Hm. What about your comments being irrelevant ?
Difference regarding what ? Again, I think you are just mixing apples and oranges.
As a side note, I do believe that FRB is based on deception so it is fraud. That doesn’t mean I want to ‘outlaw’ it, just like I don’t want to outlaw astrologists, or other revealed religions which are prolly even bigger frauds than FRB.
One answer may be : no difference. Both are examples of a STUPID business model.
It seems that to declare that insurance is a poor business model would undermine all the standard answers given in an-cap descriptions of the ideal world.
I don’t think libertarian theory depends on the soundness of the insurance business model. Insurance is not going to make people respect individual rights. Insurance can only cover damages caused by theft IF those damages are small. On the other hand if the majority of people are not willing to respect individual rights no amount of insurance can fix the problem.
Well, this is certainly true, but Murphy, Hoppe, and Rothbard all build their models on the premise that insurance companies of one form or another will hire or form the security companies themselves. Do you have an alternative model?
I’m not sure I agree with you on the economics. It seems like a reasonable model on the assumption that you set your premiums to cover the probabilities, and also have some knowledge of investments, so you can invest the money in the meantime.
Insurance is not a poor business model. It is a business model subject to variance.
FRB is not subject to variance. There is only one possible outcome.
No I don’t. And the protection of property would probably be done by companies that would operate at least partially like insurance companies. But again, that would only be possible if the majority of people stick to individual rights to begin with.
well…
so is this insurance or banking/investment … ? And how are they going to pay their claims if the money is ‘invested’ ?
Anyway, I think that insurance does work if all it entails is pooling/sharing a limited amount of risk. It cannot do more than that.
But as I said, I see no connection between FRB and insurance except that both techniques may do some gambling based on statistical inferences. And both FRB and insurance will badly fail if those ‘average’ predictions are not realized.
I hold very little cash. I needed some money last month. I sold some of my investments and had the money within minutes, thanks to the internet. It’s not that hard to do this kind of thing.
Well, yes, that’s all it’s possible to do with insurable risks. This is exactly what insurance is meant to do. Out of, say, 1,000,000 people, 1 will suffer some very expensive problem, and we don’t know which. Each would rather pay 1/1,000,000 the cost and be spared the risk of paying it all. The guy who finds these people and manages the whole thing also expects to make money by doing so. He does so on the float, or by setting premiums in such a way that there’s a little to skim off.
If actually 5 people rather than 1,000,000 suffer the fate, then yes, the manager has a problem. He will need to sell off some assets to pay what he owes.
FRB expects that, over a given time frame, say out of each $1,000 on deposit, $10 will be called. If in some period $500 is called, then the bank can be in trouble. It sells off its other assets.
I “purchase” an insurance policy. I give an insurance company $100 in exchange for the insurance company’s promise to pay $100,000 if my house burns down during the term of the policy. If my house does not burn down, I forfeit the $100. In contrast, I do not “purchase” a demand deposit account. I do not expect anything other than having my $100 back whenever I want it. There is every reason to believe I will make demand on the bank.
Aren’t the two transactions fundamentally different?
The OP asks if it is fraud in both cases because of the possibility of a “run”. I suggest in the case of FRB, the possibly of a run is 100%. Everyone will demand their money back, maybe at the same time, maybe not. On the other hand, my house may or may not burn down. If I was told, and I truly understood, that the bank has only 10% of the assets needed to cover the demand deposits, I would keep my money in my pocket. The only way a bank can make good on a demand deposit under FRB is if depositor B deposits money to cover depositor A. How is this not a ponzi scheme and thus inherently fraudulent?
In the case of insurance, an agreed upon event has to take place before a “run” of claims can happen. In the case of a FRB, no event is necessary other than “fear”.
Therefore: FRB is inherently fraudulent by its nature, and insurance is not inherently fraudulent. The fact that an insurance company may have insufficient funds is an entirely different matter.
I may be full of it, I would appreciate feed back as I am trying to figure this out myself.
That doesn’t prove much. Maybe you needed $1000 and had $10,000 in, dunno, google shares. What about Mr Smith whose house just burnt down and whose ‘investments’ are not in demand ? Internet or not, he has a problem…
Yes, no quarrel there.
What assets ? There are none. That’s the problem…
Even assuming that the manager manages to find ‘credit’ somehow, what if he has to pay 20 claims instead of 5 ? So…it boils down to two things :
how honest the people who run the company are (so yes, fraud can certainly enter the picture)
even if they are honest and sell insurance with a disclaimer like “we can only pay up to $xxxxx” they may be inept or just had to face a really unexpected situation and go broke anyway.
Insurance can only handle a very limited amount of ‘risk’…
A completely different matter. Frankly discussing FRB along with insurance will only make matters less clear. If clarity is your aim, I wouldn’t mix insurance and FRB.
Which they don’t really own.
The only non-inflationary thing that FRB can do is to lend some money that people agree to (have/not have) available on demand. Yet physical resources (represented by money) are either lent or not, and are either available on demand or not. So FRB can only go so far in gambling using statistics.
Besides, what sort of ‘fiduciary media’ are created by the banking mafia and whether there’s a commodity standard in place or not are crucial issues that are now being glossed over and talking about insurance only confuses matters more.
Wrong side of the equation. The question was about the insurance company being able to pay Mr. Smith the value of his house.
Where has this idea come from that insurance companies, banks, and so on never own any assets? Do they not own buildings and land? Accounts payable? Personal property of the owner would also be callable, in my opinion, because I oppose limited liability. But even without this, the insistence that insurance companies don’t have assets is simply bizarre.
