My Letter to National Review re: Two Excellent Book Reviews

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: Two Excellent Book Reviews
Date: Sun, 25 Jul 2010 08:15:10 -0400

Dear Sirs:
Congratulations on the two excellent book reviews in your August 2nd issue--James V. DeLong's review of The Next American Civil War by Lee Harris and Travis Kavulla's review of Prairie Republic by Jon K. Lauck. It isn't possible for most of us to read all the wonderful and important books that are written each year, so we must rely upon book reviews to distill the essence of these books, which your reviewers did so well. I was especially glad to see Mr. DeLong's defense of the Tea Party criticism of today's political class--Mr. Harris's "meritocrats". Most of the people in this class do not attain their power by merit but by rent seeking. They join the ruling class at low levels, adopt the arrogant outlook of the class and advance through the ranks through Soviet-style internal alliances. These people seldom are capable of earning a living in the private sector that comes close to their remuneration via government jobs and/or organizations that feed off of government grants. And herein lies the problem. Although the meritocrats may be a small percentage of our population, they buy the tacit support of the vast majority of Americans through their welfare and subsidy programs. For example, few Americans are willing to scrap Social Security despite the fact that it is nothing more than a government-mandated Ponzi scheme that will either fail or bankrupt the nation. Even our supposedly-independent farmers are little more than agents of the government, deriving much of their annual income through incomprehensible (to the rest of us) farm subsidy programs. The entire ethanol and wind power industries are completely dependent upon government subsidies. We are becoming a nation of pickpockets--all standing in a circle picking the pocket of the person in front of us...and who will be the first to cry "Stop"?

Patrick Barron

My Letter to National Review re: Discrimination

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: Re: Discrimination in Public Accommodations
Date: Thu, 22 Jul 2010 15:24:35 -0400

Dear Sirs:
In his letter published in the August 2nd, 2010 edition Mr. Ken Jansen states that there is a "public accommodations principle" that requires Somali taxi drivers to pick up passengers who they find to be objectionable and that "we rightfully forbid many forms of discrimination". In a rhetorical slight of hand Mr. Jansen states that these taxi drivers should "get out of the public accommodation business." But the taxi drivers are not in the public accommodation business; they are in the taxi business. They have invested significant time and money in their businesses and have every right to defend their lives and property from those whom they deem objectionable. As a more powerful example, Mr. Jansen cites laws against discrimination in hotel accommodations. What Mr. Jansen overlooks in both cases is the sanctity of property rights and that failing to offer a service or buy a service does not cause anyone harm. The fact that I buy my groceries from A instead of B does not mean that I have harmed B. Likewise, by refusing to sell a product that I own to A and not B, no matter how objectionable the reason, causes no harm to B. Real harm is physical harm; but there is no physical harm in refusing to act in a manner that "society" dictates. In a truly free society, a business owner who discriminates for reasons that society finds objectionable would find his business in decline. My wife still refuses to eat at Denny's due to media reports years ago, whether true or not, that some restaurants discriminated on the basis of race. Our modern theory of justice has been so perverted that property rights are deemed to disappear as soon as one offers a product or service for sale. This is not justice but tyranny.

Patrick Barron

REAL FINANCIAL REFORM

So Congress has finally passed its much-anticipated reform of the financial system. Like all modern pieces of legislation, it supposedly fixes a problem created by the free market but it actually is a problem that government itself caused. Its main tenets are pure demagoguery and would have the public believe that bankers are brainless. For instance, it proclaims that lenders must do sufficient due diligence to satisfy regulators that the borrower can pay back the loan. Wow! Now, who in the banking industry would ever have thought of that?

There is not sufficient space in an essay of this kind to explain all the easily identifiable adverse consequences let alone the likely unintended adverse consequences of this horrible legislation. Instead I will explain what real financial reform would look like. Now if you show this essay to most politicians or government bureaucrats, make sure they are sitting down, because my reform relies entirely upon the free market. Government’s role is restricted solely to the defense of property rights.

