Wednesday, February 27, 2013
It's so nice not to have to listen to Ron Paul questioning Bernanke
Politicians talking down from on high at witnesses is obnoxious enough - politicians thinking they know economics and talking down from on high at witnesses that actually do know economics are particularly obnoxious.
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How do you feel about smart-ass grad students?
ReplyDeleteI detest them.
DeleteBob you've given testimony before. Surely you can sympathize with my wincing over career politicians that try to lecture economists.
well, if knowing economics gets you this, then perhaps non-economists don't necessarily have to be silent and bow down before economists.
ReplyDelete(yes, Bernanke made these terrible terrible predictions (in part) in his capacity as a Fed chairman and so there may have been political reasons rather than economic-theoretical reasons for saying what he said)
Link doesn't work.
DeleteRight - presumably everyone is all on the same page that non-economists do not have to be silent nor do they have to bow down before economists.
I agree entirely with you on that and assumed it was understood by everyone involved.
Congressional testimony would be pretty useless if they had to be silent, after all.
DeleteAnyway - this is just amazing. How do you get libertarians to make snarky dissenting comments in a post complaining about condescending politicians?
DeleteMake sure you're talking about their politicians.
It's amazing to me that you guys seem to think you're any different from anyone else on this sort of thing.
to be sure, this is the link http://www.youtube.com/watch?v=9QpD64GUoXw
ReplyDeleteDaniel writes: "Right - presumably everyone is all on the same page that non-economists do not have to be silent nor do they have to bow down before economists.
ReplyDeleteI agree entirely with you on that and assumed it was understood by everyone involved."
Yep, yet your original post reflects a strong respect for Bernanke as an economist and a strong dislike of non-economists questioning his economic (and political) insights. So although I was of course exaggerating when I wrote 'be silent and bow down before' I am pointing out that your original post reflects an attitude like that (but milder) and that there are good reasons to not agree with such a deferential attitude (namely the fact that Bernanke has been so wrong, so bitterly, hopelessly, ridiculously wrong and that millions of people (non-economists) have suffered very hard times because of it (for example, because they believed him when he said that there was no housing bubble))
"Anyway - this is just amazing. How do you get libertarians to make snarky dissenting comments in a post complaining about condescending politicians?"
ReplyDelete1. You don't find this 'amazing' because it was the whole point of your posting that remark in the first place.
2. I think you're hinting at a contradiction or irony or *something* (qua the relation between the 2 assertions you make) that may not actually exist
3. it may also be the case that the snarkiness simply is justified in both cases (the politician being condescending, the libertarians commentator being snarky) and even for the same reason
Daniel wrote: "Make sure you're talking about their politicians."
I think that's neither a necessary nor a sufficient nor even (I think for me) probable condition
"It's amazing to me that you guys seem to think you're any different from anyone else on this sort of thing."
Not sure what you mean here, let alone how it follows from all of the above
Well I do respect Bernanke as an economist but that didn't really come up in the post.
DeleteThe post was about politicians talking down to witnesses and pontificating on things they don't know as much about as their witnesses (that's the whole damn point of calling witnesses).
re: "So although I was of course exaggerating when I wrote 'be silent and bow down before' I am pointing out that your original post reflects an attitude like that"
So complaining about politicians' behavior means that I am somehow suggesting that economists ought to behave that way? You're going to have to explain that one to me. Maybe this reflects some of your own views, but I pretty clearly wasn't saying anything resembling that. Your interpretation wasn't just wrong in degree - it was a flat out misinterpretation.
re: "1. You don't find this 'amazing' because it was the whole point of your posting that remark in the first place."
DeleteNo, the point was to complain about Ron Paul. I didn't make you or Bob respond the way you did. I mean, I guess you're right - it's not all that amazing. It wasn't exactly a surprise to me. But that wasn't the point of the post. Just once it would be nice for a libertarian to come out and say that Ron Paul is a real embarassment in these congressional testimonies or in his on air discussion with Krugman.
re: "3. it may also be the case that the snarkiness simply is justified in both cases (the politician being condescending, the libertarians commentator being snarky) and even for the same reason"
Nah. If you comments were justified I'd have agreed with them.
re: "I think that's neither a necessary nor a sufficient nor even (I think for me) probable condition"
Maybe not necessary or sufficient, but awfully reliable.