For one thing, the premium payments are completely surrendered to the insurance company as oppose to FRB where the depositor retains ownership of the money and can demand his money at any time.
But insurance is by definition about pooling risks in order to minimize them ,usually to the point that they are nearly eliminated ,but can never be completely eliminated. What is insurable must be subject to actuarial science or part of what Mises termed: “Class probability” as oppose to “Case Probability”.
The uncertainty of entrepreneurship cannot be insurable for each business venture belongs to what Mises termed “Case probability” and not Class probablity.
The uncertainty of a business loan cannot be combined into a class of homogeneous events because Individuals and entrepreneurs always know something about the outcome of the particular case. In other words, the entrepreneur has some control over the outcome (success or failure). This CANNOT be insured.
To make things worse, loans in FRB are not independent of each other, that is, the outcome of some businesses are affected by others. A panic for example can induce a chain reaction of business failures which can lead to a bank run. There is obvious dependence between the outcome of such loans. They cannot be insured.
FRB is not subject to the laws of actuarial science. Mises himself in Human Action point to the general fact that entrepreneureship in general can never belong to class probability.
Here is my answer, though I’m not going to suggest it officially, if FRB is fraudulent but works, then oh well.
Lots of things are “fraudulent” but make the world more prosperous. Your example of insurance is one of them.
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Again, transactions aren’t relevant. They can both be considered a gamble.
[quote=“chloe732”]
Your suggestion has nothing to do with the question. Use life insurance as comparison. Everyone will die, maybe at the same time, maybe not. If there was a big disaster and millions of insured people died, the insurance agency(s) couldn’t possibly pay everyone’s premiums (at least upon demand). How is that any different than a bank run?
So what? The above scenario is still just as applicable.
I’m not sure how you got from “in case of” to “therefore?”
DD5,
Does any of that have to do with the proposed question? I don’t care about differences between the insurance industry and the banking industry or what-have-you. Just how can one be labeled fraud due to not having enough money to pay all customers on demand and another not even though they do not have enough money to fulfill all customers claims?
Difference regarding fraud. Why is one form of not-paying-on-demand fraud and another form of not-paying-on-demand not fraud. If you think its fraud for another reason there is no reason for you to answer (unless you just want to speculate).
You’re one of the better ones. [:)]
AEN: What area of Austrian economics is most and least advanced?
MNR: Methodologically, we are pretty advanced, thanks to the work of Hoppe. But we can always use more since that is what sets us apart from the rest of the profession. And Salerno is doing great work on calculation.
Banking theory, however, has taken a very bad turn with free banking. We have to show that this is the currency and banking school argument rehashed. They have adopted the banking school doctrine, that the needs of business require an expansion of the money supply and credit. Moreover, the free banking people violate the basic Ricardian doctrine that every supply of money is optimal. Once a market in a money is established, there is no longer a need for more money. That is really the key point.
AEN: What about the argument that 100% reserves requires government intervention?
MNR: I regard fractional-reserve banking as an intervention in the free market, just as any crime against person and property is intervention. In the case of banking, the government is allowing the crime to be committed.
But how do we address the needs of trade argument, those who say that business has a demand for credit? Well, there are many things demanded on the market that are also crimes. There may be a demand for killing redheads. And there is certainly a demand for government loot. What’s so great about market demand? if it is not within a framework of non-aggression, there will always be a demand for fraud and theft.
The free bankers accept a kind of David Friedmanite anarchism, where there is no law, only people engaging in exchange and buying people out. If you have a group that wants to kill redheads, the redheads will have to buy them off if they value their hair. I think this is monstrous, the kind of anarchism would indeed be chaos. Just because there is a demand for something doesn’t mean it should be fulfilled.
AEN: One of the criticisms of this position is that it is normative and not economic.
MNR: Yes, but the response to 100% reserves is that bank entrepreneurs have the right to offer whatever fraction of deposits they want, which is also a normative position. Any discussion of policy is inherently normative. You can’t have free markets unless you have property rights,
AEN: Why isn’t private deposit insurance viable?
MNR: The same reason insuring any bankrupt industry isn’t viable. You cannot insure entrepreneurs because they engage in uninsurable risk. You can reasonably predict how many fires there will be in New York; the unlucky few who get burned can dip into the pool of resources. But entrepreneurship is not heterogeneous; it is completely unpredictable, and each attempt is non-random. The entrepreneurs assumes the risk. If an insurance company insures it, it becomes the entrepreneur. Who then insures the insurer? In the case of banks, either they don’t need insurance, since they are 100% covered, or they are uninsurable because they are taking entrepreneurial risk.
AEN: You have been critical of White’s book on free banking.
MNR: The White book says the Scottish banking system was more successful than the English system. But he doesn’t say one word about prices, inflation, or business cycles. His only statistic is that were fewer bank failures in Scotland than Britain. But what’s so great about not having failures? An industry that doesn’t have failures might be doing poorly. What if we applied this test to the Soviet Union, where no industries fail?
When you say one banking system is more successful than another, it seems the test should be less inflation and fewer business cycles. Yet this is never mentioned.
Yes, entertaining interview. Apparently it is not just Ricardo who can apply supply and demand analysis to everything except money.
Conza,
Do you want to answer the question?
Simply because one (FRB) promises something that it cannot guarantee, it depends on variables not subject to actuarial science, and therefore can in no way be compared to Insurance where the reduced risk offered by the Insurance is subject to probability calculations.
To put it in another way, One is gambling while the other is not. Read the chapter on Probability in Human Action (again if you already read it).
All those who claim FRB is fraud (myself included) always argue that deception must be involved. You may not agree but this is clearly not the case for any insurance contract.