End Fractional Reserve Banking

Fractional reserve banking is the underlying problem. By allowing banks to hold fractional reserves, rather than requiring 100% reserves, more than one person has claim upon the same asset. Since the claims are identical--both owners hold dollars that must be honored “for all debts public and private”, according to our legal tender laws--eventually the market recognizes that there are not enough resources to complete the entrepreneurial projects that were started by the initial and sustained injection of new fiduciary media. This is the nickel explanation of the boom/bust business cycle. So, number one, the government must prohibit and prosecute the fraud of fractional reserve banking. This means that the only way the money supply can grow is by way of the entrepreneurial production of more standard money; i.e., gold or silver.

Deposit Banks and Loan Banks

A common confusion that emanates from our current fractional reserve banking system, especially with the Fed as lender of last resort and the FDIC as guarantor of bank deposits, is how banks would be able to loan money at all if required to maintain 100% reserves on one’s deposit. How can they lend out the money without committing fraud? Murray N. Rothbard offers the simplest explanation in The Mystery of Banking. Divide banking into deposit banks and loan banks. Only deposit banks must maintain 100% reserves.

Here’s how I explain it to my students at the University of Iowa. Suppose that over the summer each one of them earns money and places it in the deposit bank. Since the deposit bank must keep 100% reserves, there is no way that the bank can earn money to cover its operating expenses except by charging fees for its services. After a few weeks the student has built up a balance in his deposit account that exceeds his immediate spending needs. In other words, he has accumulated enough that he can SAVE in order to spend at some later time. Therefore, he writes a check against his deposit account and gives it to a loan banker. The deposit will carry a maturity date, exactly like today’s certificates of deposit. Next the loan banker will seek worthy borrowers for our student’s money. If the student wanted to give the banker his money for a short period of time, say three months, the banker would seek borrowers who wished to finance inventory accumulation or accounts receivable financing, for example, which liquidate fairly quickly. If the student felt that he could invest his savings for a much longer period of time in order to earn a higher rate of interest, he might buy a five-year certificate of deposit. Then the banker would find borrowing needs that correspond to this time frame, perhaps financing the construction of a factory. The interest rate is the mechanism that regulates the loan market. If depositors are short term oriented, businessmen cannot finance long term projects. If the depositors are more long term oriented, then these projects may become financially sound. In Austrian economics we call the depositor’s relative orientation to the shorter or longer term as his “time preference”.

The Impossibility of a Boom/Bust Business Cycle

Notice that no matter what the depositor’s time preference he gives up his ability to spend for some defined period of time. His standard money has been moved from his deposit bank to the loan bank for further transfer to a borrower. Eventually the borrower pays back the loan and the loan bank has funds to honor the depositor’s matured time deposit. At no time was more than one person claiming the right to spend the money; therefore, there is no way that two people can claim the same physical asset. No projects will be started for which there are inadequate resources for their completion. A boom/bust business cycle is impossible under such circumstances.

The Role of the Loan Banker’s Capital Account

Notice that the depositor understands perfectly that his savings is at risk. If he did not wish to risk his savings, he could hold standard money certificates (paper claims upon real money—gold or silver—held in the banker’s vault), a book entry on the deposit banker’s records—a checking account--, or the physical gold or silver itself. As long as the government prosecutes fractional reserve banking as fraud, there is no risk that the depositor will lose his money, because he holds an audited claim upon the physical money itself. But what about the saver who deposits his money with the loan banker? What guarantee does he have that he will get his money back, with interest, when the time deposit matures? This is where the banker’s capital account and, just as importantly, his reputation for probity enter the picture.