DK wrote: "So complaining about politicians' behavior means that I am somehow suggesting that economists ought to behave that way? You're going to have to explain that one to me."
ReplyDeleteI don't understand what you mean here. How do I claim/suggest that you suggest that economists need to behave in that way? I think you're misunderstanding what I wrote (or at the very least what I *meant*).
DK wrote: "Maybe this reflects some of your own views, but I pretty clearly wasn't saying anything resembling that. Your interpretation wasn't just wrong in degree - it was a flat out misinterpretation."
See above, I think this is based on a misunderstanding.
DK wrote: "re: "1. You don't find this 'amazing' because it was the whole point of your posting that remark in the first place."
ReplyDeleteNo, the point was to complain about Ron Paul. I didn't make you or Bob respond the way you did. I mean, I guess you're right - it's not all that amazing. It wasn't exactly a surprise to me. But that wasn't the point of the post."
I know you don;t appreciate it when I question (elements of) your character/morality (even though you have, at least at times, liked it when others did that re Bob Murphy), but I'm a bit skeptical that not part of the reason you posted your complaint about Ron Paul was to provoke reactions from libertarians. Obviously I can;t prove that and I may be wrong. You may sincerely feel/think that such a motivation played no role, but I would still insist you search your soul a little deeper just in case.
Anyway, none of this, if true, would make you a bad person or anything. It would just goes to show that snarkiness occurs on all sides on this discussion.
"Just once it would be nice for a libertarian to come out and say that Ron Paul is a real embarassment in these congressional testimonies or in his on air discussion with Krugman."
I havent listened to his performances in these hearings in enough detail but I assume that there will be quite a lot of things that he says that will be similar to or the same as what your regular reasonably-or-very-well-versed-in-Austrian-Economics-and-libertarianism commentator would say, and quite a few of those things are at least very questionable and/or simply wrong and/or way too simplistic and not acknowledging all sorts of other factors that good regular economists do take into account. To the extent that Ron Paul is guilty of that (and again, I think he is guilty of that at least to some extent and probably to a considerable extent) this does not reflect well on him. And it is also likely that a couple of such remarks are downright embarrassing.
What I would say against that, however, and what was the whole point of my initial comment, is that a lot of what such an eminent economist as Ben Bernanke has said in the past is also (at least as) questionable and/or not true and/or simplistic and/or otherwise ridiculous and embarrassing (albeit in different kinds of ways. (and I reckon that the same will hold for most of the other politicians involved in these hearings)
re: "I know you don;t appreciate it when I question (elements of) your character/morality (even though you have, at least at times, liked it when others did that re Bob Murphy)"
DeleteHmmm... I don't recall ever cheering an attack on Bob's character, although I think I know what incidents you are misreading me on.
re: "I'm a bit skeptical that not part of the reason you posted your complaint about Ron Paul was to provoke reactions from libertarians"
Well I had an expectation about how people would react but I don't post simply to get a reaction.
I find the idea that Bernanke's statements on the economy are at least as questionable as Ron Paul's pretty laughable. No politicians come to mind whose take on economic questions are less questionable than Bernanke's. That's why Bernanke was appointed to the position he holds and that's why they ask him questions about the economy. None of this is to say that Bernanke is perfect, of course.
DK wrote: "I find the idea that Bernanke's statements on the economy are at least as questionable as Ron Paul's pretty laughable."
Delete(to be sure, I did add "albeit in different kinds of ways" to my remark that you're responding to here)
yep, I guess that's a main difference between you and me. I find many of Bernanke's statements in the video I linked to deeply embarrassing and questionable, and I also simply have difficulty comprehending how anybody - even people who think Bernanke is an otherwise good or great economist and/or Fed chairman - don't find themselves (at least in some way, to some extent, with whatever caveats they may want to use) thinking the same thing.
I mean, damn.
DK wrote: "re: "3. it may also be the case that the snarkiness simply is justified in both cases (the politician being condescending, the libertarians commentator being snarky) and even for the same reason"
ReplyDeleteNah. If you comments were justified I'd have agreed with them."
Ha! I know that you don't think they are justified. My point is that nonetheless they may be justified (and in my other responses I gave some reasons (e.g. bernanke's failed predictions) why they might be), and even for the same reasons. And if the latter is the case, then the fact that libertarians respond in a snarky way to a post complaining about the snarkiness/condescending nature of a libertarian politician's questioning of Bernanke is even less 'amazing'. if anything, it would be logical. And if their reasons are correct then also potentially justifiable.
