Rothbard on Recessions

I was reading through some of the Bernank's old papers, and my eyes started to bleed. Presumably those of you who frequent ZH are experiencing the same thing as the never ending recession has brought out more than its share of insane keynesian commentary.

Here is a bit of sanity for everyone on this Sunday afternoon - Rothbard on Recessions

Comments

[damage]

You take a different interpretation than 99% of those I know who quote Rothbard do then. I'm still waiting for you to quote him though, it's funny that you won't.

[NidStyles]

Because only a child with primitive understanding of something as complex as the economy would rely on quotes. To use a quote is to remove something from it's context where it has meaning, and it would lose part of it's definitions and have to be Interpreted. This is why Austrians do not use quotes often, and when they do it's more like a paragraph with and explanation on what it was referring to.

Quoting is for children with lack of understanding so they can sound more intelligent to each other without actually understanding the material at hand. If you do not know the material, then do not critique it until you learn it yourself. One would think that would be obvious by time you reach College age.

[CrownThomas]

Fractional reserve banking is part of the issue. As the fed buys securities by printing money out of thin air, some are purchased from the investing public, who turn around & deposit those funds back into the banks. The bank then reserves 10%, and plays with the rest. They really go hand in hand.

[damage]

You obviously didn't read my first link:

http://www.freebanking.org/2012/07/13/more-dumb-anti-fractional-reserve-...

You also didn't bother to watch the video where George Selgin explains how fractional reserve free banking supplied currency according to demand in Canada.

Canada had zero bank failures during 1930 when we had over one third of our banks fail. We both had fractional reserve, the difference was Canada had no central bank.

Since you obviously can't be arsed to click on a link I'll just quote it for you.

Actually I say it is wretched economics, involving the elementary error (one that would earn any student in my undergrad Monetary Economics class an F) of confusing what individual, competitive bankers can get away with with what ordinary central bankers get away with on a routine basis. An individual bank can't get away with lending more than its excess reserves; in the example, if our ultra-Rothbardian makes a fresh deposit of $50,000, and his bank seeks to maintain a 10% reserve, it can in fact only lend $45,000. That is, it is limited to lending rather less than the savings brought to it, which means there's no "thin air" lending. As for lending $450K, the possibility is "arguable" only in the sense that anyone who doesn't argue with it doesn't know how banks work. For their sake: when banks make loans, the borrowers tend to spend the proceeds. In a competitive banking system that means writing checks that are likely to end up with other banks, which then return them to the lending bank for settlement in reserve money. All this tends to happen within days. So our banker in this case would soon be confronted with a $450K clearing debit, which he'd have to cover somehow. He can't cover it with a mere $50K of new deposits. So unless he was sitting on another $400K of excess reserves beforehand (which possibility of course begs the question, why hadn't the greedy shyster lent those already?), his bank will go bye-bye, or at least would do so in a free banking system in which there was no alternative of a central bank rescue.

Though Rothbard himself never dove to quite the depths of silliness involved in this example, the example is nonetheless representative of poor grasp of basic theory typical among those of Rothbard's devoted followers who swallow his facile equating of fractional reserve banking with fraud.

Sorry if I'm coming across as a dick, but I used to be a big Rothbard guy until I actually learned how banking free of central bank monopoly worked. Now I feel profoundly stupid for pushing Rothbard retardation. So I rather dislike Rothbard for tricking me into beliving some crap he didn't bother to think through himself.

[Libertarian777]

damage, I can't comment on Canada's pre-central bank experience, but in response to your question that no one seems to be directly answering.

You are correct in that no INDIVIDUAL bank can lend more than its excess reserves (i.e. 1-reserve ratio), however, we are looking at fractional reserve banking as a SYSTEM. You asked, what happens when a bank loans 45,000 of the 50,000 out. And that 45,000 gets spent. From a balance sheet perspective though, the depositor (joe depositor) still sees an asset of 50,000, and the bank has both an asset of 45,000 (loan) and a liability of 50,000 (and 5,000 'reserves').

Now what happens when that 45,000 gets spent? Unless if it is drawn in CASH and spent directly into the economy, it will typically be paid for by cheque / credit card. E.g. bank loans a construction company 45,000. lets say he spends it all at Home Depot. Home Depot takes his cheque and deposits it at their bank (we'll leave out the complication of inventory etc and assume HD has this inventory on hand and already paid for, and does not immediately replenish its inventory). Now HD has a deposit of 45,000 at it's bank. HD's bank can now make a loan of 40,500.

