Free Banking: A sensible option

[Cutlass]

Self regulation is perhaps the wrong wording. At the heart of the crisis, were banks that were regulating a currency that wasn't their own, and could not be held accountable if it all failed.

I simply cannot imagine any reason why you might think that that is in any way a useful way to look at the problem. The financial crisis had nothing to do with the fact that banks were using US$. It's not even relevant to talk about that. If banks were using their own money they would not have been one penny more responsible. No conceivable aspect of bank issued money would in any manner have made the banks more responsible. In all seriousness the best possible scenario that can in any way be considered is that the banks would only have been a little worse rather than vastly worse.

it is just entirely outside the realm of imagination that what you were talking about could in any sense improve the situation. It's inconceivable. It's bizarre.

Why would I want to have to deal with lots of different potatoes available in one country with fluctuating degrees of quality and prices instead of the simplicity of just having one kind of potato?

On the more serious note, because the "simplicity" of one currency is simply more prone to systemic risks. Also, if there is free banking between multiple countries, it also has the advantages of having one currency as within the chains of supply, suppliers are not necessarily forced to switch currency.

I'm sorry. I don't know where this is even coming from. But it's virtually beyond anything that can be taken seriously enough to even be answered.

 

[Tahuti]

Thus a free banking system would be inferior to regulated banking, a less refined state of evolution.
It's not this simple in practice because both systems enable periods of credit expansion (where trade increases) and periods of crisis (when it collapses). Hard to actually make comparisons...

Then what would, according to you, be the next stage of monetary evolution? After all, a system that is older and precendented does not mean it is obsolete (to think otherwise would be more or less a Whig fallacy).

 

[innonimatu]

Then what would, according to you, be the next stage of monetary evolution? After all, a system that is older and precendented does not mean it is obsolete (to think otherwise would be more or less a Whig fallacy).

It is not, if you pay attention to my text, according to me. I was just retelling what most "theorists" of finance keep repeating.

As for my own personal preferences I've made them plain several times: a fully state-owned financial system.

 

[Tahuti]

As for my own personal preferences I've made them plain several times: a fully state-owned financial system.

A fully government owned financial system would probably be completely protected from systemic risk. If government faces a bank-run, money is simply printed, end of story. A bit of inflation, but nothing collapses, and there is no financial crisis to plague us for years.

However, if government fails to provide adequate credit -and I'm not trying to say that it would be a fault inherent to government - the results could be quite disastrous, perhaps even worse than the current crisis. On the other side, it may also prompt the creation of informal free banking, as investors may start offering credit on self-regulated currencies backed by their assets and non-monetary liabilities, including other types of currencies other than the currency being issued. In fact, I'm quite convinced that nationalized finance and free banking are two sides of the same coin, both being more similiar to each other than the status quo in which a few select banks are given the privilege to issue a (national) currency the value of which is independent of their own assets and liabilities.

 

[Terxpahseyton]

I literally can't imagine a scenario where the government would fail to give sufficient credit. I mean for a moment, perhaps. But imagine this to be clear and known and imagine an economy in need - politics wouldn't stand idle. If anything, to be too lax about loans would be the biggest issue I imagine.

 

[Cutlass]

I literally can't imagine a scenario where the government would fail to give sufficient credit. I mean for a moment, perhaps. But imagine this to be clear and known and imagine an economy in need - politics wouldn't stand idle. If anything, to be too lax about loans would be the biggest issue I imagine.

Well that can work both ways too. Sometimes you get a majority that has a different agenda. So too much credit is not an inherent problem. Credit given to the wrong people or for the wrong reason is a much more likely problem.

 

[Samson]

I find it very hard to imagine how this would work in real life. Would you expect to go to the shop and your pint of milk be priced at 1 wells fargo dollar, 2.3 Chase Mannhatten pounds, 324 lehman brothers shillings as well as a few more local currencies that may or may not be accepted in the shop next door? And the relative price in each of these will vary in real time as the speculation markets revalue each banks holdings?

What happens if your employer makes a bad choice of bank, and your salary suddenly drops in real terms? Do you always have to get your mortgage with the same bank as you are paid in to make sure you can pay it?

Can you still see no disadvantage in this system?

 

[Terxpahseyton]

I can't say I fully understand the theory, but when it comes to practice I am also having a hard time to imagine that this would be a good idea. Too much chaos and insecurity. In theory a market may thrive on this "chaos" due to market mechanisms. But in practice it will make investment most of all harder and riskier and varying exchange rates will make trade harder and riskier. My gut tells me that this can not be outweighed by whatever such a system in theory promises as the up-side.

 

[Cutlass]

Markets don't thrive on chaos at all. Chaos shuts markets down. And this proposal would shut markets down. It's just not possible.

