Sorry guys, I am not a good defender of the Austrian school. :(
The only thing you got "roasted" on, from the brief skimming I made, is accusing another person of not having "read economics" when he actually has a degree in it. I certainly suggest not making blanket statements like that in the future, for this very reason.
However, the Panic of 1907 was clearly a result of systematic fractional-reserve banking. The phrase used in place of this in the mainstream is "a shortage of money and credit". To paraphrase Gary North, whenever you hear or see "a shortage of money and credit", think "fractional-reserve banking". The main reason the Federal Reserve was established was to allow the systematic fractional-reserve banking to continue without nearly as much of a threat of bank runs, which can threaten to unravel the whole thing (as they did in the Panic of 1907).
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Has a degree in economics means he was told nonsense for four years day after day and stil didn't manage to figure out it was all BS and drop out. What a sorry excuse for a brain cell-equiped primate.
You may have been beaten in this particular debate but that has less to do with what you were saying than how you were saying it. By gambling on the effectiveness of the somewhat snide "read economics", you lost the intellectual high ground right from the start. Maybe on the off chance he hadn't actually read any economics he would meekly defer to you, but you crapped out when he played the "degree" card. At that point it had nothing really to do with the content of the debate. He could just overawe you with links to important sounding govt bureaus and shoot down anything you said w a simple "take a _______ course, and then you'll see what I mean," never mind the fact that what he was actually saying is mostly Keynesian cliché bullshit (the economy needs inflation to grow, the banking system was unregulated before 1913, GDP is a meaningful figure...)
A suggestion on style: even if the guy hadn't had a degree in it, nobody has read literally no economics (or at least would admit to it in a thread like this) so it sounds douchey, almost as bad as "read a book," and anyway calling people out like that tends to create an adversarial tone that doesn't usually help to change minds.
Anyway, thanks for sharing. It's always helpful to see how these debates go. I think even though AE is growing more prominent, we have to know our stuff forward and backward if we want to be able to trump conventional wisdom in debates. If we show uncertainty about how things work then it looks like we just think what we think because we don't understand.
I agree with what Stephen Adkins said. I'm sure it's meant as constructive criticism, not as any kind of put-down.
Definitely constructive criticism. I applaud your maturity in being able to criticize/critique yourself publicly, and I wanted to get across that I don't think you got "roasted" in the sense that you were ignorant of the subject you were trying to debate, but rather that if you work on some of the peripheral stuff you will be more effective in your next debate.
Ya you did alright, but you allowed the fraction reserve banking to be the standard/requirement of banking. Every counter argument he made can only be made because fractional reserve banking is cnsidered legal. At least it wasn't a high school kid you lost to.
I'm struggling to figure out what was 'lost' here, besides the pointless 'read economics' diversion that adds nothing to the debate anyway.
We mainly because he gave up. That is the first sign of defeat.
You're right. It's amazing to me that a simple ego-induced phrase can destroy your credibility in the eyes of your audience.
What I see is that you let him get away with claiming that making banks have deposits is a government regulation, while as I understand it FRB is fraud that would not occur in a free market. He appears to be making the Austrian case when he says that the panic would not have occurred had the banks been made to hold reserves.
Am I wrong here?
Missed that. Ya allowing him to get away with suggesting the only reason any bank keeps reserves is because they are forced to by regulations was an error.
I don't think fractional reserve banking is inherently against a free market. My theory is yes it's fraud, but I don't think everyone would see that. Though I do believe fractional reserve banks would go under without a central bank in a free market. Meaning consumers, after losing their money in frbs, would quickly choose to bank with 100% reserve banks and render frb obsolete.
I don't think you're wrong, but the problem with facebook debates with "econ majors" is that line of argument would seem bizarre and ridiculous to him (I'm only speculating of course). I'm impressed he knew who Rothbard was, but he only seemed to know enough to say that quoting him is dangerous. This indicates to me that he prly wouldn't be receptive to the idea that somehow the banking system would be more stable without FDIC, or that banks could function as profitable busnesses if they had full reserve backing.
I agree you did ok. When I talk to these kinds of people, I usually try to steer the conversation towards a point of logic by asking a question.
"Why did the bankers invest so much of their money in highly risky bets like subprime mortgages, especially if they KNEW they probably wouldn't get their money back? Why would they drop all normal lending standards and common sense?"
they will probably reply "because they were greedy."
You say "They were always greedy. What caused them to be stupid?"
