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America’s Great Depression Quotes of the Week: Bank Failures and Real Monetary Reform

March 28, 2013 in Economics

By John P. Cochran

The Road Not Taken in 1933 and its Modern Consequences

           The crisis in Cyprus is awakening some to the true nature of fractional reserve banking as evidenced by  headlines such as this (from the Drudge Report March 28, 2013) ‘THEY HAVE STOLEN OUR MONEY’… . Compared to responses to previous crises and applications of too big to fail, at least this response has moved away from tax payer financed bailouts of bank creditors. See for example: 1. In today’s Wall Street Journal Luskin and Roche Kelly, “Regime Change Comes to Euro Policy who argue, “The banking crisis in Cyprus prompted an overdue financial reckoning that, with luck, will spell the end of ‘too big to fail.’; and 2. From yesterday’s WSJ “Shocked About Cyprus”, with its subtitle, “How dare a European bank rescue not hit taxpayers.”

            This should be a great time to re-awaken the public again to the true risks of money substitutes and fiduciary media and begin a focus of meaningful banking reform as a beginning of true recovery and sustainable prosperity.

            Rothbard (AGD, 21) provides an strong argument for the bebefical aspects of bank failures:

Banks should no more be exempt from paying their obligations than is any other business. Any interference with their comeuppance via bank runs will establish banks as a specially privileged group, not obligated to pay their debts, and will lead to later inflations, credit expansions, and depressions. And if, as we contend, banks are inherently bankrupt and “runs” simply reveal that bankruptcy, it is beneficial for the economy for the banking system to be reformed, once and for all, by a thorough purge of the fractional-reserve banking system. Such a purge would bring home forcefully to the public the dangers of fractional-reserve banking, and, more than any academic theorizing, insure against such banking evils in the future.

And later in the same work, Rothbard commenting on the bank panic-bank holidays of late 1932 and early 1933 (AGD 329) provides a template for handling a bank failure in line with protecting property rights and the rule of law in a way that could ultimately end the boom-bust cycle:

The laissez-faire method would have permitted the banks of the nation to close—as they probably would have done without governmental intervention. The bankrupt banks could then have been transferred to the ownership of their depositors, who would have taken charge of the invested, frozen …read more

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DPRK Is the World's Responsibility, Not Just China's

March 28, 2013 in Economics

By Ted Galen Carpenter

Ted Galen Carpenter

The satellite launch and subsequent nuclear test by the Democratic People’s Republic of Korea have greatly increased the level of concern in the United States and its East Asian allies. A frequent response is to demand that China rein in its troublesome ally. There is a growing view in the West, now verging on consensus, that China holds the key to taming Pyongyang’s behavior and solving the crisis caused by the DPRK’s nuclear and missile programs. And there is mounting anger that the Chinese government seems unwilling to use its influence in a decisive manner.

Washington Post writer David Ignatius stated in a March 13 column that “through two administrations, the underlying US strategy toward North Korea has been to seek China’s help in containing this destabilizing force in northeast Asia”. But that policy “has largely failed, and the United States should be running out of patience. With depressing consistency, China has failed to step up to its responsibilities as a regional superpower”.

The view Ignatius expressed is neither rare nor recent. A December 2012 editorial in the conservative financial newspaper Investors Business Daily urged the Obama administration “to scrap the weasel words and start shaming China, whose actions are making the UN good for nothing in the face of a rapidly progressing nuclear threat”. More than a decade ago, New York Times columnist Thomas Friedman asserted that Beijing could end the North Korean nuclear crisis with a telephone call threatening to cut off aid, and he found it highly suspicious that Chinese officials were unwilling to make that call.

US policymakers and pundits should perhaps examine how a change in US strategy might produce better results.”

Such views overestimate the extent of Beijing’s influence, and often seem designed to make China a scapegoat for the international community’s inability to end Pyongyang’s nuclear aspirations. True, China is one of the DPRK’s few allies, and is by far that country’s largest and most important ally. Since the late 1940s, mutual strategic interests and ideological factors have cemented the alliance. Today, China also provides the DPRK with much of the food and energy supplies it requires.

Both the history of the alliance and the current economic relationship mean that Beijing has more influence than any other country in Pyongyang. But that does not translate into being able to dictate to the DPRK’s government. Kim Jong-un’s regime has its own …read more
Source: OP-EDS

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Europe between Planners and Searchers

March 28, 2013 in Economics

By Dalibor Rohac

Dalibor Rohac

In his 2006 book, The White Man’s Burden, William Easterly makes the distinction between “planners” and “searchers” in economic development. Planners like to believe they already have the answers to big questions of economic development, which they often see as simple engineering problems, waiting to be fixed by enlightened political elites.

In contrast, searchers display more humility both in the choice of questions they attempt to address and the answers they provide. Searchers try to address local, context-specific problems, instead of coming up with a “Grand Theory of Development,” and are willing to accept that answers might arise from the bottom up, through experimentation, and trial and error.

Although Easterly’s interest is in economic development, the distinction between planners and searchers is at the heart of many public policy disagreements. And in spite of appearances, the planners versus searchers dichotomy is not an ideological distinction. Some free-marketeers are keen on particular one-size-fits-all solutions (think about proponents of the gold standard), and there may well be people on the political left who understand the idea of context-specificity and local knowledge.

In fact, there is a place for both. Hayek once famously wrote, “this is not a dispute about whether planning is to be done or not,” but rather a dispute about whether it “is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals.” Individuals, firms, and governments do—and should—plan. A problem arises, however, when the limits of planning are not recognized and when it is expected that the planner always has a correct answer to any policy question.

We’ve yet to see the final bill for the ideological blindness of European planners.”

Hayek devoted his life to explaining the pitfalls of one instance of such hubris—the command economies of the Soviet Union and Eastern Europe. While in no way commensurable with the atrocities of communism, the ideological commitment of European political elites to the European integration project may well enter history books as yet another illustration of such bloated self-confidence.

Europe has a long-standing “planning” tradition, which the European integration process has mirrored. This intellectual undercurrent encompasses the belief that governments should play an important role in the economy, but more importantly the belief that European countries need to move towards a political union. A corollary is the notion—implicit in European policy debates—that Europe’s problems require a common European response.

Though initially prompted by an ambition to enlarge …read more
Source: OP-EDS