First of all, I know you guys don’t like hypothetical questions about what will and will not happen in an an-cap society, because obviously, you don’t really know until it’s tried.
However, has any an-cap advocate ever talked about lenders of last resort and how they could be integrated into a free society?
I understand this is an incredibly complex issue and that, as such, the real answer is likely to be incredibly complicated. But it’s just something I’m curious about and I would like to get a cursory understanding of the proposed system before I try to investigate in more depth about how lenders of last resort would come to be and how they would function.
Now why in the world would we want a “lender of last resort” in an an-cap society? If you’re unable to get sufficient credit from other lenders, then perhaps you should rethink your business venture.
By lender of last resort, do you mean a central bank? A central bank is a creature of government, so it would not exist in an an-cap society. Easy answer.
I infer from your question that you seem to presuppose that there is a need for a central bank in any society. Central banks are needed to allow the government to expand beyond its ability to tax and borrow. Central banks are used to prolong the inevitable collapse of the inherently insolvent fractional reserve banking system. They provide a “buyer” of government debt, providing holders of government debt assurance they can push off (“sell”) their holdings to a willing buyer (albeit, receiving inflated dollars in return. But these sellers are the “early recipients”, so they are not harmed as much as late recipients, you and me). Finally, central banks are useful tools in pushing banking system losses onto the taxpayer.
Since those goals would not be desired in a free society, there would be no need for a central bank to exist. A modern, technological society would develop just fine without central bank involvement. In fact, given the purpose of the central bank described above, I conclude the economy has been stunted (to say the least) by central bank involvement (world wars, depressions (called “recessions”), omnipotent government, etc.)
Do you still believe that central banks are created to “provide full employment and stable prices”? (Sorry if I went beyond your basic question, but I really think this was being inferred and it had to be addressed.)
chloe, I do not think that the OP inferred that a central bank is necessary. A central bank has the power to set interest rates, expand/contract credit, control the money supply, etc. What the OP is referring to is simply some institution(s) that are able to lend during crises when no other institution will lend. The problem with this is that there is no need for a lender of last resort because it only makes sense to “save” potentially profitable institutions - and if it’s profitable to do something, then someone will do it without government intervention.
Easy. I’ll be your lender of last resort. If there’s any value (assets) left in whatever enterprise you’ve just run into the ground, I’ll be happy to lend you enough to stay afloat – half in exchange for 80% equity at $0.10 on the dollar and the other half as a loan at 30% annual interest. Take that, or find someone else to deal with. There will ALWAYS be a price at which another agent would be willing to do a trade (equity+loan) with you, hence no scarcity of “lenders of last resort”. The assets are still there. Nothing has been “destroyed”. What happened is that ownership merely changed from the imprudent to the prudent. Simple really.
I agree with the other posters and wil put it in my own words.
If Bank of Bumbling needs a lender of last resort, what does that mean? That the cat is out of the bag, that every other person with money realizes that Bank of Bumbling is so hopelessly messed up that lending Bumbling money is like throwing it away.
So how is anyone foolish enough in this real world to be a lender of last resort? The answer is simple, he lends Bumbling SOMEBODY ELSE’S MONEY. Meaning he takes money by force from the citizenry [taxes] and gives it to Bumbling.
How did this strange situation evolve? We all know the answer to that.
So if an an-cap society means no one will be able to take money by force from the citizenry, then that particular lender of last resort won’t be there. Will anyone else be stupid enough to lend Bumbling money? Who cares, as long as he’s not using my money to do it.
Won’t it mean the end of civilization as we know it if Bumbling has to close its doors? No need to answer that one, right?
Won’t the depositors lose heaps of money if no one lends Bumbling money? Yes they will. But no matter what happens from now, someone is going to lose heaps of money, either them or the lender of last resort and his depositors. After Bumbling and maybe a few more banks go under people will check out the quality of the bank they choose very carefully, like they [supposedly] buy stocks now.
From my experience “The Lender of Last Resort” is usually talked about in the context of insuring people’s deposits. That’s just my experience though. And it’s certainly possible for loans to go bust. I didn’t mean to imply otherwise. In that case I can see some sort of “loan insurance” developing I guess, but who knows.
How does this have anything to do with the statement that there probably wont be any fractional reserves?
A non-fractional reserve bank does NOT lend demand deposit balances to anyone period. Lending out demand deposit balances is the definition of fractional reserve. So there are not loans that can go bust in this type of banking.
Savings & loan banks is another matter but they can never be fractional reserve cause the concept only applies to demand deposits.
If people defaults on loans to savings and loan bank and they go bust it is no different for the depositors then loosing in any other form of investment. A demand deposit is not an investment, that is the crucial difference.
I think that we need to clarify what we mean by “lend of last resort”. If we mean central banks, then I don’t believe that in a free society they will exist. If we mean lending institutions that will lend to banks if and when one of their loans fails to be repaid, I’m not sure why this wouldn’t exist (i.e. other banks).
lender of last resort=central bank as far as my macro studies have touched the concept anyhow.
The purpose is to guarantee liquidity in a fractional reserve banking system. For this to be possible the lender of last resort must be able to make money from nothing. Which in turn requires a fiat currency and legal tender laws so a lender of last resort simply can’t exist in a stateless society. Nor is it needed since we don’t need fractional reserve banks.
Who (except daddy) would insure the loan to someone with terrible credit rating?