murrayrothbard.com

Read “Bank Crisis” online here.

Of course, the title of this article shows why Rothbard is still relevant. This is where the saying–those who do not learn from history are doomed to repeat it–is so important. Reading through this article, this paragraph almost jumps out:

What is the reason for this crisis? We all know that the real estate collapse is bringing down the value of bank assets. But there is no ‘run’ on real estate. Values simply fall, which is hardly the same thing as everyone failing and going insolvent. Even if bank loans are faulty and asset values come down, there is no need on that ground for all banks in a region to fail.

Put more pointedly, why does this domino process affect only banks, and not real estate, publishing, oil, or any other industry that may get into trouble? Why are what Samuelson and other economists call ‘good’ banks so all-fired vulnerable, and then in what sense are they really ‘good’?

Murray’s question must be answered: Why is it that only banks are affected so negatively, i.e., why do so many just fail, as opposed to just their asset values dropping and going through a business fluctuation? The answer: fractional-reserve banking. Fractional-reserve banks, because they are inherently bankrupt, depend so much on the public’s confidence in them. 

Here is Murray on this issue:

That is why, unlike any other industry, the continued existence of the banking system rests so heavily on ‘public confidence,’ and why the Establishment feels it has to issue statements that it would have to admit privately were bald lies. It is also why economists and financial writers from all parts of the ideological spectrum rushed to say that the FDIC ‘had to’ bail out all the depositors of the Bank of New England, not just those who were ‘insured’ up to $100,000 per deposit account. The FDIC had to perform this bailout, everyone said, because ‘otherwise the financial system would collapse.’ That is, everyone would find out that the entire fractional-reserve system is held together by lies and smoke and mirrors, that is, by an Establishment con.

Rothbard has reminded libertarians that sometimes there are two common (and related) mistakes that libertarians make:

1. Anything that is private must be okay.
2. If we can privatize all public “goods” and “services,” that would be a good thing.

Rothbard points out why he was not a proponent of privatizing the banking industry–because even as a private institution they are fraudulent. Why else would the banking industry need insurance?

As we’ve heard from current Austro-libertarians about the current financial crisis: “It would be far better to suffer a one-shot deflationary contraction of the fraudulent fractional-reserve banking system, and go back to a sound system of 100% reserves.”

This entry was posted on Thursday, October 30th, 2008 at 10:10 am and is filed under banking. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.