Cafe Hayek
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On my exercise bike at the gym the other day, I caught a snippet of the Stuart Varney Show. Three guests were discussing the European crisis. John Stossel argued for letting market forces work–if I remember correctly, he wanted those banks that had lent money to Greece and Italy and Spain to bear costs, possibly severe costs like losing their money. One of the guests (I don’t know who it was) strongly disagreed. His argument was that Stossel’s solution would lead to the apocalypse. That was his argument. We risked the end of civilization–banks could go broke leading to a depression and then we’d all be worse off. Varney agreed. Stossel’s idea of market discipline was simply too dangerous.
Stossel gave a good answer. He said but what if we get the apocalypse anyway? Maybe all we’re doing is kicking the can down the road and making the reckoning even worse than it otherwise would be. His answer is made more powerful by recent history. In 2008, we rescued the creditors relentlessly that helped pave the way for this crisis. What will the next one look like?
I have a different problem with the apocalypse argument. How do you know if it’s true? Where’s the evidence that letting banks lose some, or most or even all of the money they unwisely lent or invested in bonds is going to lead to a disaster? Where are the data that make this claim credible other than a bald assertion?
But I have an even bigger problem with the apocalypse argument. If the threat of banks taking a haircut risks the apocalypse then we may as well admit the game is over. Just give the banks our wallets and checkbooks and go home. It’s the end of capitalism and the end of democracy. I’d prefer an apocalypse.
{ 58 comments… read them below or add one }
Me too.
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The problem with Stossel’s solution is it is a solution. Never waste a crisis.
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I feel the same way about all the money we waste on Israel.
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Interesting you pick out Israel. Scratch a leftist, you usually find an antisemite.
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And, you always find an idiot.
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I have little doubt that letting those banks all fail at once would lead to a steep recession. It would likely lead to a collapse in the money supply similar to the Great Depression (because of collapsing credit). However, I think you just trade off some depth for some breadth. In the US, we have many zombie banks that are only technically solvent because the authorities relaxed the mark to market rules on their assets. This is why many of them trade below their stated asset values. I think the US recession would’ve been even steeper had we let them fail, but instead we have this prolonged malaise. At least if you let market forces work and let the banks fail, rebuilding* can start sooner and we can get on with our lives.
* by rebuilding, I mean something along the lines of Kling’s PSST story: establishing new sustainable patterns of trade.
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I agree with this:
“I think you just trade off some depth for some breadth. ”
It has been 3 years since the financial crisis and unemployment is still 9%. The recovery is very weak. If you let the banks fail and even if we had a very sharp deflation especially in housing we might be well into a very strong recovery by now. A sharp enough deflation might unstick wages.
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Ironically, we have had sharp deflation in housing with more to come.
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Right! And strangely enough, Russ didn’t know the difference between currency and credit in his recent podcast with Tyler Cowen.
He wanted the banks to fail, ex-ante, then have the Fed (or whatever central bank) come in, ex-post, and start doling out currency as that would somehow make up for broken financial markets.
–Pingry
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I’m a libertarian and I say, screw the banks. They got themselves into this mess by overleveraging and making bad gambles, then using the government–i.e., taxpayers–to backstop their losses so they wouldn’t lose any profit. And right now, at least in the states, they’re so full of cash they don’t have anything to do with it.
Screw the whole FIRE industry. At this point, it’s nothing more than a carefully crafted charade designed to make our money worthless and establish an elite cadre to run our lives. I hate to say it, but I think that, on this point, those radical crazy leftists actually had something worth saying.
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Yes, but what the left has to say is that the wrong people are bobbing us, making money worthless and establishing an elite to run our lives and there’s not enough of any of it. I don’t find any comfort in that.
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I was referring mostly to those dystopian cyberpunk novels where the corporations run everything. A lot on the left really think that our modern world is a corporatocracy…and I’m not terribly inclined to disprove them, at this point.
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Totally agree. But we have to be willing to let some wealthy depositors, and other wealthy creditors of banks also take a loss. That, is what the politicians are referring to as the apocolypse.
The number of banks that will not pay out the middle class depositors even in the worst case scenarios is miniscule as all the other creditors will get stiffed first…
So, this is about protecting the rich and powerful from the consequences of bank failure and of course protecting the bankers themselves.
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Let the wealthy take the loss. It was their gamble.
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Yep, agreed. bring it on.
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Count me in for the apocalypse party. What can I bring? Are kids welcome to come?
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Who is in charge of the punchbowl? Bernanke or Greenspan?
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