DK wrote: "re: "I think that's neither a necessary nor a sufficient nor even (I think for me) probable condition"
I don;t think you have enough data on me at least to make that statement. For libertarians in general, you're probably right. But I don't think libertarians are on average more partisan, biased, selective etc. than other groups (including many of those who think they themselves are not biased or ideologically or otherwise prejudiced (you know who you are, PK &DK))
re: "Ha! I know that you don't think they are justified. My point is that nonetheless they may be justified"
DeleteNaaaah
:)
i hadn't looked at it that way yet! ;-)
DeleteThe purpose of a Congressional hearing is to give Congress the opportunity to be obnoxious.
ReplyDeleteAny trial lawyer would tell you that it would take 2 or 3 days of cross examination, by a single competent attorney with lots of expert witness support, to effectively exam Bernanke to gain any truthful admissions.
For example, above is a link to all the badly misinformed stuff Bermanke said in 2005 and 2006. If you want to skillfully cross x Bermanke there, you need to start by asking him how did he prepare and on what information did he rely, when he spoke. Why did he believe such was reliable? Lots of open questions until you have enough factual admissions to start asking closed questions, questions that need only a yes or no answer.
Any open question in a Congressional hearing is not going to get the truth.
A.H.
I recall hearing Ron Paul ask Ben Bernanke if in his discussions with other central bankers, the topic of bringing back the gold standard ever came up. I winced a lot. So did Bernanke.
ReplyDeleteah, now you know how I felt when I listened to all those Bernanke statements in the video I linked to.
Delete(I'm not saying you are wrong to wince at RP's words, only that there are (similar and/or different kinds of) grounds for wincing on both (and more) sides of this and other issues.)
as well as when listening to Bernanke's 2012 lecture series on the Fed and the crisis. http://www.freebanking.org/2012/03/21/anti-bernanke/
Deletetruly, I'd be very interested to hear your and Daniel's thoughts when reading Selgin's comments on Bernanke's lecture series. I mean, it seems to me that Selgin just makes a devastating case against Bernanke and hence that Bernanke's abilities and/or honesty as an economist (and/or Fed chairman) leave much to be desired, that Bernanke's speech is basically an embarrassment.
DeleteBut I know way too little about the subject to be totally confident that I'm seeing this in more or less the right way. What I have as a basis for my position here are Selgin's article itself and my belief that Selgin is a sophisticated economic thinker and no stereotypical Austrian who will just reflexively spew Austrian cliches
I agree with much of what Selgin has to say on what Bernanke said. Selgin is a great economic historian and his The Theory of Free Banking has greatly influenced my views of monetary policy. (Though I'm still working through the book. For all his qualities, Selgin cannot be said to have a gripping writing style) But at the end of the day, it's important to recall that Selgin is in the minority. So while his substantive points may be correct, (And I must confess I do cringe when I hear Bagehot cited to justify central banks) I don't think they show Bernanke to be a liar or a fraud. What Selgin criticizes is frankly what I heard in my intro to macro course. If anything, as Daniel pointed out before, teaching involves lots of lying to students because the lies help the students get some understanding which you can then enhance in later courses by revealing some lies and replacing them with new more accurate lies and so on and so forth until the PhD where you can just tell the students: "Look, really, we don't know. Please go figure it out and let us know when you have."
DeleteThanks for your response. I would say there are lies and there are lies. Indeed, some 'lies' told in intro classes may facilitate understanding and can later be added to so as to create truer and more complex and nuanced picture. Other lies on the other hand exactly *prevent* understanding, for example by leading the student away from a certain perspective and toward another. An example is what Selgin writes here: "In describing the historical origins of central banking, for instance, Bernanke makes no mention at all of the fiscal purpose of all of the earliest central banks--that is, of the fact that they were set up, not to combat inflation or crises or cycles but to provide financial relief to their sponsoring governments in return for monopoly privileges. He is thus able to steer clear of the thorny challenge of explaining just how it was that institutions established for function X happened to prove ideally suited for functions Y and Z, even though the latter functions never even entered the minds of the institutions' sponsors or designers!"
