Economics Questions

Re: How fractional reserve banking destroys capitalism

Nitroadict — Thu, 04 Mar 2010 17:16:04 GMT

2nd bump, hopefully PL will return to elaborate.

Re: How fractional reserve banking destroys capitalism

Nitroadict — Thu, 04 Mar 2010 04:30:41 GMT

bump.

Re: How fractional reserve banking destroys capitalism

Stranger — Thu, 04 Mar 2010 00:39:33 GMT

ProgressiveLibertarian:
This may be true at first, however consider what is mentioned above, to acquire capital one must already have capital or must go into debt. That being said, there is a distinct advantage to those who have already accumulated capital (they're not contained by debt), an advantage they can exploit to stifle, rather than foster, competition.

Simply in order to grow up to adulthood, one must be gifted an enormous amount of capital. That does not mean that competition is stifled.

Capital-owners will always find it in their interest to invest capital in order to earn back even more capital. This is what prompts them to become bankers. They have no interest in stifling competition. To the extent that anti-competitive practices are imposed, it is because the least efficient capital-owners want to forbid the more efficient from competing with them by lending and earning capital.

Re: How fractional reserve banking destroys capitalism

ProgressiveLibertarian — Thu, 04 Mar 2010 00:33:58 GMT

While I do not necessarily defend a fractional reserve banking system, finance capital itself - regardless of form - is a threat to industrial capitalism because of the intrinsic dependency the latter has on the former, and the tendency of both to concentrate market power into fewer and fewer hands. The English and the Dutch both had the experience of finance outgrowing manufacturing before the fell from being the global economic leaders. They same happened to the US in 1990s. The problem is finance produces no actual value itself, it is meant simply to lubricate those parts of the economy that do. If left unchecked, though, finance uses its position of power to leech from rather than facilitate the productive sectors of the economy.

"In a free market economy, one comes to own capital in two ways: by originally appropriating and transforming natural resources into productive capital, or by transforming capital goods that one originally appropriates and selling them in return for capital good."

What is your understanding of "originally appropriating?" Natural resources are generally acquired either by receiving it from a government that has laid claim to the land in which those resources are found, or by purchasing said land. The first instance is clearly not a free market example. The later still requires that Capital be owned in advance. Same for transforming capital goods, how does one acquire those goods with having capital in the first place. In either case one can only come to own capital, by your definition, by either having already accumulated capital or by borrowing from someone who has. Which leads us to the next issue.

"Over time, those individuals who are the most productive and most efficient for the market will come to own the largest amount of capital goods that they will exploit to their full efficiency. They will form the capitalist class."

This may be true at first, however consider what is mentioned above, to acquire capital one must already have capital or must go into debt. That being said, there is a distinct advantage to those who have already accumulated capital (they're not contained by debt), an advantage they can exploit to stifle, rather than foster, competition. Furthermore, even if we had a system in which the government had absolutely no power in the financial markets, corruption and cronyism would still exist because those who went into banking would have the power to decide who they were going to lend to and would not necessarily always make that decision based on economic efficiency, but based on prejudice or preference for friends or family. While in a perfectly competitive economy, this sort of uneconomic discrimination would put one out of business, the more the cycles of boom and bust concentrate wealth (one profits during the booms, uses savings to tide them over during the bust and also buys up assets at depressed prices, usually selling them back to the public in the next boom. Keep repeating this cycle and wealth becomes more and more concentrated), the less competitive the markets will become allowing for monopoly and oligopoly power.

"Some of these capitalists, over very long periods of time, will come to recognize upcoming capitalists with the ability to produce a lot of capital goods. They will use the capital that they themselves have accumulated through their productive talents and lend it to these upcoming capitalists at interest, in the expectation that their productive ability will exceed the rate of interest and that their own capital will grow as a result of their accurate selection of rising capitalists. These individuals will form the banker class."

Not how banking works at all. Banks bank money, they don't use their own personal money. Bankers don't lend money out of their own salary, they lend our bank deposits. The banking system can run under two principals. The free market way would be to allow banks to lend as the please with no regulation, and it would be up to consumers to research and choose a responsible bank before putting their money in them. This still leaves the risk that shareholders and deposit holders can be ripped off by executives that make short term profits but long-term losses, and leave with their bonuses before the losses come in. Now, without government guarantees, and their implicit moral hazards, shareholders and deposit holders would hopefully hold greater scrutiny and provide better incentives to their executives.