Then say "For instance, If I offered you the chance to invest in 100 different little investments and put $1 in each of them, and each investment had a 20% chance of ever paying you anything and the maximum return you would see out of each was a surplus of 50 cents, would you take that bet?
Most would say no.
Then say, "Ok, what if I offered you the same bet, then some other guy said that if the bet doesn't pay off, I will make you whole again."
Of course, you would be dumb not to take that bet.
Now explain all of the NUMEROUS incentives that were given by the state to make these subprime loans seem like a good idea.
"If men are not angels, then who shall run the state?"
In anonymous debates I'll generally say that I "study" economics. Came across someone with a degree in econ once and I just used it to make them look foolish. At that point it makes it an actual challenge and if you know your stuff it shouldn't be hard to whip something out on someone who's been bred in Keynesian theory.
Autolykos: However, the Panic of 1907 was clearly a result of systematic fractional-reserve banking.
However, the Panic of 1907 was clearly a result of systematic fractional-reserve banking.
The Panic of 1907 was the result of fractional-reserve banking like US Steel was a free market monopoly.
No need for an ignorant copout when the certain causes of certain individuals are certainly recorded: namely, L.M. Shaw's, secretary of the treasury in that period, injections of treasury money into the loan market.
http://en.wikipedia.org/wiki/L._M._Shaw
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I liked the part where US steel tried to fix prices but they failed. Good times.
Take that Elbert Gary, you dead bastard!
you shouldve told him that regulations are written by greedy bankers anyways.
how can one trust greedy politicians to protect them from greedy capitalists?
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This topic of economic cycles before the Fed was brought up recently...I'd send him these links:
What would happen in modern America today if I started a bank and refused to become a member of the Federal Reserve?
In theory, that would allow me to circumvent all manner of laws and regulations which are forced on banks generally by virtue of membership to this body.
Of course, you'd have to perhaps do away with the fractional reserve system within this one bank in order to pull it off and not create a run on your bank, or perhaps at the very least restrict your fraction to say 25% reserves, which is what some free-market banks did before the Fed came into being.
However, I think the law would try to shut such an entity down. Dunno of any examples of this, but would be interesting to hear comments and predictions.
Given that I'm still learning Austrian/free market economics, what would the ideal system be? Would the banks maintain 100% reserves? Surely, compared to the current system, this would "slow" down the the rate of loans given out. However, it would probably increase the rate of return on savings and induce more people to save. I would also imagine that more prudent investments would take place. Feel free to correct or add on to my thoughts.
I dont think a bank that doesnt join the federal reserve brotherhood could compete! How do you expect to hire talent at other bank wages? These bankers are getting paid millions. You wont be able to make much profit at all or gain public willingness to accept the risk of banking with you. One hacker can take your bank. As long as their is a federal reserve bank they have the monopoly.
i think there is one weakness in banking today. I feel my theory/business plan can bring it down, but its my idea and i'm not telling anyone until i do it.
grant.w.underwood: You wont be able to make much profit at all or gain public willingness to accept the risk of banking with you. One hacker can take your bank.
Why couldn't the non-fed member bank simply ensure their reserves through a PRIVATE insurance company. Those do exist, you know. As for the ability to hire talent, they might have to rely on talent from people that simply believe in what the non-member bank is trying to do; maybe contact the Mises institute to let the community know of its creation and that they are trying to hire like-minded people into their ranks. I know on these forums alone the talent is endless. I would even be willing to bet the talent greatly exceeds that of many, if not most, wall street guys.
Honestly you were never really beaten, it just seems like you gave up. The thing is that battles like the one that you got into are pretty endless, you end up just putting factoids back and forth against one another until someone just gets bored and stops posting. What you need to do is ask this simple question and get down to the heart of the matter:
Why are banks acting irrationally?
Normal companies don't go crazing with their business practices if they go unregulated, why do banks? I read once that the problem with bubbles is that in many ways they're a non-answer, or at least the mainstream take on them is. For the most part there's no attempt to explain why it is that there's suddenly been this amazing misallocation of resources and risky lending procedures, I.E to analyze the matter in an economic manner, it's merely assumed that there will be these bubbles due to "Animal Spirits". Minsky was the only non-Austrian who, to my knowledge, bothered to actually come up with a reasonably sound theory about why busts occur in the first place.
The question should always look at the institution which is in a situation that it doesn't have to obey market law, or which can give utterly false signals to the market and has no direct incentive to provide a valuable service, I.E the state. Fannie and Freddy gave out huge numbers of loans and the regulatory agencies, of which there are a plethora despite what liberals will tell you, gave the green light to everything. If there had been no state regulatory agencies then after the risky lending started then the public or other private agencies may well have caught on and the stock price would have plummeted and these banks would be bought up by new people who would organize them in a sustainable manner. If the government and regulators hadn't been cheering on banks in the first place then there probably would never have been such a massive boom in the first place.