ReplyDeleteAnother example is: "So like any central banker, and unlike better academic economists, Bernanke consistently portrays inflation, business cycles, financial crises, and asset price "bubbles" as things that happen because...well, the point is that there is generally no "because." These things just happen; central banks, on the other hand, exist to prevent them from happening, or to "mitigate" them once they happen, or perhaps (as in the case of "bubbles") to simply tolerate them, because they can't do any better than that."
And there are plenty more in Selgin's article. I think these are misleading and self-serving lies and/or intellectual embarrassments that hinder rather than enable understanding.
(incidentally, it would be interesting to see what percentage of lies (either useful, justified ones or misleading ones) paint the Fed in a more flattering light and which paint it in a less flattering light. I suspect it would be almost or exactly 100% of the lies paint the Fed in a more positive light, which if the lies were merely meant to help the student understand and had no ideological bias or purpose would be statistically exceedingly improbable. (though I grant that there may be some reasons other than bias and 'self-servingness' why the lies may be tilted to the Fed's perspective)
You write: "But at the end of the day, it's important to recall that Selgin is in the minority. So while his substantive points may be correct, (And I must confess I do cringe when I hear Bagehot cited to justify central banks) I don't think they show Bernanke to be a liar or a fraud. What Selgin criticizes is frankly what I heard in my intro to macro course."
But the fact that the lies are part of a majority view doesn't itself mean that they are justified and useful and merely serve to introduce the student to a subject after which more complexity can be added. it may very well be the case that the majority view consists of misleading and self-serving lies that hinder rather than enable understanding.
"it's important to recall that Selgin is in the minority."
DeleteHe may be in the minority which emphasizes these facts, but I don't see how his minority status makes it any less true that the post-Civil war US banking system prohibited interstate branching, restricted note issue to amounts backed by govt bonds, and taxed privately issued notes out of existence. Or that Canada had none of these restrictions and had zero bank failures in the early 1930s.
"truly, I'd be very interested to hear your and Daniel's thoughts when reading Selgin's comments on Bernanke's lecture series."
ReplyDeleteMe too. If Ron Paul's performances are bad, Bernanke's is even less excusable since he is an esteemed economic historian (though he hardly deserves to be known as such with his glaring omissions, obfuscations, and strawmen that Selgin calls him on).
"as Daniel pointed out before, teaching involves lots of lying to students"
Sorry, but I like Selgin's take on this better:
"I myself have been lecturing undergraduates for more than 25 years, and I have never found it necessary, much less thought it proper, to make “specious” arguments to them for the sake of making it through the syllabus. It surprises me to hear several people on this forum suggest that it is OK for Bernanke to have made false claims, even if he did so knowingly"-
http://marginalrevolution.com/marginalrevolution/2012/03/selgin-reviews-bernanke-on-the-gold-standard.html#comments
And Ron Paul can't be all bad--at least he invited Larry White to testify! (although unfortunately he invited Salerno too)
http://www.youtube.com/watch?v=jVm3Yzjq8zE (from 20:30)
Daniel wrote earlier that it is silly for Austrians to criticize the mainstream for supposedly having an unrealistic and too rosy view of government and not taking into account public choice elements, because the mainstream *is* aware of those elements and has incorporated them and takes them seriously. I responded (I think) that this may very well be the case but that I could also see the Austrians' point that the extent to which and way in which the mainstream has incorporates them is seriously lacking.
ReplyDeleteI think Selgin's criticism of Bernanke's lecture may be an excellent example of this. Bernanke's history of the Fed portrays it as a noble institution that merely tries to help the economy that otherwise would go from one crash to another. Very little to no attention is given in this history to the various interest groups that had a role in the creation of the Fed, their reasons for wanting an institution like that, let alone to the relation between the various motivations of the special interests and the facts of what the Fed actually does, and how this may contrast with the 'noble, public institution that is only here to help' perspective on the Fed.
Such a rosy picture may very well severely distort understanding of what the Fed is and what it does and what its relation is to economic crashes.
That, I think, is the point of many Austrians, and it seems to me to be a valid and important one (if true! which I can't be entirely confident of because I know too little about the topic)
I didn't see Bernanke's lectures or Selgin's response and I hate to disappoint but I won't be able to any time soon. On this: "Bernanke's history of the Fed portrays it as a noble institution that merely tries to help the economy that otherwise would go from one crash to another"
DeleteI think your use of the word "noble" valorizes it too much, but part of the reason he might have left off the fiscal stuff that you mentioned above (which would have been true of earlier central banks in the U.S.) is that the Fed was consciously created to guarantee an "elastic" currency. Our understanding of the conduct of monetary policy has changed in the last hundred years of course, but this has been the Fed's mission. Even in the case of the earlier banks which had more fiscal goals, the point of the fiscal function was to establish credit and guarantee long term growth. It was a different set of problems to be sure, but I don't think it's as salacious as you lay it out to be above.