• Informations costs is a very real problem in economics. This idea takes very low informations costs and turns it into extremely high information costs.
• Transactions costs are an important concept in economics. This idea takes very low transactions costs and turns them into extremely high transactions costs,
• The transactions and informations costs will be so extremely high that large parts of the population will be forced out of the money economy altogether. There just won't be any choice in the matter.
• Private sector actors only self-regulate to the point where it is profit maximizing, or they believe that government is about to drop the hammer on them hard. They do not do so out of the goodness of their hearts.
• Markets do not self-regulate.
• This proposal makes it a profit maximizing strategy to manipulate values in such a way as to profit the banks in ways that completely screw over everyone else.
• Contrary to the theory, the housing bubble would have been far worse under this proposal, because it would have been more profitable that way.

Essentially what this all boils down to is a mindset among many economic libertarians and conservatives that says "I want this policy, and I want this outcome, therefor this policy must result in this outcome." It's pure wishful thinking.

 

[Tahuti]

I find it very hard to imagine how this would work in real life. Would you expect to go to the shop and your pint of milk be priced at 1 wells fargo dollar, 2.3 Chase Mannhatten pounds, 324 lehman brothers shillings as well as a few more local currencies that may or may not be accepted in the shop next door? And the relative price in each of these will vary in real time as the speculation markets revalue each banks holdings?

What happens if your employer makes a bad choice of bank, and your salary suddenly drops in real terms? Do you always have to get your mortgage with the same bank as you are paid in to make sure you can pay it?

Can you still see no disadvantage in this system?

Since I'm not a libertarian, I wouldn't mind see some regulation. For example, government (if nothing else steps in) could maintain a fictitious currency all banks would need to value their currency against in order to ease commercial exchanges. They may freely change their exchange rate towards that currency, but naturally, you wouldn't choose a bank that is known to that arbritrarily and often.

While real wages drops are never nice, it is probably better than losing your job. What you cite as a disadvantage implies an advantage in that wages are less prone to stickiness, which is a major cause of unemployment and economic crises.

I can't say I fully understand the theory

Banks issue their own currency, which they can freely value against other currencies, as central banks can do with national currencies right now. Samson quite nailed when he spoke of "Wells Fargo Dollars".

 

[innonimatu]

But it must be pointed out that some people, however, thrive on chaos. Or, specifically, on shut down markets. Markets create losers and winners. Closing certain markers creates losers and winners.

 

[Ayatollah So]

Since I'm not a libertarian, I wouldn't mind see some regulation. For example, government (if nothing else steps in) could maintain a fictitious currency all banks would need to value their currency against in order to ease commercial exchanges.

Why not a real currency, the US dollar? Just because banks issue their own currencies doesn't mean there can't also be a national currency - does it?

 

[Tahuti]

Why not a real currency, the US dollar? Just because banks issue their own currencies doesn't mean there can't also be a national currency - does it?

That'll probably do. A government currency of some sort may still be useful for welfare programs.

 

[Terxpahseyton]

Are private currencies actually forbidden at the moment? If not, we already have Free Banking - and the market has spoken?

 

[Cutlass]

Everything is denominated in US$. You can use something that has a US$ value, like a check or an electronic transfer. You can use any token you want to have an exchange outside the money economy, but only with those people who voluntarily agree. But you can't pay your bills in anything other than US$ if the other party doesn't want to take it. And many bills you can only pay in US$

 

[Terxpahseyton]

Any bill (excluding taxes) must be based on a contract which must be based on agreed on prices.
If you buy bread from me, I say that I want two dollars. I don't say two eggs. And just as I choose to say dollars, I may say private currency x.
If the state wants its taxes in dollars, I can just go exchange my private currency.
I am not seeing your point.

 

[Cutlass]

The point is that if you want to work outside the legal money economy, you can. You still owe taxes if you get caught. And you can only do it up to the point where you have cooperative counterparties. And that won't be many, so you have a very limited set of choices.

 

[dutchfire]

Are private currencies actually forbidden at the moment? If not, we already have Free Banking - and the market has spoken?

Well, there is Bitcoin


Yes. The market has spoken.

 

[Tahuti]

The market has spoken.

True. This is becuase for borrowers, it does not matter of whom the credit originates, and banks can issue enough of the national currency. However, in the long run, this is problematic because fractional reserve banking is more unstable than necessary if multiple institutions are allowed to issue one currency while something else maintains its value and forces the issuing institutions to keep its value, even if it means wholesale financial collapse.

If commercial banks were to be deprived of their ability to issue national currency, issuing their own currency, would be their only option to keep up with the demand for credit. For me, this seems quite sensible, as banks ostensibly are able prevent collapse by bankrun without giving up on the advantages of fractional reserve banking.

 

[innonimatu]

I think you'll have to explain that one a little better. I at least didn't understand.