It's perfectly understandable that there may be speculatory bubbles and overinvestment, men are not gods and some are short sited, that is why the market is necessary, but there's no reason to believe that in the absence of very peculiar conditions, an act of god, or an extra-market mechanism, that there would be multi trillion dollar investments which are so risky and turn out so poorly.
Thats true. Having a private insurance company would have some weight, but do you believe the majority of people would agree? If you walk into a bank see 'your money is protected by Geico' would the average American take that over 'your money is protect by the US government'?
'rely on talent from people that simply believe' - thats called charity. Do you really think a kid out of harvard is going to take a 25k salary when JP Morgan is giving out 100k salaries while wearing 4000$ suits and driving 100k cars? No . it simply wont happen. you can probably get away with a 'mom and pop' bank, but I dont think you can operate on a national scale. Can a bank like that be able to bring in 250k+ employees by offering lower wages? Can a bank like that continue to operate when the federal reserve decides to lower interest rate way below what you can offer? that action alone can put you out of business. Even if you are a freedom lover at the Mises institute, if you have a family on the way and need a house, are you going to pay extra just to say you are banking with someone that has integrity? or are you going to save $10,000 and start bank BoA?
shackleford,
the banking system would be whatever the free market dictates.
you could have banks that just do warehousing keeping all 100% reserves, competition in different moneys (gold/silver/etc), maybe youd even see some fractional reserve banking which would be unlikely. Youd only see a fractional reserve bank if the banker that runs that bank is really careful with its reserves and makes good investments.
Or a warehousing bank that gets its money from people paying it to store money, and then that warehouse bank takes that money that it is paid to expand/invest in companies/lend to others etc as a side business.
The possibilities are endless.
Good points. Thanks, kelvin. It would be whatever works and is profitable. Let the free market decide. As Friedman would say, people would be "free to choose."
grant.w.underwood: I dont think a bank that doesnt join the federal reserve brotherhood could compete! How do you expect to hire talent at other bank wages? These bankers are getting paid millions. You wont be able to make much profit at all or gain public willingness to accept the risk of banking with you. One hacker can take your bank. As long as their is a federal reserve bank they have the monopoly.
I can guarantee your money will actually be there. I'm sure that's worth it to a lot of people. You'd charge fee for service and only loan out money people allow loaned out.
I think there'd be a huge market for a no-frills credit card that doesn't try to screw you with gotchas left and right. Just keep it at say 8% or so, backed by depositor money for those whom want to earn a bit each month rather than pay a fee for value-store.
Though, curiously, this is one of the few areas where Friedman was loath to let people be free to choose, as he was a staunch believer in the necessity of a central banking system to maintain price stability. Nobody is perfect I suppose
There is that classic moment when he claimed that the federal reserve should be abolished, however.
Not sure I remember that one! Did he find religion at the end or something?
I dunno... Maybe he was channeling the spirit of Mises at the time though...
Geez, Friedman. He also invented withholding for income tax purposes. Sheesh.
grant.w.underwood:Thats true. Having a private insurance company would have some weight, but do you believe the majority of people would agree? If you walk into a bank see 'your money is protected by Geico' would the average American take that over 'your money is protect by the US government'?
Well, to some degree I believe you. The popular perspective is that "there is no guarantee more reliable than the government." There is some truth to this in that the government COULD theoretically print any money it needs to pay off its debts (i.e. restoring lost money to a member bank). However, we don't see the government paying off its debt to foreign countries, do we? We also have seen that bonds are not the "great" investment they used to be. They are about as good an investment as a your average bank account these days. They have lowered the interest rates on them over the past few years.
