in the 1870s and 1880s despite having much less "distortionary" government intervention and such than we do today. If free banking (by that I mean "private note issue" and no other legislative changes) was subject to banking crises under the relatively laissez faire free trade conditions of the late 19th century, wouldn't it be even more unstable if implemented today?
alsdjfalsdjfos,
Table 1 presents results for the different models and sub-samples. Overall there is a strong positive relationship between credit growth and the probability of having a banking crisis. Although credit growth lagged one year is associated with a lower probability of a crisis, credit growth from two to five years earlier is strongly positively related to a crisis. The sum of lag coefficients in column 1 is 0.487. In the OLS model, the sum of coefficients implies that a sustained five year period rise of one standard deviation or 0.10 log points in real bank loans would be associated with a rise in the probability of a banking crisis of 0.049. The results are somewhat larger if we use the logit specification from column 2. Here a rise in the growth of real credit from 0.05 to 0.15 (roughly one standard deviation above the mean) would raise the predicted probability by 0.15. For the sample that is restricted to the post-World War II period, the impact is slightly smaller. Here there is a rise in the probability of 0.06 when the mean growth of credit rises from its mean of 0.04 by one standard deviation to 0.10. These results are in line with Schularick and Taylor and the literature on credit booms surveyed above. They pave the way to thinking about the fundamental drivers of credit growth. [...] Table 3 shows that changes in the short-term nominal interest rate are also a significant determinant of credit growth. When short-term interest rates fall, credit growth rises. This result is also robust to using ex post real interest rates. The relation between interest rates and credit seems to be consistent with the Borio and White story that low interest rates reflecting benign inflationary expectations can provide an environment favorable to creating a credit boom. It is also consistent with a simpler story emphasizing the role of loose monetary policy in fueling a credit boom. This result together with the relationship between credit and income growth resoundingly rejects any role for income concentration. As a robustness check, three other variables were included in Table 3: money growth, changes in the rate of investment relative to GDP and changes in the current account to GDP ratio. Mendoza and Terrones (2008) found that a rise in the current account deficit accompanied credit booms, but their sample included many emerging markets as well as leading countries. Our sample is limited to a subsample of the most developed countries. Here current account deficits have no significant relationship with credit growth. A long literature on credit booms argues that technological breakthroughs and displacements drive investment and these need to be financed with credit (Fisher 1933, Kindleberger 1978, Minsky 1986). After controlling for the business cycle and the interest rate, we find no convincing evidence that higher investment is associated with credit growth. Money supply growth is also not associated with credit growth. This result is consistent with Schularick and Taylor (forthcoming) who demonstrate that post World War II a long standing tight correlation between growth in the money supply and bank lending broke down. According to them, this reflected financial innovation that allowed banks to increase their leverage by not relying strictly on deposits for their funding. Overall then low interest rates and strong economic growth seem to be the most robust determinants of credit growth. None of the econometric model we deployed can reject the null hypothesis that top income shares have no relationship with changes in credit. Our cross-country evidence is also inconsistent with Kumhof and Rancière who argued that rises in inequality could give rise to credit booms and financial crises. The results in Table 1 show a high probability of a banking crisis after credit growth rises, but since top income growth is not a determinant of credit growth, income concentration is not associated with banking crises. Indeed, unreported regressions that include growth in top incomes in regressions like those of Table 1 show that income inequality is not a significant determinant of banking crises in our sample.