The higher the percentage of the loan banker’s capital account to his loans outstanding, the safer are his depositors’ funds. The safest loan bank would be one in which the banker’s capital account EXCEEDS his deposit obligations. Let us assume that Mr. Rockefeller capitalizes his new loan bank with $10 million and will accept savings deposits up to only $5 million. Let us assume that Mr. Rockefeller invests his $10 million in very safe short term Treasury bills. He accepts $5 million from savers and finds borrowers who will pay enough to cover Mr. Rockefeller’s interest expense to his depositors, his operating expenses, and a small provision for future loan losses. The excess of his interest revenue, obtained from his borrowers, over these three expense categories is his profit. One can see that, even if he lost all $5 million of his depositors’ money, his capital account will cover the loss by a factor of two! As time goes by and the market realizes that Mr. Rockefeller is a good banker, who suffers very few loan losses, they will be willing to accept that the capital account may be a smaller percentage of the loans outstanding. Mr. Rockefeller may accept (and the public will decide to deposit) MORE than his capital account can cover. This is NOT fractional reserve banking, since there still is only one claim upon each dollar. But let us say that Mr. Rockefeller now takes deposits up to $20 million. Now he can suffer a loss of half of his loans and still be able to meet his depositors’ claims out of his $10 million capital account.

One can see that the interest rate offered by Mr. Rockefeller and accepted by his depositors will be influenced by how safe is Mr. Rockefeller’s bank, as exemplified by his capital account and his history of sound lending. The market will have room for many lenders, each with varying percentages of capital to loans and different histories of banking success. Poorly capitalized loan banks with bad loan histories will fail to attract depositors and will be taken over by better bankers. Since there is nothing to trigger the destructive boom/bust business cycle, bad loans will be very few and loan banking will be safer than our current FDIC insured system, in which moral hazard has been institutionalized by bailouts of failed Go-Go, risky bankers.

This is not to say that a bank could not suffer loan losses in excess of its capital account, but there would be no systematic reason for widespread bank failures, as is the case now with inflationary fractional reserve banking. The unprofitable bank would attempt to liquidate before running its capital account dry; therefore, it probably would still meet its depositors’ matured time deposit claims. In other words, loan bankers might go out of business but most likely they would pay off their depositors out of what remained of their capital accounts before closing their doors. They would act out of simple self-interest to preserve as much of their capital as possible.

The only role for government in such a free market banking system is to ensure that deposit banks do not violate their requirement to keep 100% reserves. Government would have no role whatsoever in regulating or examining the loan banks. The army of regulators armed with thousands of pages of regulations would not be needed…the free market would regulate banking the same way it regulates the availability and price of any other product. The era of the boom/bust business cycle would be a thing of the past. The only barrier to this simple, common sense, free market system is the hubris of government that it can regulate banking better than the unhampered forces of the free market.

My Letter to National Review re: State Capitalism

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: State Capitalism
Date: Wed, 14 Jul 2010 11:10:40 -0400

Re: Perils of State Capitalism

Dear Sirs:
In Mr. Gordon G. Chang's excellent review of The End of the Free Market: Who Wins the War Between States and Corporations? by Ian Bremmer, Mr. Chang points out that state capitalism weakens markets.

"They (the despots and dictators) can, for instance, buy off elites by granting them monopolies and placate populations with the prosperity this system can generate. By bending markets, however, rulers ultimately make them less efficient. Over time, state-capitalist systems erode."

A better explanation is that by "bending markets" the authoritarian governments consumer capital or, at a minimum, prevent its accumulation even to the small extent needed to maintain the current capital base. For awhile an economy can display the appearance of prosperity as capital is spent on bailing out unprofitable businesses and sustaining those industries, like housing, that are already over-built. This is the destructive Keynesian prescription adopted by all the world's leading governments right now in their misguided attempt to "stimulate" the economy out of recession. But economies cannot be stimulated out of recession; they must liquidate the previous malinvestment and replenish the capital base upon which to build a new, true recovery. This requires savings--so spending must be reduced, not increased. Reduced spending will result in lower prices, the dreaded "deflation" that governments under the spell of Keynes vow to fight. But deflation is part of the cure--the inflationary bubble has burst and good riddance to it. The world's economies will not recover until governments cease their fruitless interventions.