Okay, well, when you get a chance some time I'd be interested to hear your reaction. I think the Selgin - Bernanke difference may be the best way in which I can illustrate several of the main points I've been making in response to several blog posts of yours.
DeleteFWIW, those main points that I've been trying to make are roughly:
1. that many of the problems you (mostly rightly) point out in Austrians also occur in the mainstream (albeit possibly at times in different ways or to a different extent), and that your bias influences you such that you can easily spot those problems in Austrians (which performs a very valuable service I would say) but mostly fail to recognize them in the mainstream
2. that several insights characteristic of the Austrians may have been recognized (or reached independently of the Austrians) and/or incorporated by the mainstream, but that the Austrians still have a valid and important contribution to make because the ways in which and extent to which these insights are used in the mainstream are (more or less severely) lacking.
---
and yes, of course 'noble' is exaggerated to some extent, but what I meant with that is that he in his story of the Fed he doesn't (at least not in any meaningful way) question the good intentions of the Fed while there are good reasons to analyze how the Fed operates more in terms of interactions between various interest groups operating in a certain kind of institutional, cultural and wider politico-economic environment, and while such an analysis would yield different kinds of insights into the Fed and its operations than the perspective of the Fed as a well-intentioned, useful (necessary even) albeit imperfect institution.
(btw, I found John Wood's 'A History of Macroeconomic Policy in the United States' an interesting read in terms of its analysis of how macroeconomic policy is made)
Selgin wrote: "And although Bernanke shows a chart depicting high U.S. bank failure rates in the years prior to the Fed's establishment, he cuts it off so that no one can observe how those failure rates increased after 1914. "
ReplyDeleteI mean, how would something like that that be a justifiable lie that enables rather than hinders understanding?
A remark like that (if what Selgin says is correct) to me is at least as embarrassing as what Ron Paul may say about the gold standard.
and Selgin gives a *lot* of devastating examples like that.
And I am very curious as to how Daniel regards Selgin's article and hence the nature of Bernanke's remarks.
I'm not clear on how showing evidence is a lie. Those bank failures and instability were the impetus for the Fed, were they not? Would you disagree? The big problem with bank failures after the creation of the Fed was the Great Depression. After the Great Depression Selgin's series trails off to nothing (I'm looking at the Cato version - I'm assuming nothing changed in the presentation between that and the J of Macro). I think it's a very reasonable judgement not to attribute the bank failures of the Great Depression to the institution of the Fed itself (perhaps to Fed policy decisions).
DeleteThe Canada counterfactual was always odd to me... seemed like apples and oranges. Branching certainly helped the absence of bank failures. I don't think any modern monetary economists have the old prejudice against branching. But the lack of bank failures seems to have more to do with the fact that branches rather than banks failed than anything to do with decisions about central banking vs. free banking. In other words the same event in the U.S. and Canada - the failure of a branch - would be tabulated differently (a "bank failure" in the U.S., and no failure in Canada). Right? Canada did pretty well through this recent crisis too, and it had a central bank. So is it really the central banking that's at issue here or is it something else that's different about Canada?
Speaking of Canada and its banking system in the 2007-2009 global financial crisis...
DeleteI attended the inaugural lecture of one of the economics department's newly-appointed endowed professorships - to be specific, it was the inaugural lecture of Professor Mark Setterfield, the first to hold the Maloney Family Distinguished Professorship of Economics. (He had already achieved the rank of a tenured full professor before he was appointed.)
http://www.trincoll.edu/NewsEvents/NewsArticles/pages/Setterfield-Maloney-Economics-Lecture.aspx
If my memory serves me correctly, Professor Setterfield stated that in the conclusion he arrived at in his research, it was firm conduct rather than the structure of an industry or firm size that was key to good economic performance. He was saying this with regard to the financial services industry, and he used the banking sector of Canada as an example of "firm conduct" in his conclusion.
"In other words the same event in the U.S. and Canada - the failure of a branch - would be tabulated differently (a "bank failure" in the U.S., and no failure in Canada). Right?"