Also, we can look at the issue in terms of real money reserves. If one were to really look at the financial data behind the FDIC compared to other private insurance companies, the FDIC is a joke. They could not compete were it not for their income sources. I know that New York Life and Midwestern Mutual, to name but a couple of private insurance companies, both have reserves greatly dwarfing those of the FDIC. Reserves in the case of insurance companies means roughly the same thing as it does in the banking world. If there were a "run" on the insurance company, so to speak, their reserves reflect their assets compared to their liabilities. Should every policy holder come in at the exact same minute to cash in their policies, then the two companies I have mentioned would both still have tens of billions of dollars leftover. The FDIC cannot say this. But, I will admit, it is difficult to talk in terms of real money when the valuations being used to determine these numbers are based in a currency that is strictly controlled and monopolized by a central bank such as the Fed. Also, I doubt NYL or Midwestern Mutual even insure institutions like banks, (but perhaps they would if the FDIC didn't exist).
grant.w.underwood:'rely on talent from people that simply believe' - thats called charity. Do you really think a kid out of harvard is going to take a 25k salary when JP Morgan is giving out 100k salaries while wearing 4000$ suits and driving 100k cars? No . it simply wont happen. you can probably get away with a 'mom and pop' bank, but I dont think you can operate on a national scale. Can a bank like that be able to bring in 250k+ employees by offering lower wages? Can a bank like that continue to operate when the federal reserve decides to lower interest rate way below what you can offer? that action alone can put you out of business.
First of all, I don't really believe in charity, or at least I think it is a superfluous label when we look at transactions among individuals. The term only has any real meaning when we talk about charity in terms of tax-breaks. In a free society, this term would not have any usage other than in casual, non-technical, or non-legal conversation. This is because, from the perspective of a free society, "giving to charity" is just one choice out of many in voluntary trade. When you give, you do so because you believe that giving is the best possible means available to you to achieve your desired end (this is praxeology at its most basic). This does not mean you will gain money or wealth. Perhaps you are religious, so you give "charitably" to your church in return for some kind of heavenly blessing, or you give to a the poor because you believe Jesus wants you to so you give up money in exchange for the good feeling of having helped somebody or from pleasing your God. No matter the case, you valued the money you gave less than the good feelings or blessings you (believe) you will receive form that action.
Government, however, gives the term charity more meaning than it deserves, at least in an analytical sense. They intervene in the economy by making certain transactions (which they call charity) tax advantaged. How they differentiate some transactions as charitable as opposed to others, I do not know; it seems vaguely arbitrary. So in the case of a free-market, I may not have chosen to give $X to Z-charity, but now it may be more profitable to "give my money away" than to keep it. When I use the term "give away" I mean a transaction where one party gives some amount of money to another party without the expectation of receiving any money in return. This math could only have been fathomed by a government: If you keep all of amount $X, you will retain $Y. If you "give away" some of money $X and receive nothing in return, you will retain >$Y. Therefore, if the state has its way, math miraculously changes in interesting ways because now $X = $Y but at the same time <$X = >$Y. It's a Festivus Miracle!
Now, why do I say all of this? While I understood what you meant by "charity", my point is that it is in no way a charitable activity for a recent graduate of Harvard to work at bank X for 25k/year over Bank Y for 100k/year. I'll prove to you why with a thought experiment. Let's say, on the one hand, you love making clay pots due to the many fond childhood memories you have with your mother making them at home as a fun craft. However, on the other hand, you hate the idea of working with dead bodies due to a severe childhood emotional trauma you had in a graveyard. You graduate from college and are offered 2 jobs: the first at a pottery factory for 25k/year and the second as a mortician at a funeral home for 100k/year.
Well, under your logic, you would be indulging in charitable activities by taking the pottery job. You might then ask me, "Why would I even apply for the mortician job if I hate handling dead bodies?" Well, perhaps you hear the supply of Morticians in your area is unusually low so the wage for this occupation is much higher than that of the amply supplied potter. Despite your disdain for handling the departed, you might be willing to consider this morbid line of work in exchange for the higher wage, or maybe not. Put simply, my point is that salary is not the only consideration for most individuals when they are presented with various job prospects. Ideology, religion, personal ethics, and even just unique tastes for different corporate cultures play a major role.
That being said, you may then exclaim, "But your example is different than the choice between two banking jobs! In your example, I am forced to pick between what I love and what I hate, whereas in mine, both jobs are the same job in a bank." My reply to you: they are not the same job, at least in a Rothbardian sense. This is because it is a possibility that working for a non-member bank practicing banking methods you believe to be better/more ethical is worth more to you than the $75k pay cut you will accept for doing so.
