This Bailout is Great! A Response.
January 31, 2009
– Comments (24)
I just finished reading Richard Gibbons defense of the bailout. I think he meant the $700 billion original bank bailout but it's hard to tell. Regardless of whether it's Bailout #1, #2, #3, or however many we end up having (I think it will take 15 before we see rioting), I am happy to refute Richard's position on the following 7 points.
1. Richard does not comprehend the cause of bank failures.
2. Richard does not understand capitalism.
3. Richard does not understand The New Deal.
4. Richard does not know the fallacies of Keynesian economics.
5. Richard does not know what an honest lender is.
6. Richard does not understand how The Federal Reserve works.
7. Richard can not imagine an actual free market economy.
1. Richard does not comprehend the cause of bank failures.
Why does a bank fail? There are many reasons. Banks operate with a fractional reserve, meaning one deposit can be lent to other borrowers several times over. If confidence in the bank erodes, depositors may demand all their money once, causing the bank to collapse. Banks may misprice risk. If a bank consistently lends money at an interest rate lower than the market rate for a particular loan would indicate, the losses will eventual force it into bankruptcy.
There is, of course, no reason that a bank can't hold 100% capital reserves. Except that by doing so, you would limit the amount of credit available. At least, the amount of credit available through banks. In the modern economy, credit is available in many ways but few realize how diverse it is. In fact, the amount of credit available remained at all time highs during The Credit Crunch. So much for a crisis.
In fact, the only way to keep a bank honest under a fractional reserve banking system is to allow it to go bankrupt. Bankrupt banks serve as nice reminders to other banks to properly calculate risk.
2. Richard does not understand capitalism.
"Bank executives don't care about systemic risks -- often they barely care about their own shareholders."
Since when are bank executives Capitalists? The role of the entrepreneur is to allocate capital. The role of the shareholder is to provide capital to the entrepreneur in exchange for a dividend or expected rise in company value. A bank executive that answers to the shareholder is not a Capitalist. He/she is a bureaucrat. We are now talking about the fundamental difference between Capitalism and Corporatism. In Capitalism, the interests of the business manager with the greatest stake in the operation often diverges from the interests of the shareholders. In an efficient company, those business managers make the decisions most suitable to the future of the company regardless of the interests of the share holders, because ultimately the entrepreneur must answer to the consumer not the shareholder. Rarely do we see a bank executive whose personal fortune rests on the performance of the bank itself. In those banks where this is the case, the overwhelming majority of them opposed the bailout! Go figure.
3. Richard does not understand The New Deal.
At least in this regard, Richard is not alone. In fact, Nobel Prize winning charlatan.. er, Economist Paul Krugman has stated on several occasions that Hoover did nothing and only FDR saved us. Hooey! There is a mountain of evidence that FDR only continued Hoover's pre-New Deal. There is a mountain of evidence that FDR prolonged the depression. There is a mountain of evidence that not only did FDR worsen America economically, but he also greatly reduced American liberty, crushed the ability of the owners of wealth to protect themselves, engaged in Fascism, and provoked Japan in order to mobilize the citizenry.
If any one of these assertions can be proven true, then FDR should be regarded as a horrible President. If all of them are true, he should have been put in jail.
4. Richard does not know the fallacies of Keynesian economics.
"Out of false theories of employment, money, and interest, Keynes distilled a fantastically wrong theory of capitalism and of a socialist paradise erected out of paper money. Moreover, Keynes offered no theory of stagnation at all. He merely gave a perfectly normal phenomenon, such as falling prices a bad name, so as to find another excuse for his own inflationary schemes." - Hans-Hermann Hoppe, Professor of Economics at UNLV
Since Hoppe has recently put together a tremendous work on this, not to mention Henry Hazlitt's rebuttal of Keynes, Nobel Prize winner Hayek's work on The Business Cycle, and countless others, I am just going to link them and move on. Keynes' work has been so thoroughly discredited it must be put into some sort of context. Since his views generally call for government intervention, is it any surprise that the government would continually promote Keynesian thinkers?
5. Richard does not know what an honest lender is.
I am an honest lender. I make Person-To-Person loans through a couple of different websites. I am limited by the amount of capital that I have available. In order to stay in business I must properly caclulate risk. If I fail to assess risk in the proper manner, I will go out of business because I do not have a lender of last resort. That's what keeps me honest. If I had an unlimited trough of money at my disposal (The Federal Reserve) it would be impossible for me to properly assess my risk. You can't calculate something that is infinite, e.g. The Federal Reserve's ability to create money. There are honest banks out there. Those banks aren't on The Fed's handout list. Those banks suffer when the dishonest banks get bailouts. That's the world that Richard wants to live in. You can't have it. I moved out of the country.
6. Richard does not understand how The Federal Reserve works.
Much ink has been spilled on this subject as well. The battle to control central banking has waged throughout American history. At first, those in favor of a central bank, like Alexander Hamilton, were honest about it. They wanted more power for the federal government and understood how such a bank could create it. They were called federalists. Andrew Jackson smashed one of our earliest central banks during his presidency, making him one of our greatest. Woodrow Wilson, bought and sold by the bankers, brought it back. People point to the bank panics of the late 1800's and early 1900's, but there is a great deal of evidence that J.P. Morgan and fellow financiers helped create those panics in order to secure a favorable atmosphere for the central bank discussion. In other words, our ancestors were duped.
7. Richard can not imagine an actual free market economy.
A collapse of the megabanks scares Richard (and most people.) They can not imagine a world without Citigroup or AIG or maybe even GM. It's scary. Others businesses would fail. People would be put out of work. There would be chaos and maybe even, revolution. Why doesn't this scare me? Because I'd still have my brain, and you would too. As I have said before, mining for gold starts in your own brain. Those of us that have filled it with knowledge will prosper no matter what supposed calamity arises. Having an imagination makes humans special. Nearly everything in our world was created thanks to the imagination of an individual.
I also never fell for the easy credit ideas of the leveraged society. I bought only what I could afford. I lent only what I could afford. If I needed credit for an emergency situation, I paid it off quickly. I have never held a loan to maturation. Not a home loan. Not a car loan. Not a school loan. I pay for everything in cash these days. It's the reward for my success and my knowledge. It is people like me that would thrive should the big banks disappear. There are a lot of people like me. Do you think we deserve it, or would you rather have megabank bureaucrats in charge?
David in Qatar
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