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“Market” Failure

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One of the most predictable charges caused by the current banking failures is that the crisis is due to unregulated markets and “market fundamentalism”. Because of lax government oversight, investment banks were able to design nefarious scary financial instruments, filling the pockets of overpaid bankers while endangering everyone of us with their financial alchemy. Therefore, these practices should be banned and this was a clear case of the market coming up with stuff that is dangerous for all, thus: market failure.

This charge is understandable. However, it is false, because it assumes the current system was a “free market” system. Certainly it wasn’t. The non-market factors that lead to the crisis:

– The existence of a federal reserve with government mandated currency, the fiat dollar.

– The existence of a banking system based upon rules set by the government, handling this government created fiat dollar. The existence of fractional reserve banking, whereby deposits and withdrawals are hugely amplified in times of crisis is key here. However, presumably that’s why we have a Federal Reserve in the first place: to prevent a crisis of withdrawals occurring in a system that inherently gives rise to these withdrawals. Interesting.

-The existence of financial institutions besides the regulated banking sector coming up with legitimate innovations, but misused by the REGULATED banking sector. They used these instruments while they were supposed to have minimal capital requirements. Rating agencies who provide these ratings (which only the government regulated sector cares a damn about, to satisfy their regulatory requirements) hugely misjudged these instruments.

– Fannie <ae, Freddie Mac. Government forced loans to people who cannot afford them, on a tremendous scale . A federal reserve printing money, providing cheap loans, causing a boom in the asset where these cheap loans went (housing), accelerating the bubble, and worsening the eventual bust.

– The existence of a government happy to put tax-payer money in any place of the above, because the whole ridiculous system is now “too big to fail”.

Finally: A bunch of socialists calling this system the “free market”, calling the failure of this grotesque sick government mandated horribly unstable system “market failure”, and basically calling any classical liberal a fascist and profiteer and ideologue.


We now live in the USSA, where there is socialism under the name of capitalism, which is happily blamed by the left-wing university indoctrinated population, and with the defenders of liberty unable to explain the difficult mess, leading to even worse socialism. Lenin and Marx couldn’t have designed a better Orwellian paradox themselves.

What is the alternative then? The seventeenth century Dutch Republic, the United Provinces, provide some lessons.

The foundation of the new system should consist of heavily regulated and controlled 100% reserve “deposit” banks that serve as “girobanks” to transfer money. The money should be a commodity-money, perhaps best a commodity-basket of Gold, Platinum, or what have you. This would be a risk free storage and transfer facility. At market rates this bank will provide currency-exchange at cost.

Whatever springs up besides this core is irrelevant. There will always be risk and uncertainty, since we are mortal human beings proceeding through time and an unpredictable changing space, giving rise to an uncertain future. This uncertain future people will try to anticipate and people will make financial (amongst other) bets on this. The total of this future-market will make us adjust our current behavior as least worst as possible to future predicted circumstances.

There will be investment institutions that should be forced to display the amount of value in their vaults or wherever it is. Accounting takes care of that. People will serve as a check on whether to put their money in these institutions, and will bear their own risk. These investment institutions can do deals with each other in any way they want — the public will choose investment institutions that match their risk/reward ratios. These institutions will in no way have anything to do with the central bank. Calling them an investment “bank” would be very very wrong.

There will be lend-borrow institutions that simply match lenders and borrowers, who will assume their own risk. Nothing fancy here.

There will still be mistakes made, and money lost, and there might still be huge systemic misjudgements. But there is no way to improve upon that. If there was, if someone somehow knows better than individuals doing what they think is best for them, it would be a dictatorship. Regardless, people will know where their money is, the tax payer will never be used in a bailout, and systemic risk will be as low as is possible.

There will be market “failures”, as humans are fallible. But having people bear their own risk will minimize failure.

We need to separate the two functions of financial institutions. 1)Transfering, storing and safekeeping of value. and 2)placing value in a risk/reward position that you prefer over the safety of 1).

Mixing these two up, with a nice big government hugging us to death from behind, (too big to fail?) will mess us up< REAL GOOD.

Even better when it’s left-wing obama-buddies Franklin Raines and James A. Johnson timing the revealing of information to coincide with the election-campaign’s last stretch.


Written by cultured ape

October 21, 2008 at 2:58 am

Posted in Uncategorized

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