Additionally, I think your argument is flawed in another, more glaringly obvious way: it is terribly shortsighted. Even if we ignore every point I have made thus far, suppose these banking jobs had been offered to you back in 2005 or 2006. Let us also assume these two salaries are as you have specified. At that time, of course the extra $75k would be of great benefit to you. But if we look at the long run, if you had been a lower-mid level bankster at one of the major member banks (likely the rank one would hold on a mere $100K salary) then come 2008 or 2009, you may not have a job. The people getting laid off were not the top executives at these firms. If you were laid off, you were probably a lower to lower-mid level employee. Now, you are making exactly $0 and that $25k/year salary has started to look real nice. It was due to your poor foresight that you chose a career with a less than dubious firm. Non-member banks practicing the roles of a traditional bank (monetary storage and voluntary loan facilitation) would likely not have been nearly as affected by the housing crash. This does not, however, consider the ill effects that the existence of a central bank will have on anybody holding money, Fed member or otherwise.
grant.w.underwood:Even if you are a freedom lover at the Mises institute, if you have a family on the way and need a house, are you going to pay extra just to say you are banking with someone that has integrity?
Again more choices! Why do you need a house? Wasn't a major contributor to the housing boom fueled by a largely nonsensical belief that owning a house (thus likely a hefty mortgage debt) was necessary? Why can't you rent? I think if funds are tight, like in cases where a family is on the way, that might be the best time to be renting instead of amassing giant piles of debt, not to mention the interest included along with that debt. "I have a family on the way, so money is tight and paying a few extra service fees at a bank I believe in both ethically and economically would be unreasonable, however taking out heavy loans many times greater than my annual wage that I must pay over 20 to 30 years seems like a reasonable thing to do." Not so much.
Plus, if inflation is a worry for you (and it should be) don't put your money in a bank account. But if you do, then put your money in gold and then in a bank account. This is where a non-member bank would be useful: a secure storage area for your gold. The bank could have U.S. currency on hand to lend out to borrowers should you be willing to risk you savings. I doubt there would be much borrowing from a bank like this, however, because the interest rates would be vastly higher than member bank's rates. That being said, this doesn't render the bank totally worthless, as it could still function as a secure storage facility whilst also acting as a draftable checking account.
Stephen Adkins: Though, curiously, this is one of the few areas where Friedman was loath to let people be free to choose, as he was a staunch believer in the necessity of a central banking system to maintain price stability. Nobody is perfect I suppose
Why are people so obsessed with price stability? Isn't it a good thing when prices change, for then they reflect the most current market conditions?
Yes of course it's a good thing.
It's superficially plausible to think that price stability would prevent the boom bust cycle, but of course that's not the case. I happen to think that this particular school of economic thought, as opposed to others, gained so much traction because it's convenient for the government. If price stability is the goal, then obviously you will need price stabilizers. The Fed's famous "dual mandate" is to keep unemployment low and, you guessed it, to stabilize prices.
Obviously the record of the 19th century indicates what economic development and progress should look like: prices steadily falling over time as capital accumulates, production structures lengthen, and productive capacities increase. This process places a downward pressure on prices as the supply of goods increases. The fact that even while the industrial revolution was going on in full tilt during the '20s, prices were not falling, indicates what "price stability" means in practice: monetary inflation, which robs the consumer of the higher standard of living he otherwise would have enjoyed as a result of the falling prices, not to mention the misallocations of resources and the malinvestments that result.
trigger - first part we are virtually on the same page. when you say its 'controlled and monopolized by a central bank' thats what i see as the whole problem. its like your mom and pop grocery store when walmart comes to town. Look at how hard some of the small towns tried to fight off walmart by refusing to shop there. The bottom line is walmart is better at business and provides better goods and services at better prices. Mom and pop shop have two options lower prices to compete then they wont make the profit to keep their previous salaries, rent, wages, or raise prices to keep the profitability. Thats when the customer loyalty leaves when they feel that the company is fixing their prices to make extra profits. Thats with walmart doing nothing immoral and just conducting business. What do you think the banking cartel will do when a rogue bank starts taking their money? If our rogue bank has 100 million dollars in assets thats taking $1 billion out of the federal reserve system. The federal reserve/major banks can dump $900 million in benefits onto our customers and still be able to be $100 million in the black. Obviously large banks dont have the overhead to dump that much money, but i can assure you they will dump as much as they can to put the rogue bank out of business.
Alex - yes price fluctuation is a good thing and a requirement for a market to function properly. When Austrians talk about 'price stability' they are typically talking about the value of the dollar. If price changes because of the value of the dollar it is almost impossible for a business owner to figure out why demand is changing. In order for a business owner to make correct decisions on pricing the value of the dollar needs to be as stable as possible. when the fed talks about prices changes they are talking about the price changes in actual goods. The keynes definition of inflation is the general rise in prices of goods, the austrian definition of inflation is an increase in the money supply (which will cause price of goods to rise because the value of the dollar is less)
Think about starting and running a Bank, but one for depositors of precious metals.