Now to the 'clearing' element. HD's bank will ask our original depositor's bank for the money. If they settle in cash (which banks still do sometimes, normally on a net basis though, and usually through the central bank as a clearinghouse not directly with each other), they would send the 45,000 from joe depositor to HD's bank. So joe depositor's bank has only 5,000 in cash, 45,000 in loan assets (to construction co), 50,000 liability to joe depositor. HD's bank has cash asset of 45,000, and 45,000 liability to Home Depot (deposit). Follow this down the line (HD's bank loans 40,500 to xyz party etc etc). So Joe depositor's bank is not on the hook for the entire 450,000 credit mulitplier, but then entire SYSTEM has 450,000 of credit created off of 50,000 originally deposited.

So now the question is, what if joe depositor's bank has no other clients, and Joe depositor walks in on Monday and asks for 10,000 in cash. His bank will be unable to deliver (it can give him 5,000). It can call on the construction company loan to pay in, but if that company's bankrupt now what? Home Depot still has its 45,000 deposited at it's bank, but joe depositor's bank too will be bankrupt (insolvent) and he will have a 90% haircut.

The federal reserve however will call this a 'liquidity' issue (not a 'solvency' issue) and proceed to monetize the FDIC (FDIC has $25bn to cover $10trn. so it will issue some sort of bond that the fed will monetize).

Rothbard just skipped all this intervening steps and did a worse case scenario. As I mentioned, if the loan was withdrawn in cash it would collapse the multiplier.

For what it's worth i'm not a 'Rothbardian', I feel often his 'anarcho-capitalism' while it has sound points is a bit too far extreme for me.

At least you still understand that 'greenbackers' got it wrong. I hate that they portend to replace central banking with... central banking.

[damage]

That "system" you speak of only exists because of the central bank. There are only individual banks in a free banking system with competing banks and currencies. You aren't making any sense...

I'll quote this part one more time even though I've already quoted it twice:

An individual bank can't get away with lending more than its excess reserves;

...  <snip> ...

In a competitive banking system that means writing checks that are likely to end up with other banks, which then return them to the lending bank for settlement in reserve money. All this tends to happen within days. So our banker in this case would soon be confronted with a $450K clearing debit, which he'd have to cover somehow. He can't cover it with a mere $50K of new deposits. So unless he was sitting on another $400K of excess reserves beforehand (which possibility of course begs the question, why hadn't the greedy shyster lent those already?), his bank will go bye-bye, or at least would do so in a free banking system in which there was no alternative of a central bank rescue.

So what was your argument again?

[Kayman]

damage

I don't know how you can conclude a lack of failure of Canadian banks means fractional reserve banking, per se, is a success in Canada.

Canadian banks have always had the Canadian government happy to fix their boo-boos whenever one or all of them starts to whine.

There have been plenty of bank failures in Canada, just not out in the open. Aside from CMHC buying up mortgages in 2008/2009 how about Dome Petroleum and Reichman ? Successful banking in Canada ? These dinosaurs are the classic TBTF's; right up there with RICO exempt boys in New York.

[damage]

Did you watch the video? You obviously did not.

I'm talking pre-central bank Canada. The stuff you mention is post central bank Canada. Pre-1935 bank failures in Canada were quite rare.

http://www.youtube.com/watch?v=JeIljifA8Ls&feature=player_detailpage#t=917s

Edit: Without fractional reserve the banks in Canada would have not been able to properly supply the demand for currency as they did during harvest season. See the graph displayed shortly after the time I linked to in the above video.

If you're going to argue with me, at least please take the time to understand what you're arguing against first.

[Sean7k]

http://www.artsci.wustl.edu/~swilliam/papers/qr89.pdf

There are many differences between banks in Canada and the US during you timeframe that were much more influencial that the type of fractional  reserve banking, including bank size, clearing arrangements, population size, risk and currency creation.

[damage]

You're completely missing the point

The point is the system was pretty much unregulated as far as reserve requirements went and it was able to supply currency as demand dictated. The system was also very stable and they had no central bank support.

How is what you're saying contradict my point in any way that Rothbard is totally wrong on this subject?

[Sean7k]

You failed to read the citation. The system was regulated- self regulated and banks acted as lenders of last resort. Bank size is important in regards to bank failures. You are holding up this system as a model and the model is not what you say it is. What part of contradiction do you not understand?

[damage]

Sorry, I misunderstood you before.

Yes, there were many other factors which made the Canadian system more stable. My point is though that fractional reserve banking by itself is not the evil or the problem with the current banking system, and that without lending out deposits the economy would be starved for credit.

[Midas]

Maybe he agreed with what you said, but gave you a down arrow for being cocky.  BTW, I gave you an up arrow, so as not to get called out.

[damage]

If pointing out that Rothbard had serious flaws in his logic makes me cocky, then I guess I'm cocky.

Btw, I didn't downvote your comment. That was someone else.