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One thing Hinsky never bothered to do, which is astonishing when one thinks about it, is a logical explanation that shows exactly how a free market capitalist system contains a seed to financial instability. He has access to historical data, but historical data is one characterized by the presence of central banks, which are not free market institutions.Most economists agree that central banks are a major source, if not the source, for monetary instability. After all, they are ultimately charge of money!
Both Minsky and Fischer gave a pretty good explanation of how the role of private leverage results in endemic financial instability in a credit-driven capitalist economy.
Tom Hickey:Both Minsky and Fischer gave a pretty good explanation of how the role of private leverage results in endemic financial instability in a credit-driven capitalist economy.You mean credit EXPANSION facilitated by central banks driven capitalist economy.They weren't talking about capitalist economies per se.
Modern economies run on credit. As a result the highest priority of governments other than providing for national security is protecting their credit systems. That is not going to change anytime soon without severely limiting the financial sector and governments regard their financial sector as equal to the military in projecting power.
Tom Hickey:Modern economies run on credit.Free market capitalist societies do not run on credit EXPANSION, i.e. credit not backed by prior voluntary savings.Credit backed by prior saving is healthy. Credit unbacked by prior saving is not.
The problem is that even if banking were reformed a great deal of credit creation now is accomplished through shadow banking. The auto industry long ago figured that it didn't need to give the rent on auto loans to banks but could finance its products on its own.As rent-seeking increases, banks are being cut out as the intermediary.
Major_Freedom, You don't know what credit is. Credit is not passing assets along, it is creation of new IOUs, no prior savings are involved.
Tom Hickey:The problem is that even if banking were reformed a great deal of credit creation now is accomplished through shadow banking.Well, with a central bank constantly pre-bailing banks out via increasing their reserves, credit expansion can be created by bank more or less continuously.PeterP:You don't know what credit is. Credit is not passing assets along, it is creation of new IOUs, no prior savings are involved.PeterP, you completely misunderstood what I said. I didn't claim credit is passing assets along. I specifically said credit can be created ex nihilo, unbacked by any prior saving. My point is that credit that is created unbacked by prior savings, versus credit backed by prior savings, have different effects on the economy.
Major Freedom, If something is backed by prior savings then it is not credit. Credit is creation of IOUs. This is how money comes about, we didn't inherit "prior savings" from Cro Magnon people, we started writing IOUs. If you pass prior savings it is NOT credit. So there is no point juxtaposing two types of credit, one backed by prior savings, because such thing doesn't exist.
"Free market capitalist societies do not run on credit EXPANSION, i.e. credit not backed by prior voluntary savings"Do you have any actual proof that this is true?
Anonymous:"Free market capitalist societies do not run on credit EXPANSION, i.e. credit not backed by prior voluntary savings"Do you have any actual proof that this is true?Well, it can't be empirical proof since we don't have a free market, but a market with governmental intervention. So the proof must be "OK, IF we had a free market, what would it look like?"The answer then requires an understanding of what a free market entails and what it does not entail.A free market means the individual has economic freedom. That of course requires the individual to be the final authority and judge over the disposition of his own property. That means a given property can only have, at most, one ownership party. In other words, the same property cannot be owned by more than one party.What credit expansion does is result in the same property having more than one ownership claim, economically speaking. By "economically speaking" I mean in terms of people's actions, that is, in terms of what they are actually doing.Credit expansion results in the same property (a sum of money) having more than one ownership claim over it, economically speaking. On paper, on contract, it can certainly say that the bank has ownership only, or that the client has ownership only, but in terms of what the people are actually doing, how they are behaving, there is a definite extra party claim to the same property, because both the demand deposit client as well as the bank and their other clients, are behaving exactly as if they each have a legitimate absolute ownership claim.A free market then cannot accommodate credit expansion, but it definitely can accommodate credit backed by prior saving. It can accommodate credit backed by prior saving because in this process of saving, accumulating cash, then transferring ownership to the bank, there is always just one ownership party, economically speaking, to the same property.
Major Freedom, You are confusing philosophy and economics. When you go to a bank and both you and the bank create IOUs out of thin air (this is how money is made in the loan-making process), there is no several parties owning the money. You have an asset (the money: bank's IOUs, which is the deposit), you also have a liability (you signed the loan - a pledge to repay). The banks likewise has an asset (loan) and a liability (deposit). In no case several parties own any asset here. The bank is the sole owner of the loan, you are the sole owner of the deposit. The important fact is that NEW MONEY was created here, not only passed along. Your explanation is very confused here.If you want to think about passing around assets, then ask yourself: where did this first money come from? Someone had to create it, it is someone's liability. (because credit is the oldest form of money, far far older than metallic money, that is a historical fact http://www.nakedcapitalism.com/2011/08/what-is-debt-%E2%80%93-an-interview-with-economic-anthropologist-david-graeber.html)
Hypothesis TestingDefine Hypothesis, what is Hypothesis? Define Hypothesis Testing, null Hypothesis,http://www.infoaw.com/article.php?articleId=952
"That means a given property can only have, at most, one ownership party. In other words, the same property cannot be owned by more than one party"In which universe would that be then? Have you never heard of multiple ownership, or public property? Why the extreme private individualist fundamentalism?Anyway, you appear to be talking about full-reserve banking. You are aware, aren't you, that full-reserve banking has to be imposed for it to hold? Free markets do not spontaneously create full-reserve banking models.
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