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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: gpowell who wrote (54091)	2/17/2006 1:12:37 PM
From: mishedlo	Read Replies (1) \| Respond to of 110194

The very worst thing a government can do is to impede this process by guaranteeing the public and a bank against loss, as it is my contention that through the management of moral hazard, a profit-seeking bank facilitates economic growth precisely because it can better manage risk, i.e. allow greater risk to be taken. Any implicit and explicit guarantees increase risk without an expectation of greater profit, i.e. creates "unbounded instability" with zero or negative expected growth. You would abolish the FDIC? Mish

To: gpowell who wrote (54091)	2/18/2006 12:28:38 AM
From: basho	Read Replies (1) \| Respond to of 110194

Assets and Liabilities You're pushing on an open door here. I didn’t say a mismatch of assets and liabilities but a duration mismatch. Economic Distortion etc No argument on the inadvisability of implicit and explicit guarantees from me. As I said an earlier post, I’m in favour of an entirely free market in money and banking. I’m dubious however about the alleged positive externalities of fractional reserve banking’s capacity to provide liquidity. If anything, I’m inclined to think the opposite is true. After all, liquidity becomes an increasingly critical issue the greater the degree of systemic leverage. Better by far in my view if banks acted as safekeepers of money and as intermediaries in the mobilisation and allocation of real savings. Bank Reserves and Scottish Free Banking The ground seems to be shifting a little bit here. If you now say reserves need never be adjusted, then there seems little point in bringing them up at all. Nevertheless, for my part it seems unlikely that a bank operating without external support in a free banking environment would have less than 10% in liquid reserves. As for your comment about the Scottish “Free Banking” experience, I had another quick look at this and found there are at the very least great differences of opinion on this issue. The following quotes are from Rothbard’s analysis of White’s “Free Banking in Britain.” mises.org/journals/rae/pdf/rae2_1_15.pdf "White professes to be puzzled at this strange action of the Scottish banks. Why, he asks, did they not "remain tied to specie and let their currency float against the Bank of England note?" His puzzlement would vanish if he acknowledged an evident answer: that Scottish banks were not free, that they were in no position to pay in specie, and that they pyramided credit on top of the Bank of England.6 Indeed, the Scottish banks' eagerness for suspension of their contractual obligations to pay in specie might be related to the fact, acknowledged by White, that specie reserves held by the Scottish banks had averaged from 10 to 20 percent in the second half of the eighteenth century, but then had dropped sharply to a range of less than 1 to 3 percent in the first half of the nineteenth. Instead of attributing this scandalous drop to "lower costs of obtaining specie on short notice" or "lower risk of substantial specie outflows," White might realize that suspension meant that the banks would not have to worry very much about specie at all." (p 231) "If gold and silver were scarcely important sources of reserves or of grounding for Scottish bank liabilities, what was? Each bank in Scotland stood not on its own bottom, but on the very source of aid and comfort dear to its English cousins-the Bank of England. As Checkland declares: "the principal and ultimate source of liquidity [of the Scottish banks] lay in London, and, in particular, in the Bank of England."13 I conclude that the Scottish banks, in the eighteenth and first half of the nineteenth centuries, were neither free nor superior, and that the thesis to the contrary, recently revived by Professor White, is but a snare and a delusion." (p. 233) Monetisation etc Intertemporal coordination aside, I can’t really see how it is inconsequential that the US government was able to spend $550 billion in this period against which it neither levied taxes nor borrowed from the markets. I also find it slightly puzzling that you seem to be suggesting that the demand for money from the public ought to be met by an effectively limitless supply from the fractional reserve system. Foreign demand for currency Not sure about this either. It seems to me the reasons for offshore dollar currency holdings would vary widely and that some of what I’d guess are the larger of these holdings (such as those associated with drug dealing) may if anything be less likely to place discipline on the Fed. At any rate, as far as I can judge, this large external demand enables additional monetisation with reduced domestic consequences. Enjoyable as it’s been, I get the feeling this exchange may be shaping up as a debate without end. I just wanted to give fair notice that, for the moment at least, my desire to continue is waning. Unless, of course, you hit me with something that really opens up a new perspective! Thanks for all your thoughts and insights.