Thursday, September 29, 2011
Rothbardian fail?
The blogger known as 'Lord Keynes' appears to have caught the Rothbardians in a logical contradiction. From the post "If Fractional Reserve Banking is Fraudulent, Why isn't the Insurance Industry Fraud": "First, virtually all business investment and insurance industries could be regarded as inherently instable, like FRB, because the future is uncertain. But the insurance industry – just like FRB – can be operated profitably over long periods and is stable. When some unforeseen event happens like a massive natural disaster, the insurance companies could be overwhelmed by claims and collapse, because they cannot pay. If all or a very large number of the policy-holders of an insurance company suddenly needed insurance payments over a brief period, the company might not be able to honour all its claims or find a credit line to allow it to do so. But that is not an even remotely serious argument against insurance, because all business activity involves risk and uncertainty, and both clients of a business and the business itself can never escape uncertainty and the possibility that the business’s contracts might not be honoured."
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The real difference is that while insurance companies and banks can become insolvent due to excessive claims, governments that are monopoly providers of non-convertible floating rate currencies can never become insolvent. In the final analysis, government can and do step in to make up the shortfall in extremis.
The sound money folks are concerned about inflation in such cases, but government can also withdraw net financial assets it injects later through taxation if inflation threatens. Thus, government is the ultimate "insurer" of financial stability, as is recognized by the central bank's lender of last resort function and the political demand on government to act in cases of disaster, since funds are always freely available to governments sovereign in their currency.
Arguments to the contrary are moral arguments without substance.
"If Fractional Reserve Banking is Fraudulent, Why isn't the Insurance Industry Fraud"
Maybe it is. Ever read Andrew Tobias's Invisible Bankers?
http://www.andrewtobias.com/invisible.html
It is sort of curious that its the only industry Congress has specifically exempted from federal antitrust laws.
Those who claim to have demolished the “fractional reserve is fraudulent” argument (and it’s easily demolished) have not achieved much. Reason is that the more clued up opponents of FR do not rely on the “fraud” argument.
Their objection to FR is that it promotes instability. When asset prices rise, that makes those assets better collateral, which encourages more borrowing, which raises asset prices still further. In the late 1920s it was mainly shares, and in the recent credit crunch it was mainly houses.
Plus it is not difficult to set up a full reserve system under which even if lots of depositors do try to withdraw their money at once, nothing much happens. Certainly banks don’t go bust. See:
http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf
As I mention on LK's site, the entire world revolves around potential frauds.
All transactions are potential frauds. That the potential frauds rarely turn into real ones is the magic of the system. Trust works.
Saving for a Christmas Hamper is no different to a savings account at a bank.
Some insurance arguably is fraudulent. Consider an insurance company selling hurricane insurance in Florida. It collects premiums for several years, booking a profit and paying a dividend to its owners. Then a "once in 100 years" hurricane hits and it goes bankrupt. Whether you call it fraud or not, it's not a happy situation.
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