Patrick Barron

My Letter to National Review re: The Real Cause of the Business Cycle

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: Roubini's Reputation and the Real Cause of the Business Cycle
Date: Fri, 9 Jul 2010 13:27:00 -0400

Re: The Real Cause of the Business Cycle

Dear Sirs:
In his review of "Crisis Economics" by Nouriel Roubini and Stephen Mihm, Mr. David M. Smick calls Mr. Roubini a "media superstar" for his 2006 claim that the U.S. was in a housing bubble. If one goes to Mises.com and searches on "housing bubble", one will find over 1,200 entries, many of which go back to 2003. Austrian economists have been right about this crisis from the beginning, because they understand the true nature of the business cycle, so ably explained by Professor Gary Wolfram elsewhere in the same NR issue. (See "Your Money Back") According to Mr. Smick's review, Mr. Roubini claims that "Crises--unsustainable booms...are hard-wired into the capitalist genome." Wrong. The boom/bust business cycle is caused by an extension of bank credit not backed by real savings. Banks are tempted to extend credit in an unsustainable manner due to their right to engage in fractional reserve banking. This is the primary source of the boom. In the nineteenth century two crucial court cases in England gave banks unprecedented legal protections. British courts ruled that bank demand deposits were loans and not bailments. In other words, the banker was not required to keep standard money in his vaults equal to the amount of money entrusted to him by his depositors. Unlike a grain elevator operator, for example, the banker could lend out his customers' demand deposits for his own benefit, meaning that there can be two or more claims upon the same money. Of course this is the very definition of fraud, but the British courts ruled otherwise, and the American courts followed British precedence. Although fractional reserve banking may be legal it is not immune to the law of economics, which punish bankers for making loans with demand deposits and not savings deposits. As Michael McKay explains in his wonderful little book, "Secrets About Money that Put You at Risk", it is as if the bank creates multiple owners of the same horse, who may have no conflict until they decide to have a horse race. The real problem is one of a violation of property rights, which is not just a legal problem but also an economic one. Expansion of the money supply not backed by a commodity creates claims upon existing property for which no one has given consideration. It is theft through the banking system, and eventually it becomes apparent that there are not enough resources to honor all the claims. This is the beginning of the bust phase, and attempts to keep the bubble inflated are futile and cause even more damage. Therefore, don't expect a recovery until the government stops manufacturing claims via its inflation machine par excellence; i. e., the Fed.

Patrick Barron

My Letter to National Review re: $130 trillion debt

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: $130 trilliion debt
Date: Thu, 8 Jul 2010 18:22:47 -0400

Re: The Other National Debt by Kevin D. Williamson

Dear Sirs:
Kudos to Kevin D. Williamson and NR for "telling it like it is", in the immortal words of Howard Cosell, about the REAL state of our nation's finances. It is clear that the national debt cannot be paid in anywhere near the purchasing power of today's dollar. To try to do so would require the imposition of such high taxes that the productive sector of the country would revolt. To so debase the dollar so as to pay the debt in nominal terms only would be to create hyperinflation. Mr. Williamson gives a hint to our salvation, though. The federal government has NO constitutional authority to run a pension system or a national healthcare system. Both are unjust, and, as is the case whenever an injustice is recognized, both should be terminated immediately. Either that or national economic chaos. I choose the former.

Patrick Barron

My Letter to National Review re: The Sources of the Crisis

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: The Sources of the Crisis
Date: Thu, 8 Jul 2010 08:30:39 -0400

Dear Sirs:
A grad school professor on mine many moons ago said that a good book review makes one believe that he does not need to read the book. That is my conclusion after reading John Steele Gordon's excellent review of Judge Richard A. Posner's new book on the current financial crisis, The Crisis of Capitalist Democracy. Although I will not read the book, Mr. Gordon's recap of Judge Posner's analysis and recommendations lead me to the conclusion that Judge Posner's prescription is just more of the same failed regulatory tinkering that has brought us to the brink of financial collapse. The very fact that Judge Posner has "high praise for John Maynard Keynes" is enough for me. Combine that with the judge's recommendation that the U.S. establish a "well-funded inquiry into the causes of the crisis...conducted by an elite presidential commission" and my gut feeling is confirmed. (Gee, I wonder who could possibly be persuaded to head such a "well-funded" commission...let's see...oh, how about Judge Posner!) This is ironic since the judge himself states in the first line of his book that the crisis was caused by the Fed. I'll save the overly burdened U.S. taxpayer some more boondoggle commission money and give my prescription in one word--FREEDOM. The U.S. needs economic freedom. This means ending the Fed. The only role for the government would be to prevent fraud, something that it now PROTECTS in its devil's bargain with the Fed by allowing it to print as much fiat paper money as it deems necessary...and, oh, how it deems it necessary! In a free economic market place no one would accept fiat paper money. The market would accept only commodity money or commodity money substitutes (certificates backed 100% by commodity money). The government's sole responsibility--charged to it by the Constitution, by the way--would be to prosecute as fraudulent any bank that issued certificates in excess of its commodity holdings. Furthermore, rather than separate commercial banking and investment banking--the Depression Era Glass-Steagall law so loved by Judge Posner--the government should insure the separation of deposit banking and loan banking. For a simple and yet powerful explanation of this sound banking practice, see Murray N. Rothbard's The Mystery of Banking. It's all there. We need look no further and require nothing more than to regain our freedom and charge our government with protecting our property.