Much of the public, however, does not want a free market bank system. That is why, regardless of whether we agree with the decision, the FDIC was created. Because when banks fail under the aforementioned system, you have runs on the banks, and people's deposits can be lost. A strict free market supporter might say that is just the risk you take, but I doubt you could get most people to agree with you. If you insure bank deposits (and back that insurance company with the full faith and credit of the federal government) you create a moral hazard for bankers. That is why the same act that created the FDIC, separated deposit and investment banking (this rule was then removed by deregulation just 8 or 9 years before our current crisis began). You need either no insurance and no regulation, or insurance with regulation, otherwise we have privatized gains and socialized costs (pretty much the definition of a kleptocracy). Notice, I'm not saying either one is necessarily better, regulated or unregulated, just that a half and half system often results in the worst of both.

"Successful bankers will be selected based on their ability to select successful capitalists, and they will come to control the largest asset banks from which loans are available. Bad bankers will deplete their capital and exit the business."

As I said before, as wealth become concentrated and markets become less competitive, firms begin to have market power which they can use to block out competitors and favor or disfavor certain groups and/or people. The weakness in the orthodox free market argument is that the idea that an unregulated free market naturally tends towards maximum efficiency only holds true in a perfectly competitive market (it's like using the perfect gas law in physics, and not factoring in the environmental variables, in this case problems of information and externalities). It also ignores the advantages that groups and individuals who have already accumulated wealth have in the market place (not having to secure debt or pay interest on it). Even if we are to imagine that we start with a perfectly level playing field, certain firms eventually win the competition and use the assets and market power in their industry to hold back future competition. Competition cannot, therefore, maintain itself naturally, instead it will destroy itself and declare victors. And in reality there has never been a level playing field. A great number of the wealthy today have inherited that wealth, and almost all the wealthy capitalist countries first accumulated their capital not through free market competition but through mercantilist colonialism. As competition is allowed to continue declaring victors and allocating them the according spoils, success is less and less based on merit, and more and more on the inherited advantages which you brought to the field in the first place.

Re: How fractional reserve banking destroys capitalism

Stranger — Tue, 02 Mar 2010 21:19:58 GMT

15 Years Ago, the Combined Assets of the 6 Biggest Banks Totaled 17% of GDP... By 2006, 55% ... Now, 63%

Re: How fractional reserve banking destroys capitalism

DD5 — Tue, 02 Mar 2010 05:54:19 GMT

Stranger:

Caley McKibbin:

Money is not capital in AE.

?

Never seen such a bizarre idea.

We talk of capital value in terms of money, which is why the confusion occurs.

Re: How fractional reserve banking destroys capitalism

DD5 — Tue, 02 Mar 2010 05:45:49 GMT

Esuric:

Stranger:

Esuric:

This is the first phase of production (which requires capital itself). Individual's don't venture into the woods and try to create their own capital with natural resources.

They do in fact do this. How do you think America was colonized? People deforested the land and built farms, which they then exploited to productive use.

They imported capital. Cutting down trees and farming land requires capital.

The first Americans probably did come equipped with some capital.

However, Robinson Crusoe had no such luxury. He had nothing but his bare hands and mental capacity - he had human capital, until he built his first tool, which became his first capital good.

Re: How fractional reserve banking destroys capitalism

z1235 — Tue, 02 Mar 2010 04:47:48 GMT

Good OP, Stranger.

Re: How fractional reserve banking destroys capitalism

Esuric — Tue, 02 Mar 2010 03:04:07 GMT

Stranger:

Investment banks are not banks.

Thanks for your insight.

No problem.

Caley McKibbin:
Money is not capital in AE.

Not just in AE.

Re: How fractional reserve banking destroys capitalism

Stranger — Tue, 02 Mar 2010 03:03:34 GMT

Esuric:
Investment banks and funds are not banks--they are different kind of financial intermediary. Depository institutions (commercial banks, credit unions, and thrifts all have deposits).

Investment banks are not banks.

Thanks for your insight.

Re: How fractional reserve banking destroys capitalism

Stranger — Tue, 02 Mar 2010 03:03:07 GMT

Caley McKibbin:

Money is not capital in AE.

Never seen such a bizarre idea.

Re: How fractional reserve banking destroys capitalism

Esuric — Tue, 02 Mar 2010 03:01:37 GMT

Stranger:

Esuric:

This is the first phase of production (which requires capital itself). Individual's don't venture into the woods and try to create their own capital with natural resources.

They do in fact do this. How do you think America was colonized? People deforested the land and built farms, which they then exploited to productive use.

They imported capital. Cutting down trees and farming land requires capital.

Stranger:
This is incorrect. There have always been capital lenders separate from the currency deposit system. Remember The Merchant of Venice?

No I don't, but monetary economies don't have financial institutions which lend and trade real capital.

Stranger:
Even today there are many banks that have no deposit operations whatsoever.

Investment banks, insurance companies, and funds are not banks--they are a different kind of financial intermediary. Depository institutions (commercial banks, credit unions, and thrifts) all turn deposits into loans.