The Theory of Banking (by Hans-Hermann Hoppe) - Introduction to Austrian Economics, 4of11

[sosofresh360]

watch?v=n30zO0ABFqc

[sosofresh360]

@PanzerDivisionBOM I agree but u should watch this lecture by Dr.Richard Wolff of the New School University and how this contraction is very different from the others. Uses charts and all to show u how and why the crisis deepens and why it'll last longer that others. Very much worth watching and informative i highly suggest it...here the link

[PanzerDivisionBOM]

@sosofresh360

I've now seen about half of that video, and I feel I dare venture a few initial remarks.

First, he has some good points about the current crisis, with which the Austrians mostly agree. Shuffling good money into bad companies doesn't make those companies less bad. Bush's and Obama's policies have amounted to nothing more than such shuffling, and contribute only to prolonging and worsening the problem.

Unfortunately, Wolff's analysis is stunted by incorrect -

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[PanzerDivisionBOM]

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- economic theory. He opposes foreign trade qua foreign trade as the pre-Classical mercantilists, and he seems to think that employment is an end in itself. Even Classical economic theory is sufficient to show the absurdity in this.

His characterization of the Great Depression is inaccurate. I leave to the eminent Austrian scholars to explain the particulars.

It also seems highly suspect to me that anyone can attempt to explain the causes of the current crisis without -

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[PanzerDivisionBOM]

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- mention of Basel II. The shadow banking system which developed under those regulations has only one counterpart in history that I know of - Blat, the sanctioned Soviet system of organized black markets.

Finally, I might remark that Austrian Libertarians share Wolff's dissatisfaction with the current state of affairs. When Wolff talks of Capitalism, he means a Corporatist or "mixed" economy, different than the free market which Austrolibertarians advocate.

[sosofresh360]

@PanzerDivisionBOM, ok sure he may not have covered all the mechanics, but neither have Austrians, or at least the limited articles I have read in Austrian Theory, ever mentioned credit agencies as contributing a significant factor to the crisis. Credit agencies were the ones who rated those junk securities as AAA through a method called "structuring", but all it really is a bribe from multinational to rating agent.

[sosofresh360]

@PanzerDivisionBOM Or also Financial engineering as well, it's worth while to look at Joseph Schumpetters concept of "Creative Destruction", it perfectly resonates with those highly risky but yet highly creative exotic instruments that were created in the laboratories of Wall Street. I've never come across an Austrian that has covered either of these, as of my limited reading of course, not much so im not challenging u, perhaps u could guide me to an Austrian who covers these concepts. Thanks.

[PanzerDivisionBOM]

@sosofresh360

I was thinking of the work of my fellow countryman, Johan Norberg, in his book on the global financial crisis. He covered a variety of possible causes, including the recent changes in the regulatory structure and the risk assessment built on mathematical models with no common sense.

The Mises Wiki article does not mention Basel II by name, but does talk about the exotic assets and the government intervention in the subprime mortgage sector among others.

[sosofresh360]

@PanzerDivisionBOM Or also Financial engineering as well, it's worth while to look at Joseph Schumpeter concept of "Creative Destruction", it perfectly resonates with those highly risky but yet highly creative exotic instruments that were created in the laboratories of Wall Street. I've never come across an Austrian that has covered either of these, as of my limited reading of course, not much so im not challenging u, perhaps u could guide me to an Austrian who covers these concepts. Thanks.

[MartyrofCake]

What if the economy is in a recession? Would free market fix itself? Do Austrians think fiscal/monetary policies are useless? Isn't this a very radical idea?

[PanzerDivisionBOM]

@MartyrofCake

The recession is in itself a method for expunging the unsustainable investments which were made during a boom phase. A large number of investments are revealed all at once to have been unprofitable, and activity slows down temporarily as these resources are redirected towards sustainable lines of production.

Not only does the recession resolve itself, but it's generally caused by disequilibrating government activity, like easy credit policies or inflation.

[sosofresh360]

Check out how this Great Recession is different from those experienced in the past, a lecture given by Dr.Wolff of the New School University. Check it out

[100percenteri]

The guy asking a question in the end, is waaaaaaaay off.

If lower interest rates helps why not NO INTEREST RATES. And thats a simplest answer to any inflastionista.

[seven8000]

I've seen all the Videos (Zeitgeist, Money as debt, Moneymasters,) etc. Still I have three (3) questions: (1) can the FRB buy directly treasury bonds from the government ? (2) does the FRB give the treasury any money gained from the interest of treasury bond or does it give it to its stockholders and (3) is it true that if all debt is payed back money would really disappear ?

[Nielsio]

@seven8000 I recommend asking these questions on the forum of the Mises Institute (mises DOT org).

[AussieAustrianBlog]

@seven8000 Just a friendly word of caution re the Zeitgeist films (more so parts 2 &3), they advocate some form of socialism...a system incompatible with creating wealth and prosperity.There's alot of propoganda out there.