DeleteThis doesn't seem to be the case. According to Charles Calomiris and Gary Gorton,
"Failure rates in Canada were much lower, but they do not accurately portray the situation since the number of banks in Canada was so small. However, calculation of failure rates based on the number of branches yields an even smaller failure rate for Canada. The failure rate in the United States for national
banks during the period 1870-1909 was 0.36, compared to a failure rate in Canada, based on branches, of less than 0.1"
"Comparing average losses to depositors over many years produces a similar picture. Williamson (1989) compares the average losses to depositors and finds that the annual average loss rate was 0.11 percent and 0.07 percent, respectively."
So it isn't a matter of branch failures in Canada being hidden by different tabulation methods.
http://www.nber.org/chapters/c11484.pdf (pages 116-17)
So is it really the central banking that's at issue here or is it something else that's different about Canada?
DeleteThe point of the historical comparison with Canada is relevant b/c it shows that a Free Banking system actually has worked to create a stable banking environment in the absence of a central bank. The US case is often invoked as evidence that a Free Banking system is unstable and leads to a confusing array of regional currencies and financial panics, thus a central bank is needed to fix the chaos of a Free Banking system (these panics, esp. 1907, were indeed the justification put forth in favor of the creation of the Fed). Yet, to quote Gorton again,
"During the period 1870 to 1913, Canada had a branch banking system with about forty chartered banks, each
extensively branched, while at the same time the United States had thousands of banks that could not branch across state lines. The U.S. experienced panics, while Canada did not. There were high failure rates in the U.S. and low failure rates in Canada. Thirteen Canadian banks failed from 1868 to 1889, while during the same period hundreds of bank failed in the U.S."
"Overall, the Canadian banking system survived the Great Depression with few effects, while in the U.S., which had enacted the Federal Reserve Act in 1914, the banking system collapsed."
http://www.nber.org/papers/w9102.pdf (pages 4-5)
But the lack of bank failures seems to have more to do with the fact that branches rather than banks failed than anything to do with decisions about central banking vs. free banking.
Yes! If indeed it was the lack of branch banking (and other bad regulations, such as required banking of currency issue by equivalent amounts of govt debt) that led to the persistent 19th century US panics, then the case for the founding of the Fed seems much weaker in retrospect, does it not?
"required banking" should be "required backing"
Deletere: "The point of the historical comparison with Canada is relevant b/c it shows that a Free Banking system actually has worked to create a stable banking environment in the absence of a central bank."
DeleteAlright but your estimates above of the U.S. before the Fed suggest there is something different about the U.S. and banking stability that has little to do with central banks - even before the Fed we had over three times as many bank failures.
And that lower rate for Canada doesn't demonstrate at all that it's wrong to say the "no bank failures" is misleading because it doesn't take branch failures into account. Unless there were zero branch failures it's still a misleading claim.
re: "So it isn't a matter of branch failures in Canada being hidden by different tabulation methods."
Of course it is. What you mean is that it isn't just a matter of branch failures.
Your second comment just confirms my point that it's not central banking that's the issue - it's branch banking.
The point of the Fed was to provide an elastic currency.
That's why Canada eventually got one too.
Sorry for taking a while to get back to you.
DeleteYou say the Fed was created to provide an elastic currency. However, that wasn't the only potential solution. Canada's Free Banking system had an elastic currency, while the US currency was inelastic due to restrictive govt regulation. So the inelasticity problem didn't require the creation of the Fed--it could have been solved instead by removing the regulations that (1) new banknote issuance had to be backed by govt bonds**; and (2) allowing interior banks to establish branches in New York to access the money market there instead of having to rely on NY "correspondent banks."
http://www.youtube.com/watch?v=JeIljifA8Ls
Please look at the graph (and brief explanation) that starts at 15:10. The US currency stock steadily declined or remained flat in the latter 19th century (due to the retirement of much of the nat'l debt), while Canada's money stock steadily rose and also adjusted seasonally to meet increased currency demands in the harvest season.
(**The most common cause of bank failures in the pre-Civil War era (3:00) was state regulations that banks had to purchase state bonds to back note issue (e.g., to issue $90 of notes, the bank would have to buy $100 worth of state bonds). This bad regulation was included in the Civil War National Bank Acts, which forced the new federally chartered banks to buy federal govt debt to back note issue.