Patrick Barron

My Letter to the NY Times re: Krugman's "Myths of Austerity"

From: patrickbarron@msn.com
To: letters@nytimes.com
Subject: Letter re: Myths of Austerity
Date: Mon, 5 Jul 2010 09:32:55 -0400

Re: Myths of Austerity by Paul Krugman

Dear Sirs:
In his attempt to belittle those G-20 nations who spurn more wasteful stimulus spending, Mr. Paul Krugman resorts simply to name-calling and labeling (fantasy, prejudices, sheer speculation), with no substantive empirical or theoretical analysis. His evidence that more stimulus spending is the "...safest bet in a stumbling economy..." is a vague quote by the director of the Congressional Budget Office that "There is no intrinsic contradiction between providing additional fiscal stimulus today, while the unemployment rate is high and many factories and offices are underused, and imposing fiscal restraint several years from now, when output and employment will probably be close to their potential." Well, now, that is a real ringing endorsement for more paper money stimulus if ever I heard one. And equating Ireland as an example of a failed attempt at austerity is hardly convincing. It is clear that Mr. Krugman is determined to pump more paper money stimulus into the all-ready addicted U.S. economy until it collapses, at which time he undoubtedly will claim that even this was not enough.

Patrick Barron

My Letter to the NY Times re: Government Spending is NOT Stimulative!

From: Patrick Barron (patrickbarron@msn.com)
Sent: Fri 7/02/10 9:23 AM
To: NY Times (letters@nytimes.com)
Re: Pulling Back, Amid Echoes of the 1930s

Dear Sirs:
In his above-the-fold, front page "economic scene" commentary on June 30th Mr. David Leonhardt repeats your paper's oft stated misunderstanding of the effect of government spending and taxing. He takes to task those G-20 nations who will reduce spending and increase taxes in order to balance their nation's budgets. He treats both spending cuts and tax increases as anti-stimulus and, therefore, as threatening to a nascent recovery. Spending cuts and tax increases are very different things. Government spending MUST deprive the private sector of resources, for, to paraphrase Frederick Bastiat from over a century and a half ago, the government can spend only what it has already taken from the people. Therefore, REDUCING government spending is STIMULATIVE to the private, real economy. Next, prior to the age of fiat paper money, it was clear to the people that government can pay for its spending from only two sources--by taxing the people or borrowing from them. Taxing is the most politically risky, and borrowing drives up interest rates. Thusly, both methods were abhorrent. However, in this age of fiat paper money, governments now PRINT the money that they spend, just as would any counterfeiter and with the same result as any counterfeiter. The taxation on the people is conducted in a stealthy manner, but the people are robbed nevertheless. The most misunderstood and, therefore, the most damaging economic fallacy that underlies governments' so-called stimulative efforts today is that government spending PROVIDES the people with resources rather than TAKING resources from them. The source of this misunderstanding is Keynesian economic theory. To learn why this is fallacious I recommend chapter five of Hans Hermann Hoppe's book The Economics and Ethics of Private Property. (Click on the link for a free PDF download.) For the Cliff's Notes version read my brief essay on Mises.org titled "C + I + G = Baloney".

Patrick Barron