Friday, May 2, 2014

The pro free market IEA opposes the free market.

Philip Booth of the Institute of Economic Affairs tries to oppose full reserve banking in this recent Financial Times article. That is, he argues the case for fractional reserve banking, which of course in NORMAL TIMES gets a variety of subsidies funded by taxpayers – never mind the trillions made available to banks during the crisis.
It’s hilarious: the IEA which claims to be pro-free market arguing for the permanent subsidy of a significant chunk of the economy. Anyway, let’s run thru Booth’s arguments.
His first eye catching point is that “the monetary system is fiendishly complicated”. Agreed. You need to spend MONTHS reading up banks and money before you have any chance of making a constructive contribution to this debate.
In his 3rdand 4th paragraph, Booth claims that under full reserve, depositors “would pay charges and would receive no interest on their deposits”. Well given that I personally get about £5 a year interest and pay £13 a month charges in my High Street current or checking bank account, I regard Booth’s claim as a joke, as will others.
However, Booth does have a point: that is, the NET COSTS for depositors under full reserve of running a current / checking / safe account would rise. However, there is a REASON for that increased cost to consumers of the product in question: the product is no longer being subsidised!!! (Any readers not clear on why that’s the case, see my 300 word summary of full reserve here.)
If baked beans had been subsidised for the last few decades and for no good reason, would the IEA object to the removal of the baked beans subsidy?
Next, Boot claims that full reserve is “no recipe for monetary stability” because under full reserve the state rather than private banks create money, and there are numerous examples in history of the state behaving in an irresponsible manner when it comes to money creation (Robert Mugabe being an obvious example, although Booth does not cite Mugabe).
Well there are two big flaws in Booth’s argument there. First, the recent crises was sparked off by irresponsible PRIVATE BANK lending / money creation, not by irresponsible behaviour by central banks or states.
Second, if a there was some country where full reserve had been implemented and a Mugabe came to power, he would’nt give a toss for any of the legal niceties that stopped him printing excessive quantities of money. Indeed, in Argentina the head of the central bank is told from time to time and no uncertain terms what politicians want the central bank to do.
In short, if a seriously irresponsible government comes to power, the country is stymied REGARDLESS OF WHETHER there’s a full or fractional reserve system in place. So the full versus fractional argument is irrelevant there.
That leaves the question as to what to do given a reasonably responsible government and central bank. Now under those conditions, the IEA itself (along with about 90% of economists) advocates having government and central bank do some fine tuning: e.g. implementing stimulus when a recession hits. But that idea is an admission that it’s the free market (which includes fractional reserve banks) does not give us anything near perfect stability!!!
In short, Philip Booth and the IEA are trying to have it both ways. They claim it’s desirable for the central bank and/or government to attempt to iron out the instabilities caused by the fractional reserve banking system, or more generally, by the free market. At the same time, they claim it’s the central bank and/or government which is primarily responsible for those instabilities, rather than fractional reserve banks / the free market.
As for the rest of Philip Booth’s article, I have read it, but I can’t be bothered setting out the flaws here. Hopefully I’ve established that gets so much wrong in the first half that he is not worth listening to.

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