The National Bank Acts also taxed privately issued currencies out of existence (8:55). This further increased the forced market for federal debt, but it also unnaturally tied the stock of US currency to the amount of federal debt (10:30). As Selgin says, if the govt retired all of its debt, national banks would have been able to issue no currency at all.)
So there wasn't a need to establish a central bank; instead, the restricitve regulations could have been lifted (allowing for a Free Banking system), as Selgin mentions at 25:30.
Here's a related (and short) paper by Selgin on these issues: http://www.cato.org/sites/cato.org/files/pubs/pdf/pa060.pdf
Delete"That's why Canada eventually got one too."
I haven't read this paper, but the conclusion of Bordo and Reddish is that the creation of the Bank of Canada in 1935 was due to political pressures rather than economic necessity. Now of course, they could be mistaken; but Bordo and Redish are obviously quite knowledgeable about banking history, so their opinion can't be dismissed lightly, imo.
Bordo & Redish abstract viewable here:
Deletehttp://www.jstor.org/discover/10.2307/2122238?uid=3738392&uid=2&uid=4&sid=21101928048857
So I'll need to read it, but I'm not sure I understand their abstract. Didn't the Fed get established for political reasons too?
DeleteAgree with you on the inelasticity imposed by banking regulation. I'm not sure exactly what that is supposed to prove. It doesn't change the fact that a central bank aids (and in this case was deliberately established to aid) the elasticity of the currency. I guess I just don't see deregulation and central banking as the opposites that you do.
Removal of certain regulations is not incompatible with central banking. For example, removing restrictions on branch banking is not incompatible with central banking.
DeleteHowever, certain regulations do make central banking fundamentally incompatible with Free Banking. One of the core aspects of Free Banking is currency competition among privately issued banknotes. According to the theory (and the historical record), such competition produces a money supply which is self-correcting (banks will not underissue currency b/c of the incentive to generate profits from "float"; overissue will also not be a problem b/c any bank that overissues will lose base money through adverse interbank clearings). Central banking generally prevents such competition b/c the central bank has a monopoly on currency issue.
I believe you said somewhere in another post that you generally agree with Austrian views that the free market does the best job at allocating resources and satisfying consumer needs (I can't find the exact post, so I may be mis-stating what you wrote).
So why can't the invisible hand work for money, credit, and banking? I'm not saying it does, but given the historical record of Canada & Scotland and the theoretical foundation laid by White/Selgin, why not at least consider free banking in the context of this larger discussion going on now about stabilizing the financial system and devising better monetary policy?
To you, it seems that the bad US banking regulations don't really have anything to do with the issue of central banking. What I'm saying is that the central banking solution didn't really make sense either, given the situation. The US had an inelastic currency (which led to panics) due to lack of branch banking and the bond-backing requirement. So the answer is a central bank?! Why not just remove the bad regulations first, and then re-evaluate after 10-15 years? (There actually was a proposal to do this, the "Baltimore Plan" of 1894, p. 88 here:
http://books.google.com/books?id=VaWqwcOX5X0C&pg=PA88&lpg=PA88&dq=free+banking+baltimore+plan+canada&source=bl&ots=yOioikSBlu&sig=EJ_7k5RKPW2pLqB5vBXWEOUZ3lw&hl=en&sa=X&ei=NK8-UefoIKiemQXX8oCYAw&redir_esc=y#v=onepage&q=free%20banking%20baltimore%20plan%20canada&f=false )
(Btw, a fascinating post on Canadian money from JP Koning here: http://jpkoning.blogspot.kr/2013/03/strange-moneyprivate-6-and-7-notes.html )
Whoever is the Congressperson that questions Chairman Bernanke, that person better be competent. However, as far as I know, no one in the current U.S. Congress has extensive and formal training in Economics beyond the undergraduate level.
ReplyDeleteThat stated, I believe that Dr. Michael Emmett Brady has been critical of the U.S. Federal Reserve System (though I believe he would disagree with someone like Ron Paul, who advocates the abolishment of the Fed). In these four reviews, Dr. Brady criticises Chairman Bernanke.
http://www.amazon.com/review/R28HW2WJACX6RZ
http://www.amazon.com/review/R245225BG3CSX3
http://www.amazon.com/review/RTVAFLROI44CP
http://www.amazon.com/review/R1PW1AGA4QFZAY