I have been working on my own ideas here.The gist is that bankers are making most of their money in interest and fees in relation to pseudo-investments.
Could I be on to something?
A few problems I’m seeing here.
That’s just a subjective guess. Someone could just as easily say ‘no u. I think it should be 90%’.
The more valuable a company is by stock price, the easier it will be to raise money through either further stock floats or through borrowing money, therefore investing in a company you believe to be undervalued will push up the price and direct investment towards a company that is viewed as a valuable investment.
Markets work best when prices reflect all available information the best. Say someone knows that there is going to be a shortage of oil, and buys (or ‘speculates’ in) oil. This will drive up the price of oil and cause people to change their behaviour in tune with the future shortage without even having any knowledge of it.
I’ve never understood the problem many Austrians and other libertarians seem to have with consumer borrowing. Sure, monetary inflation makes it much more widespread than it should be, but it would be perfectly reasonable in a purely free market for someone with a high time preference to buy something with the savings of someone with lower time preference, and to pay for the use of said savings.
Like I said above, speculation can be beneficial, so how would any such regulatory agency (ignoring moral arguments against this) distinguish between beneficial speculation and that which is a part of bubble activity?
Fractional Reserve Banking, FDIC
Sure its a guess, but I’m not suggesting that a government need to choose a level. I’m just suggesting that action should be taken to reduce/eliminate pseudo-investment. The amount of real investment will then reveal itself automatically.
This is a rather tertiary effect - the bank/investor that is considering lending to said company could/should simply look at the fundamentals of that company.
I don’t have much of a problem with the idea of speculating with your own money. The problem is with borrowing to speculate. If someone is good at speculating then they will earn plenty of money to make larger future speculations anyway.
But from the point of view of society as a whole, using up savings with consumption diminishes the pool of savings available for real investments.
Just follow these three steps:
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Bar the practice of borrowing to speculate on commodities and secondary share price fluctuations.
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Re-jig the pensions system to eliminate the charade of pretending that a pile of money needs to be “invested for our retirements”.
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Take some action to deter borrowing to consume, this could be done in a variety of ways.
Banking is a highly corrupt, highly cartelized industry.
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I thought the Austrian school didn’t believe cartels were a problem?
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I agree that there is a lot of fraud in the banking sector, but its hard to see how that could account for such gargantuan wealth. In many economic sectors there is of the order of say 10% fraud (which in the banking sector would correspond to a massive number), but it would appear to me that the banking sector is at least two or three times wealthier than it should be. Its hard to imagine that level of fraud.
We don’t think cartels can arise on the free market, or that if they did arise it would be highly unstable and easy to get rid of. However, we do think government cartels are a problem.
Every loan they make is fraudulent because it either comes from printed money or fractional reserve lending.
Because that’s where everyone puts their money.
With regard the FDIC: In a world without it, how is “Joe the plumber” or ermmm, “Susan Boyle” (!) supposed to decide which banks are safe?.. I suggest they haven’t a snowballs chance in hell of distinguishing a safe bank from an unsafe one. Would you really want them to risk having their life savings wiped out?
You’re looking at this from one perspective. What about the banks that actually do a good job of protecting deposits?
How are banks government cartels? Anyone can start up a bank.
The fact of FRB and fiat currencies don’t account for the size of the banking sector today. Both features existed several decades ago when the sector was far smaller. Something has happened that has allowed the banking sector to grow, and I suggest that it is the growth in pseudo-investments (as described in my blog entry).
Banks are just money warehouses. Don’t people already safely select warehouses for other sorts of things? If people didn’t know when a bank was doing a bad job, why were there banking runs?
Conversely, with the FDIC, all banks are insulated from failure. This is a blank check to take big risks that might have extremely negative consequences. While it may seem like a good thing that everyone gets a guarantee on their accounts, everyone has to pay for the bailout when the banks fail.
What about them?
I’m going to be honest and say I don’t know much about what it takes to start a bank. In theory, all you need is a safe place to store money. In practice, I know there are a lot of regulations but I’m not quite sure what all this entails.
I will say, however, that due to the gross profitability of banking, if anyone could start a bank they would. I mean every customer you got you could just lend out 9x that much and make a killing. And if you messed up, you’re insured by the government so there’s practically no risk. It cannot be this easy. If it is, let me know, I will start 10 banks right now.
The interest rates are also insanely low. They have never been ~3-5% before let alone 0. All the crises of the last ~30 years have been solved by expanding the money supply… Again I don’t claim to have detailed knowledge of the banking industry, but this is my gut instinct.
Banks are infinitely more complex than warehouses. They need to have people that choose between different businesses that make requests for loans. Thats a very complex task.
In the recent case of RBS in the UK, the immanent crash was all over the popular newspapers and television. You can be damn sure that the previous day 95% of the customers had no clue whatsoever that there was any problem at all.
Not true, the shareholders loose all their cash and the management loose their jobs… at least that’s how it should be… but other agencies (not the FDIC) have stepped in with the bailouts - now that’s what’s led to moral hazard.
I made that mistake too in the early days of my research. See here to be corrected.
Well see this is the problem… banks can’t really make loans without fractional reserve banking. The only entities that can make loans are ones with excess liquidity.
Yeah I mean most banking runs are all at once. People still have some way to figure out that banks are insolvent.
Well they aren’t completely insulated. But it insulates the consumer from failure, which is what I should have said. This means there is no system of profits-and-losses for consumers to check the banks.
Well, I, as a libertarian, do have a problem with government created & enforced cartels.
The banking mafia and its partner the government both control the printing presses/‘money supply’. Creating money out of thin air seems to be a very ‘profitable’ activity…
Without a free market you can’t really know what’s the correct size for the banking sector. Maybe today it’s three times as big as it would be if it wasn’t propped by the state. Who knows.
Why would anyone choose them when they can choose a bank that’s willing to offer them higher rates of interest on their deposits and can promise that even if the bank fails the depositor will get his/her money back?
I mean I don’t care about what bank my money is with, I’ve got FDIC insurance. I know from personal experience how good it feels to have that backing. But I also know it changed the way I looked at banks and deposits.
You mean that’s impossible in theory ? As a matter of fact banks can make loans using timed deposits…