[sony8877]

hans herman hoppe - history has him heroic

[charronfamilyconnect]

here is an extreme question as I am not sold yet on 100% gold standard: What if the majority of the worlds gold is held by one person and all the gold of the world has been mined by the same person. What incentive do they have to lend out gold when they potentially risk losing it to defaulters? Can I get an intelligent practical(not theoretical)answer to this question? Thanks!

[RJMooreII]

@charronfamilyconnect

If one person in the world owned all the gold and wouldn't lend it out, then we'd start using something else as money; since gold would obviously be useless for indirect exchange due to the fact that only one person has any..

Also, that's such a bizarre fantasy world I can't believe you thought of that as a serious concern.

[gergenheimer]

@charronfamilyconnect It's important to understand is that not everyone means the same thing when they talk about a gold standard. Some people think that a gold standard should be mandated and controlled by government. While this might be more stable than paper money, it would still be subject to manipulation/distortion by government. It is likely that, if allowed, the market would once again choose a gold or silver backed money, but it could be abandoned it if it failed to meet their needs.

[caveltor]

Even under a fractional reserve system, the money supply is not limited by those reserves, unless the reserves are gold, or other finite commodity.

Depositing and withdrawing cash has no effect on the money supply or of a banks ability to make loans.

Banks are never constrained by reserves. Loans are made regardless of current reserves. Loans are made first, then reserves are found later, not the other way around.

And those reserves will always be provided by the central bank if required.

[zuiprax]

I don't consider fractional reserve banking to be fraud if the customers are aware of the operation and if the central bank isn't constantly bailing out the banks that go bankrupt.

Let's say I want to deposit my gold in a 90% reserve bank. I am aware that if more than 90% of the customers come at the same time, the last 10% to come will have to wait a few months until the loaned money comes back.

It's speculative. It's risky. But it does have some benefits. And it would be voluntary.

[zuiprax]

Personally, I would not choose to involve myself in this if I could go to a bank that offered me 100% reserves but no interest on my deposit.

If I was sure I wasn't going to need the money, I would rather loan it all out for full interest.

[Nielsio]

I think you're confusing fractional with ability to earn interest. All fractional can do is redistribute wealth. It has nothing to do with earning extra purchasing power. Earning an interest while losing purchasing power gets you nothing.

[zuiprax]

@Nielsio Fractional reserve lending only increases inflation to the extent that people are willing to take cheques from a fractional reserve bank at the same rate that they take money.

So it only redistributes wealth because the state forces people to hold their money in banks with fractional reserve standards.

[Nielsio]

This doesn't address my point. I'm talking about all fractional reserve schemes, including private.

[zuiprax]

@Nielsio If you're talking about private, voluntary fractional reserve system then any inflationary tendencies depends upon the willingness and the extent that people are willing to take a cheque from -or a bank deposit made to- a fractional reserve bank as if it was money. The actual gold can only exist at one place at the same time.

There is no transfer of wealth other than that agreed to by the individuals directly involved in this interaction.

[Nielsio]

I'm not disputing that you can voluntarily give up your wealth to others. If I give you a banana I no longer have a banana. Yes, that's voluntary but in the case of banking the point is to actually get more back than what you invest.

A fractional scheme is nothing but a redistribution, and totally separate from investing for interest. Investing for interest means you hand goods over to an entrepreneur. It makes no sense to give him anything but the goods that you invest (i.e. a fraction of it).

[patrikkorda]

I have to agree with Nielsio, "free" frb inevitably leads to government intervention with public support. This may be in terms of a lender of last resort (central bank) or for government to monopolize money itself. I suggest reading "Money, Bank Credit, and Economic Cycles" by Jesús Huerta de Soto, where he points out that frb violates property rights.

[patrikkorda]

@patrikkorda Hence, even if two or more parties voluntarily engage in frb, it is still a property violation of those who do not with to participate. Therefore, the only way free frb could ever function would be if an isolated bank with isolated atm's etc. would be in place (nearly impossible).

[zuiprax]

@patrikkorda How would that be impossible?

[truevoice08]

@patrikkorda I think Hayek advocated private paper money and not private frb

[gergenheimer]

@patrikkorda I would agree that fractional reserve banking, as it is practiced, is inherently fraudulent and a violation of property rights, so it seems bizarre to me that people who advocate for free banking would say that FRB would be allowed under a system of free banking. In a free society one of the few legitimate functions of government is the enforcement of contracts and the punishment of fraud. I see no problem with a "free" banking system where FRB is prohibited.

[roger767]

@gergenheimer FRB will stay in a free banking system, because the core is still paper money not backed by a commodity like gold or silver. Unless gold and silver is allowed as a currency that can compete with fiat money, you will see that eventually people and businesses will want no FRB because its easier to calculate future cost with a currency that isn't inflationary.

[gergenheimer]

@roger767 FRB was also practiced under the various gold and silver standards - the question is, will enough people become aware that FRB is inherently fraudulent and demand that it be stopped? FRB is a separate concern from unbacked vs. commodity-backed currency. To be sure, monetary mischief is much easier under a regime of fiat paper currency, but we have had commodity-backed money with FRB and it's possible you could have fiat paper currency where FRB is not allowed.